In a 113-page opinion issued on Friday, February 11, U.S. District Judge Alan S. Gold quashed a $480 million fraudulent transfer judgment against the Transeastern lenders in the TOUSA, Inc. chapter 11 case. The Transeastern lenders were the recipients of the proceeds of $500 million in term loans borrowed by Tousa, Inc. and its subsidiaries in July 2007. The district court’s opinion held that the bankruptcy court below had erred in finding that the TOUSA subsidiaries had not received “reasonably equivalent value” when they entered into a $500 million secured financing transaction in July 2007. Finding that the financing did confer value on the subsidiaries, the district court concluded that the lenders were not liable for a constructive fraudulent transfer under section 548 of the Bankruptcy Code. The case raises critical issues under fraudulent transfer law in situations where the proceeds of a financing are utilized by only one member of an integrated corporate family that jointly obligates itself to repay the loans. In the TOUSA case, the proceeds of the loans were used to settle a series of disputes relating to the Transeastern joint venture, including the enforcement of completion and bad-boy guarantees against the parent entity. A related decision by the bankruptcy court invalidating the liens and claims of the TOUSA term loan lenders is still on appeal and under advisement before District Court Judge Adalberto J. Jordan.
Holding that the bankruptcy court had improperly adopted nearly verbatim the proposed findings of fact and conclusions of law submitted by the TOUSA statutory committee of unsecured creditors, which was pursuing the fraudulent transfer action on behalf of the estate, Judge Gold invoked a rarely-used procedure to decide the matter himself rather than remand the case back to bankruptcy court. The district court thus did not merely reverse the judgment of the bankruptcy court below but “quashed” it, ruling that it was “null and void” and replacing it with the district court’s own conclusions based on its review of the evidence in the record. We think it’s a pretty safe bet that the TOUSA creditors’ committee will appeal Judge Gold’s decision to the United States Court of Appeals for the 11th Circuit, and the district court’s opinion itself anticipated this likelihood, so this decision probably is not the last word in the long-running TOUSA litigation. There are many issues that flow from the decision, including whether the creditors’ committee will have to pay for the appeal themselves.
We’re working on a more detailed summary of the TOUSA opinion and will post it here on the Blog as soon as it’s done.