High-Profile Florida Bankruptcy Court Rulings

In a 190-page ruling, the United States Court of Appeals for the Eleventh Circuit reversed and remanded the Florida Bankrupcy Court’s fraudulent transfer ruling in the Tousa case. The Florida Bankruptcy Court’s fraudulent transfer ruling voided loan transactions, as fraudulent transfers, and brought commercial lenders under scrutiny.

Tousa, Inc. Bankruptcy

Tousa, Inc., a Hollywood, Florida builder with 37 affiliates and $2.3 billion in assets, filed for Chapter 11 bankruptcy in Fort Lauderdale on January 29, 2008. Florida housing sales declined 26 percent, property values decreased and foreclosures doubled in 2006. A record number of 279,325 foreclosures were filed in Florida during 2007.

Tousa, behind in payments on a $200 million construction loan, $300 million in notes and $185 million in subordinated notes, was buried under lender’s litigation. Tousa was $1.8 billion in debt when they filed for bankruptcy.

Determined to settle lenders’ litigation and against the advice of its largest stakeholders, Tousa borrowed $500 million from another lender. The new loan was secured by subsidiaries’ assets. Tousa’s subsidiaries were not tied up in litigation and not directly obligated for Tousa’s debts. The purpose of the new loan, in the closing documents, was to pay creditors (Transeastern Lenders). Closing on the new loan was 6 months before Tulsa and its subsidiaries filed for bankruptcy.

Tousa Bankruptcy Hearing

In the 13-day trial in the United States Bankruptcy Court for the Southern District of Florida, unsecured creditors sued for more than $1 billion in bond debt. The Florida Bankruptcy Court decided Tousa was insolvent when they closed on the new loan. Its subsidiaries did not receive loan funds in exchange for liens on their assets.

The Bankruptcy court held Transeastern Lenders liable because they received the funds from the new loan. The Bankruptcy Court ordered Transeastern lenders to return the funds to Tousa and the new lender and reinstate their original claims in bankruptcy court. The bankruptcy court voided the new loan.

United States Court of Appeals for the Eleventh Circuit

Both the new lenders and Transeastern lenders appealed the Tousa case to the United States Court of Appeals for the Eleventh Circuit. The appellate court immediately, completely reversed and remanded the Bankruptcy Court’s decision.

The Appellate Court found the bankruptcy court’s definition of value, limited in scope. The Appellate Court ruled that the subsidiary companies received indirect value: benefits, enhanced lines of credit and delayed total bankruptcy. The Appellate Court did not, however, establish a new legal definition of value.

The Appellate Court ruled that the Florida Bankruptcy Court broadened the scope of the fraudulent transaction laws when they included Transeastern Lenders, as the party for whose benefit the loan was transacted. Transeastern lenders was not a party to the second loan transaction.

Fraudulent Transfer Rulings

Florida Today and USA Today cited “deceit, greed and arrogance” was behind Timothy Durham’s securities fraud charges. Durham was sentenced to 50 years in prison and ordered to repay $202.8 million after he fraudulently transferred $200 million into National Lampoon’s account when he was National Lampoon’s Chief Executive Officer. National Lampoon owns the “Vacation,” “Animal House” and “Van Wilder” movies.

National Lampoon, Inc. filed for bankruptcy in Ohio and settled a lawsuit for $3 million pending approval of the U. S. Bankruptcy Court. Fair Finance Company, now bankrupt, filed suits against National Lampoon for 5,200 stockholders because Timothy Durham bought his mansion and luxuries with the transferred funds.

Bankruptcy Fraud

On May 18, 2015, David W. Griffin (44) of the Tampa area was charged with mail fraud, nine counts of bankruptcy fraud, identity theft and two counts of lying under oath. Griffin signed quitclaim deeds with homeowners in foreclosure. The homeowners stayed in the home, but they paid rent to Griffin.

Griffin filed bankruptcy in the seller’s name without the homeowner/seller’s permission. The Federal Bureau of Investigation, the U.S. Postal Inspection Service, the Federal Housing Finance Agency and the U.S. Department of Housing and Urban Development are all prosecuting Griffin, who lied under oath before the United States Trustee and the United States bankruptcy trustee.

Florida’s Department of Law Enforcement (FDLE)

The Florida Department of Law Enforcement (FDLE) in Tallahassee opened $17 million contract negotiations with consulting firms to maintain Florida’s Computerized Criminal History system, a constantly used database of 15 million arrests and 4 million prisoners. During April 2015 contract negotiations with ThinkStream, a Louisiana vendor, Computer Projects of Illinois protested because ThinkStream was in bankruptcy court.

ThinkStream felt they presented honest financial statements, third party financial ratings, tax returns and balance sheets. The involuntary bankruptcy petition against ThinkStream was dismissed, but the New Orleans Times - Picayene reported Louisiana law enforcement officials own stock in ThinkStream.

Commentary

Commercial lenders must consider all members of consolidated enterprises. Fraudulent transfer law requires lenders to consider how each entity benefits from a loan. Lenders must also consider the source of payments on their loans.

Is deferment of debt collection a value or benefit? Case law is ambiguous and the Tousa Ruling does not answer this question. Finally, commercial loans contain clauses which protect the lender or limit the lender’s liability. The Florida Bankruptcy Court summarily voided the loan contract.

The synchronization of Federal Agencies, States Attorneys and Local Law Enforcement Offices brings swift prosecution of all types of financial fraud not resolved in bankruptcy court. President Obama’s Financial Fraud Enforcement Task Force established in 2009 aggressively investigates and prosecutes all types of financial fraud.