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Client Alert

District Court Quashes Controversial TOUSA Fraudulent Transfer Decision
Authors: Brandon R. Johnson, Craig A. Barbarosh, Erica Edman Carrig, Karen B. Dine

2/22/2011
In a recent 113-page decision, Judge Alan S. Gold of the U.S. District Court for the Southern District of Florida quashed the TOUSA Bankruptcy Court’s previous controversial fraudulent conveyance decision that required secured lenders (the "Transeastern Lenders") to disgorge approximately $480 million received in settlement of their claims against TOUSA. In a ruling with wide-ranging implications for the financing community, the District Court thoroughly rejected the Bankruptcy Court’s reasoning and held that the TOUSA subsidiaries that guaranteed the new loans necessary to fund the settlement had in fact received "reasonably equivalent value" in exchange for their commitments by, among other things, preserving the value of the troubled homebuilder’s entire corporate enterprise.

Factual Background
The Debtors designed, built and marketed detached single-family residences, town homes, and condominiums under various brand names. At one time, TOUSA and its subsidiaries operated the thirteenth largest home building business in the country with operations in Florida, Texas, the mid-Atlantic States and the western United States. In June 2005, TOUSA Homes LP (a wholly owned subsidiary of TOUSA) formed a joint venture with a third party for the purpose of acquiring certain real estate assets owned by Transeastern Properties, Inc., a leading developer in Florida. The Transeastern Lenders provided financing of $675 million (the "Transeastern Loan") for the joint venture. The joint venture financing was independent of the remainder of the TOUSA enterprise, although TOUSA—the corporate parent—was an obligor under the new credit facility.

As the housing market weakened, the joint venture failed and the Transeastern Lenders commenced litigation against TOUSA seeking immediate repayment of the outstanding amount of the $675 million loan plus interest. Success by the Transeastern Lenders in their litigation would not only mean that TOUSA would be obligated to pay amounts due and owing on the Transeastern Loan, such adverse ruling would also cause TOUSA and its subsidiaries to cross-default under the terms of their own $1 billion unsecured bond indebtedness (the "Bonds"), as well as their $700 million revolving credit facility (the "Revolver").

To read this publication in its entirety, please click the link in the adjacent "Download" section.
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