Tousa III, Lenders Beware? Eleventh Circuit Upholds Bankruptcy Court's Original Fraudulent Transfer Decision

Previously published May 17, 2012

Keywords: TOUSA III, bankruptcy code, petition date, transeastern lenders

On May 15, 2012, the Eleventh Circuit Court of Appeals (the "Circuit Court") issued an opinion in In re TOUSA, Inc.,1 in which it affirmed the original decision of the bankruptcy court and reversed the appellate decision of the district court. After a 13-day trial, the bankruptcy court had found that liens granted by certain TOUSA subsidiaries (the "Conveying Subsidiaries") to secure new loans (the "New Term Loans") incurred to pay off preexisting indebtedness to certain lenders (the "Transeastern Lenders") were avoidable fraudulent transfers. The bankruptcy court also found that the payoff to the Transeastern Lenders from the New Term Loan proceeds was subject to clawback.

On appeal, the district court had reversed the bankruptcy court on every major issue.2 In reversing the district court this past Tuesday, the Circuit Court gave significant deference to the original factual findings of the bankruptcy court. The Circuit Court framed the two key issues on appeal as follows:

The "Reasonably Equivalent Value" Issue: Whether the bankruptcy court erred in finding that the Conveying Subsidiaries did not receive reasonably equivalent value in exchange for pledging their assets to secure the New Term Loans; and The "For Whose Benefit" Issue: Whether the bankruptcy court erred in finding that the Transeastern Lenders were entities for whose benefit the liens were transferred. On the first issue, the Circuit Court focused narrowly on the evidentiary record and the posttrial factual findings of the bankruptcy court, in turn sidestepping the open legal question of what constitutes value in the context of upstream guaranties. On the second issue, the Circuit Court's decision, while arguably consistent with existing Eleventh Circuit precedent, appears to broaden the pool of potential defendants in avoidance actions under the Bankruptcy Code. Notably, although the bankruptcy court (in dicta) had sharply criticized the use of a so-called "savings clause" in the transferring documents in respect of the New Term Loans, neither the district court nor the Circuit Court addressed the bankruptcy court's statements regarding the efficacy of such savings clauses.3 Recap of the Facts

TOUSA and numerous affiliates, homebuilders operating throughout the country, filed for bankruptcy protection on January 29, 2008 (the "Petition Date"). As of the Petition Date, TOUSA had substantial outstanding indebtedness, including approximately $500 million worth of New Term Loans. TOUSA had entered into the New Term Loans six months prior to the Petition Date in order to finance repayment of the Transeastern Lenders and to resolve litigation relating to a related failed joint venture. Unlike the debt owing to the Transeastern Lenders, which was unsecured, the New Term Loans were secured by liens on the assets of...