Posted on Friday, October 22, 2010
Lenders, creditors battle over home-builder Tousa's loans
A group of big lenders will face off against creditors of home-builder Tousa today in a legal tug of war over more than $500 million.
The case involves a loan issued to Tousa in the months leading up to its Chapter 11 bankruptcy filing in January 2008.
A collection of local and out-of-state lawyers representing a group of 67 lenders, including Citicorp, Wells Fargo and Bank of America will spar with attorneys for creditors as they seek to convince U.S. District Judges Alan Gold and Adalberto Jordan in Miami that U.S. Bankruptcy Judge John K. Olson erred last year when he ruled that a $500 million loan Tousa received was a fraudulent transfer.
In bankruptcy proceedings, cash transfers and new debt can be considered fraudulent if the company was insolvent at the time it received the money.
The transactions also can be considered fraudulent if a company is left with insufficient money to pay debts.
In a 182-page opinion in October 2009, Olson found the lenders liable for providing the $500 million to Tousa before it filed for protection from its creditors.
Olson also required the lenders to post $700 million pending the appeal.
Citicorp, one lender appealing Olson's ruling, said in a court filing the order is a "'textbook' example of judicial overreaching."
The case is being closely watched by the banking industry and their lawyers, who say Olson's ruling could make lenders nervous about providing big loans to companies.
The litigation ¬— which so far has cost about $100 million in legal fees, according to a source who asked not to be identified ¬— revolves around a series of financial deals in July 2007, about six months before Tousa filed for Chapter 11 reorganization.
The company listed assets of $2.1 billion and debt totaling $2 billion.
In 2005, Tousa borrowed a total of about $675 million from a group headed by Deutsche Bank known as the senior Transeastern lenders and formed a joint venture with home-builder Transeastern Properties.
The joint venture later ran into financial trouble, and Tousa defaulted on the loans.
In 2007, Tousa and the Transeastern lenders reached a settlement in which Tousa was to pay the $420 million.
To pay the settlement, Tousa obtained two loans totaling about $500 million from two large groups of lenders that included Wells Fargo, Bank of America and CIT Group.
As part of that financing, Tousa used as collateral its subsidiaries, which owned most of the company's assets.
After Tousa filed for bankruptcy, the committee representing unsecured creditors sued the Transeastern lenders, claiming they were entitled to the $420 million. They also asked Olson to void the $500 million financing package.
Judge Olson ruled for the creditors committee, saying the lenders "did not act in good faith and were grossly negligent" when they made the loans.
Olson, who said the lenders "had more than sufficient knowledge to understand Tousa's precarious situation," ruled Tousa's subsidiaries deserved the money since they did not benefit from the deal in which they were pledged as collateral.
Wells Fargo, in a brief filed in support of the appeal, said Olson ignored "the reality of corporate group financing."
In the brief, the bank said financing "involving parent company debt and subsidiaries acting as co-borrowers and/or guarantors is typical for many corporate enterprises, as it allows for financing on favorable terms to strengthen the group as a whole."
Scott Baena, a Bilzin Sumberg Baena Price & Axelrod attorney representing Wells Fargo, which is leading one of the lending groups in the lawsuit, declined comment.
Michael Goldberg, an Akerman Senterfitt attorney in Fort Lauderdale who is co-counsel to several Transeastern lenders, also declined comment.
Last year, Olson ordered the lenders to return the $420 million to Tousa's estate at a 9 percent interest rate dating from 2007.
That would produce more than $80 million in interest.
Olson also stripped the lenders of a $207.3 million security interest in a tax-refund claim.
If Olson is upheld, the lenders that provided $500 million to Tousa will lose their interest in the company's subsidiaries' assets.
They will be left with secured claims against the insolvent parent. The lenders that received the $420 million payment in 2007, would have to return the money to Tousa's estate.
If Olson's order is overturned, the unsecured creditors of Tousa will have little chance of being paid.
Patricia Redmond, a Stearns Weaver Miller Weissler Alhadeff & Sitterson attorney who is co-counsel to Tousa's unsecured creditors' committee referred questions to New York lawyer Larry Lawrence, who declined comment.
Several lenders also say that Tousa and its subsidiaries were not insolvent when the loans were made.
The lenders also dispute the more than $30 million in legal fees the court ordered paid to Tousa's subsidiaries.
Polyana da Costa
Daily Business Review