# 3V Capital Master Fund Ltd. v. Official Committee of Unsecured Creditors of Tousa, Inc. (In Re Tousa, Inc.)

> District Court, S.D. Florida · February 11, 2011 · 444 B.R. 613

URL: https://www.frixlaw.com/law-library/cases/2193929

## Case

- **Full name:** In Re TOUSA, INC., Et Al., Debtors. 3V Capital Master Fund Ltd., Et Al., Appellants, v. Official Committee of Unsecured Creditors of Tousa, Inc., Et Al., Appellees
- **Court:** District Court, S.D. Florida
- **Decided:** February 11, 2011
- **Citations:** 444 B.R. 613; 2011 U.S. Dist. LEXIS 14019; 2011 WL 522008
- **Precedential status:** Published
- **Opinion:** Opinion by Gold
- **Judges:** Gold
- **Cited by:** 13 later opinions in the Frix Law Library

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## Opinion text

OPINION AND ORDER ON APPEALS BY TRANSEASTERN LENDERS
ALAN S. GOLD, District Judge.
L INTRODUCTION
The Appellants in this bankruptcy appeal are a collection of financial entities (the “Transeastern Lenders”)
1
that loaned appropriately $450 million in 2005 to a homebuilding joint venture involving TOU-SA, Inc. (“TOUSA”).
2
The Bankruptcy Court below ordered the Transeastern Lenders to disgorge, as “fraudulent transfers” under Section 548 of the Bankruptcy Code ( 11 U.S.C. Sections 101 ,
et seq.),
monies that they received on July 31, 2007, in repayment of their antecedent debt, and to pay prejudgment interest for a total disgorgement of more than $480 million dollars. The Transeastern Lenders appeal
3
from this ruling as established by the Amended Findings of Fact and Conclusions of Law [EOF No. 722 in Bankruptcy Case No. 08-10928] (“the Opinion” or “Op.”) and the Amended Final Judgment (the “Judgment”) entered on October 30, 2009 by U.S. Bankruptcy Judge John K. Olson. This Court has jurisdiction pursuant to 28 U.S.C. § 158 and Federal Rule of Bankruptcy Procedure 8001(a).
II. BACKGROUND
A. The Tousa Entities
The Debtors in the bankruptcy proceedings below were TOUSA and various affiliates and subsidiaries of TOUSA (collectively, “the Debtors”), which design, build, and market detached single-family residences, town homes, and condominiums under various brand names. [Stip., p. 2].
4
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Several aspects of this appeal focus on a subgroup of the Debtors called the “Conveying Subsidiaries.”
5
The TOUSA Group’s assets include land and homes in various stages of completion and related assets. Between 1995 and 2005, the Debtors’ business activities grew rapidly as they acquired other home-building companies. [Committee’s Br., p. 13]. As of 2006, they operated the thirteenth largest home-building enterprise in the country with operations in Florida, Texas, the mid-Atlantic states, and the western United States. [First Lien Proposed Findings, pp. 1, 4]. The two main home-building subsidiaries, which held the majority of the home-building assets, were TOUSA Homes, Inc. (“THI”) and its wholly owned subsidiary, Newmark Homes LP (“New-mark”). [Stip., p. 22 n. 11].
i. Funding for the TOUSA Entities
To finance operations for itself and its subsidiaries, TOUSA relied on two principle sources of funding: bonds and a revolving credit facility.
1. Bonds
The TOUSA entities took on unsecured bond indebtedness through six major issuances between June 2002 and April 2006. On June 25, 2002, $200 million of notes were issued, which were due in 2010; on
*622
the same date, an additional $150 million of notes were issued, which were due in 2012; on February 3, 2003, $100 million in notes were issued, which were due in 2010; on March 17, 2004, $125 million of notes were issued, which were due in 2011; on December 21, 2004, $200 million of notes were issued, which were due in 2015; and on April 12, 2006, $250 million of notes were issued, which were due in 2011. [Stip., pp. 3-8; Trial Exhs. 3064-69].
6
a. Information Contained in Bond Prospectus Documents
For each bond indenture, a Prospectus was issued, which contained information about TOUSA’s structure and the nature of its operations.
7
Bondholders who reviewed the information in the Prospectuses learned that TOUSA operated as a diverse but highly integrated enterprise in which the company’s subsidiaries played a critical role in the vitality of the organization as a whole.
The Prospectuses provided collective information about the enterprise as a whole to explain its operations. They referenced “consolidated” or “combined” financial statements; they referred to the “consolidated net worth” of the enterprise; and they noted that TOUSA marketed homes under “various brand names.”
[E.g.,
Trial Exh. 3296, pp. 1, 7, 10], The Prospectuses also provided information about how bond notes would be paid, including details on interest rates. TOUSA was primarily responsible for payment of the notes, but the consolidated financial statements made it clear that the funds used to pay the notes would derive from the
net operations of TOUSA and its subsidiaries.
[Trial Exh. 3064, p. 41]. On each level, the TOUSA enterprise’s decision to raise money through bonds and then guarantee those bonds was a collective, group effort. [Appeal Hr’g Tr. 11:24-12:2 (counsel for the Committee noting that “the bond debt was used for the purchase of real estate and companies that were being rolled up, and those decisions, it is true, were made at headquarters”);
id.
at 13:17-22 (counsel for the Committee agreeing that “there was no money that went initially on the bonds that later became notes directly to the subsidiaries [because the bond debt was a joint effort among the TOUSA and its subsidiaries]”) ].
When identifying certain “Risks related to the Notes,” TOUSA stated in the Prospectuses that “[w]e may not have sufficient funds to satisfy our repurchase obligations that arise upon a change in control or a decline in our
consolidated net worth.”
[Trial Exh. 3296, p. 12 (emphasis added) ]. The Prospectuses also noted that cash flows for the TOUSA enterprise were heavily dependent on the role of the subsidiaries:
Substantially all of our operations are conducted through our subsidiaries. Therefore,
our ability to service our debt, including the notes, is dependent upon the cash flows of those subsidiaries
and, to the extent they are not subsidiary guarantors, their ability to distribute those cash flows as dividends, loans or other payments to the entities which are obligors under the notes and the guarantees.
[Id.
at 13 (emphasis added) ].
Because the subsidiaries played such a vital role to the bondholders, the Prospec
*623
tuses also specifically referenced and disclosed other debts of the borrowers, including the subsidiaries. For example, the Prospectuses provided information to bondholders about the guarantees provided by TOUSA’s subsidiaries under the Revolving Credit facility as discussed in further detail below.
