Tousa ruling deals a blow to lenders

Author: | Published: 20 Aug 2010

Late last year, in the Tousa bankruptcy case, the US Bankruptcy Court for the Southern District of Florida struck down fraudulent transfer savings clauses as unenforceable. These clauses are intended to allow subsidiaries, and other affiliates of a borrower, to provide credit support such as guarantees or grants of security interests for the borrower's debt.

In Tousa, certain subsidiaries of the parent company granted security interests in their assets to secure debt that the parent company incurred under its $500 million of first and second lien syndicated term loan facilities. The parent used over $420 million of the proceeds of that debt to settle ongoing litigation between the parent and another group of unsecured lenders in an unrelated lending transaction that did not involve the subsidiaries and for which they provided no credit support. The subsidiaries were not defendants in the litigation.

Unlike many European and other jurisdictions, the US...