CORPORATE BANKRUPCY PANEL
                                Professor Jessica Gabel∗
                                       Tom Hall∗∗
                                    Alan Kornberg∗∗∗
                                     Gary Marsh∗∗∗∗
                               Professor Jack Williams∗∗∗∗∗
MR. MARSH: My name is Gary Marsh, and I’m honored to be the moderator
of the TOUSA panel. The last time I was on the stage of Tull Auditorium was
in 1985 when I was a finalist in a moot court competition as an Emory Law
student. It’s nice to be home, and I’m not as nervous as I was that day for my
moot court argument.
    I’m a partner with McKenna, Long & Aldridge. I’m the chair of our
bankruptcy practice in Atlanta. I’m truly honored to have a distinguished panel
to dissect and examine the TOUSA bankruptcy court opinion and a recent
district court reversal of a portion of that opinion.
    Next to me is Jack Williams. He’s a professor of law at Georgia State. He’s
a senior managing director with Mesirow, which is a financial advisory firm.
He was a consultant who worked on the TOUSA case on reasonably equivalent
value and solvency issues from a financial perspective.
    Next to Jack is Alan Kornberg. He’s the chair of the bankruptcy department
of Paul Weiss Rifkind Wharton & Garrison based in New York. He, Alan, was
counsel for one of the large unsecured bond holders in TOUSA in the case.
   Next to Alan is Tom Hall, who is a senior partner at Chadbourne & Parke
in New York. He’s co-chair of their commercial litigation department. He was

    ∗  Professor of law at Georgia State University School of Law.
   ∗∗  Partner, Chadbourne & Parke; co-chair, commercial litigation department.
   ∗∗∗ Partner, Paul Weiss Rifkind Wharton & Garrison: Chair, Bankruptcy Department.
  ∗∗∗∗ Partner, McKenna, Long & Aldridge.
 ∗∗∗∗∗ Professor of law at Georgia State University School of Law; Senior Managing Director, Mesirow

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lead counsel for the first lien and revolver lenders in TOUSA in the bankruptcy
court and was at trial.
    Next to Tom is Jessica Gabel, who is a professor of law at Georgia State.
She’s a former clerk at the Eleventh Circuit Court of Appeals. She’s co-author
of the ABI Bankruptcy Appeals Manual. I’ve read a draft of an article she’s
written on TOUSA I and TOUSA II that she hopes to finalize and publish in the
Emory Bankruptcy Developments Journal.
   I also think we should recognize the Honorable Judge Olson who was the
judge who decided the TOUSA opinion and who was on the first panel this
    We’re lawyers, so we have a disclaimer, because this is truly a unique
situation. TOUSA was a landmark constructive fraudulent conveyance case.
There has been one appeal decided already on part of the case. There’s another
appeal pending before another district court judge, and the case is most
certainly going to be appealed to the Eleventh Circuit. Since three of the
panelists are still actively involved in the case, we need to be clear that this is
for educational purposes. They have remarks and they’ve come prepared to
share their insights on the case, but there’s certain issues they may not want to
discuss or certain questions they may decline to answer. Nothing they say
should be attributable to their clients or in any way used in the proceeding. For
similar reasons, Judge Olson is also not going to speak, given the appeals.
Obviously, he spoke in his opinion.
    With that, I’m going to turn it over to Jessica, who’s going to talk about the
bankruptcy court decision and make sure we’re all grounded in the same
starting place. And then Alan and Tom are going to focus on the bankruptcy
court opinion, but more so on the district court opinion and the reversal of a
portion of the bankruptcy court opinion. Then Jack is going to focus on
solvency and reasonably equivalent value issues. With that, Jessica, take it
MS. GABEL: Thank you, and thanks to Emory for having me here. I’m sort of
the Monday morning quarterback of this crew because I am not involved in the
TOUSA litigation. I’m just a student of the opinions. I’m going to take you
through the tale of TOUSA, which will set the stage for what we’re going to
talk about as we go along through this panel.
   So, TOUSA, the company, is the poster child for the housing crisis. We all
know that there was the meltdown in 2007 and TOUSA was caught up in the
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middle of that. For the factual background, TOUSA’s initial financing, it was
fairly standard. So in 2005, TOUSA entered into the Transeastern Joint
Venture. The Transeastern Joint Venture is ultimately TOUSA’s undoing in
this case. TOUSA formed a partnership to acquire these assets from another
company. It was to build more homes. TOUSA was a large homebuilder in
several different states. The critical part to the factual background here with
this transaction was the conveying subsidiaries, because TOUSA is made up
of, how many different subsidiaries?
MR. HALL: Thirty-nine.
MS. GABEL: Thirty-nine subsidiaries. The entities that later become called
the “Conveying Subsidiaries” have no part in this joint venture. They’re just a
small part of the larger TOUSA organization. It was the parent, in fact, that
entered into this transaction.
    Now, like we said, there’s the collapse of the housing bubble, and of course
with the collapse of the housing bubble, there’s also the collapse of the joint
venture. New construction had slumped, existing home sales were down, and
the bottom was really dropping out of the market. TOUSA itself was bleeding
money. Then they had a lawsuit on because they defaulted on the loan for the
joint venture. Of course, when you’re facing a lawsuit, there’s the prospect of,
“Do we litigate it and spend a lot of money, or are we going to try to settle it
and keep going as a company instead of being driven into bankruptcy?” So
they opted, and there was some disagreement about whether it was a good
option, to go for the settlement. On July 31st, 2007, TOUSA the company
entered into a settlement of the Transeastern litigation related to the joint
    Now, it’s a complex transaction and there are many moving parts, but
effectively what happened was, the parent company TOUSA settled with the
Transeastern Lenders––the folks who had the loan for that joint venture. But if
you’re going to settle something, you’ve got to pay for it somehow and
TOUSA didn’t have the cash in its own accounts, so they had to go get a loan
from what we’re going to call the “First and Second Lien Lenders.” TOUSA
borrowed from the First and Second Lien Lenders to pay off the Transeastern
Lenders in the joint venture. So you can see how this is starting to get a little
complicated and would make your head hurt.
   The key here lies with the conveying subsidiaries—the conveying
subsidiaries, remember I mentioned earlier had no interest in that joint venture
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litigation. They were not parties to it. They were not defendants, but suddenly
the subsidiaries become very important because they are giving up their assets.
The converying subsidiaries allowed liens on their assets in order to effect this
settlement. The settlement occurred on July 31, 2007. Six months later,
TOUSA slides into bankruptcy. The parent and the subsidiaries file for
bankruptcy. Not surprisingly, the July 31st lawsuit is why it catches
everybody’s attention. It becomes a focal point of the bankruptcy because there
were hundreds of millions of dollars at stake and it happened just a short six
months before the bankruptcy. So, the creditors comprising the committee of
unsecured creditors, are, as their name suggests, unsecured. They don’t have
any interest in the liens. The conveying subsidiaries didn’t secure any of those
debts. They have absolutely no secured status. They’re the ones that get a
committee in the Chapter 11 bankruptcy and they then file the lawsuit.
    Now, the case concerns a fraudulent transfer action. For those of you who
don’t know the mechanics of such an action is available under the Bankruptcy
Code in Section 548. A fraudulent transfer means that the debtor gave
something away before bankruptcy or maybe sold it or transferred the two
years before bankruptcy, but it didn’t receive anything of value for it, or it
received just a nominal value for it. So, in other words, what could have been a
valuable asset of the estate got transferred out and no money was brought back
in for it. So you’ve diminished the estate but you haven’t diminished any
owing obligations. And because of that, either the bankruptcy trustee, the
debtor, or the committee––like we have in TOUSA––can then try to get those
assets back into the estate. That’s where you get the term “clawback.” So that’s
what happened in TOUSA. They went for relief under § 548(a)(1)(B). Section
548(a)(1)(B) is constructive fraud, which means that you can’t prove the intent
related to the actual fraud of a fraudulent transfer, but you’re dealing with the
constructive fraud.