8
b. Guarantors of the Bond Indentures
TOUSA was the obligor under each of the six bond indentures, and most of the Conveying Subsidiaries
9
were jointly and severally liable as guarantors. [Stip., p. 3]. The Prospectuses described these guarantees, noting that “[although the notes are our obligations, they are unconditionally guaranteed on a senior unsecured basis by all of our material domestic subsidiaries, other than our mortgage and title subsidiaries.” [Trial Exh. 3296, p. 13;
see also
Appeal Hr’g Tr. 10:24-25 (counsel for the Committee noting that “the conveying subs were guarantors on [the bonds]”)]. Likewise, the bond indentures themselves specified the nature of the subsidiary guarantees:
Section 10.01. SUBSIDIARY GUARANTY
(a) Subject to this Article 10, each of the Subsidiary Guarantors hereby, jointly and severally, unconditionally Guarantees to each Holder of a Note ... that (a) the principal of, premium, if any, and interest, including Special Interest, if any, on the Notes shall be promptly paid in full when due, whether at maturity, by acceleration, redemption or otherwise, ... and (b) in case of any extension of time of payment or renewal of any Notes or any of such other Obligations, that same shall be promptly paid in full when due or performed in accordance with the terms of the extension or renewal, whether at Stated Maturity, by acceleration or otherwise. Failing payment when due on any amount so Guaranteed or any performance so Guaranteed for whatever reason, the Subsidiary Guarantors shall be jointly and severally obligated to pay the same immediately. Each Subsidiary Guarantor agrees that this is a guarantee of payment and not a guarantee of collection.
(b) Each Subsidiary Guarantor hereby agrees that its Obligations with regard to this Subsidiary Guaranty shall be absolute and unconditional.
[Trial Exhs. 3064-69 § 10.01],
As counsel for the Committee confirmed during oral argument, these subsidiary guarantees played a critical role in the bond offerings because the subsidiaries provided a rich cash flow to the TOUSA enterprise. [Appeal Hr’g Tr. 14:22-15:1 (‘Yes. [The Prospectuses] presented consolidated financial statement, and it made
*624
very clear that the credit worthiness of the bonds turned in large part, in principal part, on the case flow of the subsidiaries which is why the bondholders took guarantees from the individual subsidiaries.”) ]. As such, the bondholders dealt with TOU-SA and its subsidiaries “as a consolidated enterprise that was interdependent, both in terms of structure and the flow of money.”
[Id.
at 16:20-25].
c.
Default
Pursuant to Articles 6.01-02 of each indenture, a judgment for more than $10 million against TOUSA or its subsidiaries or a bankruptcy filing by TOUSA or its subsidiaries would constitute an event of “default,” which would permit the note holders to declare all outstanding amounts under the bond debt to be immediately due.
Section 6.01 EVENTS OF DEFAULT
(a) Each of the following is an “Event of Default”:
(vi) any judgment or judgments for the payment of money in an aggregate amount in excess of $10.0 million that shall be rendered against the Company or any Restricted Subsidiary and that shall not be waived, satisfied or discharged for any period of 30 consecutive days during which a stay of enforcement shall not be in effect;
(vii) the Company or any Significant Subsidiary pursuant to or within the meaning of any Bankruptcy Law:
(1) commences a voluntary case,
(2) consents to the entry of an order for relief against it in an involuntary case,
(3) consents to the appointment of a custodian of it or for all or substantially all of its property,
(4) makes a general assignment for the benefit of its creditors, or
(5) generally is not paying its debts as they become due;
(viii) a court of competent jurisdiction enters an order or decree under any Bankruptcy law that:
(1) is for relief against the Company or any Significant Subsidiary in an involuntary case,
(2) appoints a custodian of the Company or any Significant Subsidiary or for all or substantially all of the property of the Company or any Significant Subsidiary, or
(3) orders the liquidation of the Company or any Significant Subsidiary,
and the order or decree remains unstayed and in effect for 60 days; or
(ix) any Subsidiary Guaranty relating to the Notes ceases to be in full force and effect (other than in accordance with the terms of such Subsidiary Guaranty), or any Subsidiary Guarantor denies or disaffirms its obligations under its Subsidiary Guaranty relating to the Notes.
(b) a Default under clause (a)(iv) is not an Event of Default in respect of the Notes until the Trustee or the Holders of not less than 25% in aggregate principal amount of Notes then outstanding notify the Company of the Default, and the Company does not cure such Default within the time specified after receipt of such notice. Such notice must specify the Default, demand that it be remedied and state that such notice is a “Notice of Default.”
Section 6.02 ACCELERATION
(a) If an Event of Default (other than an Event of Default specified in Section 6.01(a)(vii) or (a)(viii)), shall have oc
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curred and be continuing, the Trustee or Holders of not less than 25% in aggregate principal amount of the Notes then outstanding may declare to be immediately due and payable the principal amount of all the Notes then outstanding, plus accrued but unpaid interest, including Special Interest, if any, to the date of acceleration. In the case of an Event of Default specified in Section 6.01(a)(vii) or (a)(viii), such amount with respect to the all the Notes will become due and payable immediately without any declaration or other act on the part of the Trustee or the Holders.
[Trial Exhs. 3064-69 §§ 6.01-02],
As of July 31, 2007, the total amount of principal outstanding on the TOUSA bond debt was approximately $1.06 billion. [Stip., p. 3].
2. Revolving Credit Facility
On March 9, 2006, TOUSA established a revolving credit facility (“the Revolver”) with Citicorp North America, Inc. serving as Administrative Agent.
[Id.
at 8]. TOUSA used this facility to fund working capital and land acquisitions and to support letter of credit requirements under land option agreements. [I'd]. The credit line capped at $800 million. [Trial Exh. 2017], The amount of credit under the Revolver was determined once per month based on the combined value of the TOU-SA enterprise’s collateralized assets that made up the “Borrowing Base” as defined in the Revolver. [Trial Exh. 2017, pp. 3-4, 15, 54 (defining “Borrowing Base” and explaining how “Maximum Credit” is determined by level of “Borrowing Base”) ]. Citicorp representative Marni McManus explained the concept of the “Borrowing Base” in the following manner:
The borrowing base is a construct which is in most of the homebuilder deals, whether secured or unsecured, and essentially it governs the percentage of dollars that can be borrowed against a certain category of assets that the home builder may have on its balance sheet. So, for example a completed home, you may be able to borrow 90 cents, versus an uncompleted home it would be 50 cents and a piece of raw land, 10 cents.... [T]he company would be limited in the amount they could borrow to either the amount that the borrowing base — their assets allowed them to or the total size of the facility.
[Bankr.Hr’g Tr. 3605:4-24],
The Revolver was the primary source of liquidity for TOUSA, and it allowed TOU-SA to post letters of credit and surety bonds.
[Id.
at 258:16-259:21, 3900:1-3901:11].
a. Amendments to the Revolver
Several of the Conveying Subsidiaries were guarantors under the Revolver as of March 9, 2006.
10
The Revolver was
*626
amended twice before the July 31, 2007 transactions at issue in this appeal (the “July 31 Transaction”).
11
Both of these amendments had an impact on TOUSA’s subsidiaries. On October 23, 2006, TOU-SA and Citicorp amended the Revolver, requiring TOUSA’s subsidiaries, including the Conveying Subsidiaries, to pledge assets as security under the Revolver. [Stip., p 9; Trial Exhs. 209, 3062].
