Recent TOUSA Development Reverses Bankruptcy Court
February 16, 2011
Co-written by Richard Kohn, and William Meyers of Goldberg Kohn Ltd., and Jonathan Helfat and James Cretella, of Otterbourg, Steindler, Houston & Rosen, P.C.
Last Friday, the U.S. District Court for the Southern District of Florida, in a well-reasoned opinion extending for more than 100 pages, reversed the Bankruptcy Court on certain important issues in the case of In re TOUSA, Inc., 408 B.R. 913 (Bankr. S.D.Fla. 2009). Goldberg Kohn Ltd. and Otterbourg, Steindler, Houston & Rosen P.C., as Co-General Counsel of the Commercial Finance Association ("CFA"), filed amicus briefs in two related appeals.
To review the opinion click here.
The TOUSA decisions arose out of loans (the "New Loans") advanced by two syndicates of lenders (the "First Lien Lenders" and the "Second Lien Lenders") to finance the settlement of litigation brought by another group of lenders (the "Transeastern Lenders") against, primarily, the TOUSA parent entity, TOUSA, Inc. The Bankruptcy Court found that the liens granted by various subsidiaries of TOUSA, Inc. to secure the New Loans, as well as the payment of the proceeds of the New Loans to the Transeastern Lenders to settle the litigation, were fraudulent transfers under Section 548 of the Bankruptcy Code. In doing so, the Bankruptcy Court also invalidated the "savings clauses" set forth in the documents governing the New Loans (and typically found in upstream guarantees).
Separate appeals were taken from the Bankruptcy Court's decision by the First Lien Lenders, the Second Lien Lenders and the Transeastern Lenders. CFA filed an amicus brief in support of the First and Second Lien Lenders addressing the court?s invalidation of the savings clauses.
The District Court?s decision last Friday reversed the rulings of the Bankruptcy Court with respect to the Transeastern Lenders, holding that (i) the payment of the settlement proceeds to the Transeastern Lenders did not constitute a fraudulent transfer because (A) the settlement proceeds were not property of the subsidiaries and (B) even if the proceeds were property of the subsidiaries, the subsidiaries received reasonably equivalent value in exchange for granting liens on their assets and (ii) even if the transaction was a fraudulent transfer, the Transeastern Lenders were not entities from whom a fraudulent transfer could be recovered under Section 550 of the Bankruptcy Code.
Under Section 548 of the Bankruptcy Code, a transfer is not considered a fraudulent transfer if the property transferred is not property of the debtor. The District Court found that the settlement proceeds were not property of the subsidiaries because, as guarantors of the New Loans rather than borrowers of the New Loans, they did not have a sufficient degree of control over how the proceeds were used.
Also under Section 548 of the Bankruptcy Code, a transfer is not considered a fraudulent transfer if the debtor received reasonably equivalent value in exchange for the property transferred (even if the debtor is insolvent at the time of the transfer). The Bankruptcy Court had found that TOUSA's subsidiaries did not receive reasonably equivalent value in return for granting liens on their assets as security for the New Loans advanced to TOUSA, Inc. by the First and Second Lien Lenders. Reversing the Bankruptcy Court, the District Court found that TOUSA's subsidiaries did, in fact, receive reasonably equivalent value in the form of indirect benefits, such as attempting to avoid bankruptcy, continued access to financing (through downstream loans from the parent) and avoiding the entry of a judgment which would have triggered the subsidiaries' liability under various guarantees. Having found that TOUSA's subsidiaries received reasonably equivalent value in the transaction, the District Court held that the granting of liens was not a fraudulent transfer within the meaning of Section 548 of the Bankruptcy Code.
The District Court then held that, even if the transaction constituted a fraudulent transfer under Section 548 of the Bankruptcy Code, the Transeastern Lenders were not entities from whom the fraudulent transfer could be recovered under Section 550 of the Bankruptcy Code. While the liens granted by TOUSA's subsidiaries were granted to the First and Second Lien Lenders, and not to the Transeastern Lenders, the Bankruptcy Court had nevertheless held that Section 550 permitted recovery from the Transeastern Lenders as the entities for whose benefit such liens were granted. Reversing the Bankruptcy Court, the District Court held that Section 550 did not permit recovery from the Transeastern Lenders because any benefit received by the Transeastern Lenders was not the "immediate and necessary consequence" of the liens granted to the First and Second Lien Lenders, but rather resulted from how the proceeds of the loans were used. In other words, the Transeastern Lenders were too far removed from the transaction to be liable for a fraudulent transfer under Section 550 of the Bankruptcy Code.
In a stunning rejection of the Bankruptcy Court's rulings, the District Court refused to remand the decision back to the Bankruptcy Court for further proceedings (which would have been the typical remedy). Rather, criticizing the Bankruptcy Court for rendering an opinion which essentially parroted the Creditor Committee's brief verbatim, the District Court simply quashed the order of the Bankruptcy Court as to the liability of the Transeastern Lenders and declared the Bankruptcy Court's imposition of remedies against the Transeastern Lenders to be null and void.
Decisions have not yet been rendered in the two remaining appeals by the First and Second Lien Lenders. On Tuesday, February 15, Judge Jordan, the District Court judge presiding over those appeals, ordered the parties, intervenors and amicus curiae in those appeals to file supplemental briefs, on or before March 15, explaining how Judge Gold's opinion and reasoning, if adhered to, affects the issues in those cases. In addition, and perhaps foreshadowing his conclusions, Judge Jordan instructed the parties, the intervenors and amicus curiae not to argue whether Judge Gold's ruling is correct, but instead to assume that it is. While Judge Jordan will of course render his own opinion regarding whether the transaction constituted a fraudulent transfer, Judge Gold made clear in his opinion that Section 550 of the Bankruptcy Code does not permit recovery from the Transeastern Lenders even if the transaction is a fraudulent transfer. In other words, even if Judge Jordan holds that the transaction constituted a fraudulent transfer, the Transeastern Lenders will not be required to disgorge the payments they received (unless, of course, there is an appeal to the 11th Circuit and Judge Gold is reversed on appeal).
For more information please contact:
Richard Kohn at 312.201.3920 or firstname.lastname@example.org
William Meyers at 312.201.3919 or email@example.com.
February 16, 2011
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