Senior Transeastern Lenders v. Official Committee of Unsecured Creditors (In re Tousa, Inc.)

Summarized by B. Chandler , Louisiana State University Paul M. Hebert Law Center
13 years 9 months ago

Citation:

Case No. 11-11071 (11th Cir. May 15, 2012)

Tag(s):

Ruling:

The Eleventh Circuit REVERSED the order of the district court, AFFIRMED the liability findings of the bankruptcy court, and REMANDED to the district court for further proceedings consistent with its opinion. Specifically, the Eleventh Circuit held that the bankruptcy court did not clearly err when it found that certain debtor subsidiary entities (the “Conveying Subsidiaries”) of debtor TOUSA, Inc. (“TOUSA”) had not received reasonably equivalent value in exchange for the liens they conveyed to secure loans used to pay a debt owed only by TOUSA, such that the liens could be avoided as fraudulent transfers; and (2) the Transeastern Lenders (defined below) who had received loan proceeds secured by such liens were entities “for whose benefit” the Conveying Subsidiaries transferred the liens, such that recovery could be sought from the Transeastern Lenders pursuant to 11 U.S.C. 550(a)(1). Finally, the Eleventh Circuit declined to consider the remedies ordered by the bankruptcy court and matters related to judicial assignment and consolidation because those issues had not yet been considered by the district court and remanded to the district court for further proceedings.

Procedural context:

In an adversary proceeding filed by the Committee of Unsecured Creditors (“Committee”), the bankruptcy court held that liens transferred by the Conveying Subsidiaries of TOUSA, to secure the payment of a debt owed only by their parent, TOUSA, could be avoided as a fraudulent transfer because the Conveying Subsidiaries had not received reasonably equivalent value. Additionally, the bankruptcy court ordered the Transeastern Lenders (defined below) to disgorge $403 million of the loan proceeds secured by the liens because the transfer of the liens was for the benefit of the Transeastern Lenders. The bankruptcy court also awarded damages to the Conveying Subsidiaries. The Transeastern Lenders and the New Lenders (defined below), as intervenors, appealed to the district court. The district court quashed the judgment of the bankruptcy court. The Committee appealed to the Eleventh Circuit, presenting two issues: (1) whether the bankruptcy court clearly erred when it found that the Conveying Subsidiaries had not received reasonably equivalent value in exchange for the liens to secure loans used to pay a debt owed only by TOUSA, such that the liens could be avoided as fraudulent transfers; and (2) whether the Transeastern Lenders were entities “for whose benefit” the Conveying Subsidiaries transferred the liens such that recovery could be sought from the Transeastern Lenders pursuant to 11 U.S.C. 550(a)(1).

Facts:

