CORPORATE UPDATE

Fraudulent Transfers in the TOUSA Bankruptcy

A Florida bankruptcy court recently handed down a decision in the TOUSA bankruptcy that has a potentially significant impact on commercial lending in general, but particularly when the financing is provided to a company in financial difficulty and is guaranteed by one or more subsidiaries. In Official Committee of Unsecured Creditors of TOUSA v. Citicorp North America (In re TOUSA, Inc.), 2009 WL 3261963, Adv. No. 08-1435 (Bankr. S.D. Fla. Oct. 13, 2009), a Florida bankruptcy court invalidated on fraudulent transfer grounds the liens granted in favor of lenders who provided $500 million of new financing to TOUSA, Inc. (“TOUSA”). The court further ordered certain other lenders that had received the proceeds of the new loans to repay the amounts received to the bankrupt estate.

Three aspects of the court’s analysis may be particularly troubling to lenders. First, the court found that the new lenders did not take the liens securing the new loans they were providing in good faith and therefore failed to qualify for the good faith safe harbor to fraudulent transfer actions found in Section 548(c) of the Bankruptcy Code. Second, the court rejected the application of certain savings clauses included in the relevant loan documents that were designed to reduce the amount of the obligations secured by the liens to the extent necessary to prevent the obligor’s insolvency and thereby insulate the transaction from fraudulent transfer attack. Finally, the court held that, in addition to forfeiting all fees paid in connection with the transaction, the new lenders were also liable for the diminution of value of the collateral securing the new lenders’ liens during the period between when the liens were granted and the date such liens were invalidated. Each of these issues is discussed in more detail below.

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