In Re TOUSA, Inc.

Homebuilding giant TOUSA, Inc. (debtor) grew rapidly by acquiring homebuilder subsidiaries. To finance its acquisitions, TOUSA issued more than $1 billion in bonds guaranteed by its subsidiaries and drew on a Citicorp revolving line of credit. When the housing market collapsed, a joint venture that TOUSA had entered to acquire homebuilding assets from Transeastern Properties, Inc. (Transeastern) defaulted, and the lenders who financed the acquisition sued TOUSA. TOUSA settled for over $421 million, financed by borrowing another $500 million that Citicorp agreed to syndicate from new lenders, secured by liens conveyed by TOUSA subsidiaries (the conveying subsidiaries) (debtors). Citicorp transferred the funds to a TOUSA title company, which wired the funds to a Transeastern agent who disbursed $421 million to the Transeastern lenders and the rest to pay professional and advisory fees. At that point, TOUSA owed $1.061 billion on its bond debt and $224 million on its revolving loan. Six months later, TOUSA and its conveying subsidiaries filed for bankruptcy reorganization. The Unsecured Creditors’ Committee (UCC) brought an adversary proceeding to avoid the transfer to the Transeastern lenders and recover the liens’ value. The parties agreed the conveying subsidiaries were insolvent, undercapitalized, or unable to pay debts at the time of the transfer but disputed whether they received reasonably equivalent value in exchange for the liens. The Transeastern and new lenders argued the conveying subsidiaries received equivalent value because of the economic benefit of avoiding default and bankruptcy. The bankruptcy judge avoided the transfer as fraudulent and ordered the lenders to disgorge the loan proceeds. The lenders appealed, and the district court reversed. The UCC appealed.