On May 15, 2012, the U.S. Court of Appeals for the Eleventh Circuit upheld a U.S. Bankruptcy Court for the Southern District of Florida in In re TOUSA, Inc. opinion that reinforces lender liability for fraudulent transfers in subsidiary-supported loans.
TOUSA background facts: TOUSA, a manufacturer of housing, was in debt after issuing more than $1 billion of public bonds. Most of the bonds were guaranteed by certain of its subsidiaries (Conveying Subsidiaries). TOUSA’s debt also came from borrowed funds under a revolving line of credit for which the same subsidiaries were jointly and severally liable, and a failed joint venture for which it borrowed funds from a series of lenders (Transeastern Lenders).
In 2007, the Transeastern Lenders demanded repayment from TOUSA and its joint venture partner, alleging total over $2 billion in damages. TOUSA settled with the Transeastern Lenders for more than $421 million to them. To pay the settlement, TOUSA incurred two new syndicated loans, one for $200 million and the other for $300 million. Each note was secured by first and second liens on the assets of the Conveying Subsidiaries and TOUSA parent. The Conveying Subsidiaries directly forwarded $421 million to the Transeastern Lenders though not previously liable to the Transeastern Lenders. Six months later, TOUSA parent and the Conveying Subsidiaries filed for bankruptcy.
In bankruptcy, the Committee of Unsecured Creditors (Committee) challenged as a fraudulent conveyance the grant by the Conveying Subsidiaries of collateral to support the $500 million in additional debt incurred by TOUSA. The Bankruptcy Court agreed with the Committee, finding the Conveying Subsidiaries received less than equivalent value for the collateral that they provided for TOUSA’s loan obligations. The Bankruptcy Court found that the Transeastern Lenders were entities from whom the Committee could recover $421 million. The liens on the assets of the Conveying Subsidiaries were undone, and the Transeastern Lenders were forced to disgorge over $400 million to the debtors’ bankruptcy estates.
The U.S. District Court reversed the Bankruptcy Court on appeal. The Conveying Subsidiaries received benefits from their pledge of their assets in support of TOUSA’s loan. The benefits included the avoidance of defaults should the TOUSA parent company default in obligations to the Transeastern Lenders. The District Court notes “reasonably equivalent value” can include indirect benefits such as an entity’s continued existence as a going concern and the avoidance of bankruptcy. The District Court found the Transeastern Lenders could not be liable for receiving the loan funds because they were subsequent, and not direct, transferees of the funds.
The Eleventh Circuit reversed the District Court and affirmed the Bankruptcy Court’s ruling. The Eleventh Circuit upheld the Bankruptcy Court’s finding that the Conveying Subsidiaries did not receive equivalent value for providing their assets as collateral. The Eleventh Circuit noted “not every transfer that decreases the odds of bankruptcy for a corporation can be justified.”
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