In October 2009, Bankruptcy Judge John K. Olson of the United States Bankruptcy Court for the Southern District of Florida (the “Bankruptcy Court”), issued a controversial decision in In re TOUSA, Inc., ordering that the $403 million paid by TOUSA to settle litigation with certain lenders outside the Bankruptcy Code’s “preference” period be avoided and recovered for the benefit of certain of TOUSA’s subsidiaries’ estates as a fraudulent transfer and awarding prejudgment interest. On February 11, 2011, the district court reversed the Bankruptcy Court without remand, holding that Judge Olson’s decision was clearly erroneous. Given the complex facts and the alternative theories asserted by the plaintiff official committee of unsecured creditors, it is instructive for future stakeholders in large chapter 11 cases in which value-shifting is sought through the avoidance powers of the Bankruptcy Code to reflect on those decisions.

Factual Background

TOUSA and its subsidiaries designed, built, and marketed various sorts of residences. TOUSA was obligated on debt incurred to finance the so-called “Transeastern Joint Venture,” a very unsuccessful venture that TOUSA undertook in 2005. On July 31, 2007, TOUSA entered into a $500 million loan (the “New Loans”) with a group of new lenders (the “New Lenders”) to pay $421 million (the “Cash Transfer”) to holders of the Transeastern Joint Venture debt (the “Transeastern Lenders”) in satisfaction of their claims against TOUSA. Certain of TOUSA’s subsidiaries (the “Conveying Subsidiaries”) that were not previously liable to the Transeastern Lenders guaranteed and pledged their assets to secure the New Loans (the “Lien Transfer”). Six months later, on January 29, 2008, TOUSA and the Conveying Subsidiaries filed for chapter 11 protection.

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