    So the bankruptcy court held a trial. It was a thirteen-day trial with fifty
witnesses by deposition and twenty live witnesses. So it was a massive trial in
the context of bankruptcy. It took a long time to get through. There was a lot of
evidence. There were how many documents?
MR. HALL: Millions.
MS. GABEL: Literally millions of documents that had to be sifted through, if
you can imagine that scale. So during the course of the trial, the committee had
to prove certain elements of the fraudulent transfer under § 548(a)(1)(B). At
the end of the trial, the judge took it under advisement. The trial was in July.
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The opinion came out in October. The opinion is what we’re going to talk
about. The order was issued on October 13, and it found that the July 31st
transaction was in fact a fraudulent transfer. This decision sent shockwaves
through the lending industry. There’s really no other way to describe what this
decision did and why it is a landmark case in many respects, (i.e., not only
does it epitomize the entire housing crisis, but it has serious consequences for
the lending industry as a whole).
    In the bankruptcy court’s order, the Judge found that there were fraudulent
transfers from the July 31st transaction, and the Judge unwound the entire
thing. So, in other words, the first and second lien lenders had to disgorge and
give up the liens. The Transeastern Lenders had to disgorge funds. It was a
massive clawback action that was going back into the estate.
    We’re going to break down the different pieces of the bankruptcy court
opinion. You guys will just have to stick with me on this because there’s a lot.
It’s a 183-page opinion. That’s a lot of reading. Great reading if you’re on an
airplane or need late-night reading to go to sleep.
    Was there a transfer or obligation? That’s the first question that we deal
with under § 548. The bankruptcy judge, in fact, found that there had been a
transfer. The other question that comes up, although not necessarily related to
this particular issue is: is this property that could be transferred at all? Because,
remember, we’re talking about the conveying subsidiaries, and did they have
any property interest in the proceeds that the parent paid from the loan to the
Transeastern Lenders. And when you start to draw this out, if you can think of
the transaction like a square, you’ve got TOUSA (the parent company), the
Conveying Subsidiaries, the Transeastern Lenders, and the First and Second
Lien Lenders. The First and Second Lien Lenders fund the money to the parent
which then sends it over to the Transeastern Lenders. The Conveying
Subsidiaries in return give up the liens back to the First and Second Lien
Lenders that funded the settlement. So it’s a square—or, if you want, you can
call it a trapezoid because it’s such an “odd-shaped” transaction. When we get
to the district court opinion, you’re going to see how it collapses suddenly into
a triangle because the transactions between the parent and the subs are now
becoming one unit as opposed to two different entities giving it up. I know you
love geometry, right? That’s why we all went to law school.
    So was there a transfer or obligation? The court held that, yes, there was. It
also held that the conveying subsidiaries didn’t get anything for giving up
those liens on the property, which is part of the definition of a fraudulent
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transfer. They gave something up but they didn’t get anything back. So the
property of the estate was diminished but the obligations still remained.
Although there’s a discrepancy—or, not a discrepancy––but there may have
been, which Jack Williams will mention later about taxes that got paid which
would be included in that.
    The next piece you look to is reasonably equivalent value. This is the bulk
of the district court opinion, but in the bankruptcy court, the defendants argued
a variety of theories. First, you’ve got to look at whether there were any direct
benefits. No direct benefits were found by the bankruptcy court. However, an
indirect benefit could still qualify in order to give the value to the Conveying
Subsidiaries. So when you analyze it from the indirect benefit standpoint, it has
to be received by the debtor and it has to have some sort of value, either
property or satisfaction of a present or antecedent debt. And it also has to be in
exchange for that transfer. What did the conveying subsidiaries receive in
exchange for giving up the liens on their assets?
    The defendants argued that the indirect benefits here were clear: that the
subsidiaries got the benefit of the elimination of that lawsuit (i.e., that the dark
cloud hanging over the parent company was eliminated). It also staved off the
bankruptcy of TOUS and it also forestalled the bankruptcy of the subsidiaries
(although, for only six months in each case). The bankruptcy court rejected
these arguments and it analyzed each debtor independently and looked at who
was receiving the benefits as opposed to using a framework of “one big, happy
family of the parent and subsidiaries” that receiving the benefits as a cohesive
unit. So while the parent may have escaped the lawsuit, was that really a
benefit for the subsidiaries? An issue important both in the bankruptcy court
decision and in the district court decision.
    Next, was the debtor insolvent? If you look at what they had before the
transaction and what they had after the transaction, it could lead to the opinion,
and it eventually did, that the subsidiaries were gutted by this transaction.
    Next we must analyze whether the debtor had unreasonably small capital?
This is also an element of fraudulent transfers, because remember, we’re
proving constructive fraud. We don’t have actual intent here to say that when
TOUSA entered into this transaction, they deliberately wanted to cause, delay,
or hinder the bankruptcy proceeding or cause, hinder or delay the ability of the
creditors. So the conveying subsidiaries were found to have lacked
unencumbered assets and that they were in effect operating with unreasonably
small capital.
2011]                     FRAUDULENT CONVEYANCES                                 291

    Next, we must analyze whether the debtor believed it would be able to pay
its debts as they became due? This is another constructive fraud theory. Here
you have to look to circumstantial evidence, because you’re not going to have
somebody get on the stand and say, “We couldn’t keep the lights on.” So you
have to look at other indicia of what may give evidence of an inability to pay
its debts. So you could infer that, from the circumstantial evidence, that the
subsidiaries were completely unable to pay their debts.
    Now, even if you prove all of these pieces of a fraudulent transfer for
constructive fraud, (i.e., that there was not reasonably equivalent value, that a
transfer occurred, and that the debtor was operating with unreasonably small
capital) the defendants in this case can still use § 548(c) as a good faith defense
to negate or get out of the fraudulent transfer. So under § 548(c), you look at
the fraudulent transfer, but you have to look at whether that transfer was made
with, first of all, good faith, but second, that it was for value. The analysis here
was, “Did the transferee or obligee act in good faith?” In other words, did the
lenders act in good faith in this transaction? The defense was defeated because,
here, the lenders had inquiry notice. They knew that this transaction needed to
happen because TOUSA was in a precarious financial position. You can’t play
the ostrich with your head in the sand and say, “We didn’t know that there was
a problem going on here.” Housing was on the verge of bottoming out.
    The court also found that the First and Second Lien Lenders had inquiry
notice as well. So then they were on inquiry notice, and because of that,
because of the specter of bad faith, they can’t take advantage of § 548(c) as a
good faith defense. So at the end of the day, we’re back to this being a
fraudulent transfer.
    Now, the next issue that comes up is, even if you get to a fraudulent
transfer, how on earth do you recover? Section 548 gives you the fraudulent
transfer, but you have to get there before you can get to § 550, which is the
section that allows you to recover. Now, the First and Second Lien Lenders,
could be recovered from as initial transferees because the liens went directly to
them. And then you’ve got the Transeastern Lenders, who got the benefit but
through a roundabout way. They weren’t necessarily the initial transferee.
