CLIENT
ALERT
In
Destabilizing Decision for Secured Lenders, 11th Circuit Reverses
TOUSA District Court
by Andrew M. Troop and Brandon R. Johnson
On May 15, 2012, the Eleventh Circuit Court of Appeals issued a fraudulent transfer ruling in TOUSA, Inc.'s chapter 11 case with wide-ranging implications for the financing community. As discussed herein, this decision weakens protections for secured lenders, especially when extending credit to distressed borrowers.
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).