The Tousa, Inc. Bankruptcy Decision: Anatomy And Implications Of A Landmark Creditors’ Rights Case

by Miller Starr Regalia


A landmark Bankruptcy Court case involving TOUSA, Inc. (“TOUSA”), a Florida-based homebuilder, and several well-known banks, including, among many others, Citicorp North America, Inc. (“Citicorp”) and Wells Fargo Bank, was recently decided in Florida’s Southern District. The case’s final outcome is still uncertain since an appeal is pending, but the implications of the Bankruptcy Court’s unprecedented ruling setting aside the lenders’ security for over $600 million in loans and ordering disgorgement of over $400 million from a prior lender may prove widespread. If upheld, the Court’s ruling will profoundly impact underwriting and risk assessment practices of lenders, title insurers, and financial advisory firms alike. This article explores the key facts of the relevant transactions as found by the Bankruptcy Court, and highlights the most significant parts of the Court’s opinion and their potential implications for the title and financial industries.


A. The Formation and Expansion of TOUSA, Inc.

In June 2002, TOUSA, Inc. was formed by a merger between Engle Holdings Corp. and Technical Olympic, USA, wholly owned subsidiaries of a publicly-traded Greek development company, Technical Olympic, S.A. The merger created a unified homebuilding company, originally called Technical Olympic USA, Inc., but later renamed, TOUSA, Inc. Shortly after the merger, TOUSA undertook a plan of rapid expansion, acquiring regional home building companies across the country.2 By 2004, Florida-based TOUSA was the 13th largest homebuilder in the United States and a publicly traded company on the New York Stock Exchange (the “NYSE”). TOUSA and its numerous subsidiary companies were primarily involved in the design, building and marketing of residential real estate, but TOUSA’s subsidiaries were also involved in title insurance and mortgage brokerage services. TOUSA operated in numerous U.S. states, including Florida, Tennessee, Texas, Nevada, Colorado, Arizona, Maryland, Pennsylvania, Delaware and Virginia.

In June 2005, TOUSA announced plans to acquire a major competitor, Transeastern Properties, Inc. (“Transeastern”). The acquisition agreement was structured as a joint-venture between TOUSA Homes LP, a wholly owned TOUSA subsidiary (“Homes LP”), and other entities (the “Falcone Entities”), owned by Transeastern’s two majority shareholders, Arthur and Edward Falcone. Homes L member. After the August 1, 2005 Transeastern acquisition, TOUSA became the 11th largest homebuilder in the United States.

Deutsche Bank Trust Co. Americas (“Deutsche Bank”), as agent, and other mezzanine lenders (collectively “Transeastern Lenders”), funded TOUSA’s acquisition of Transeastern by providing $675 million in financing.3 The Transeastern JV secured the debt by pledging certain assets and ownership interests and making the debt non-recourse to TOUSA. The Transeastern Lenders also obtained Completion Guarantees from TOUSA and Homes LP and Carve-Out Guarantees from TOUSA, Homes LP and the Falcone Entities on the indebtedness.4

Initially, the Transeastern JV appeared a successful investment for TOUSA. The company’s SEC Filings showed strong performance in the third quarter of 2005, and its annual financial results revealed continued growth. Just ten months later, however, in September 2006, TOUSA representatives reportedly met with the Transeastern Lenders and notified them that the rapid decline of the Florida housing market (which constituted the majority of the Transeastern JV’s operations) had led to their decision to write off TOUSA’s entire $143.6 million investment in the joint venture.

This massive write-off triggered a default in the Deutsche Bank financing, and the lenders threatened to exercise their remedies under the terms of the loan agreement.5 TOUSA and Homes LP, disputing the Transeastern Lenders’ claims of default, filed a declaratory relief action against Deutsche Bank in the U.S. District Court for the Southern District of Florida on November 28, 2006.6 The next day Deutsche Bank sued TOUSA and Homes LP for breach of guaranty in a New York state court.....

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Written by:

Miller Starr Regalia

Miller Starr Regalia on:

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