   When we talk about the senior Transeastern Lenders, keep in mind these
are the parties that we settled with. TOUSA settled with the Transeastern
Lenders because they funded the joint venture; they’re the ones that called in
the loan and said you have to pay or we’re going to sue. So here, the
committee sought disgorgement of all the funds received during that
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transaction, which was in excess of $400 million. So the court went through
and reapplied the § 548 analysis as it did with the first and second lienholders.
    Again, we look at the question of, “Was this a transfer of property?” I’m
not going to get into the finer details of this because the other panelists are
going to cover it when they discuss the district court decision, but it’s not so
much the definition here of transfer that the district court looked at, but it was
the definition of property that it first started with. Actually the definitions of a
lot of words come into the appeal. But again, we look at, “Did the debtor
receive reasonably equivalent value?” Well, the senior Transeastern Lenders
weren’t creditors of the conveying subsidiaries. Remember the Conveying
Subsidiaries had no stake in that litigation. They had no interest. They weren’t
part of the joint venture. They weren’t defendants in it. So by reason of that,
the senior Transeastern Lenders were not creditors. And again, this is assuming
that we have divisible entities instead of the one big, happy family.
    The question of property: who received a direct or an indirect benefit here?
And again, the conveying subsidiaries did not receive either of those from the
Transeastern lenders. Then the court looked at the previous analysis and
looked at the insolvency issue, and again found unreasonably small capital,
whether or not they can pay their debts. The analysis there can be carried over
to the analysis here because we’re talking about the same debtor. The others
applied to the actual components of the defendants’ transaction there, but here
we’re talking about the debtor, so they’re still insolvent, they’re still operating
with unreasonably small capital, and they still wouldn’t be able to pay their
debts as they became due.
    Additionally, the court rejected the good faith defense. The conveying
subsidiaries didn’t receive any value. The senior Transeastern lenders again
were found to have notice of this, so they can’t use the good faith defense.
Again, under 548(c), the same thing. The court rejected that the subsidiaries
received any value and that they had inquiry notice (meaning they didn’t take
the property in good faith).
    So now that you have these fraudulent transfers and you’ve avoided the
liens and the loans and everything else that went on, you still have the matter
of where are you going to get the money who receives the proceeds. So the
property value here, it gets measured back to the time when the transfer was
made, so July 31st. When calculating that, you have to look at the obligation
versus the collateral. Ultimately, in this whole unwinding, the Transeastern
lenders had to disgorge $403 million in payments they received to settle that
2011]                   FRAUDULENT CONVEYANCES                               293

litigation, plus 9% interest a year. They also ended up with unsecured claims
against TOUSA and TOUSA Homes. So in other words, they lost their secured
   The First and Second Lienholders also had to relinquish all of the liens. In
other words, the liens were suddenly extinguished against the conveying
subsidiaries, and so they had to disgorge any payments that they received in
connection with the July 31st transaction.
    At the end of the day, this is where we’re left with TOUSA. Funds have to
be disgorged by the Transeastern lenders, the First and Second Lien Lenders
were able to receive some of the funds. I don’t think anybody can make an
argument that lending has gotten less restrictive and that the credit markets
have opened up. And so, are the components of the bankruptcy court’s opinion
actually being employed and practiced today in terms of lending and in terms
of just commercial loans that are going on out there because the economy is
not much better than it was back when TOUSA was bankrupt? I’m trying to
think of the best way to phrase it, but it’s really a matter of how bankruptcy
bridges a lot of different areas. This one decision had a vast impact on lending
communities, but also looking at housing from a different perspective. The
next panelists are going to explain more of the minutiae of the deals and also
some of the arguments that were made to the bankruptcy court.
MR. MARSH: Thanks, Jessica. Alan is going to pick up with the district court
opinion and the arguments the committee, which was the plaintiff in the case,
made to the district court. The district court opinion reversed—this was an
appeal by the Transeastern Lenders. There’s a separate appeal by the First and
Second Lien Lenders that has not been decided. The only appeal that has been
decided is the Transeastern Lenders’. Alan is going to talk about that and
explain to you what a savings clause is and what the bankruptcy court thought
about that.
MR. KORNBERG: Thanks, Gary. It’s important to emphasize, as Gary was
just saying, that the story of TOUSA is not over. I think, as Jessica mentioned,
there has been one appellate decision. I have little doubt that there will be
further proceedings, most likely before the Eleventh Circuit. Let me also echo
what the Dean said at the outset of today, which is that these kinds of
bankruptcy cases are extraordinarily complex. They’re multi-party litigation.
TOUSA had it all: many, many disputed factual issues; many, many disputed
legal issues; many issues, frankly, of first impression, because I think, as you
saw from Jessica’s description, this was not just a commercial loan made to an
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integrated enterprise. This was a much more complicated situation where there
was this discrete joint venture in respect of which the parent had liability at the
beginning, and it ended up with all of the subsidiaries having liability as well–
–so it was an unusual situation. I for one believe that people that said that this
would be the end of commercial lending as we know it were vastly overstating
the situation.
    My first disclaimer is that what I’m going to provide to you is a gross over-
simplification. There were many, many additional issues that were tried before
the bankruptcy court. There were literally hundreds and hundreds of pages of
briefs, all very, very interesting. I commend them for airplanes, for whenever
you’re in a horizontal position and you need something meaty to read.
    I will discuss the basic arguments of the creditor’s committee, which again
was the plaintiff here representing the interests of the estate. I’m going to focus
on three of these arguments.
    First, that the conveying subsidiaries were insolvent on July 31, 2007,
because remember you look at solvency at the date of the transaction. The trial
really focused principally on the contemporaneous factual evidence: what was
going on at the company? What was going on in the marketplace? What were
people saying? What were they doing?; and, then expert evidence. For those of
you that have seen valuation trials in the bankruptcy court or have had some
experience with them, it’s the classic battle of the experts. But as I’ll mention
in a moment, this had some interesting twists and turns. The second major
argument was that the conveying subsidiaries did not receive reasonably
equivalent value from the transaction that Jessica described. You have to look
at this on a granular basis. There’s no substantive consolidation in this case,
and therefore, you have to analyze the effect on each one of the conveying
subsidiaries, individually. And if they received any value, at most it was
minimal and couldn’t possibly be equal to the magnitude of the obligations
they incurred in giving the guarantees and securing those guarantees to
effectuate the settlement with the Transeastern Lenders. And finally, that the
bankruptcy court properly exercised its discretion in the remedies that it
ordered that Jessica described.
    So the first argument, and I know Jack will focus on this a bit more, was
that the evidence showed, both the contemporaneous evidence, fact evidence,
showed that the conveying subsidiaries were insolvent at the time of the
transaction. Just some highlights: there was some very interesting testimony in
the record from the CFO and the CEO of TOUSA basically saying to the
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boards, “This is a very, very dicey proposition, to load up all this debt on these
subsidiaries.” And obviously the housing market, although it hadn’t crashed,
was in a very, very rocky situation.
    There was also expert testimony. The committee relied principally on two
expert witnesses, one of whom, Bill Derrough, was scheduled to be here today
but actually had a paying matter that took him abroad. Charles Hewlett was a
real estate valuation expert, and Bill is a very, very well known financial
advisor in the insolvency world. The committee took the position on appeal
that the court was proper in making the determination that the conveying
subsidiaries were insolvent at the time of the transaction. But what’s
interesting about this is that it shows you the range of issues one has to deal
with in a trial of this magnitude. Now, for the real litigators on the panel, it’s
no big deal, but for us mere bankruptcy types, this is all very fascinating and
complex and kind of scary.
