We reported to you last month a significant development in the matter of In re TOUSA USA, when the United States District Court for the Southern District of Florida issued its opinion and order reversing the controversial holdings of the Bankruptcy Court in the TOUSA chapter 11 case as to the so-called “Transeastern Lenders,” a group of lenders who had previously been ordered to disgorge nearly ½ billion dollars received in repayment of indebtedness which the Court found constituted a fraudulent transfer under Sections 548 and 550 of the Bankruptcy Code. Our February Client Alert may be found here.

On March 4, 2011, the District Court issued a second decision in the TOUSA matter, this time affirming the holdings of the Bankruptcy Court which absolved the Revolver Lenders from liability for avoidance of their liens under Section 548. The District Court decision represents a second victory for creditors in financial markets, and provides some additional comfort to lenders who agree to amend the terms of existing loans to distressed borrowers.

The most recent decision resolves an appeal by The Official Committee of Unsecured Creditors (the “Committee”) of the Bankruptcy Court’s rejection of its fraudulent conveyance claims asserted against Citicorp N.A. (“Citicorp”), the lender to the TOUSA entities under a series of revolving credit agreements, under which the TOUSA entities were obligated to repay advances made by Citicorp to the TOUSA parent. Citicorp, together with a group of other lenders, had first extended credit to the TOUSA entities under a revolving credit agreement in October of 2006, at which time the solvency of the TOUSA entities was not in question. The credit agreement was subsequently amended, and later amended and restated in its entirety on July 31, 2007, seven months prior to the commencement of the bankruptcy cases by TOUSA and certain of its subsidiaries and affiliates. The Committee asserted, both in the Bankruptcy Court and on appeal to the District Court, that the July, 2007 amendment and restatement, and the liens granted in favor of Citicorp by certain of the TOUSA entities to secure these obligations, were voidable as fraudulent transfers because the TOUSA entities in question received less than reasonably equivalent value in exchange for the obligations they incurred and the liens they granted to Citicorp. The Bankruptcy Court disagreed and declined to avoid the liens at issue, and allowed the Committee’s complaint to survive solely with respect to liens granted to Citicorp in July of 2007 which extended to new categories of collateral.  

On appeal, the District Court likewise rejected the Committee’s assertions. The District Court reasoned that the TOUSA borrowers incurred obligations to Citigroup upon signing of the original revolver agreement, and further concluded that the amendment and restatement of the revolver did not result in the creation of new liens upon the TOUSA borrowers’ collateral in July, 2007, because Citigroup was already the holder of perfected liens in this collateral as a result of the prior revolver and the financing statements filed in connection therewith. As a result, the 2007 grant of liens in favor of Citigroup could not be avoided as a fraudulent conveyance.

The decision is a significant one for lenders dealing with distressed borrowers. Particularly important is the finding in the District Court’s analysis that the filing of new financing statements in connection with the amendment and restatement of the revolver did not invalidate Citicorp’s preexisting liens in its collateral.

The next chapter in the TOUSA saga will be the judgment on the appeal by TOUSA’s first and second lien lenders of the original Bankruptcy Court decision which is also currently pending before the Honorable Adalberto J. Jordan in the District Court. For more information about the TOUSA decisions please contact one of the above attorneys or any other member of our Bankruptcy Group.