Reversing a controversial decision and judgment of the
bankruptcy court, the United States District Court for the Southern
District of Florida has held that a group of lenders who received
payment in settlement of their defaulted debt from the proceeds of
new loans secured by the assets of certain subsidiaries of TOUSA,
Inc. which were not themselves liable on that debt, did not receive
fraudulent transfers.
The District Court found that because the TOUSA subsidiaries in
question never controlled the loan proceeds from the new loans, the
settlement payment to the lenders was not a direct transfer made by
the subsidiaries, and, accordingly, the subsidiaries could not
avoid the transfer. The subsidiaries also sought recovery based on
avoidance of the liens they granted to secure the new loans. The
district court found, however, that the subsidiaries received
reasonably equivalent value for whatever minimal property interest
they had in the new borrowing proceeds that were paid to the
lenders.
Specifically, the district court found that indirect benefits,
though difficult to value with precision, provided reasonably
equivalent value for the liens the subsidiaries granted, even if
the subsidiaries' interest in the proceeds of the new loans had
been directly transferred to the lenders. Using a "totality of
the circumstances" test, the court held that such indirect
benefits included avoiding default, avoiding bankruptcy (for the
time being), and having continued access to financing under a
revolving credit agreement that would otherwise have been in
default. It found that the bankruptcy court's use of the
dictionary definition of "property" as the measure of
whether value was received was incorrect, and that, in this
context, the mere opportunity to receive an economic benefit in the
future constituted value under the Bankruptcy Code. Thus, a
reprieve from foreclosure and the right to continue operations
could confer an indirect economic benefit. The district court
reasoned that an expectation that a settlement which would
"avoid default and produce a strong synergy for the
enterprise" would suffice to confer "value" so long
as the expectation was legitimate and reasonable. The touchstone,
the court held, was whether the transaction conferred
"reasonable commercial value" on the debtor.
The district court also found error in the bankruptcy court's
holding that, because the lenders were entities "for whose
benefit" the subsidiaries transferred liens to secure the new
loans, the subsidiaries could recover under section 550 of the
Bankruptcy Code. It rejected the argument that the lenders received
a benefit "flowing from the use to which the initial lien
transfer was put; namely the further transfer of [proceeds of the
new loans] to TOUSA, which, in turn, transferred the proceeds to
the [lenders] in settlement and payment of a valid, antecedent
debt." The court held that only an entity who receives a
benefit from the initial transfer can be an entity "for whose
benefit the initial transfer was made." It found that the
settlement payment was not the immediate and necessary consequence
of the initial transfer, but flowed from the manner in which the
initial transfer was used by its recipient.
Finding that the lenders would have had a valid "good
faith" defense in any event, the district court rejected the
bankruptcy court's "good faith" standard requiring
lenders receiving payment on a bona fide debt from an entity
other than the debtor to investigate the debtor's
financing structure, including whether its subsidiaries received
value and whether the debtor was insolvent. It found such a
standard "patently unreasonable and unworkable."
A second appeal stemming from the portion of the bankruptcy
court's decision avoiding the liens of the lenders which
provided the new loans is still pending before another district
judge in Florida. These actions are likely to be appealed to the
U.S. Court of Appeals for the 11th Circuit.
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