In re TOUSA, Inc.— Eleventh Circuit Reinstates Widely Criticized Fraudulent Transfer Decision

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On May 15, 2012, the United States Court of Appeals for the Eleventh Circuit issued an opinion in the TOUSA, Inc. (“TOUSA”) chapter 11 bankruptcy cases reinstating a $480 million fraudulent transfer judgment previously entered by the United States Bankruptcy Court for the Southern District of Florida (the “Bankruptcy Court”) against the so-called “Transeastern Lenders.” In doing so, the Eleventh Circuit both opened the door to a narrow reading of the term “reasonably equivalent value” in the fraudulent transfer provisions of the Bankruptcy Code and endorsed an expanded view of the entities subject to such fraudulent transfer liability.

The Eleventh Circuit affirmed the Bankruptcy Court’s widely criticized ruling, which had avoided as fraudulent transfers certain liens and related indebtedness incurred by TOUSA’s debtor subsidiaries (the “Conveying Subsidiaries,” and together with TOUSA, the “Debtors”) in connection with $500 million of “rescue financing” incurred by TOUSA and the Conveying Subsidiaries six months prior to the Debtors’ bankruptcy filings (the “Refinancing”). The proceeds of the Refinancing were used to repay the Transeastern Lenders for obligations of TOUSA that were not guaranteed by or secured by property of the Conveying Subsidiaries. Not only did the Bankruptcy Court avoid the transfer of the new liens in favor of the New Lenders, but it also ordered the Transeastern Lenders to disgorge the proceeds of the Refinancing (with interest) on the basis that they were bad faith recipients of the proceeds of a fraudulent transfer (i.e., the Refinancing). On appeal, the United States District Court for the Southern District of Florida (the “District Court”) quashed the Bankruptcy Court’s decision with respect to the Transeastern Lenders. The Eleventh Circuit, however, affirmed the liability findings of the Bankruptcy Court and concluded that the factual record supported the conclusions that: (a) the Conveying Subsidiaries did not receive reasonably equivalent value and (b) the Transeastern Lenders were entities for whose benefit the fraudulent transfers had been made.

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Published In: Bankruptcy Updates, Business Torts Updates, General Business Updates, Finance & Banking Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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