12
On January 30, 2007, TOUSA’s subsidiaries, again including Conveying Subsidiaries, were added as “Subsidiary Borrowers” on the Revolver. [Stip., p. 10; Trial Exh. 210].
13
As the largest consumers of Revolver funds and the two subsidiaries holding most of the enterprise’s assets, THI and Newmark — both of which are Conveying Subsidiaries — were most affected by these amendments. [Bankr.Hr’g Tr. 1626:1-7].
The terms of the January 30, 2007 Revolver governed until the July 31 Transaction at issue in this case. Under the January 30, 2007 Revolver, TOUSA and its subsidiaries had full access to the Revolver.
14
TOUSA, as “Administrative Borrower,” exercised more control than the “Sub
*627
sidiary Borrowers.” For example, under Section 2.2, labeled “Borrowing Procedures,” TOUSA was authorized to give notice requesting funds for each instance of borrowing on behalf of all of the Borrowers. [Trial Exh. 210, pp. 33, 59]. The agreement provided a specific form for “Notice of Borrowing” to be submitted by TOUSA for each “Proposed Borrowing.”
[Id.
at Exhibit D]. Also, each of the Borrowers under the Revolver appointed TOUSA as their “agent” for “all purposes” under the agreement, and “[a]ny acknowledgment, consent, direction, certificate or other action which might otherwise be valid or effective only if given or taken by all of the Borrowers or acting singly,
shall be valid and effective if given or taken only by the Administrative Borrower [TOUSA], whether or not any of the other Borrowers joins therein.” [Id.
at 111 (emphasis added)].
b. Default Provisions
The Revolver had specific default provisions similar to those contained in the bond indentures. Pursuant to Section 8 of the January 30, 2007 Revolver, any bankruptcy proceeding or judgment for over $10 million involving TOUSA or any subsidiary constituted a default, which would have made all outstanding amounts of principal and interest immediately due and payable to the Revolver lenders from TOUSA or any of the Subsidiary Borrowers.
EVENTS OF DEFAULT
Section 8.1
Events of Default
Each of the following events shall be an Event of Default:
(f)(ii) any proceeding shall be instituted by or against the Administrative Borrower or any of its Restricted Subsidiaries seeking to adjudicate it a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief or composition of it or its debts under any Requirement of Law relating to bankruptcy, insolvency or reorganization or relief of debtors....
(g) any final judgment or order (or other similar process) involving, in any single case or in the aggregate, an amount in excess of $10,000,000 in the case of a money judgment, to the extent not covered by insurance, or that could reasonably be expected to have a Material Adverse Effect, in the case of a non-monetary judgment, shall be rendered against one or more of the Administrative Borrower and its Restricted Subsidiaries by a court having jurisdiction, and such judgment or order shall continue unsatisfied and in effect for a period of thirty days without being vacated, discharged, satisfied, or stayed or bonded pending appeal....
Section 8.2
Remedies
During the continuance of any Event of Default, the Administrative Agent (a) may, and at the request of the Requisite Lenders shall, by notice to the Administrative Borrower declare that all or any portion of the Revolving Credit Commitments be terminated, whereupon the obligation of each Lender to make any Loan and each Issuer to Issue any Letter of Credit shall immediately be decreased or terminate, as the case may be, and/or (b) may, and at the request of the Requisite Lenders shall, by notice to the Administrative Borrower, declare the Loans, all interest thereon and all other amounts and Obligations payable under this Agreement to be forthwith due and payable, whereupon the Loans, all such interest and all such amounts and Obligations shall immediately become and be forthwith due and payable, without presentment, demand, protest
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or further notice of any kind, all of which are hereby expressly waived by the Borrowers;
provided, however,
that upon the occurrence of the Events of Default specified in Section 8.1(f)(ii) [the bankruptcy provisions], the Revolving Credit Commitments of each Lender to make Loans and the commitments of each Lender and Issuer to Issue or participate in Letters of Credit shall each automatically be terminated and the Loans, all such interest and all such amounts and Obligations shall automatically become and be due and payable, without presentment, demand, protest or any notice of any kind, all of which are hereby expressly waived by the Borrowers.
[Id.
§§ 8.1(g), 8.2 (emphasis in original) ].
As of July 31, 2007, TOUSA and the subsidiary borrowers owed $373 million on the Revolver loan. [Trial Exh. 3429; Appeal Hr’g Tr. 60:22, 66:4-8]. As noted above, TOUSA and the subsidiary borrowers simultaneously owed approximately $1.06 billion under the bond issuances as of this date. As also noted above, the bondholders were aware of obligations of TOU-SA and the Conveying Subsidiaries under the Revolver.
B. The Transeastern Joint Venture
In June 2005, TOUSA became involved in a joint venture, which plays a central role in the origins of the current dispute. Tousa Homes LP (“Homes LP”), a wholly owned subsidiary of TOUSA, and Falcone/Ritchie LLC (“Falcone”) formed a joint venture called TE/TOUSA LLC (“Transeastern JV” or “the Joint Venture”). [Stip., p. 11]. They formed the Joint Venture for the purpose of acquiring certain home-building assets owned by Transeastern Properties, Inc. (“TEP”), which was a leading developer in Florida. ted]. TOUSA viewed this acquisition of TEP as attractive because it offered TOU-SA the chance to become a dominant player in Florida’s real estate market, and it provided TOUSA a partner that could obtain independent financing and share business risks. [Trial Exh. 104, p. 042818; Bankr.Hr’g Tr. 263:13-21],
Within the Joint Venture, Homes LP served as Managing Member and held a 50 percent voting interest shared with Falcone. [Stip., p. 11]. There were also a series of “tiered” special purpose subsidiaries: EH/Transeastern (“EHT”) served as the primary operating subsidiary; TE/TOUSA Senior LLC (“TOUSA Senior”) served as managing member and sole owner of EHT; TE/TOUSA Mezzanine LLC (“TOUSA Mezz”) owned all of the membership interests in TOUSA Senior; and TE/TOUSA Mezzanine Two LLC (“TOUSA Mezz II”) owned all of the membership interests in TOUSA Mezz.
[Id.].
i. Funding for the Transeastern Joint Venture
The Transeastern JV was funded independently of the TOUSA enterprise, using $675 million of third-party debt capacity, a subordinated loan from Homes LP, and equity.
[Id.].
The $675 million third-party debt lies at the heart of these appeals. The entities responsible under the pledges, liens, and guarantees for this debt were TOUSA, Homes LP, TOUSA Senior, EHT, TOUSA Mezz, and TOUSA Mezz II — none of which are Conveying Subsidiaries. The debt consisted of three parts, stemming from three agreements, which were all executed on August 1, 2005 (the “Transeastern Credit Agreements”).
1. Senior Debt
TOUSA Senior and EHT entered into a “Senior Credit Agreement” with Deutsche Bank Trust Company Americas (“DBTCA”) as Administrative Agent.
