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Creditors Hold Onto Priority Status in South Florida Homebuilder’s Chapter 11 Bankruptcy

new-home-construction-1The 11th Circuit Court of Appeals issued another ruling in the long-running case of the bankruptcy of a South Florida-based homebuilder whose fortunes collapsed along with the housing market in the 2000s. The appeals court affirmed a ruling of the bankruptcy court that gave the debts held by two creditors (who had purchased the claims of landowners) priority status, based upon the terms contained in the property development contracts the homebuilder had created several years earlier.

The debtor in the case was a homebuilder named TOUSA Homes, Inc. The collapse of the housing market sent TOUSA into financial failure, and it filed for Chapter 11 bankruptcy. Ultimately, the bankruptcy court approved a confirmation plan that placed the debts TOUSA owed into different categories. Creditors holding debts classified as “senior debt” would stand to recover much greater percentages of the debts owed to them than creditors holding other categories of debt.

Two entities, Jefferies Leveraged Credit Products, LLC and Castle Creek Arbitrage, LLC, filed claims asserting that the debts owed them were senior debts. Jefferies and Castle were companies that purchased the right to recover on the claims held by the landowners in TOUSA’s case. The bankruptcy court sided with Jefferies and Castle. This prompted a court challenge by another creditor, Wilmington Trust Co., whose debts were not senior debts. The bankruptcy court ruled against Wilmington, and the 11th Circuit affirmed that decision on appeal.

The key to resolving the dispute lay within a series of property development contracts the homebuilder executed back in the early 2000s. If those agreements contained anything within them showing that the obligations TOUSA owed to the landowners (and now to Jefferies and Castle) would qualify as debts, the bankruptcy court was correct in ruling that the obligations to Jefferies and Castle were entitled to senior debt status.

There were a variety of ways that the obligations could qualify as debts. Five of the seven contracts qualified because they involved conditional sales. The remaining two did not qualify as involving conditional sales because they did not involve actual obligations to make purchases. Those two nevertheless qualified as debts, however. Each of the two involved either “debt for money borrowed” or a “sale-leaseback transaction,” meaning that, even though they did not involve conditional sales, they were still debt obligations of TOUSA. As a result, all seven of the contracts qualified, and all of the amounts owed to Jefferies and Castle were entitled to senior debt status.

This ruling by the 11th Circuit was the latest in this prolonged litigation. Much of the litigation that previously took place in this case centered on the legitimacy of certain loan transactions. One of TOUSA’s subsidiaries had defaulted on $675 million of debt. TOUSA bailed out the subsidiary, using financing that was secured by a lien on virtually all of TOUSA’s assets. In that bailout, the subsidiary’s lenders received a settlement in the amount of $421 million. Six months later, TOUSA filed its Chapter 11 petition. The bankruptcy court later ruled, and the 11th Circuit affirmed, that this transaction was a fraudulent transfer and that the $421 million the subsidiary’s lenders received was vulnerable to the clawback provisions in the Bankruptcy Code.

Pursuing a Chapter 11 bankruptcy can be a very beneficial but nevertheless complicated process. If you are considering options for your business, including Chapter 11, consult the skilled Florida bankruptcy attorneys at Stok Folk + Kon. Our attorneys have the experience and ability to help you make a wise choice and navigate the process until the end.

Contact us online or by calling (305) 935-4440 to schedule your consultation.

More blog posts:

Delay Stymies Creditor’s Action; Environmental Claim Against Chapter 11 Debtor Was Discharged, Florida Business Lawyers Blog, Jan. 16, 2016

Federal Appeals Court Approves Florida Debtor’s Chapter 11 Reorganization with Third-Party Releases, Florida Business Lawyers Blog, Nov. 20, 2015