In re TOUSA, Inc.

TOUSA, Inc. (debtor) funded home-building projects through bond issuances and a revolving-credit facility (the revolver) on which certain TOUSA subsidiaries (the conveying subsidiaries) (debtors) were liable as guarantors. The bond indentures and the revolver provided that a judgment for more than $10 million against TOUSA or a bankruptcy filing by TOUSA would be a default event triggering accelerated repayment of any outstanding amounts due. In June 2005, TOUSA subsidiary Homes LP formed a joint venture to acquire assets owned by Transeastern Properties, Inc. The joint venture was funded under credit agreements that included $450 million in senior debt guaranteed by TOUSA and Homes. In September 2006, the lenders involved in the joint venture (the Transeastern lenders) and TOUSA agreed that a default had occurred under the credit agreements, and litigation ensued over TOUSA’s obligations under the guarantees. TOUSA settled with the Transeastern lenders and obtained new loans to fund the settlement agreements. The new loan documents gave TOUSA the authority to distribute the loan proceeds to the settling lenders. On July 31, 2007, TOUSA and the conveying subsidiaries pledged their assets as security to the new lenders, who took liens on the assets in exchange for $500 million. The new lenders wired the funds to a TOUSA agent, who then wired the funds to the Transeastern lenders’ agent. TOUSA and the conveying subsidiaries subsequently filed for Chapter 11 bankruptcy due to a housing-market crisis. TOUSA’s unsecured creditors’ committee claimed that the July 31 transaction was a fraudulent transfer that could be avoided under 11 U.S.C. § 548, and the bankruptcy court agreed. The bankruptcy court’s decision was based on the idea that the conveying subsidiaries had a property interest in the new loan proceeds, but the subsidiaries had received less than reasonable value in exchange for giving up that property interest and had been rendered insolvent. The bankruptcy court held the Transeastern lenders liable as the direct transferees of the new loan proceeds and as the entities for whose benefit the conveying subsidiaries transferred the liens to the new lenders. The bankruptcy court thus ordered the disgorgement to the conveying subsidiaries of the funds paid to the Transeastern lenders, plus prejudgment interest. The Transeastern lenders appealed.