TOUSA: Eleventh Circuit Upholds Fraudulent Transfer Opinion Against Lenders

On May 15, 2012, the United States Court of Appeals for the Eleventh Circuit issued a decision1 in the much-watched litigation involving the residential construction company, TOUSA, Inc. ("TOUSA"). The decision reversed the prior decision of the District Court,2 reinstating the ruling of the Bankruptcy Court.3

BACKGROUND

The litigation involved the transfer of liens by certain subsidiaries of TOUSA (the "Conveying Subsidiaries") to secure approximately $476 million in debt incurred by TOUSA to a syndicate of lenders (the "New Lenders"). The proceeds of the transfer were used primarily to pay a settlement of approximately $421 million in respect of unsecured debt to another group of lenders (the "Transeastern Lenders"). The settlement was entered into by TOUSA as a guarantor of loans made by the Transeastern Lenders to a joint venture between a TOUSA subsidiary and a third party after the Transeastern Lenders alleged TOUSA was in default of its obligations and owed the Transeastern Lenders approximately $2 billion.

As part of the settlement transactions, TOUSA entered into new second and first lien credit facilities with the New Lenders and used $421 million drawn under the new credit facilities to pay the settlement amount owed to the Transeastern Lenders. The new credit facilities were guaranteed by the Conveying Subsidiaries, and these guarantees were secured by liens on the assets of the Conveying Subsidiaries. The Conveying Subsidiaries, however, had not been obligors under the debt originally owed to the Transeastern Lenders.

After TOUSA and the Conveying Subsidiaries filed for bankruptcy, TOUSA's unsecured creditors' committee brought an action challenging the liens granted to the New Lenders as fraudulent transfers, maintaining that the Conveying Subsidiaries had not received reasonably equivalent value in exchange for such liens. The unsecured creditors' committee sought to recover the value of the liens from the Transeastern Lenders under section 550(a)(1) of the Bankruptcy Code on the grounds that the Transeastern Lenders were the entities for whose benefit the transfer had been made.

In its October 30, 2009 ruling, the Bankruptcy Court, finding that the Conveying Subsidiaries did not receive reasonably equivalent value, avoided the liens granted by the Conveying Subsidiaries to the New Lenders as a fraudulent transfer and ordered the Transeastern Lenders to "disgorge" $403 million in loan proceeds because the transfer was for the benefit of the Transeastern Lenders. The Bankruptcy Court also awarded...