15
*629
[Trial Exhs. 2007, 2010, 3071, 3076], The Senior Credit Agreement provided a $335 million senior secured term loan and a $115 million senior secured revolving credit agreement from the “Senior Transeast-ern Lenders”
16
with TOUSA Senior and EHT obligated as borrowers. The Senior Debt was secured by first priority liens on substantially all of the assets of EHT and a pledge of the membership interests in EHT held by TOUSA Senior. [Stip., p. 12].
2.Senior Mezzanine Debt
TOUSA Mezz entered into a Senior Mezzanine Credit Agreement with DBTCA as Administrative Agent. [Trial Exhs. 2008, 2009, 3072, 3079]. That agreement provided a $137.5 million term loan from the “Senior Mezzanine Lenders”
17
with TOUSA Mezz obligated as borrower. [Stip., p. 12].
3.Junior Mezzanine Debt
TOUSA Mezz II entered into a “Junior Mezzanine Credit Agreement” with DBTCA as Administrative Agent. [Trial Exhs. 2011, 3082], That agreement provided an $87.5 million loan from the “Junior Mezzanine Lender.”
18
4.Carve Out and Completion Guarantees
As a condition precedent to the Transeastern Credit Agreements, TOUSA and Homes LP also granted two types of guarantees, completion and carve-out guarantees, on the Senior Debt, the Senior Mezzanine Debt, and the Junior Mezzanine
*630
Debt, for a total of six guarantees (the “Completion and Carve-Out Guarantees”). [Stip., p. 13]. The “Completion” part of the guaranty obligated TOUSA and Homes LP to complete work on Transeastern JV properties in progress when the Joint Venture was created in the event the Joint Venture itself failed to do so. [M]. The “Carve-Out” part of the guarantee required TOUSA and Homes LP to indemnify the lenders for losses resulting from fraud, misappropriation and similar acts by the Joint Venture, and it required full repayment of the Transeastern Loans if the Joint Venture voluntarily filed for bankruptcy protection. [M]. In the event of bankruptcy, the guarantors would also have a 100 percent obligation to pay the debt in full. [Trial Exh. 3075, pp. 1-2; Bankr.Hr’g Tr. 1594-99].
The guarantee provisions in the Completion and Carve Out agreements provided the following:
Guarantors do hereby, jointly and severally, unconditionally, absolutely and irrevocably guarantee [the debt] to the Administrative Agent_This is an irrevocable, absolute, continuing guaranty of payment and performance and not a guaranty of collection. Guarantors waive any right to require that any resort be had by the Administrative Agent or any lender to any of the security held for payment of the Guaranteed Obligations or to any balance of any deposit account or credit on the books of the Administrative Agent or any lender in favor of Borrowers or any other person. This Guaranty may not be revoked by Guarantors and shall continue to be effective with respect to the Guaranteed Obligations arising or created after any attempted revocation by Guarantors. It is the intent of Guarantors that the obligations and liabilities of Guarantors hereunder are absolute and unconditional under any and all circumstances and that until the Guaranteed Obligations are fully and finally satisfied, such obligations and liabilities shall not be discharged or released in whole or in part, by any act or occurrence which might, but for the provisions of this Guaranty, be deemed a legal or equitable discharge or release of Guarantors.
[Trial Exhs. 3074, 3075, 3077, 3078, 3080, 3081],
C. The Transeastern Litigation
The downturn in the housing market and the weak overall economy soon threatened the viability of the Joint Venture. Several events marked the decline of business for the Transeastern JV. On September 29, 2006, DBTCA, as Administrative Agent for all of the Transeastern Lenders, entered into a “Consent and Agreement” with TOUSA Senior, EHT, TOUSA Mezz, and TOUSA Mezz II, recognizing that a potential default or an event of default had occurred under the Transeastern Credit Agreements. [Trial Exh. 4044, pp. 1-2], On October 2, 2006, TOUSA disclosed potential losses associated with the Transeastern JV in its Form 8-K SEC filing. [Trial Exh. 5005]. On October 4, 2006, certain Falcone entities gave notice of default to the Transeastern JV on existing land option agreements. [Stip., p. 14].
On October 31 and November 1, 2006, Deutsche Bank sent demand letters to TOUSA and Homes LP, demanding payment of all debt under the Transeastern Credit Agreements pursuant to the Completion and Carve-Out Guarantees. [Trial Exhs. 398, 399]. On November 14, 2006, TOUSA filed Form 10-Q, disclosing that the Transeastern JV would not have the ability to continue as a going concern. [Trial Exh. 2034, pp. 13, 37].
As noted above, Citicorp, the Administrative Agent under the Revolver, required
*631
TOUSA and its subsidiaries to increase their obligations under the Revolver in light of TOUSA’s ongoing difficulties with the Transeastern JV. Specifically, the Revolver lenders recognized that TOUSA was “no longer able to satisfy all of the conditions precedent under the March 2006 Credit Agreement” because of “Transeastern Events.” [Trial Exh. 209, p. 1]. In response, the Conveying Subsidiaries agreed on October 23, 2006, to pledge assets as security under the Revolver so that the Revolver lenders would continue to grant the TOUSA enterprise access to its most important source of liquidity. [Stip., p 9; Trial Exhs. 209, 3062; Trial Exh. 5006 at Ex. 10.1]. When difficulties with the Transeastern JV continued, the Conveying Subsidiaries agreed on January 30, 2007 to provide additional guarantees, now listing themselves as “Subsidiary Borrowers” under the Revolver. [Stip., p. 10; Trial Exh. 210].
Litigation also ensued between TOUSA and the Transeastern Lenders. TOUSA and Homes LP filed an action against DBTCA in Florida on November 28, 2006, seeking a declaratory judgment that they were not obligated under the Completion and Carve-Out Guarantees. [Trial Exh. 3105, pp. 11-12]. On December 4, 2006, DBTCA, on behalf of the Senior Transeastern Lenders and the Senior and Junior Mezzanine Lenders, filed action against TOUSA and Homes LP in New York state court. [Trial Exh. 3089]. DBTCA sought repayment of the Transeastern loans and damages for the various breaches by TOU-SA and Homes LP of the Completion and Carve-Out Guaranties. [Stip., p. 15; Trial Exh. 3089].
19
When TOUSA and Homes LP moved to dismiss the New York action, the court denied their motion. [Trial Exhs. 3094-98]. The Parties agreed to consolidate the Florida and New York actions. [Trial Exh. 3112, p. 3],
In its Complaint, DBTCA alleged that “[t]o date, more than $600 million has been advanced to the joint venture borrowers under various related credit facilities” and DBTCA requested “an award of damages for the various breaches by TOUSA and TOUSA Homes ... in an amount to be determined at trial up to the full amounts outstanding under the Credit Agreements, plus interest thereon.” [Trial Exh. 3089, pp. 2, 59]. One month after filing its complaint, Deutsche Bank sent a letter to TOUSA to “clarify” the “potential scope of TOUSA’s liability.” [Trial Exh. 443, p. 1]. Specifically, Deutsche Bank argued that “it is DBTCA’s view that [the Completion Guarantees] apply the horizontal
and
vertical construction of all phases of all developments for which there was
any
work ... commenced as of the closing of the transaction. ... By our rough calculation, the indemnifiable costs under the reading exceed the full amounts outstanding under the Credit Agreements several times over.”