    There was a huge battle over Mr. Hewlett’s testimony and whether it
should be admitted. Even though he was a very, very qualified real estate
expert with all kinds of credentials and a very, very lengthy record, there was
an enormous battle over his approach. I’m going to be very brief on this, but
essentially he said, look at the value of this business by thinking about what
another home builder would pay for this package of assets. So you might think
of that as a wholesale transaction; whereas, the lenders took the position that,
no, this is a retail homebuilder and you have to project out that they will build
the houses, they will sell them, and what’s the value of the sales prices that
they will collect in that process.
    There was also an interesting battle as to whether or not Hewlett could
testify because he was not a state licensed appraiser. The committee argued
that that was really irrelevant to the task at hand.
    There was also a battle over Bill’s testimony and, again, I’ll leave this
largely to Jack, but he was challenged not only on his credentials, but also on
his methodology. He used something called the observable market valuation.
There has been a trend in these kinds of cases starting with Iridium—no, I
guess starting with Vlasic Foods which was a Delaware decision and then
Judge Peck’s decision in Iridium that said, gee, the experts are really
interesting and I can get law professors and economists to tell me about
valuation, but what does the market say? What is the market saying about the
value of this company, assuming the market is efficient and not being misled?
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    So these issues were very interesting and played quite a major role in the
district court’s decision and the bankruptcy court decision below, and
consumed quite a bit of paper and thought and argument. It gives you a sense
of the range of issues you have to be prepared to deal with in a case of this
    As you heard, one of the big issues and the position, the firm commitment
of the creditor’s committee was that no reasonably equivalent value was
received here and that you have to look at this, again, on a granular level (i.e.,
look at the conveying subsidiaries). They have to receive reasonably equivalent
value. You can’t look at it as a consolidated enterprise because, again, no
substantive consolidation had been granted or has been granted. So that
requires you to think of each conveying subsidiary as a separate debtor. Why is
it that elimination of a parent company liability would be reasonably
equivalent value to a conveying subsidiary? They started the day in the box
that Jessica described, not being liable, and at the end of the day, they had
another $500 million of liability on their balance sheet. The committee’s
position is that Judge Olson got it right, that the conveying subsidiaries did not
receive reasonably equivalent value.
    This is not a law school class, so I don’t want to be too granular on this, but
§ 548(d)(2)(A) talks about value as meaning property or satisfaction or
securing of a present or antecedent debt of the debtor. Obviously, the
committee’s position was the conveying subsidiaries were not satisfying a debt
of the conveying subsidiary itself. They were called upon to guarantee and
secure the obligations of the parent. And what did they get in return? There is
case law that talks about indirect benefits and things that are not necessarily
quantifiable, but the bankruptcy court in our view properly determined that
property is an enforceable right in a tangible or intangible item.
    There was a lot of contest over how important it was to do this deal and
keep the TOUSA enterprise out of bankruptcy, and that was an issue that the
district court has focused on as being of enormous value. There was testimony
at trial, and Bill Derrough in particular testified that in his experience, it was
very possible that the conveying subsidiaries would not necessarily go into
default because the parent did go into default; that it was possible that its
lenders could have given forbearance or other arrangements or there could
have been independent financing, and that there was no quantification of the
indirect benefits that were really the basis of the lender’s position.
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    In terms of remedies, as Jessica said, the thrust of the decision below was
to really reverse the effects, one by one, of the fraudulent conveyance that the
bankruptcy court found. So as to the Transeastern Lenders, as Jessica
mentioned, they had to disgorge $403 million because that’s what they took
out of this multi-party transaction. As she also mentioned, as to the first and
second lien lenders, they lost their liens on the property of the conveying
subsidiaries and their claims against the conveying subsidiaries. As to the
conveying subsidiaries, again, they were freed from the liens––they got back
interest and other amounts they had paid to the First and Second Lien Lenders,
and finally, the court ordered that the conveying subsidiaries be compensated
for the diminution in value of their assets that occurred after the July 31
    Again, I’m going to come back to this in a moment. There are some very
interesting questions with respect to the liability of the senior Transeastern
Lenders. I would say, I don’t know if the panelists would agree, this was a very
unusual situation. Did the Transeastern Lenders start the day with valid claims
against the TOUSA parent? I think there was certainly liability and that
liability was settled. So from their perspective, well, we were just getting
repaid valid debts that were owed to us. That is certainly one perspective. I
think the big difference in how various parties and the two courts that have
looked at some of these issues conceive of them is that the bankruptcy court
really looked at this as more of one series of interrelated transactions. When
you read the district court opinion, the district court rejected that approach. I
think, to many people that came as somewhat of a surprise because we’ve all
learned in the LBO context—and again, this was not a leveraged buyout—but
in the LBO context, we’ve known for decades, and courts have been very clear
that you collapse the transactions. You look at what the net economic effect
was and you don’t look at the individual steps involved. You’ll see in the
district court decision here that Judge Gold took a very different position. What
he did was to say that you look at what the effect was on the conveying
subsidiaries in TOUSA and what was done with the loan proceeds in the July
31 transaction is really quite separate. So this is, I think, a wide area for
potential disagreement.
    As Jessica also mentioned, we’re talking about two kinds of liability with
respect to the Transeastern Lenders. One is, “Were they a direct transferee of a
property interest?” And to be clear, the property interest we’re talking about is,
“Did the conveying subsidiaries have any interest, any property interest in the
loan proceeds?” That’s an interesting question which gave rise to quite a bit of
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litigation. And then the second approach was, “Were they a party for whom the
transfer was made?” In other words, did the conveying subsidiaries incur the
liens, grant the guarantees so that the money could be available from the first
and second lien lenders for the benefit of the Transeastern lenders? And I will
say here again, the usual kind of case that we see is where an obligation is
incurred and it benefits a guarantor. This is a very, very different fact setting.
   Let me switch subjects and talk about savings clauses, because this is an
area that has not been addressed yet by the district court. It was addressed
extensively by Judge Olson. This is an area that generated tons of discussion,
commentary, Law Review articles, and magazine articles about this will be the
death knell for commercial lending.
    First of all, what’s a savings clause? The best example that you probably all
see in your practices (or in other situations) is the savings clause that you have
in the usury situation where it’s common to say, no matter what the stated rate
of interest is, in no event will I collect more than the legal rate of interest. And
the savings clause involved in TOUSA is a very standard one that we’ve seen
for decades in the leveraged finance world. That is, basically as to the
guarantee and the liens, in no event will they be for an amount that would
constitute a fraudulent conveyance. You limit the amount of the guarantee and
the related lien to an amount that will not cause the entities to be insolvent or
unable to pay their debts as they come due or to have unreasonable small
    The bankruptcy court held that the savings clause was invalid and gave five
reasons, by my count. One is that, since the conveying subsidiaries were
insolvent at the time, there’s nothing to save. They couldn’t incur one penny of
guarantee liability. Secondly, even if they were able to do so, this was a kind of
clause that is invalid under § 541 of the Bankruptcy Code. And § 541, as you
know, voids provisions that are conditioned on the insolvency or financial
condition of the debtor or that causes a forfeiture. Here, what the court was
trying to protect was the fraudulent conveyance claim, and a savings clause,
arguably, takes away that valuable right of the estate. Third, the savings
clauses really are, I think in the words of the bankruptcy court, a frontal assault
on the estate’s power to pursue a fraudulent conveyance claim. Also, the court
turned to contract law and said, as a matter of contract law, these savings
clauses are too indefinite. Remember you had a first lien loan and a second lien
loan and related guarantees. Each had their own savings clause. If you have to
figure out what the liabilities are in order to limit them so that the entity is no
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longer solvent, how do you do that without knowing what amount of the first
lien liability is there and what amount of the second lien liability is there?
