On May 15, 2012, the U.S. Court of Appeals for the Eleventh Circuit issued a significant opinion regarding fraudulent transfer claims. Senior Transeastern Lenders v. Official Committee of Unsecured Creditors (In re TOUSA), 680 F.3d 1298 (11th Cir., 2012). The TOUSA opinion is particularly important to the distressed investing and lending communities, especially those who provide “rescue funding” to financially troubled companies in an effort to avoid bankruptcy.
In particular, the Eleventh Circuit held that subsidiaries of a borrower did not receive reasonably equivalent value in exchange for liens that the subsidiaries granted to lenders to secure in excess of $400 million in debt. The funds that were lent to the borrower were used to repay pre-existing debt owed to another lending group. Therefore, the liens could be avoided as a fraudulent transfer under §548(a)(1) of the Bankruptcy Code.
