Facing Greater Fraudulent Transfer Liability

Law360, New York (May 23, 2012, 3:03 PM EDT) -- In a decision with significant implications for borrowers and lenders, on May 15, 2012, the Eleventh Circuit Court of Appeals affirmed a bankruptcy court's findings that upstream guarantees and associated liens delivered by a bankrupt debtor's subsidiaries were avoidable as fraudulent transfers.

The decision, which came in the bankruptcy case of housebuilder Tousa Inc. and its affiliates, undermines the enforceability of upstream guarantees given by subsidiaries for the benefit of a parent borrower. To protect against its effects, lenders will need to ensure that subsidiary guarantors are solvent or will tangibly benefit from loans to the parent corporations.

In June 2007,...

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