There really is a circularity to that analysis. Finally, the court said, as to this
contract, there was a provision that said modifications have to be in writing
and there was no modification in writing. It really operated automatically.
    Let me just say that these issues have generated amicus briefs. The
Commercial Finance Association and the Loan Syndications and Trading
Association (the LSTA) have weighed in and they are very focused on these
issues. Again, as I said, there is discussion as to whether that ruling is dicta.
There is also the fact that the appellate court has not weighed in.
    So let me just very briefly talk about some of the issues with respect to the
Transeastern lenders. As I mentioned, it’s very interesting, and I think
unprecedented because their situation is not the usual one in a leveraged loan
transaction. Again, there are two theories of recoveries. One is that they were
direct transferees of the new loan proceeds. The second is that they were
entities for whose benefit the conveying subsidiaries transferred the liens. This
was reversed on appeal, as was mentioned.
    Section 548 applies to an interest of the debtor in property. There has to be
a transfer of an interest of the debtor in property. The question here was
whether the conveying subsidiaries had any interest in the loan proceeds. The
district court said, “no,” and that under Eleventh Circuit precedent, you have to
look at who can control those proceeds. Here, the conveying subs didn’t have
the right to control the proceeds. This whole transaction was organized to get
the money to the Transeastern lenders, which to my mind also suggests that
maybe this was really one integrated transaction. Secondly is: for whose
benefit? There, the question is whether or not, as I mentioned earlier, you
could say that this transaction really was structured for the benefit of the
Transeastern lenders. There, we believe the bankruptcy court got it right that
this was indisputably one integrated transaction, but the district court has ruled
otherwise and said that it was not part of a single integrated transaction, that
you have to—and this is key to the court’s ruling—distinguish between folks
that get the loans and the decision of what to do with the proceeds.
   Also, as Jessica mentioned, there was quite a bit of litigation over the
availability of the good faith defense in § 550(b), and this has also generated a
huge amount of buzz in the commercial lending world, which was the
bankruptcy court ruled, in our view, correctly that everybody knew that the
conveying subsidiaries were on the verge of insolvency. There were publicly
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reported financials. There was a lot of information available. At the minimum,
the lenders were on inquiry notice. The district court has rejected that and in
very strong language said that to hold otherwise would be to impose
extraordinary duties of due diligence on the part of the creditors accepting
repayment, and that there was no reason to impose that duty.
    So, again, I hope this gives you a sense of the complexity and of the,
literally, dozens of issues that you face in litigating the unraveling of
complicated secured lending transactions––particularly with the additional
nuances and complexity of this situation.
MR. MARSH: Thanks, Alan. That was great. Tom is going to pick up and
focus on reasonably equivalent value, burden of proof, intangible benefits and
the definition of property.
MR. HALL: I find myself in a somewhat unusual position because, having
represented the first lien term loan lenders in the case and continuing to
represent them on appeal, at times I have argued for reversal of the bankruptcy
court’s opinion, and at times I argue for affirmance. The reason is that the
bankruptcy court avoided my client’s loans so we can’t recover those loans
from the debtors, so of course we’re trying to get reversal of that aspect of it.
On the other hand, the bankruptcy court ordered that the other lenders who
took the $500 million out return it to the debtors, and that will flow down
eventually to my clients. So we’re seeking affirmance of the remedial structure
on appeal as well. But I think, as Alan said, it’s a very complex case and that
dichotomy in position, I think, is reflective of the complexity of the case.
    Let me talk briefly about reasonably equivalent value. Here, I think, is the
overriding question: Did TOUSA’s subsidiaries receive reasonably equivalent
value for their conveyance of liens on their assets to secure the $500 million
July 31, 2007 term loan financings used to settle the Transeastern litigation
against their parent company? As Jessica mentioned, the subsidiaries had no
direct obligation for the Transeastern liability, yet borrowed money to pay off
that liability. We focused at trial really on two major areas of benefits to the
subsidiaries. One was that there was preexisting financing in place on which
the subsidiaries were liable. They had over a billion dollars in bond financing
and over $300 million in revolver loan financing. The provisions of those
preexisting financing arrangements provided that if there was a judgment of
$10 million or more against the parent company, that would be a default under
those financings, thus triggering the conveying subsidiaries’ obligations to
repay $1.4 billion or more. The revolver financing at least was on a secured
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basis, so a judgment against the parent company by Transeastern would have
exposed the conveying subsidiaries to very substantial risk in terms of defaults
    The other thing we pointed to was the integrated nature of this company.
The parent company was the brains of the outfit. At the parent company level
you had management, you had accounting, you had legal, you had insurance,
you had finance. Everything you needed to run the company was at the parent
company level. The subsidiaries did not, for the most part, even have their own
employees. The employees of all the subsidiaries were employed by another
TOUSA entity. There was another TOUSA entity that owned all the
intellectual property so that when a subsidiary went out and sold a home under
the name Angle, they’d have to pay a royalty to the other subsidiary. We
argued vigorously that all this really reflected a deep, deep dependence by the
subsidiary on the parent, and even apart from the loan defaults, that a collapse
or bankruptcy of the parent company would effectively result in immediate
bankruptcy of the conveying subsidiaries.
   I’ve picked out six areas just for discussion purposes of where the
bankruptcy court and the district court disagreed. One was on burden of proof:
“Who had the burden of proving or disproving reasonably equivalent value?”
What the bankruptcy court ruled was that once the plaintiff showed that the
conveying subsidiaries did not receive a direct benefit––direct value––then the
burden shifted to the defendants to show that the indirect value was tangible,
concrete, and quantified with reasonable precision.
    Let me talk for a second about the difference between direct and indirect
benefits. A direct benefit here would be if the conveying subsidiaries had
received the $500 million in loan proceeds, and then placed it in their bank
account and used it for whatever they had wanted. That would be a direct
benefit. Indirect benefits are these other things that we’ve been talking about:
the other benefits that indirectly flow to the conveying subsidiaries as a result
of this loan. Although this quote here deals with burden of proof, there were
two other aspects that we’ll get to that the district court disagreed with. One is
the requirement that the indirect value be tangible and concrete. You’ll see the
district court disagreeing with that. And two, that indirect value be quantified
with reasonable precision. There’s disagreement on that which we’ll get to.
   The district court disagreed. You’ll see the district court here saying,
“Under established case law, the burden of proving lack of ‘reasonably
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equivalent value’ under [Section 548(a)(2)(A)] rests on the trustee,”1 here the
committee, “challenging the transfer.”2 So clearly different conclusions as to
who has the burden of proof. I cited here another case, a Third Circuit case, In
re Fruehauf Trailer, which may present an approach that’s somewhat in-
between. In that case, where the plaintiff made a prima facie showing of no
value, the courts shifted the burden to the defendants, but not to quantify;
simply the burden was to show some evidence to rebut plaintiff’s proof, then
the burden of quantification shifted back to the plaintiff.
