october 15, 2009

On October 13, in the chapter 11 cases of homebuilder TOUSA, Inc. and its subsidiaries, Judge John K. Olson of the United States Bankruptcy Court of the Southern District of Florida avoided as fraudulent transfers the liens and underlying debt obligations incurred by certain of TOUSA's subsidiaries in connection with $500 million of secured loans made six months prior to the bankruptcy filing. The proceeds of the loan facilities were used to fund a litigation settlement of TOUSA and another subsidiary (that was not an obligor on the loans).

In avoiding the liens against and obligations of the subsidiary obligors, the court found that (i) such subsidiaries received little or no benefit from the loan facilities (and therefore did not receive reasonably equivalent value in exchange for incurring the obligations and granting the liens) and (ii) due to the collapsing housing market such subsidiaries were insolvent both prior to and after giving effect to the transaction, and were left with unreasonably small capital with which to operate their businesses as a result of the transaction.

The court declined to adopt the lenders’ argument that they acted in good faith and without knowledge of the avoidability of the transaction. Significantly, the court also found, using surprisingly broad language, that “savings clauses” (which provide that the obligations and liens are deemed to be reduced to the extent necessary to prevent the insolvency of each obligor), commonly found in loan documentation, are unenforceable.

Please click here to view the opinion.

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If you have questions regarding the matters covered in this publication, please contact any of the lawyers listed below or your regular Davis Polk contact.

Donald S. Bernstein
212 450 4092 | donald.bernstein@davispolk.com

Timothy Graulich
212 450 4639 | timothy.graulich@davispolk.com

Marshall S. Huebner
212 450 4099 | marshall.huebner@davispolk.com

Benjamin S. Kaminetzky
212 450 4259 | ben.kaminetzky@davispolk.com

Brian M. Resnick
212 450 4213 | brian.resnick@davispolk.com

Damian S. Schaible
212 450 4580 | damian.schaible@davispolk.com

Karen E. Wagner
212 450 4404 | karen.wagner@davispolk.com