TOUSA III: The Secured Lenders Take the Lead!
Once again, TOUSA’s Chapter 11 proceedings caught the attention of bankruptcy professionals as Judge Alan S. Gold of the U.S. Bankruptcy Court for the Southern District of Florida granted a motion that amounts to a score for the first and second lien holders.
Judge Alan S. Gold of the U.S. District Court for the Southern District of Florida entered an order today granting the motions of the first and second lien lenders (the lien lenders) to intervene in the appeal involving the Transeastern lenders to the 11th Circuit Court of Appeals (the Transeastern appeal). In so doing, Judge Gold accepted the proposition that the 11th Circuit’s decision on the issue of reasonably equivalent value (the REV issue) would bind the lien lenders. And, because Judge Gold had decided the REV issue in favor of the position advocated by the lien lenders — meaning that the lien lenders did not receive fraudulent transfers — this one can definitely be scored as a victory for the lien lenders, albeit an interim one.
To back up a bit… In the TOUSA Chapter 11 proceedings, the bankruptcy court held that the lien lenders and the so-called Transeastern lenders had received fraudulent transfers arising out of a July 31, 2007 financing transaction. In that transaction, the lien lenders lent $500 million to TOUSA, the bulk of which was used to settle a TOUSA guarantee of obligations owed to the Transeastern lenders. The bankruptcy court concluded that the secured guarantees granted by TOUSA’s subsidiaries to the lien lenders were fraudulent transfers because, among other reasons, the subsidiaries did not receive reasonably equivalent value in exchange for securing TOUSA’s obligations. The bankruptcy court further held that the payments to the Transeastern lenders were also avoidable as fraudulent transfers, again for the reason (among others) that the subsidiaries did not receive reasonably equivalent value.
To simplify the procedural posture a bit, two appeals were taken. The lien lenders appealed the decision against them and, eventually, their appeal was assigned to Judge Adalberto Jordan. The Transeastern lenders appealed the decision against them and their appeal was assigned to Judge Gold. (There was also a separate appeal from a separate decision of the bankruptcy court involving the so-called revolver lenders. Our discussion of the decision on appeal in favor of the revolver lenders can be found at the link provided at the end of the article.)
On February 11, 2011, Judge Gold quashed the bankruptcy court judgment against the Transeastern lenders. While this was done on several grounds uniquely relevant to the Transeastern lenders, Judge Gold also concluded in the alternative that the subsidiaries did receive reasonably equivalent value for granting their secured guarantees. Our discussion of Judge Gold’s decision, which includes a fuller discussion of the specifics of the REV issue, can be found using the link at the end of this article. The committee then filed the Transeastern appeal, albeit prematurely given that there is still a motion for rehearing pending before Judge Gold.
Based on Judge Gold’s decision on the REV issue, Judge Jordan decided to stay the appeals of the lien lenders pending a decision by the 11th Circuit in the Transeastern appeal. In his stay order, Judge Jordan noted that “nearly every interested entity has acknowledged that Judge Gold’s opinion… if upheld, would be dispositive” of the fraudulent transfer judgment against the lien lenders.
The Motions to Intervene
Given that all of the action had now shifted back to the Transeastern appeal, the second lien lenders quickly filed an emergency motion to intervene in Judge Gold’s decision so that they would have their own right to brief and argue the REV issue before the 11th Circuit. While it is unusual to file an intervention motion after a decision has already been entered, it is not unprecedented. The first lien lenders shortly followed suit.
The committee opposed both intervention motions, arguing that the post-decision intervention motions were “untimely” and that the REV issue would be fully addressed by the Transeastern lenders and the committee before the 11th Circuit, such that there was no need for the lien lenders to participate in their own right. The committee asserted in the alternative that, if intervention was permitted, only the first lien lenders should be permitted to intervene.
Judge Gold made short shrift of the committee’s arguments, to the point of referring to one of the committee’s arguments as “def[ying] logic.” As a result, both the first lien lenders and the second lien lenders are now full parties as to the REV issue in the Transeastern appeal. Judge Gold’s order granting the intervention motions can be found using the link at the end of the article.
Given that both Judge Jordan and Judge Gold have assumed that the 11th Circuit’s decision on the REV issue will be binding on the lien lenders, the lien lenders can belatedly claim victory in their own appeal.
However, the victory is only interim. Just as an 11th Circuit opinion affirming Judge Gold on the REV issue would require affirmance in favor of the lien lenders, so too would a reversal by the 11th Circuit on the REV issue adversely bind the lien lenders.
But, the REV issue was only one of the grounds for reversal asserted by the lien lenders. Most importantly, the lien lenders also asserted that TOUSA and its subsidiaries were solvent after the July 31, 2007 loans were made. If true, then it would be irrelevant under fraudulent transfer law whether the subsidiaries received reasonably equivalent value. In other words, even if the 11th Circuit reverses on the REV issue, the lien lenders will still have the opportunity to argue the solvency appeal before Judge Jordan. The same is not true for the committee, however. If the 11th Circuit affirms on the REV issue, then all fraudulent transfer challenges will be over for the committee.
However, there is no assurance that the 11th Circuit will decide the REV issue. As noted above, it was an alternative ground for reversing in favor of the Transeastern lenders. In theory, the 11th Circuit could decide in favor of the Transeastern lenders without reaching the REV issue. Were that to occur, the lien lenders would then need to pursue a separate appeal to the 11th Circuit on the REV issue.
Finally, the bankruptcy court also held that the lien lenders had received a substantial preferential transfer. In the view of the lien lenders, an 11th Circuit decision on the REV issue would also dispose of the preference issue for reasons having to deal with the fifth element of the preference statute. The committee, however, has stated that it vigorously disagrees with this view, such that there may be further litigation on the preference issue even if the 11th Circuit affirms on the REV issue.
In the meantime, however, the lien lenders can be pleased both that the REV issue has, for now, been decided in their favor and that they will be entitled to fully brief and argue the REV issue in their own right before the 11th Circuit.
To access the appeal and discussions referenced above, visit http://www.bracewellgiuliani.com/index.cfm/fa/news.advisory/item/cd7bb1b6-4155-442f-b5e7-b0827dd4eb37/TOUSA_III_The_Secured_Lenders_Take_the_Lead.cfm .
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Evan D. Flaschen is the chair of the Financial Restructuring Group at Bracewell & Giuliani LLP. His practice includes representation of many of the world’s largest institutional investors, private investment funds, Wall Street desks, fund managers, leveraged finance participants and financial services companies in out-of-court restructurings, in-court proceedings and distressed M&A transactions, both domestically and internationally.
Gregory W. Nye is a partner on the Financial Restructuring team, where he focuses on out-of-court and Chapter 11 restructurings, with a particular emphasis on litigation assessment, bankruptcy trial work, and bankruptcy appeals. He also handles complex commercial cases in federal and state courts throughout the nation.
Daynor M. Carman is a member of the firm’s litigation team, where she handles complex commercial litigation in federal and state courts. Carman focuses on the representation of institutional investors and lenders in complex bankruptcy adversary and appeal proceedings with a particular emphasis on litigation assessment, bankruptcy trial work and appeals.