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While junior creditors often threaten to sue bankrupt companies and their secured lenders for fraudulent conveyance, few ever follow through, Debtwire reports. Even fewer actually clear the substantial burden of proof needed to win such arguments. But bond holders of Florida-based home builder TOUSA Inc. did just that Tuesday in a legal upset.
The decision is a slam dunk win for holders of the company’s aggregate USD 1.05bn in unsecured and subordinated bonds and their legal counsels Robbins Russell and Akin Gump, said a trader and a bond holder. TOUSA’s USD 200m 9% senior notes due 2010 rocketed up to 50 this morning from 11, said the trader. Meanwhile, its USD 200m 7.5% senior subordinated notes due 2015 traded up to 4 from zero, the trader said. The second lien was quoted at 2/6, said a buysider.
A US bankruptcy court ruled Tuesday that the liens on the USD 500m loans Citigroup arranged for TOUSA in 2007 fraudulently conveyed value away from its operating subsidiaries. Judge John Olson of the US Bankruptcy Court of the Southern District of Florida released an opinion requiring that the lenders to the company’s USD 200m first lien and USD 300m second lien loans disgorge all principal and interest payments, as well as all liens on USD 207m in tax refunds, according to court documents.
In addition, Judge Olson ruled that the lenders to Transeastern – TOUSA’s joint venture with Falcone/Ritchie – who received USD 403m in proceeds from the 2007 loans must return those payments. Transeastern lenders can submit a claim against TOUSA Inc. and TOUSA Homes LP by 13 November 2009, according to court documents.
The 182-page ruling noted that TOUSA and its subsidiaries were insolvent before and after TOUSA issued the USD 500m in first and second lien debt – a transaction that rendered them even less solvent, with unreasonably small capital, and unable to pay their debts as they came due.
Citigroup, which arranged both loans – and was later replaced as administrative agent by Wells Fargo in the second lien piece – was “motivated by the prospect of substantial fee income” and completed the financing for the USD 500m in secured debt, despite its concern over TOUSA’s solvency, concluded the court.
Commitments for the loans dropped by 50% in July 2007 as news about the declining housing market spooked investors, according to court documents. Citigroup increased pricing on the facilities to keep allocations and that increase in pricing further impacted TOUSA’s ability to generate cash.
Citigroup wasn’t the only party motivated by fees, according to court documents. The judge noted that Antonio Mon, TOUSA’s CEO, received USD 4m in fees from the July 2007 transaction.
TOUSA filed for bankruptcy in January 2008. Now that the judge has ruled on the fraudulent conveyance action, the company will proceed with formulating a plan-of-re-organization.
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