June 7, 2017 - The LSTA this week, joined by the Commercial Finance Association, filed an amicus brief in a case of great importance to the loan market, In re TOUSA. At issue is whether a bankruptcy court can violate the four corners of the bankruptcy code (in this case, in the context of a remedy for a fraudulent transfer) on the basis of the court’s “equitable powers”. The LSTA believes the answer is no. In 2005, TOUSA, Inc. – a national homebuilder – created a joint venture funded in part by secured loans from the “Transeastern Lenders”. In July 2007, with the venture in default, TOUSA reached a settlement with the Transeastern Lenders, paying them the full amount owed under the guarantees of the loan. To fund the settlement, TOUSA borrowed $500 million from certain New Lenders, which it secured with liens on the assets of certain of its subsidiaries. Six months later, TOUSA and its subsidiaries filed for bankruptcy, and the unsecured creditors committee filed an adversary action to avoid the transfer of liens to the New Lenders. In October 2009, the Bankruptcy Court entered a post-trial order upholding the committee’s fraudulent transfer claims.
Instead of simply avoiding the liens transferred to the New Lenders, the Bankruptcy Court also directed the Transeastern Lenders to disgorge the estimated value of the liens plus prejudgment interest ($505 million). Thus, the Bankruptcy Court’s remedial scheme granted not only the return of the transferred property (i.e.,avoidance of the liens), but also damages equal to the value of the property, even though Section 550(d) of the Bankruptcy Code permits only a single recovery for a fraudulent transfer. Moreover, the court directed that the 70% of the disgorgement be transferred from the bankrupt debtor to the New Lenders even though there were no claims pending between the Transeastern Lenders and the New Lenders. In reaching this solution, the Bankruptcy Court acknowledged that its remedial scheme would violate the single satisfaction rule under normal circumstances but stated that TOUSA “is no ordinary case”. As such, the court relied on its inherent powers as a “court of equity” to impose its unusual and far-reaching solution.
After many years of litigation (on various related and unrelated matters), the Bankruptcy Court’s remedial scheme is on appeal to the United States Court of Appeal for the 11th Circuit. The LSTA’s amicus brief argues that by avoiding the liens and also ordering disgorgement of the value of the liens, the remedial scheme violates the single satisfaction rule under § 550(d) of the Code which allows the trustee to either “recover . . . the property transferred, or . . . the value of such property” and limits the trustee “to a single recovery for each transfer.” The Bankruptcy Court’s justification of this remedial scheme on the basis of its inherent powers as a “court of equity” to address an unusual case is clearly at odds with the U.S. Supreme Court’s recently decision in Czyzewski v. Jevic, where the Court (in another case in which the LSTA filed an amicus brief) held that “rare case” exceptions to fundamental principles of the Bankruptcy Code are impermissible because the difficulty in giving precise content to such exceptions “threatens to turn a rare case exception into a more general rule” and injects uncertainty into the market. Such concerns are equally applicable in TOUSA. Finally, the LSTA notes that authorizing ad hoc departures from the bankruptcy code threatens the efficient administration of bankruptcy cases and imposes harmful and unnecessary costs on creditors.