    A second area of disagreement between the bankruptcy court and the
district court was: how do you define property? The term “reasonably
equivalent value” was not defined in the Code; the term “value” is. The term
“value” includes the term “property.” The term “property” is not defined in the
Code. The bankruptcy court adopted what some would view as a relatively
narrow definition of property, saying, “the Conveying Subsidiaries could not
receive property unless they obtained some kind of enforceable entitlement to
some tangible or intangible article.”3 It went on to say, “‘Avoiding default’ is
not ‘property’ and therefore is not cognizable as value under the statute.”4 The
district court disagreed with those findings, initially presenting a rather broad
view of the term “property,” saying, although it is not construed in Section
102, it is used consistently throughout the Code in the broadest sense. The
district court went on to say that, “I conclude that the Bankruptcy Court
committed legal error in holding that the ‘avoidance of default and bankruptcy
by the Conveying Subsidiaries’ is . . . not property . . . .”5
    A third area of disagreement between the bankruptcy court and the district
court was the extent to which intangible benefits can constitute value. Here, the
district court says that the Eleventh Circuit has not yet had the opportunity to
rule on this in the complex situation that we find ourselves in this case.
“Nonetheless, other circuits, such as the Third Circuit, have rejected the notion
that a debtor must receive a direct, tangible economic benefit in order to
receive ‘value’ for purposes of Section 548(a)(2).”6

     1 3V Capital Master Fund v. Official Comm. of Unsecured Creditors of Tousa, Inc. (In re Tousa), 444

B.R. 613, 654 (S.D. Fla. 2011) (internal citation omitted) [hereinafter TOUSA II].
     2 Id.
     3 Official Comm. of Unsecured Creditors of TOUSA, Inc. v. Citicorp N. Am. Inc. (In re TOUSA, Inc.),

422 B.R. 783 (Bankr. S.D. Fla. 2009) [hereinafter TOUSA I].
     4 Id.
     5 TOUSA II, at 654.
     6 Id.
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    The district court went on to say, “. . . the opportunity to avoid default, to
facilitate the enterprise’s rehabilitation, and to avoid bankruptcy, even if it
provided to be short-lived,” and here it was six months between this loan and
the eventual bankruptcy, “may be considered in determining reasonable
equivalent value.”7
    A fourth area of disagreement was whether the loan here and the settlement
of the Transeastern litigation prevented or forestalled the bankruptcy of the
parent company and whether that constituted value. The bankruptcy court
thought not. It said, as a threshold matter, the evidence shows that “the July
31st transaction did not in fact prevent the bankruptcy of the parent
company.”8 Because it did not prevent the bankruptcy, it at most delayed the
inevitable. It could not give rise to any purported benefits and therefore did not
constitute value. The district court disagreed, viewing much of the bankruptcy
court’s findings on that front as being conclusions reached through the lens of
retrospection, considering that we all know now that the parent company in
fact filed six months later.
     A fifth area, although related, is whether the July 31 financing prevented or
at least forestalled the bankruptcy of the conveying subsidiaries, which may
have been triggered immediately had they not settled the Transeastern
litigation, the bankruptcy court finding that an earlier TOUSA, Inc. bankruptcy
would not necessarily have caused the conveying subsidiaries to declare
bankruptcy. The district court disagreed with that, calling that a speculative
conclusion tied to the bankruptcy court’s further erroneous resort to hindsight
reasoning when viewed from the parent level. The bankruptcy relied, in that
regard, on the expert testimony of two experts to the effect that a parent
company bankruptcy would not have necessarily resulted in the bankruptcy of
the subsidiaries. The district court disagreed, finding that testimony by those
experts to be speculation.
   A big issue here at the trial, and on appeal, was whether or not the
conveying subsidiaries apart from the parent could’ve gone out and obtained
independent financing. We argued, vehemently, that the interrelationship
between all the entities made that impossible. Plus, there were inter-company
accounts between all these entities. The accounting on that was fairly weak,
and there was some expert testimony on our side to the effect that the existence

   7    Id.
   8    Id. at 640.
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of unresolved inter-company accounts would make it very difficult, if not
impossible, for the subsidiaries to get their own financing.
    The district court concluded that, “By virtue of the Transeastern Settlement,
the Conveying Subsidiaries’ ‘net worth’ was preserved and imminent default
was avoided, thereby preserving, at that point in time, the interests of the
Committee’s unsecured creditors by allowing the enterprise to continue to
meet its bond interest.”9 So clearly the district court disagreed, thought that at
least bankruptcy, if not avoided entirely, was forestalled, and gave the entity an
opportunity to resurrect itself and that itself was reasonably equivalent value.
    The last area of difference between the two opinions is how to quantify
value. The bankruptcy court said the burden was on the defendants to quantify
the benefits with reasonable precision. The district court disagreed with that,
applying a totality of the circumstances test. It went on to say at the end of this
that, “a per se rule as applied by the Bankruptcy Court, that indirect benefits
must be mathematically quantified is error.”10
    I think I presented six areas of disagreement. There are probably dozens
and dozens more, but I think that gives you at least some appetite for some of
the issues that will work their way up the line through the Eleventh Circuit. I
know everyone here is interested in that outcome, but certainly I am interested
for personal and business reasons. Thank you.
MR. MARSH: Thanks, Tom. That was great. Jack Williams is going to talk
about solvency opinions, solvency, and reasonably equivalent value from a
financial perspective and evidentiary perspective.
MR. WILLIAMS: Thank you, Gary. I’m going to talk from here, if that’s
okay. First, let me say that it’s such a great pleasure for me to be here. Rarely
do I get the opportunity to see both mentors in my career and students of my
teaching in the exact same place. To me, that’s just an exquisite opportunity to
rekindle my relationships with people who’ve taught me a tremendous amount
and have had a great influence on my career, and the folks who I have taught
over the years that are in the audience today who, by the way, also have taught
me a lot and have been a tremendous influence on my career.
    I’m going to look at these issues: solvency, in two different contexts, and
reasonably equivalent value from the perspective of financial advisors and

      9   Id. at 655.
  10      Id. at 666.
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testifying experts. One of the areas that has always fascinated me in the
bankruptcy world is the way in which we use experts in the case. We push
experts harder in bankruptcy cases and litigation than in any other forum in the
federal system to be sure, and most of the state systems that I’m aware of. A
number of the issues that are going to influence how the experts will develop
their methodologies and ultimately formulate their opinion and provide
testimony are driven by legal issues or mixed questions of fact and law, that
experts oftentimes are also asked to consider with their own independent
judgment. Occasionally what will happen is what financial experts have been
taught and how they apply the various tools that I’m going to be talking about
in just a minute within their discipline might run smack up against legal
determinations that are made either statutorily by the Bankruptcy Code or
decisionally by bankruptcy cases or the bankruptcy court in the particular case
in which they’re dealing with.
    One of those issues is going to be this notion of common enterprise. I’m
going to hold that off. You’ve heard the other panelists talk about it from
different perspectives. That’s an important legal determination that will
influence how the testifying experts will approach their particular role. Now,
they are versed in a number of different disciplines: finance, investment
banking, bankruptcy accounting or insolvency accounting, and real estate
appraisals––some from the dirt up and others who view real estate from a
portfolio perspective. And all of that is going to influence, to be sure, what
these experts are going to be doing in this case. What I hope to do is provide
for you today, if I do my job right, the methodology by which those disciplines
address the issues that percolated in the TOUSA case, and also to point out
some of the strengths and weaknesses, what you learn very quickly in the
valuation of businesses and financial distress. There’s no question. All the
experts would agree that TOUSA was in financial distress. That doesn’t mean
it was necessarily insolvent, but it certainly was in financial distress.
    When you’re valuing a business that’s in financial distress, many of the
models that we’re going to talk about are models that are based on stable,
solvent businesses. So we’re engaging in a leap of faith when we use, let’s say,
an income approach to a company in financial distress, or a market comparable
approach, oftentimes cobbled out of an analysis of comparable companies that
themselves may be solvent and perfectly healthy, and then extrapolating from
that a relative value of the subject company, the company we’re interested in
valuing, which happens to be in financial distress.
