Last month we reported on the overwhelming victory of the Transeastern Lenders in their appeal of the decision by the United States Bankruptcy Court for the Southern District of Florida ordering them to disgorge almost $500 million in loan repayments, pre- and post-judgment interest and professional fees (“TOUSA I“1). That update can be found here. On March 4, 2011, it was the turn of TOUSA’s Revolver Lenders to declare victory in “TOUSA II“,2 which can be found here.

In TOUSA II, TOUSA’s Creditors’ Committee alleged that TOUSA’s Revolver Lenders were the recipients of two types of fraudulent transfers, the first being liens on new collateral granted as part of an amendment at the same time as TOUSA incurred the new First and Second Lien Loans, and the second being subsidiary guarantees of new advances from time to time after the original closing. While in TOUSA I the District Court seriously questioned whether the Bankruptcy Court was biased in favor of the Committee, the TOUSA II District Court did not need to consider bias because the Bankruptcy Court had actually held in favor of the Revolver Lenders. In a nutshell, the Bankruptcy Court concluded that the amendment and new liens were simply continuations of the original secured Revolver Loans, and therefore no new transfers occurred that could be avoided as fraudulent. As to the new advances, the Bankruptcy Court concluded that the subsidiary guarantees thereof should be considered as part of their original guarantees of the Revolver Loans and, therefore, did not comprise new transfers that could be independently analyzed on fraudulent transfer grounds.

It is not surprising that the TOUSA II District Court affirmed the Bankruptcy Court and took only 13 pages to do so, which was 100 fewer pages than it took the TOUSA I District Court to quash the Bankruptcy Court’s adverse decision against the Transeastern Lenders. The Committee’s arguments were premised almost entirely on the Second Circuit’s 1981 Rubin decision,3 which arguments the Court quickly disposed of on the basis of waiver (see below) and on the merits.4 The Court then quickly rejected the remainder of the Committee’s arguments and that was that.

As noted in our TOUSA I update, TOUSA’s First and Second Lien Lenders are still anxiously awaiting the decision on their appeals of the Bankruptcy Court’s fraudulent transfer, preferential transfer and disgorgement holdings against them. However, while TOUSA I was a source of considerable optimism for the First and Second Lien Lenders because it included encouraging overlapping findings,5 TOUSA II was based on discrete issues not relevant to the First and Second Lien Lenders’ appeals.

Nevertheless, the First and Second Lien Lenders can take at least some encouragement from two aspects of TOUSA II.

First, as noted above, the TOUSA I decision was highly critical of the Bankruptcy Court, an encouraging sign for the First and Second Lien Lenders. In TOUSA II, there was no basis for criticism of the Bankruptcy Court because it had decided in favor of the Revolver Lenders and had not adopted near-verbatim a party’s proposed findings and conclusions. But this is not to say that the Court found nothing to criticize, and the TOUSA II Court took square aim at Committee counsel for advocating positions that (in the District Court’s view) the same counsel had explicitly abandoned below. For example, the TOUSA II Court noted that:

Now having disclaimed any reliance on Rubin for its fraudulent transfer claims in the bankruptcy court, the Committee argues on appeal that Rubin demands reversal…. The Committee here did more than just fail to rely on Rubin below; it expressly disavowed Rubin and told the bankruptcy court that it was in fact relying on the theory that Rubin had rejected…. The Committee’s actions did not just constitute the mere forfeiture of a theory…, but rather amounted to a flat-out waiver…. [U]nder the circumstances, it is not appropriate for the Committee to rely on Rubin here.6

In their appeals of TOUSA I, the First and Second Lenders were also critical of (in their view) (and in our view, given that we represent the Second Lien Lenders) the Committee’s apparently inconsistent positions, so TOUSA II provides some encouragement on that score.

Second, as noted in our TOUSA I update, TOUSA I was decided by Judge Gold whereas the First and Second Lien Lenders’ appeals are assigned to Judge Jordan. TOUSA II demonstrates that Judge Jordan is focused on the TOUSA appeals and, perhaps, will issue his decision relatively soon. Judge Jordan’s sua sponte Order referred to in endnote 5 provides similar encouragement.

But, to quote one of our favorite sources (being ourselves, in this case from our TOUSA I update), “Bracewell & Giuliani as counsel for the Second Lien Lenders certainly knows better than to count its TOUSA houses before they are built.” However much encouragement one can take from TOUSA I and TOUSA II, the TOUSA’s Creditors’ Committee has proven itself to be a formidable adversary, such that it is still very much an open question whether TOUSA III will be strike three against the Committee or, instead, the Committee will knock the third pitch out of the park. And then there is the Eleventh Circuit Court of Appeals, should the Committee take it that far…