The United States Court of Appeals for the Eleventh Circuit issued its much anticipated decision in the TOUSA, Inc. bankruptcy cases on May 15, 2012.  The decision provides an ominous reminder to Lenders to carefully assess the value of accepting asset pledges or guarantees from borrowers’ subsidiaries, sometimes referred to as upstream guarantees.

The rules applying to the filing of proofs of claim were overhauled substantially in 2011 and require parties filing proofs of claim in bankruptcy proceedings to take heed, especially where the debtor is a natural person (an individual). 

On May 24, 2012, the California Public Utilities Commission (CPUC) dismissed with prejudice a complaint brought by AT&T California, Inc. against Fones4All Corp. in 2006. AT&T sought to recover alleged overcharges paid to Fones4All for termination of intraLATA toll traffic. Following an evidentiary hearing, the CPUC issued D.07-07-013, granting the relief AT&T requested in its complaint, or approximately $2.6 million, plus interest.

Buying natural gas assets from financially distressed companies is an inherently risky proposition.  Even when an attractive prospect is identified, the purchaser has to overcome a number of issues such as clearing up title, including mechanic and materialman liens and getting assignments of contracts and lessor consents.  Assuming these hurdles can be managed, the purchaser is also faced with legacy liability problems ranging from plugging and abandonment and decommissioning costs, unknown claims from interest owners under joint operating agreements, general claims from oil field

The United States Court of Appeals for the Eleventh Circuit, on May 15, 2012, reversed a district court's February 2011 decision that lenders were not liable on a fraudulent transfer claim. In re TOUSA, Inc., ___ F.3d ___, 2012 U.S. App. LEXIS 9796 (11th Cir. 5/15/12).^[1] It rejected the district court's finding that corporate subsidiaries had received "reasonably equivalent value" when they encumbered their assets to secure a loan made to them and their corporate parent.

Sleep better at night knowing that the loan you made to your borrower is supported by collateral from the borrower’s subsidiaries? You may want to keep one eye open. On May 15, 2012, the U.S. Court of Appeals for the Eleventh Circuit upheld a bankruptcy court opinion that reinforces lender liability for fraudulent transfers in subsidiary-supported loans. The Eleventh Circuit upheld the opinion of the U.S. Bankruptcy Court for the Southern District of Florida in In re TOUSA, Inc., and overruled a contrary opinion by the U.S. District Court.

On May 15, 2012, the Court of Appeals for the Eleventh Circuit affirmed two key rulings made by a Florida Bankruptcy Court in the long-running bankruptcy case of TOUSA, Inc., once one of the largest homebuilders in the country. The Bankruptcy Court had avoided—as fraudulent transfers—the liens granted by TOUSA’s subsidiaries (the Subsidiaries) to new lenders (the New Lenders) that provided $500 million in financing for TOUSA to payoff debt that was owed by TOUSA, but not the Subsidiaries, to then existing lenders (the Old Lenders).

Clients often raise questions concerning the enforceability of arbitration clauses in bankruptcy proceedings. While this topic has been hotly debated for many years, a recent Ninth Circuit opinion, In re Thorpe Insulation Co., 671 F.3d 1011 (9th Cir. 2012), reminds us that arbitration clauses are not sacrosanct and can be struck down by the court.

There are many aspects to the purchase of distressed assets that make this type of an acquisition a unique challenge for a buyer. However, the upside of such an acquisition can be great for the educated and patient buyer.

Distressed M&A certainly has risks and it is complicated by the fact that third parties, like judges, receivers and lenders, actively participate in the sale process, which brings uncertainty and a loss of control to the process. Nevertheless, an opportunistic buyer has the potential to acquire assets at a great value and free of many claims.

In In re Crane, the Bankruptcy Court for the Central District of Illinois recently held that a mortgage can be avoided in bankruptcy if it fails to include the maturity date and the interest rate of the underlying debt within the mortgage document. The court found that failing to include these loan terms on the face of the mortgage as recorded, violated the requirements of Illinois conveyancing statutes, and therefore did not provide the constructive notice to the trustee necessary for preventing the avoidance.