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    So what you learn very quickly is, notwithstanding the leap of faith, there
are very few per se rules. A lot of it is fact and circumstance intensive, and all
that you can ask the expert to do is to bring their own skills and judgment and
independence, and spread on the record the assumptions that they make so that
the court can weigh those. Because at the end of the day, the experts in any
bankruptcy case, in any federal case, are there because they have a specialized
skill that can help the trier of fact; usually it’s the bankruptcy court judge,
because most of the bankruptcy cases are bench trials. That’s their job, and
they do it by being relevant and reliable, and that requires healthy doses of
skepticism and objectivity. And that really is all that one can ask of an expert
in the case. Oftentimes we might disagree with an assumption, but more often
than not, if you look deep, that assumption is a legal one, and the expert has to
take that, going forward based on the skill set that that expert has.
    So let’s step back, look at the first step in the process of experts. This was
the solvency opinion. This isn’t the solvency opinion that we’ve been talking
about in the case itself. This is a solvency opinion that’s rendered by an
independent, at least theoretically independent, objective firm, who comes in
and takes a look at a particular subject company or economic unit and renders
an opinion of whether the firm is solvent or not for purposes of engaging in a
transaction. We see it often in the context of mergers and acquisitions. We see
it here in the context of what many would call rescue financing. We see it in
the leveraged buyout context. We see it in restructurings and recapitalizations.
We also see solvency opinions when we see equity carve-outs and spin-offs,
divisive transactions, across the board, the spin-offs, split-offs, split-ups (things
that are very common in the mergers and acquisitions world right now).
    Why do we do it? Why do we have a solvency opinion? Why do we bring
an expert in to talk about whether the transaction I’m about to engage in, on
behalf of the firm to which I owe a fiduciary duty as a director, will take place
at a time I’m insolvent or would render me insolvent? The easy answer is:
because most of the time the people that are bringing money to the table
demand it. They insist upon obtaining a solvency opinion. A lot of it can be
traced back to an old Delaware case, Smith v. Van Gorkom, which didn’t deal
with a solvency opinion at all; it dealt with its cousin, a fairness opinion. But
the court in Smith v. Van Gorkom said, you know what? If a management
apprises itself of the consequences of its action, including not only consulting
internal advisors but external advisors as well, like an investment banking firm
who could issue a fairness opinion as to the price that one is going to receive,
that’s going to go a long way for our determination of whether the board was
2011]                    FRAUDULENT CONVEYANCES                                 307

meaningfully informed and therefore cloaked by the business judgment rule in
any subsequent breach of fiduciary duty action. So from the board’s
perspective in a transaction that it’s looking at, particularly in the context of
financial distress, the board’s going to want to consider whether the transaction
that they’re about to enter into is going to render them insolvent. So, again,
they hire an independent advisory firm to do that.
    What the bankruptcy court did in this case was to look at that, and that’s an
important step in determining the context in which this transaction takes place.
We have a lot of testimony, fact witnesses, experts, and millions of documents.
It really is kind of the equivalent to an archeological dig. Now the bankruptcy
court, along with the attorneys, is engaged in this wonderfully complex
excavation of a transaction that took place. It needs to develop a narrative, a
story, its opinion, that ties itself in a closely tailored way to the facts. Well,
context then is not just important; it’s all important. The facts themselves don’t
stand alone. They’re part of an overall narrative.
     So the bankruptcy court starts with the solvency opinion, because that
informs the trier of fact whether we’re talking about an objective series of
decisions made by management or whether we’re talking about management
that’s trying to game the game, if you will. So management retains a particular
firm. It’s discussed in the opinion. I’ll leave the name off for right now because
it’s irrelevant for our discussion today. The firm engages in a solvency analysis
and determines that the company is solvent under three tests. Those three tests
largely mirror the tests that ultimately are going to play out in the context of
the fraudulent transfer action. The problem that the court identifies, and a
problem that I and two of my co-authors who are in the audience have
identified in our literature, is that the court determines that the provider of the
solvency opinion—remember this is pre-transaction. This is to inform
management. It’s not the expert testimony. But the provider of the solvency
opinion really has a “success fee” or a contingency fee associated with the
opinion that’s being rendered. The court makes this factual finding based on
the evidence that’s presented before it. This calls into question the very
independence or objectivity of the experts who’ve been—the non-testifying
experts, if you will—the non-litigation experts who’ve been called in with a
special expertise to inform the board about whether this transaction is going to
render TOUSA insolvent. And TOUSA here is the economic unit, the entire
common enterprise, or the entire consolidated group, if you will.
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    The court has great difficulty with this, and I think rightly so. Once you
make the conclusion that this is a contingency or success fee, I think the rest of
the result follows. One is highly skeptical, if not simply persuaded to disregard
in its entirety that type of an opinion. It’s, again, as I’ve said, an issue I’ve
looked at a lot.
    Now, why did they do that? Why do financial advisors market or price their
services that way? They certainly would argue clearly it’s not because they’re
going to provide an opinion that’s made to order. There is really a market
reason behind it, and I leave it to you to decide whether contingency fees for
experts in any capacity or success fees for experts in any capacity are always
per se violative of the role of independent experts, because the courts are split
on this issue with a very recent decision from the Southern District of New
York, which in a testifying capacity concluded that having a contingency fee
for an expert or an expert’s firm was not per se disqualifying; it just went to the
weight of the credibility of the testifier. In fact, in that case it appeared that the
experts from both sides had contingency fees.
    In defense, if you will, or certainly an explanation for what investment
banking outfits and other firms have, and justification for how they price their
opinion, is that they recognize that there is virtually no risk other than future
business risk, I guess you could add, to rendering an opinion that the entity is
insolvent. If you render an opinion that the entity is insolvent, then you’re not
going to be sued later because you blew it in determining that the entity was
insolvent. What might happen is you’ll be fired and be replaced by another
firm that’s willing to give an opinion. But they argued that the solvency
decision is one that comes with great risk. Because if you determine that the
company is solvent and it nonetheless goes into bankruptcy or into greater
financial distress, you can anticipate additional time being devoted, if not
becoming target in the case because of the opinion rendered. They price it
    So what we’re looking at in those particular situations then, is a
determination based on market, on how they price their role in a particular
case. Now this is outside of litigation. I’ll leave it to you. And the students that
are here, that would be just an outstanding comment or student note to look at,
a fascinating opportunity to delve into that. Because you know what? The
market is important in bankruptcy, but it’s not all important. Bankruptcy is
more than just an economic organ of the state. If the market prices it but not
withstanding, that’s just not something that you do or something that’s
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prohibited. The answer is that it’s something you don’t do. It’s something
that’s prohibited. The market is just going to have to adjust.
    If I can then step away from that and talk about the solvency opinion and
reasonably equivalent value. I’m going to move fairly quickly through this area
because I want to focus on the methodology. I think the judges, Judge Olson
and Judge Gold, do a good job in the strengths and weaknesses of the various
experts. I knew all of the experts in the case and studied their work, except two
that were actually appraising the dirt, if you will. But I certainly knew the
valuation guys at the high end.
