If it Seems Too Good To Be True The Eleventh Circuit Hammers the Hopeful Unsecured Lender

Every lender sincerely hopes that, even when its borrower is flat on the floor and seems down for the proverbial count, the borrower will still find the wherewithal to repay it. A lender often starts counting the days after it is repaid until the 90-day preference period (11 U.S.C. §547) has passed. The lender generally breathes a sigh of relief on the 91st day, confident that if its borrower files for bankruptcy, the money paid to the lender is safe from being clawed back by the Bankruptcy Court. In a recent appeals court decision, however, the 11th Circuit Court of Appeals gave lenders more to worry about than the preference period. Senior Transeastern Lenders v. Official Committee of Unsecured Creditors (In re TOUSA, Inc.), Case No. 11-11071 (11th Cir. May 15, 2012). In TOUSA, the court confirmed the decision of the Bankruptcy Court that a fraudulent transfer could be recovered from "the entity for whose benefit such transfer was made" (11 U.S.C. §550(a) (1)) by expanding the scope to certain payments made to unsecured lenders from a subsequent secured loan. Since the statue of limitations for fraudulent transfers under the Bankruptcy Code is two years (11 U.S.C. §548(a)(1)), a lender may have to wait longer to be assured that its repayment is safe from disgorgement under circumstances similar to those found in TOUSA.

By way of background, TOUSA, Inc. was the thirteenth largest homebuilding enterprise in the country before it filed for bankruptcy. TOUSA, but not its operating subsidiaries, owed a group of unsecured lenders well in excess of $500 million and perhaps as much as $1 billion. Approximately six months prior to filing bankruptcy (well outside of the 90-day preference period), TOUSA paid a $421 million settlement to its existing unsecured lenders (the court refers to them as the "Transeastern Lenders"). TOUSA received these funds from a group of new lenders (aptly named the "New Lenders"). To persuade the New Lenders to lend, TOUSA had a number of its subsidiaries grant liens in their assets to the New Lenders. These subsidiaries had not previously been borrowers from the Transeastern Lenders. Six months later, TOUSA and all of these subsidiaries filed for bankruptcy.

The Bankruptcy Code's fraudulent transfer statute is 11 U.S.C. §548. The general purpose of fraudulent transfer statutes is to prevent a debtor from transferring its assets for little or no money in order to keep the property out of the hands of the debtor's...