In June of 2005, TOUSA entered into a joint venture for the purpose of acquiring certain homebuilding assets. This joint venture was funded by financing from lenders known as the “Transeastern Lenders”. TOUSA subsequently defaulted on its obligations to the Transeastern Lenders. In June 2007, TOUSA entered into a settlement with its partner and the Transeastern Lenders (“Transeastern Settlement”). Pursuant to the Transeastern Settlement, the Transeastern Lenders were paid approximately $420 million. TOUSA and the Conveying Subsidiaries obtained new loans from certain new lenders (“New Lenders”) to fund the settlement. Pursuant to the new loan agreements, the Conveying Subsidiaries pledged their assets as security for the new loans. Prior to the Transeastern Settlement, the Conveying Subsidiaries had not been obligated to the Transeastern Lenders in connection with the joint venture. Six months after the Transeastern Settlement. TOUSA and the Conveying Subsidiaries filed petitions for bankruptcy under Chapter 11. The Committee filed an adversary proceeding against the New Lenders and the Transeastern Lenders to avoid as a fraudulent transfer the transfer of the liens by the Conveying Subsidiaries to the New Lenders and to recover the value of the liens from the Transeastern Lenders. In October of 2009, the bankruptcy court found in favor of the Committee. It held that the liens conveyed by the Conveying Subsidiaries could be avoided pursuant to 11 U.S.C. § 548 because the Conveying Subsidiaries had not received “reasonably equivalent value” in exchange for the liens. In reaching this conclusion, the bankruptcy court first noted that “value” is defined in section 548 as being “property” or “satisfaction or securing of a present or antecedent debt of the debtor.” 11 U.S.C. §§ 548(a)(1)(B)(i), (d)(2)(A). It then determined that, the Conveying Subsidiaries could not receive “property” unless they had “obtained some kind of enforceable entitlement to some tangible or intangible article.” Under this definition of “value,” the bankruptcy court found that, because the Conveying Subsidiaries had not received any property, they had not received reasonably equivalent value. Alternatively, the bankruptcy court found that even were it to accept the “value” asserted by the New Lenders, any value the Conveying Subsidiaries had received, if any, would not have been “reasonably equivalent value” for the liens. The bankruptcy court also found that the Transeastern Lenders were entities “for whose benefit” the improper transfer had been made and, thus, the value of the liens could be recovered from the Transeastern Lender. It ordered the Transeastern Lender to disgorge more than $400 million. From the disgorged funds, the court awarded the Committee damages to cover the transaction costs and other damages. The bankruptcy court ordered that the remaining funds be distributed to the New Lenders and restored the unsecured claims of the Transeastern Lenders against TOUSA and its partner in the joint venture. The New Lenders and the Transeastern Lenders each appealed to the district court. The decision at hand relates specifically to appeals filed by the Transeastern Lenders. In considering the appeals by the Transeastern Lenders, the district court quashed the order of the bankruptcy court. In reaching its decision, the district court determined that the bankruptcy court had too narrowly defined “value” when it determined that the Conveying Subsidiaries had not received “reasonably equivalent value” and had clearly erred when it found that the Conveying Subsidiaries had not received reasonably equivalent value from the transaction. The district court found that the transaction had given the Conveying Subsidiaries the opportunity to avoid bankruptcy, continue as going concerns, and make further payments to their creditors. It found that these benefits did not need to be quantified to be deemed to establish reasonably equivalent value. The district court also held that the Transeastern Lenders could not, as a matter of law, be liable as “entities for whose benefit” the transfers were made because they had not benefitted from the transfer of the liens to the New Lenders within the meaning of section 550(a)(1). The district court held that the Transeastern Lenders were subsequent transferees of the proceeds backed by the liens, not immediate beneficiaries of the transfer of the liens, and that subsequent transferees are not covered by section 550(a)(1). The Committee appealed the decision of the district court to the Eleventh Circuit. In its decision, the Eleventh Circuit reversed the district court and upheld the findings of the bankruptcy court as to liability. First, the Eleventh Circuit held that the bankruptcy court did not clearly err when it found that the Conveying Subsidiaries had not received reasonably equivalent value in exchange for their liens such that those liens could be avoided as a fraudulent transfer. In reaching this conclusion, the Eleventh Circuit specifically declined to address whether the possible avoidance of bankruptcy can confer “value”. It declined to reach this point because the bankruptcy court had determined that, even if the purported benefits asserted by the New Lenders -- such as the delaying a bankruptcy filing and continuing as a going concern -- were legally cognizable, they did not convey “reasonably equivalent value” for the liens. The record supported the bankruptcy court’s factual determination that the costs of the Transeastern Settlement outweighed any perceived benefits. The court explained that, “[t]he bankruptcy court correctly asked, based on the circumstances that existed at the time the investment was contemplated, whether there was any chance that the investment would generate a positive return. And the record supports the negative answer found by the bankruptcy court.” (internal quotations and citations omitted). The Eleventh Circuit next held that the bankruptcy court had not erred in finding that the Transeastern Lenders should be deemed an “entity for whose benefit” the liens securing the new loans had been conveyed such that the TOUSA estate could recover from the Transeastern Lenders pursuant to section 550(a)(1) of the Bankruptcy Code. In concluding that the bankruptcy court had not erred, the Eleventh Circuit rejected the assertion by the Transeastern Lenders that section 550(a)(1) did not apply to them because they were not entities for whose benefit the initial transfer (the conveyance of the liens) had been made. In reaching its conclusion, the court noted that prior Eleventh Circuit case law supports the conclusion that a creditor such as the Transeastern Lenders may be liable as an entity for whose benefit a transfer was made. The court pointed to a prior decision in which the court had determined that a creditor of the debtor was an “entity for whose benefit” a note and security interest had been made when the debtor had executed a note in favor of a lender, secured by a certificate of deposit, and that lender had transferred funds to the creditor. Similarly here, the court explained, the Conveying Subsidiaries transferred liens to the New Lenders, who transferred funds to the Transeastern Lenders. The court also rejected the argument that the Transeastern Lenders should not be liable under section 550(a)(1) because they had benefitted from the subsequent transfer of funds, and not from the initial transfer of liens from the Conveying Subsidiaries. In rejecting this contention, the court noted that the new loan agreements specifically provided that the loan proceeds were to be paid to the Transeastern Lenders and that the liens were conveyed by the Conveying Subsidiaries to the New Lenders in conjunction with the distribution of the loan funds to the Transeastern Lenders. The court also found that, although the loan funds had been conveyed first to a subsidiary of TOUSA, the subsidiary was required to immediately transfer the funds to the Transeastern Lenders. As such, because TOUSA (through its subsidiary) never had control over the funds, the Transeastern Lenders would not be deemed a subsequent transferee of the loan funds. Finally, the Eleventh Circuit declined to consider the remedies ordered by the bankruptcy court and matters related to judicial assignment and consolidation because those issues had not yet been considered by the district court.

Judge(s):

TJOFLAT, PRYOR and FAY, Circuit Judges.

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