[Id.
(emphasis added) ]. TOUSA management personnel believed that “the ultimate ... claim from Deutsche Bank was in excess of the amount of the debt ... it was $2 billion and above.” [Bankr. Hr’g Tr. 1616:16-1617:7, 2829:16-17],
To resolve the Transeastern litigation, TOUSA faced three possibilities: (1) litigate the claims, (2) file for bankruptcy, or (3) settle the claims. TOUSA manage
*632
ment believed that “the senior lenders [to the Senior Credit Agreement] were entitled to get 100 percent cash. Everyone took the position if we didn’t pay them 100 percent, we had no deal.... Certainly, we had a series of advisors, and the decision was that there was no sense spending time trying to negotiate with them.”
[Id.
at 1611:4-16;
see also id.
at 506:15-16 (former TOUSA Executive Vice President and CEO Steve Wagman stating that he “believed that there was significant risk associated with continuing to litigate”);
id.
at 3616:20-23 (Citicorp’s Manager on TOUSA Relations, Marni McManus, stating that “the company had a clear view that it had come to with the advice of their counsel as well as their financial advisors that settlement was better for the company overall”); Appeal Hr’g Tr. 20:25-21:14 (“[T]here was no dispute in this litigation that the amounts paid by TOUSA to the Transeastern lenders were, in fact owed.... Nobody has contended that the guarantees weren’t valid obligations of TOUSA that arose to at least the level that was paid, so there isn’t an argument of a gift.... And just to be clear, the fear of the parent was that the judgment against it would be far in excess of what it paid ultimately to resolve the Transeastern litigation.”) ]. Counsel for the Committee even conceded at oral argument that settlement was in the best interests of TOUSA as the parent company. [Appeal Hr’g Tr. 20:12-16 (“I agree with the Court that there’s no question at some point that the parent decided to honor the guarantee and settle the case because it, in contrast to the conveying subsidiaries, was on the hook for the guarantee.”) ].
TOUSA’s consultants and advisors also believed that settlement was in the best interests of the TOUSA enterprise. According to Kirkland & Ellis and Lehman Brothers, there was “a substantial risk of a judgment against TOUSA,” and time was “of the essence and the Company [did] not have the luxury of continuing to negotiate with the EHT lenders over a longer period of time.” [Trial Exh. 187, p. 35]. When TOUSA sought advice from its consultants regarding bankruptcy, Lehman Brothers provided a detailed “waterfall analysis,” concluding that if bankruptcy occurred, TOUSA “may not be able to continue operating as a going concern and reorganize” and such a bankruptcy would be “likely to have a negative impact on TOUSA’s liquidity, value of its assets and its ability to obtain performance bonds.”
[Id.
at 36-39]. TOUSA management shared these same concerns on behalf of the subsidiaries. [Bankr.Hr’g Tr. 1848:8-9 (“[W]e didn’t see how the company could exist with the parent in bankruptcy.”) ]. In light of these concerns, TOUSA chose to settle the Transeastern litigation.
D. The Transeastern Settlement
To repay the Transeastern Lenders, TOUSA had to obtain new financing (the “New Loans”). TOUSA selected Citicorp North America, Inc. (“CNAI”) as the Administrative Agent for the new lenders (the “New Lenders”), and on June 27, 2007, CNAI sent TOUSA a final commitment letter reflecting the structure of their intended transactions. [Trial Exh. 3301],
i.
The Settlement Agreements
TOUSA entered into a number of settlement agreements during this time. On May 30, 2007, TOUSA, Homes LP, and the Transeastern JV Subsidiaries reached a settlement agreement with Falcone and related entities under which TOUSA became the sole owner of the Joint Venture and paid approximately $49 million to receive properties related to the Joint Venture. [Stip., p. 18; Trial Exh. 2116].
20
*633
The Transeastern assets that were sold resulted in proceeds that went into a centralized cash management system “available for all of the various subsidiaries to use.” [Bankr.Hr’g Tr. 551:15-21]. In addition to real estate, TOUSA acquired Transeastern’s unrestricted cash, restricted cash, fixed assets, and other assets. [Valdes Dep., pp. 60:18-63:13]. A portion of this was cash held in escrow deposits that would become actual, unrestricted cash upon the closing of the homes. [De-vendorf Dep., pp. 46-47]. The Parties dispute the actual value of these Transeast-ern assets as of July 2007,
21
but it is undisputed that proceeds from the sales of all these Transeastern assets and deposits that Transeastern held prior to TOUSA’s acquisition were swept into TOUSA’s central cash management system, which was available to the Conveying Subsidiaries. [McAden Dep., pp. 154-55; Bankr.Hr’g Tr. 1675:17-21],
The acquisition of the Transeastern assets also affected the “Borrowing Base” of the collective borrowers’ assets under the Revolver. TOUSA’s former Executive Vice President and CFO believed that “as a result of the July 31 transactions, the available credit, the borrowing base available credit under the revolver increased ... by $150 million ... [and] that additional liquidity of value [was] ... available to the various subsidiary borrowers on the revolver.” [Bankr.Hr’g Tr. 545:9-546:15; Trial Exh. 362, p. 7]. This was especially valuable to the Conveying Subsidiaries in July 2007 because it would have been “pretty close to impossible” for the Conveying Subsidiaries to secure their own financing at that time. [Bankr.Hr’g Tr. 546:19-547:1].
On June 29, 2007, TOUSA, Homes LP, and the Transeastern JV Subsidiaries executed settlement agreements with the Mezzanine Lenders. [Trial Exhs. 2134, 3111].
22
On July 31, 2007, TOUSA, Homes LP, and the Transeastern JV Subsidiaries reached a settlement agreement with lenders under the Senior Credit Agreement (the “CIT Settlement Agreement”). [Stip., p. 16; Trial Exh. 2182]. Under the terms of the CIT Settlement Agreement, EHT and TOUSA Senior agreed to pay $421,522,193.46 to the lenders, plus additional interest payments of approximately $140,000.00 per day. [Stip., p. 16; Trial Exh. 2182],
To fund the settlement agreements with the Transeastern Lenders, TOUSA entered into two separate credit agreements with the New Lenders — First and Second Term Loan facilities with CNAI as Administrative Agent for the First and Second Lien Term Lenders. [Trial Exhs. 360, 361].
23
The First Lien Term Loan provided $200 million, and the Second Lien Term Loan provided $300 million to the borrow
*634
ers. [Trial Exhs. 360, 361].
