In Destabilizing Decision for Secured Lenders, 11th Circuit Reverses TOUSA District Court

The dispute arose out of a new $500 million loan TOUSA received months prior to its bankruptcy. TOUSA used the loan proceeds to settle claims of secured lenders stemming from a failed joint venture. A three-judge panel for the Eleventh Circuit unanimously reversed the district court and reinstated the bankruptcy court's ruling that the transaction constituted a constructive fraudulent transfer under section 548 of the Bankruptcy Code. The Eleventh Circuit affirmed that TOUSA's subsidiaries, which granted liens to secure the new debt, did not receive reasonably equivalent value in exchange. Although the Eleventh Circuit remanded as to remedies, the decision will likely permit the bankruptcy estate to recover over $420 million from the secured lenders that received the settlement payment out of the proceeds of the new loan.

In re TOUSA, Inc., No. 11-11071, --- F.3d ---, 2012 WL 1673910 (11th Cir. May 15, 2012).

Factual Background

TOUSA designed, built and marketed detached single-family residences, town homes, and condominiums under various brand names. As noted by the Eleventh Circuit, at one time TOUSA and its subsidiaries operated the 13th largest home building business in America, 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 joint venture was funded with $675 million from various lenders (the "Transeastern Lenders"). Although TOUSA—the corporate parent—was the obligor on the secured loan from the Transeastern Lenders, this financing was independent of the financing for the remainder of the TOUSA enterprise.

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