The Terrible TOUSAs: Opinions Test the Patience of Corporate Lending Practices

Abstract

Two diametrically opposed decisions pit creditors against debtors. The case of troubled homebuilder TOUSA has generated shockwaves through the lending industry. Set against the backdrop of the housing collapse and risky lending, the bankruptcy court’s decision left secured creditors with a mixture of shock, anger, and worry over the repercussions. In that opinion, the bankruptcy court unwound a nearly $1 billion transaction of liens and loan proceeds, on grounds that the transactions drove the debtor company into the ground. In other words, the court found that a fraudulent transfer had occurred. Not surprisingly, the lenders appealed and the next decision in what surely will be a long line of TOUSA opinions unwound the bankruptcy court’s decision – for a limited set of defendants – and effectively blessed the transaction. How can two opinions couched in the same facts disagree so vehemently at nearly every twist and turn of the case? This article examines the TOUSA I and TOUSA II opinions. It assesses the holdings and reasoning related to fraudulent transfers, reasonably equivalent value, and indirect benefits. It compares the contrasting approaches and attempts to frame the issues for the case’s eventual turn in the Eleventh Circuit Court Appeals. Last, this article focuses on the effects of TOUSA I and TOUSA II and whether the prognostications are inevitable or mere puffery.

Keywords: TOUSA, Bankruptcy, Creditors, Debtors, Fraudulent Transfers, Bankruptcy Law

JEL Classification: G33, K29, K22, K39