24
Both of the New Loans directed that loan proceeds be used to satisfy the Transeastern Settlement, which the New Loans referred to as the “Acquisition.” [Trial Exh. 360 §§ 1.1, 4.12; Trial Exh. 361 §§ 1.1, 4.12].
25
Specifically, Section 4.12 provided that loan funds be used to “discharge all amounts of outstanding indebtedness of the Transeastern JV Entities” and that TOUSA was to serve as the sole “Administrative Borrower.” [Trial Exh. 360 § 4.12; Trial Exh. 361 § 4.12],
Unlike the Transeastern Credit Agreements, both of these New Loan agreements named all of the Conveying Subsidiaries as “Subsidiary Borrowers.” [Trial Exhs. 360, pp. 132-36; Trial Exh. 361, pp. 131-35]. In accordance with their obligations as “Subsidiary Borrowers,” the Conveying Subsidiaries were required to pledge their assets as security under the New Loans. Because the Conveying Subsidiaries had already pledged their assets as security to the Revolver lenders under the Revolver amendments described above, the New Lenders had to obtain the consent of the Revolver lenders before they could enter into the First and Second Lien Term Loan facilities. Thus, on May 1, 2007, TOUSA made a presentation to a Steering Committee of Revolving Credit Lenders, and 79.125% of the Revolver lenders approved the terms of the new financing. [Trial Exh. 352; Bankr.Hr’g Tr. 3667:1-12]. As Marni McManus of Citicorp explained on behalf of the New Lenders, the “revolvers had taken collateral in the fall [on October 23, 2006], so we needed their approval in order to share that collateral with any other lenders.” [Bankr.Hr’g Tr. 3615:17-25].
In accordance with the May 1, 2007 creditor presentation, the Revolver Lenders, the First Lien Lenders, and the Second Lien Lenders entered into an “Inter-creditor Agreement” on July 31, 2007 to clarify the priorities of their liens. [Trial Exh. 2166]. Citicorp acted as Administrative Agent in the agreement on behalf of all of the lenders involved.
[Id.
at 1]. The agreement provided for equal priority of liens among the Revolver lenders and the First Lien Term Loan Lenders.
[Id.
at 4-8].
The Revolver lenders also independently required the borrowers under the Revolver to amend that agreement again on July 31, 2007. Under the new amendments, the maximum credit available under the Revolver was reduced from $800 million to
*635
$700 million. [Trial Exh. 362, p. I].
26
The Conveying Subsidiaries remained listed as “Subsidiary Borrowers” that were jointly and severally liable with TOUSA under the terms of the Revolver, and their assets remained pledged as collateral.
[Id.
at 1, 139-41; Trial Exh. 2172, pp. 5-7].
The parties to the Revolver amended their agreement two more times after July 31, 2007. On October 25, 2007, they amended the Revolver to provide for a waiver of solvency certification requirements for the third quarter and to permit borrowings of up to $65 million through the end of 2007. [Trial Exh. 216, pp. 2-3, 9], In December 2007, TOUSA negotiated another amendment to the Revolver, providing for an extension of the prior certification waiver through February 1, 2008. [Trial Exh. 389 ¶ 46],
The internal corporate decisions approving the New Loans as part of the Transeastern Settlement play an important role in this dispute and should be examined carefully. On June 20, 2007, TOUSA’s board, which consisted of five inside directors and six outside directors, unanimously approved settlement of the Transeastern Litigation. [Trial Exh. 255; Bankr.Hr’g Tr. 189:21-190:11, 248:25-250:18]. The resolutions passed by TOU-SA’s Board explicitly state that the New Loans were not only in the best interest of TOUSA but were also “necessary and convenient to the conduct, promotion and attainment of the business of the Administrative Borrower [TOUSA]
and its subsidiaries.”
[Trial Exh. 374, pp. 5, 8 (emphasis added) ]. Of critical importance, officers and directors of all of the Conveying Subsidiaries also executed formal resolutions or consents approving their obligations under the New Loans. [Trial Exhs. 375-76, 501-31, 2163;
see also
First Lien Br., p. 62], These formal documents all contain substantially the same language, specifically recognizing the New Loans as being in the “best interest” and for the “benefit” of the individual subsidiaries. For example, the resolution passed by THI, one of the two largest Conveying Subsidiaries holding most of TOUSA’s assets, provides the following:
WHEREAS, it is a condition to the extension of loans under the [First and Second] Lien Credit Agreements] that certain subsidiaries, including the Corporation, guaranty the obligations of the Administrative Borrower and each other Borrower under the [First and Second] Lien Credit Agreements];
WHEREAS,
the Board [of THI] deems to be in the best interest of the Corporation to become Borrower under the [First and Second] Lien Credit Agreements]
and to guaranty the obligations of the Administrative Borrower and each other Borrower under the [First and Second] Lien Credit Agreements] ....
WHEREAS,
the Corporation will obtain benefits from the incurrence of the Loans and the other obligations under the [First and Second] Lien Credit Agreements]
and the other Loan Documents which are necessary and convenient to the conduct, promotion and attainment of the business of the Corporation.
NOW, THEREFORE BE IT:
RESOLVED, that
the Board finds that the Loan Documents (i) are in the best interest of the Corporation,
(ii) are necessary and convenient to the conduct,
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promotion and attainment of the business of the Administrative Borrower and its subsidiaries, including, without limitations, the Corporation, and (iii) may reasonably be expected to benefit, directly or indirectly, the Corporation.... [Trial Exh. 504, pp. 4-5, 7-8 (emphasis added) ].
The settlement also resulted in significant tax benefits for the TOUSA subsidiaries. In exchange for the conveyances associated with the First Lien Term loan, TOUSA and the Conveying Subsidiaries obtained the right to future tax benefits totaling approximately $74.8 million. [Trial Exh. 5404 ¶ 40; Trial Exh. 3000, p. 147], As with all TOUSA receipts, those funds were expected to be placed into the TOU-SA centralized cash management system, on which all TOUSA subsidiaries could draw. [Bankr.Hr’g Tr. 1675:17-21],
ii.
The Flow of Funds on July 31, 2007
The exchange of property interests and funds that make up the “July 31 Transaction” can be broken down into three parts. First, as a result of the New Loan agreements, TOUSA and the Conveying Subsidiaries pledged their assets as security to the New Lenders, which, in turn, placed liens on those assets. Second, in exchange for these liens, the New Lenders disbursed $500 million in funds to TOUSA, the parent. Of the $500 million that TOUSA received from the New Lenders, the net proceeds were $476,418,784.40 after accounting for fees and expenses, including legal and syndicate costs. [Trial Exh. 442], In accordance with the New Loans, the Conveying Subsidiaries provided written authorization to TOUSA, appointing TOUSA as their agent for the purpose of using these funds to settle the Transeastern debts. [Trial Exh. 360 § 10.21],
The exact disbursement of these funds was as follows: On July 31, 2007, CNAI, as Administrative Agent for the New Lenders, wired $476,418,784.40 to Universal Land Title, Inc. (“ULT”), a wholly-owned subsidiary of TOUSA. [Stip. ¶ 43]. CNAI’s instructions for the wire transfer provided that the funds were to be received by David Bronson of ULT and credit for the wire was to go to Technical Olympic USA, Inc., which was TOUSA’s former corporate name. [Trial Exh. 442], TOUSA management explained that ULT was a “non-conveying, non-filing” subsidiary that acted as part of TOUSA’s financial services group in the capacity of a title company or escrow agent. [Bankr.Hr’g Tr. 1709:25-1710:9]. Management further confirmed that TOUSA’s subsidiaries, including the Conveying Subsidiaries, exercised no control over the $476,418,784.40 transferred from the New Lenders to ULT.
