Florida Bankruptcy Court Finds TOUSA Loans Fraudulent Conveyances and Orders Lenders to Return More Than $600 Million

October 19, 2009
In a potentially landmark decision, the U.S. Bankruptcy Court for the Southern District of Florida ordered lenders to turn over more than $600 million in Official Committee of Unsecured Creditors of TOUSA v. Citicorp North America, Inc. (In re TOUSA, Inc.). The court held that “savings clauses” in guaranties—which provide that the obligations and liens are deemed to be reduced to the extent necessary to prevent the insolvency of each guarantor obligor—are unenforceable, and the “common enterprise” approach is inappropriate when conducting a valuation and solvency analysis of subsidiaries. Private equity sponsors and other investors should take note of the guidance provided by the court on the limitations of, and the proper compensation arrangements for, solvency opinions, as well as the importance of credible financial diligence and expert testimony. Investors should also be aware this decision calls into question the efficacy of current defense strategies against fraudulent conveyance-based attacks on leveraged buyouts. This update summarizes the case and clarifies significant implications for the future of similar financings.