11th Circuit Upholds Fraudulent Transfer Claims Against Lenders In Tousa

In a recent decision, Senior Transeastern Lenders v. Official Comm. of Unsecured Creditors (In re TOUSA, Inc.), 2012 US App. LEXIS 9796 (11th Cir. May 15, 2012), the 11th Circuit Court of Appeals overturned a district court decision which had forcefully quashed a bankruptcy court decision to avoid, as a fraudulent transfer, a $400 million settlement and loan repayment by a parent company to a group of lenders (the "Transeastern lenders"). The TOUSA parent's settlement and loan repayment was funded with the proceeds of new loans which were secured by guarantees and liens granted by subsidiaries who were not liable for the original loan. The 11th Circuit held that, under the applicable standard of review, the bankruptcy court did not "clearly err" in finding that the subsidiaries did not receive reasonably equivalent value in exchange for the guarantees and collateral. The district court had found that the opportunity for the enterprise to avoid bankruptcy and continue as a going concern constituted reasonably equivalent value. The 11th Circuit deferred to the conclusion of the bankruptcy court that, based on the facts of the case as they existed at the time of the transaction, bankruptcy was inevitable and that the costs of the transaction to the subsidiaries outweighed the benefits by a significant margin. To support its conclusion, the court referred to numerous internal TOUSA emails and communications from around the time of the transaction, as evidence that the transaction was likely to increase the risk of bankruptcy for the enterprise in a failing real estate market and that senior management knew or should have known this. The 11th Circuit did not address the question of whether intangible benefits, such as the opportunity to avoid bankruptcy, could ever constitute reasonably equivalent value.

Importantly, the 11th Circuit also held that the Transeastern lenders were the entities "for whose benefit" the guarantees and collateral were transferred to the new lenders—and were therefore "initial transferees" for purposes of Section 550(a)(1) of the Bankruptcy Code (i.e., the avoidance recovery provision). Subsequent transferees may raise a "good faith" defense to avoidance recovery under Section 550(a), but initial transferees may not. The Transeastern lenders had apparently argued that they were subsequent transferees of the proceeds of the new loans, and that the new lenders were initial transferees of the subsidiary guarantees and...