In a stunning reversal of a Bankruptcy Court decision in TOUSA, Inc. that had lenders and trading desks alike concerned, Judge Alan Gold of the District Court for the Southern District of Florida held that a transaction in which subsidiaries of TOUSA, Inc. encumbered all of their assets to borrow money in order to pay a debt of their parent company was not a fraudulent conveyance as to the parties paid with the loan proceeds. In doing so, he recognized prevailing fraudulent conveyance law prior to the Bankruptcy Court opinion in TOUSA, Inc., and held that “reasonably equivalent value” as referred to in the fraudulent conveyance statute could consist solely of intangible benefits. Official Committee of Unsecured Creditors of TOUSA, Inc., v. Citicorp North America, Inc. (In re TOUSA, Inc.), 422 B. R. 783 (Bankr. S.D. Fla. 2009).
While the District Court decision in TOUSA does not necessarily break new ground, it restores balance to fraudulent conveyance jurisprudence by overturning the lower court opinion which questioned longstanding assumptions by lenders as to the applicability of fraudulent conveyance law to commercial transactions. But the saga is far from over. The appeal of the lender defendants, which involves, among other things, the viability of the industry standard “savings clause” is pending before another District Court judge, and appeals to the 11th Circuit are likely. Nonetheless, lenders can take comfort from the affirmation of mainstream views by Judge Gold, and lenders and traders alike have learned an important lesson about allocating the risk of disgorgement when documenting trades.