For several years now the bankruptcy and lending communities have been abuzz over the now concluded "Tousa Saga,"1 a fraudulent conveyance lawsuit that began with a multi-hundred million dollar disgorgement ordered by the Bankruptcy Court for the Southern District of Florida,2 reversed by the District Court for the Southern District of Florida,3 and ultimately reinstated by the Eleventh Circuit.4 The Tousa line of decisions is remarkable and unique due to the amount of money involved, the nature of the transaction at question and the sweeping relief granted by the bankruptcy court. Practitioners, however, should not dismiss the Tousa line of decisions as limited to the transactions and factual circumstances involved.
The Tousa decisions contain practical guidance and warnings for bankruptcy and finance professionals evaluating what might have seemed like ordinary workout and lending transactions. As the Eleventh Circuit noted in the first of the line of its decision, the Tousa Saga is about nothing more than the "transfer of liens by subsidiaries of [a parent entity] to secure the payment of a debt owed only by their parent."5 The Tousa decisions highlight the dangers and uncertainties involved with loans made to a parent company but secured by the assets of its subsidiaries, especially when the subsidiaries are already deeply in debt to unsecured creditors. Lenders seeking to mitigate losses on distressed loans naturally look to any unencumbered assets in an enterprise to secure unsecured portions of existing loans or new advances even in small and middle market situations. Accordingly, the Tousa decisions serve as a cautionary tale for lenders seeking to protect themselves in distressed deals and an informative one for unsecured creditors (and their committees) evaluating the potential returns from a bankruptcy estate.
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