Contributed by Yvanna Custodio
Last month, we wrote about the TOUSA decision from the United States Court of Appeals for the Eleventh Circuit. The Eleventh Circuit decision affirmed the holding of the Bankruptcy Court for the Southern District of Florida that liens granted by subsidiaries of the borrower, TOUSA, Inc., to refinance obligations owed to the borrower’s lenders constituted fraudulent transfers under section 548(a)(1) of the Bankruptcy Code with respect to those lenders.
In the latest development, the lenders have now petitioned the Eleventh Circuit for rehearing en banc. Rule 35(a) of the Federal Rules of Appellate Procedure provides that a rehearing en banc is generally not favored and the party requesting the rehearing must show that either resolution of the issue en banc “is necessary to secure or maintain uniformity of the court’s decisions” or “the proceeding involves a question of exceptional importance.”
In the petition, the Transeastern Lenders argued that (i) the Eleventh Circuit’s deference to the bankruptcy court’s findings of fact conflicts with Stern v. Marshall because “bankruptcy courts lack the constitutional authority to enter final orders on fraudulent transfer claims” and (ii) the Eleventh Circuit’s interpretation of section 550(a)(1), which authorizes recovery from the Transeastern Lenders as entities “for whose benefit” the fraudulent transfers were made, conflicts with decisions within the Eleventh Circuit, as well as decisions from other circuits.
In developing their Stern v. Marshall argument, the Transeastern Lenders emphasized that the Supreme Court relied heavily on its prior holding in Granfinanciera, S.A. v. Nordberg that fraudulent transfer actions against non-creditors do not fall within the doctrine permitting non-Article III courts to resolve cases involving public rights. The Transeastern Lenders asserted that, in line with Granfinanciera and Stern, only Article III courts—and not the bankruptcy courts—have the authority to enter final orders on fraudulent transfer claims. To bolster their argument, the appellees pointed to a recent standing order issued by the Southern District of Florida “instructing its district court judges to treat purported final orders issued by bankruptcy judges as proposed findings of fact and conclusions of law if they determine that the bankruptcy judge lacked constitutional authority to enter a final judgment.” Arguing that the case originated pre-Stern, the Transeastern Lenders claimed that their failure in raising the bankruptcy court’s lack of constitutional authority to issue final judgments in the case did not constitute an implied consent to a final adjudication by the bankruptcy court.
Regarding the section 550 issue, the Transeastern Lenders argued that the Eleventh Circuit interprets section 550(a)(1) too broadly, such that “any entity that is an intended beneficiary of an avoided transfer can be held liable for that transfer, even if the benefit comes from another transfer.” Pointing to the Eleventh Circuit’s conclusion that “every creditor must exercise some diligence when receiving payment from a struggling debtor[,]” the appellees argued that the logical extension of such a conclusion imposes an impractical obligation on creditors that would cripple the credit markets. Moreover, the Eleventh Circuit’s decision fails to consider that, under the relevant credit agreement, TOUSA had the explicit right to prepay the loan and the lenders’ refusal to receive the repayment in order to conduct “diligence” would amount to a breach.
If the petition is denied, the Eleventh Circuit’s TOUSA decision will stand, although a petition for certiorari to the United States Supreme Court is still possible. If the petition is granted, however, the circuit judges will then hear the parties’ arguments en banc and may either affirm or reverse its decision. Stay tuned for updates on TOUSA as we continue to monitor the developments in the case.
Disclosure: Although Weil is not counsel of record on the fraudulent transfer case, we do represent parties in connection with the TOUSA bankruptcy.