[Id.
at 1711:22-1712:7]. CNAI personnel also explained that “[n]one of the subsidiaries had a right to the funds.”
[Id.
at 3696:23-24;
see also
Appeal Hr’g Tr. 93:2-10 (counsel for the committee stating that the $476,418,784.40 “actually went to a particular subsidiary of TOUSA that is not one of the conveying subsidiaries and was then earmarked directly, pursuant to the very loan documents,
to go directly to the Senior Transeastem
Lenders....
[The Conveying Subsidiaries] didn’t formally hold the money”)
(emphasis added) ].
Third, following this transfer of $476,418,784.40, ULT wired $426,383,828.08 to Citibank, as Administrative Agent for the Transeastern Lenders. Citibank disbursed these proceeds to the other Transeastern Lenders by separate wire transfers taking place on July 31, 2007 and August 1, 2007. [Stip., p. 20; Trial Exhs. 136, 5107, 5109].
27
*637
E. The Bankruptcy PreTrial Proceedings
Despite the July 31 Transaction, it became clear between August 2007 and the beginning of 2008 that TOUSA and its subsidiaries would not be able to continue as going concerns. TOUSA’s eventual collapse was caused in large part by the catastrophic economic events that independently doomed the housing market shortly after the July 31 Transaction. According to company management, nobody within TOUSA predicted that the housing market would get anywhere near as bad as it did after July 31, 2007. [Bankr.Hr’g Tr. 287:12-288:4, 543:4-10]. Media reports in the record referred to August 2007 as a “once in a century credit tsunami,” a “Black Swan” event, and an “economic Pearl Harbor.” [Trial Exhs. 4168-70]. Real estate valuation experts, such as Christopher James who testified at the trial below, confirmed that homebuilders like TOUSA were devastated by the tightening of credit markets in August 2007. [Bankr.Hr’g Tr. 2142:8-2146:10; Trial Exh. 3002 ¶¶ 7-54 (“Like many homebuilders, TOUSA was hit hard by the August 2007 credit-market freeze and the consequent collapse of the mortgage market, which dried up the pool of home buyers.”); Intervenor’s Br., p. 5].
The Committee’s own expert, Charles Hewlett, even conceded that the economy must have played a role in TOUSA’s downturn after the July 31 Transaction: “There is absolutely no question, and no one would dispute, that after July 31, 2007, the market got even worse.” [Bankr.Hr’g Tr. 757:21-23]. Similarly, the Bankruptcy Court acknowledged in its Order that it was “undisputed” that the national housing market “went to hell in a handcart beginning in August 2007.” [Op., p. 50].
Given these catastrophic conditions, TOUSA and most of its subsidiaries filed petitions for relief under Title 11 of the U.S.Code on January 29, 2008. [Stip., p. 22].
28
On February 13, 2008, the Office of the U.S. Trustee for the Southern District of Florida appointed the Official Committee of Unsecured Creditors of TOUSA, Inc. (the “Committee”).
29
[Id]. On
July 14, 2008, the Committee brought
30
this adversary proceeding on behalf of the Conveying Subsidiaries.
[Id].
31
The Committee claims that when TOU-SA and the Conveying Subsidiaries filed for bankruptcy, the Transeastern Lenders and the First and Second Lien Term Lenders “elbow[ed] their way to the front of the creditors’ line” and “the unsecured creditors
[ie.,
the bondholders] were
*638
pushed to the back of that line” as a result of the July 31 Transaction. [Committee’s Br., pp. 3, 32]. In total, the Committee asserted twenty claims collectively against the Transeastern Lenders and the New Lenders. [Bankr.ECF No. 243], The Committee alleged that the July 31 Transaction constituted a fraudulent transfer under 11 U.S.C. § 548 .
32
The Committee argued that the July 31 Transaction rendered the Conveying Subsidiaries insolvent and that the Conveying Subsidiaries did not receive “reasonably equivalent value” for the New Loans because TOUSA used the loan proceeds to finance the settlement of the Transeastern Litigation, in which the Conveying Subsidiaries held no stake because they were not defendants. The Committee brought claims on behalf of the Conveying Subsidiaries against the Tran-seastern Lenders, seeking recovery of the settlement funds they received in the July 31 Transaction.
33
The Debtors were not originally parties to the Committee’s action, but they became involved when the New Lenders brought identical third-party claims against certain of the Debtors in the Fall of 2008. [Bankr.ECF Nos. 28, 276]. CNAI and Wells Fargo, as Administrative Agents for the New Lenders, brought contingent claims, denying the Committee’s allegations, but alleging that
if
the Committee were to establish the allegations in the Complaint, then the Debtors had “materially breached” the New Loans in which they represented that they were solvent. [Bankr.ECF No. 28 ¶ 12; Bankr.ECF No. 276 ¶ 218].
The Bankruptcy Court entered several significant pretrial orders. Two of them are relevant to the appeal proceedings before me concerning the Transeastern Lenders: First, on July 2, 2009, the Bankruptcy Court granted the Debtors’ Motion to Strike the Senior Transeastern Lenders’ Counterclaim and Third-Party Claim. [Bankr.ECF No. 508]. Second, on July 8, 2009, the Bankruptcy Court granted the Committee’s Motion for Summary Judgment on the Defendants’ Affirmative Defenses of Substantive Consolidation, Single Business Enterprise and Alter Ego. [Bankr.ECF No. 513].
34
F. The Bankruptcy Trial
The Bankruptcy Court held a bench trial from July 13 to July 28, 2009, in which more than twenty witnesses testified, including several witnesses who provided extensive information on the July 31 Transaction and TOUSA’s decision-making
*639
process leading up to that date.
35
TOUSA management testified about the danger faced by the Conveying Subsidiarif the July 31 Transaction had not gone through. In particular, if the Transeastern Lenders received a judgment against TOUSA in excess of $10 million dollars or TOUSA filed for bankruptcy, TOUSA would be in default of the bond indentures, and “the bond debt was placed at TOUSA, Inc., but with guarantees from each of the TOUSA subsidiaries. They were absolute- and unconditional guarantees.” [Bankr. Hr’g Tr. 1623:10-1624:13]. Likewise, in the case of a $10 million judgment or a bankruptcy filing, that “would have triggered the Citibank obligation, the $800 million revolver. And, again, those subsidiaries were absolutely, unconditionally guarantors and were co-borrowers, and their assets were pledged.”