    When you’re talking about valuing a company, there are basically eight
steps. It’s not very difficult as far as the methodology is concerned. If you look
through the opinions and if you have the opportunity to look at the expert
reports, you’ll see that they follow the same sorts of approaches and
    First, you have to identify the transfer date. That includes identifying the
transfer and identifying the debtor that’s making the transfer. Here I can tell
you that the tension is between the Bankruptcy Code’s statutory language and
how finance and economics would value TOUSA. From the perspective of a
financial analyst or a credit analyst, from the perspective of an investor, let’s
say a bond holder, from the perspective of accountants, the SEC for reporting
purposes, the IRS for tax purposes, TOUSA is just one big consolidated group.
It views it as one economic unit. And most valuation experts would do the
same as well. In fact, if you were valuing TOUSA from a financial perspective,
you would look at it as one big consolidated group. That’s not unusual. Take
the top 100 of the Fortune 100 companies––that would be the Fortune 100
companies I guess. If you take a look at them, they have on average 180-some-
odd subsidiaries, on average. The corporate structure is not unusual, but we
tend to view that as one economic unit.
    The Bankruptcy Code, and you’ve heard the debate and it’s an important
one, may or may not replicate the financial reality here. And remember, at the
end of the day, it’s the Bankruptcy Code that wins that battle, not financial
reality. The Bankruptcy Code can decide, notwithstanding the fact that in so
many ways you would value this as an economic unit. Nonetheless, bankruptcy
demands that you value it on a separate entity basis, on a debtor-by-debtor
basis. But keep in mind that oftentimes that’s a false dichotomy, and good
experts recognize that. It’s not a question of whether this is a common
enterprise, where you don’t recognize corporate separateness at all, or whether
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it is a separate entity analysis where you recognize corporate separateness but
disregard the common enterprise. It’s not unusual to have consolidated groups
that share assets. In TOUSA, there was a centralized cash management system
and that was shared by the entity and it was an asset––a direct asset of the
parent. The parent owned that deposit account, if you will, what we call the
head account in a centralized cash management system, so that you can have
assets that are shared, and that should be part of the analysis as well.
    The second, of course, is identifying the testing period. This was tough.
You had one of those cases where on July, 31, a global settlement is entered
into. By August 7th, the credit market was freezing up, the economy was
dropping quickly. And now you have to decide, how do you test this thing?
Well, again, you have differing views on the testing metaphor, if you will, as
far as the appropriate testing period.
    The third, then, is a market analysis. Again, the valuation takes place in a
context in which the sector on which the firm’s sector within an industry and
its own particular economy operates.
    The fourth is the premise evaluation. Here, the experts agreed that for
TOUSA, it was a going concern, but going concern doesn’t always mean fair
market value. Remember the requirement under § 101(32) for insolvency
purposes is a determination of the debts against the debtor versus the debtor’s
property at a fair valuation. Fair valuation doesn’t have to be synonymous with
fair market value. It’s also contextual and depends on the facts and
circumstances of the individual cases.
    You go from there to the general approaches. Here, what was used was the
income approach, the comparable company approach, and then some attempt
at a precedent transaction approach, but the primary focus was on an income
approach in the form of a discounted cash flow analysis and a comparable
company approach. Now, why do we value businesses using more than one
approach? Well, because inherent in the valuation process is a cross-validation
technique. It’s a lot like shooting stars in celestial navigation. You can shoot
one star and then plot it on a chart, and you may be right and you may be
wrong. In my career, I was more often wrong than right. You could also shoot
additional stars, and over time they start to cross-validate. Where those lines
tend to cross, particularly if you could get three or more intersections at the
same place, now the reliability goes up.
2011]                    FRAUDULENT CONVEYANCES                                311

    One of the problems that you have is, oftentimes the income approach,
which is an intrinsic value approach, it’s built up based on the specifics of the
particular firm that you’re investigating, is influenced at a great degree by the
market approach, which then oftentimes subsumes the income approach. So
then instead of a cross-validation of an income approach and a market
approach, what you have is a replication of the market approach under the
guise of an income approach. That’s one of the issues with the solvency
opinion of one of the plaintiff’s experts who uses as a terminal value, that’s the
value of a company after you projected discrete net cash flows to the firm.
Let’s say you project for five years, and then there’s a terminal value because
the company is going to go on beyond the five-year period. That terminal value
can be based on a perpetuity method. One often used is called the Gordon
Growth Method, which looks back at the firm and the firm’s increase in cash
    Another approach is to go to the market and look at a market multiple like
an EBITDA multiple, or let’s say, a book value inventory multiple, which was
used by one of the experts in TOUSA. When you look to the market, your
terminal value then is going to be influenced by a market comparable
approach. If that’s a large component of the overall value of the income
approach, it’s converted an intrinsic value into a relative value. Here, the
terminal value of the expert I’m talking about, based on a market approach,
was 64% of the overall value of the firm. That in itself is not unusual, but it
does pose an issue as to whether we’ve collapsed the old cross-validation
techniques into really one application.
    There are a couple of other things you do, too: the inability to pay,
unreasonably small capital, and then a total cross-validation, but that’s beyond
the scope of my discussion. I just want to say with a minute on the question of
reasonably equivalent value: there are some things that we can develop on a
reading of the law that influence financial advisors that can be used in the
context of proving up reasonably equivalent value. One of them is that you
learn that value for fraudulent transfer purposes is defined, as my colleagues
have pointed out, but it’s defined by reference to property. Now, property is
not defined in the Code. The bankruptcy judge looked to the dictionary, and
that’s a very common approach to statutory interpretation. In fact, I used to use
it a lot, too. My dad, who was a soybean farmer in Oklahoma, would always
say, “Where’d you get that definition from?” I’d say, “From Webster’s,” and
he’d always say, “That’s just one man’s opinion.” But I said, “But it’s an
important man’s opinion.” But it’s not unusual to look to the dictionary.
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    Maybe it’s because of my own Talmudic training, but I tend to look first
into the Code itself. The term “property” is never defined in the Code, but it’s
used over (by my count) fifty-five times throughout the Code, and it’s used in
some peculiar places. One of the areas that might inform us is that the term
“property,” which you don’t find defined in the Code, is used in § 101(37) in
the definition of “lien.” It says that if you can take an interest in it and it’s a
lien, then the “in it,” the thing has to be property because by definition you can
only take a lien in property according to § 101(37) of the Code.
    So the question then becomes, what are things that you can take a lien in?
Well, can you take a lien on synergies in some abstract sense? No. You can’t
take a lien in those, but to the extent that you can tie them to net worth or
future income, well, that is something you can take a lien in. You can take a
lien in the income-producing ability of an underlying asset. You certainly can.
We do it all the time in either the nature of general intangibles, if it’s a
component of goodwill, or proceeds as inventory is sold. Of course, for
business, the income-producing potential is tied to the assets and the aggregate
of a going concern.
    So maybe that provides some guidance. It’s certainly not a gavel-down
moment, but when we’re looking at experts to help us in the area of reasonably
equivalent value, they’re looking at guidance on that particular issue, because
ultimately what constitutes property is a statutory term. It’s influenced by the
facts and circumstances of the case, and certainly an expert might provide
some specialized knowledge on how his discipline views that particular term.
But at the end of the day, the judge has to make that decision in interpreting the
statutory requirement there. So there’s only so much you could expect from an
expert on a question like that. But the ultimate decision, that’s a decision for
the judge in a § 548 case.
   So, really, that is all that I’ll talk about. Again, my focus was primarily on
the methodology. These are fascinating cases. To my students, I tell them
they’re very sexy cases, and I usually get a hand that’s raised and the owner
says, “You need to get out more often, Professor.” And I think there’s probably
some truth to that, as well. But thank you so much for the opportunity to visit
with you.
MR. MARSH: I just want to thank my panel. I think you heard a top flight
program on TOUSA.

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