In re TOUSA, Inc., Nos. 10-60017-CIV/Gold, 10- 61478, 10-62032, 10-62035, and 10-62037 Slip Op. (S.D. Fla. Feb. 11, 2011)
The recent decision of the United States District Court for the Southern District of Florida in the bankruptcy case involving TOUSA, Inc. (and several subsidiaries) has received a lot of attention, especially from financial institutions. Lenders, for now, can breathe a sigh of relief, because this decision overturns the controversial decision of the Bankruptcy Court in In re TOUSA, Inc. Many bankruptcy practitioners believed the Bankruptcy Court had expanded the scope of the fraudulent conveyance provision found in section 548 of the Bankruptcy Code, as well as the ability of the trustee to recover pre-petition transfers under section 550 of the Bankruptcy Code. Not only did the District Court overturn the findings and holdings of the Bankruptcy Court, but the District Court also was highly critical of the manner in which the Bankruptcy Court reached its conclusions. The District Court so strongly rejected the findings of the Bankruptcy Court that it refused to send the case back to the Bankruptcy Court to make new findings of fact and issue a new opinion consistent with the District Court’s holdings.
TOUSA, Inc., a large homebuilder with a principal place of business in Florida, along with a number of its affiliates and subsidiaries, filed for bankruptcy relief in January 2008. The bankruptcy filing came on the heels of one of the worst crashes ever to affect the United States housing market. TOUSA and its subsidiaries operated as a highly integrated enterprise, even though they were separate and distinct companies.
TOUSA was financed by an $800 million secured revolving loan facility, which provided the lion’s share of its liquidity. The Revolving Facility was funded by Revolving Facility Lenders, whose administrative agent, Citicorp, held a lien on the assets of TOUSA, as well as its subsidiaries, as security for the debt. TOUSA’s subsidiaries were not separately financed and depended upon the Revolving Facility for their liquidity. Many of them were either co-borrowers or guarantors of the Revolving Facility. Among the default provisions in the Revolving Facility documents was the entry of a final judgment or judgments against TOUSA or one or more of its subsidiaries in an aggregate amount exceeding $10 million, which was not covered by insurance and was not satisfied within 30 days.
TOUSA was also financed by several bond issuances. These unsecured bonds were issued between 2002 and 2006. Even though TOUSA was principally responsible for the payment of the bonds, the prospectuses regarding the bond issuances made it clear that the funds to repay the bond debt would derive from TOUSA and its subsidiaries. The subsidiaries were jointly and severally liable as guarantors of the bond debt. Under the bond indentures, a judgment against TOUSA in an amount greater than $10 million would constitute an Event of Default, permitting the exercise of remedies by the bond trustee. Further, an Event of Default under the bond indentures triggered a default under the Revolving Facility.
In June 2005, TOUSA became involved in a joint venture (the Transeastern JV) that was financed with separate loan facilities. These Transeastern Loans aggregated $675 million, and the lenders to the Transeastern JV were known as the Transeastern Lenders. TOUSA and certain of its affiliates guaranteed the repayment of the Transeastern Loans, as well as the completion of the residential developments that the JV was intended to build. The guarantees also guaranteed full repayment of the Transeastern Loans in the event of a bankruptcy of the JV.
Underlying Litigation and New Financing – In late 2006, the Transeastern Loans went into default and the Transeastern Lenders demanded payment from TOUSA and one of its subsidiaries. Litigation soon ensued. In early 2007, as a result of the continuing problems involving the Transeastern JV and the drain on TOUSA’s resources caused thereby, the Revolving Facility Lenders demanded additional collateral for the Revolving Facility. It was at this time that the Conveying Subsidiaries (as defined below) pledged liens on their assets to further collateralize the Revolving Facility, and many became co-borrowers under the Revolving Facility.
The litigation among the Transeastern Lenders and TOUSA grew more and more acrimonious, with the Transeastern Lenders positing that the debt under the TOUSA guarantees could be higher than $2 billion. TOUSA’s board grew increasingly concerned about the possibility of an adverse judgment, and the potential demise of TOUSA and its subsidiaries. TOUSA’s management and board became convinced that if it did not settle this litigation, TOUSA would be compelled to seek bankruptcy protection for itself and its subsidiaries.