Where s the Money Bankruptcy Court Reverses Tousa Ruling

The bankruptcy of mega-builder Tousaas a bombshell in the Florida homebuilding market, affecting thousands of homeowners, subcontractors, and trade workers. Because Tousa was a complicated financial organization, the legal ripples from that bankruptcy continue to make waves in the Florida market. Last year, for instance, hundreds of Florida contractors were surprised to find themselves facing lawsuits from Tousa creditors who wanted the contractors to return money Tousa had paid them in 2007. The creditors argued that Tousa was already insolvent when it paid those subcontractor bills, and so legally the subs should have to get in line with all the company’s other unsecured creditors. South Florida Business Journal covered that story last year (“ South Florida contractors battle new TOUSA bankruptcy claims”). More information from Tousa’s lawyers about the status of the bankruptcy proceedings is available (“Restructuring Active Cases TOUSA Inc ”). The Creditors Committee in the bankruptcy also maintains a website (“Official Creditors Committee Information Website”). Now, a Miami Federal District Court has issued a ruling in another complex, murky element of the Tousa bankruptcy: the case of the so-called “Transeastern Lenders.” U.S. District Judge Alan S. Gold of the U.S. District Court for the Southern District of Florida reversed an earlier ruling by judge John K. Olson of the U.S. Bankruptcy Court for the Southern District of Florida over emergency loans to Tousa from Citicorp. The Citicorp loans to Touse were guaranteed by Tousa-owned subsidiaries. Tousa used the money to stave off bankruptcy by repaying Deutschbank, which served as administrator for a group of lenders called the “Transeastern Lenders.” ,. The bankruptcy court had ruled that the subsidiaries gained nothing by guaranteeing the loans, and thus that the transfer of the loan proceeds to the Transeastern Lenders was fraudulent. As may have been true when Tousa paid its subcontractors for actual work, the bankruptcy court found that Tousa was already broke for all practical purposes when it repaid the Transeastern Lenders. So the judge ruled that the lenders, like the subs, should cough up the money and place it back in the pool of assets to be divided up in bankruptcy proceedings. Judge Gold of the District Court disagreed. His 113-page “ Opinion and Order on Appeals by Transeastern Lenders” may be hard for laypersons to understand, but it will be interesting to experts in big-builder financing, as well as to specialists in bankruptcy law. The opinion traces the complex history of Tousa’s financial wheeling and dealing, and it gives some sense of the desperation facing the giant enterprise as its house of cards began to feel the effects of gravity in late 2006. The Citicorp loan was an attempt to stay afloat, but may have had the opposite effect – the load amount was $421,522,193.46, with additional interest payments amounting to about $140,000.00 per day. The full story follows a convoluted path all the way to the sad ending where Tousa went bankrupt in spite of the emergency help, and the sequel where the bankruptcy court took over the job of splitting Tousa’s assets among its many creditors. The fallout of the bankruptcy is still ongoing. The weight of this latest District Court decision is that the Transeastern Lenders, who got the benefit of a last-minute payout in the early stages of Tousa’s bankruptcy end-game, will get to keep that cash — at least pending appeal. And financial observers are welcoming that outcome — they say without it, lenders would be reluctant to step in to help companies facing bankruptcy navigate the shoals of their financial difficulties. A Wall Street Journal blogger comments, “a dark shadow has just been cleared in the form of a court ruling that lowers the risk of creditors coming after the backers of heavily indebted companies that run into trouble” (“ Ruling Clears Another Barrier To Return Of Mega Deals,” by Nick Elliott). On Friday, another Federal judge ruled on a related aspect of the Transeastern Lenders case. Miami U.S. District Court Judge Adalberto Jordan ruled that “changes in the revolving loan agreement as the home builder slid into trouble did not open the deal up to attack as a fraudulent conveyance,” according to the Wall Street Journal (“ Tousa's Creditors Lose Bid To Revive Revolving Loan Claims by Peg Brickley Smaller contractors in the struggling South Florida market may have little interest in the concerns of high-finance gurus and investors. But it might be worth their while to be aware of situations where they might be forced to cough up money they earned working for a developer on the verge of bankruptcy. You can learn some of the ins and outs of that situation from a law blog by West Palm Beach attorneys Bruce Loren and Associates (“ Another Fear for Contractors Bankruptcy Courts May Force You to Return Money Rightfully Earned”). One risk factor, says Loren, is being the last man on the job: “Your risk of being sued in a Preference Action may depend upon your trade. Generally, the debtor (or trustee) pursues the trades that perform work last on a project and [are] paid last. For example, flooring, landscape, and painting contractors are paid after the cement and block contractors.” In a phone interview with Coastal Connection, Bruce Loren said the clawbacks by creditor committees in big builder bankruptcies are an ongoing issue. Said Loren, “Most of the cases with Tousa have been settled — either they gave back the money, or in some cases Tousa gave up because the contractor was out of business.” But Loren says he’s representing five contractors who are still fighting the Tousa takebacks. And he says he has other clients who have just been put on notice of a similar clawback attempt by the creditors of bankrupt WCI. “Prior to Tousa,” Loren says, “this kind of thing was rarely ever done. Typically, contractors were getting paid for work they got done, and the builders appreciated the value added. Also, for example, in the case of Tousa, the company was able to go ahead and sell houses because of the completed work that some of my clients did. So the value that was there for the other creditors to draw on was much greater because of that work.” So why would a builder such as WCI want to burn bridges with those subs by clawing back money it already paid? In bankruptcy, Loren points out, the builder itself doesn’t have much say — other creditors such as bank lenders are responsible for the move against the subs. In the case of Tousa, he says, “Tousa’s gone. It’s the creditor committee that is doing this.” But even WCI, which is starting operations again in Florida, has no way to stop the creditor committee from targeting contractors WCI has worked with, and paid, in the past. Florida contractors targeted by WCI creditors are going to find the cases tough to defend. At least Tousa’s action was fought out in Florida. But in the case of WCI, small contractors facing a clawback action will have to defend themselves not in Florida, but in Federal Bankruptcy Court in Delaware where WCI is headquartered.