[Id.
at 1678:4-25,1688:1-1689:25].
TOUSA management and their advisors testified that they believed that the Transeastern litigation presented an existential threat to the TOUSA enterprise because of the default provisions in the Revolver and the bond indentures. There was a “significant risk associated with continuing to litigate,” and “settlement was better for the company overall.”
[Id.
at 505:8-507:23, 3616:19-25]. TOUSA’s outside counsel advised that the proposed settlement “was likely a better outcome than full litigation.” [Trial Exh. 187, p. 20]. As to the possibility of bankruptcy, TOUSA’s Executive Vice President and Chief of Staff testified that it would not have been possible to keep TOUSA’s subsidiaries out of bankruptcy if TOUSA filed for bankruptcy. [Bankr.Hr’g Tr. 1623:10-1624:13, 1678:3-1679:21, 1847:25-1848:16 (“[W]e didn’t see how the rest of the company could exist with the parent in bankruptcy.”) ]. One of the primary concerns facing the Conveying Subsidiaries in the event of default was their failure to have maintained individualized audited statements because they “absolutely could not” obtain their own financing given the interrelated nature of the TOU-SA enterprise.
[Id.
at 1877:5-1879:16].
Because of these considerations, the TOUSA Board, including five outside directors, unanimously approved the Tran-seastern Settlement.
[Id.
at 189:21-190:2, 248:18-250:18].
36
Paul Berkowitz, who signed corporate resolutions consenting to the Transeastern Settlement on behalf of the Conveying Subsidiaries, testified that he “thought the transaction was in the best interest of the company as a whole and each of the its subsidiaries,” and that he believed that the subsidiaries “benefitted” from the transaction.
[Id.
at 1592:12-24, 1692:4-5, 1718:10-1719:22 (“I believed it was benefitting the organization as a whole.”) ]. The former TOUSA Executive Vice President and CFO confirmed that when he signed the resolutions approving the July 31 Transaction, he felt that “what would benefit TOUSA, Inc., would also benefit the subsidiaries, given out structure and how we operated the business.”
[Id,
at 528:19-21].
The Bankruptcy Court also spent significant time during the bench trial to consider arguments concerning the solvency of TOUSA and its subsidiaries as it related to the Committee’s claims against the First and Second Lien Term Lenders. Accordingly, the Parties relied heavily on expert witness testimony concerning the valuation of TOUSA and its subsidiaries with the Committee’s witnesses coming to very different conclusions than the Defendants’
*640
witnesses. The Defendants filed pre-trial
Daubert
motions to exclude the expert testimony as to two of the Committee’s key expert witnesses on these issues — Charles A. Hewlett and William Q. Derrough— which the Bankruptcy Court denied. [Bankr.ECF Nos. 387, 392, 397-98, 474;
see also
Op., pp. 67, 132-34, 182].
37
G. The Bankruptcy Court Order & Post-Order Proceedings
Following the bench trial, the Bankruptcy Court ordered the Parties to submit post-trial submissions in the form of Proposed Findings of Fact and Conclusions of Law. On October 30, 2009, the Bankruptcy Court issued its Order,
38
holding in the Committee’s favor on all of its claims. Specifically, it held that (1) the obligations incurred by the Conveying Subsidiaries to the First and Second Lien Lenders, and the Liens transferred to secure those obligations, could be avoided pursuant to 11 U.S.C. §§ 544 and 548; (2) the Senior Transeastern lenders were entities “for whose benefit” the improper transfer was made; and (3) the transfer of more than $421 million to the Senior Transeastern Lenders could also be avoided pursuant to Sections 544 and 548. [Op., p. 171].
As the Order relates to the Transeastern Lenders, the Bankruptcy Court found that the Conveying Subsidiaries did not receive reasonably equivalent value in exchange for the obligations they obtained by pledging their assets to the New Lenders.
[Id.
at 104], To the extent the Conveying Subsidiaries received “any value at all, it was minimal and did not come anywhere near the $403 million of obligations they incurred.”
[Id.
at 105]. The Conveying Subsidiaries received no “direct benefits” because “the money was transferred by the lenders to Universal Land Title, Inc.”
[Id.].
It also found that the Conveying Subsidiaries received “minimal indirect benefits” because the “July 31 Transaction did not in fact prevent the bankruptcy of the parent company” and because “the Conveying Subsidiaries would not have been seriously harmed by such an earlier bankruptcy.”
[Id.
at 108-09], As for the danger presented by defaulted bonds, the Bankruptcy Court noted:
[One of the Committee experts, William Q. Derrough] testified, based on his experience with similar situations, that the Conveying Subsidiaries could have come to an accord with the bondholders, possibly by obtaining their own financing to refinance the bonds, which would have allowed them to continue as going concerns despite the default. [Another Committee expert, Charles A. Hewlett], confirmed, based on his particular experience with the real-estate industry, that the Conveying Subsidiaries — which held some 95% of TOUSA’s assets — could have obtained their own financing even if the parent were in bankruptcy.
[Id.
at 109].
*641
In response to arguments regarding the dangers faced by the Conveying Subsidiaries about defaulting under the Revolver, the Bankruptcy Court found “no reason to believe that the Conveying Subsidiaries could not have dealt with a possible Revolver default by transitioning to an alternative source of financing.”
[Id.
at 111]. It further found that the New Lenders and the Transeastern Lenders did not act in good faith and were grossly negligent when they engaged in the July 31 Transaction on the basis that there was “overwhelming evidence that TOUSA was financially distressed.”
[Id.
at 116-17].
The Bankruptcy Court held that under the language of 11 U.S.C. § 548 (a)(l)(B)(I),
an “indirect benefit” is cognizable only if three requirements are satisfied. First, the benefit must be received, even if indirectly, by “the debtor,”
i.e.,
by an individual Conveying Subsidiary.... Second, any purported “indirect benefits” defense must also be limited to cognizable “value.” ... Since this case does not concern the satisfaction of the debt of any Conveying Subsidiary, “property” received by a Conveying Subsidiary is the only value that is relevant here. Third, properly must have been received by a Conveying Subsidiary “in exchange for” the transfer of obligation.
[Id.
at 146-47],
It went on to define “property” according to WebsteR’s DiCtionary as “some kind of enforceable entitlement to some tangible or intangible article.”
[Id.
at 148 n. 55].
The Bankruptcy Court further held that the Transeastern Lenders were entities “for whose benefit the transfer was made” under 11 U.S.C. § 550 (a)(1). It held that payment to them in order to extinguish the Transeastern debt was a fraudulent transfer, and it rejected their defenses of recoupment and good faith.
[Id.
at 151-63].
The Bankruptcy Court also adopted the same remedy scheme proposed by the Committee. It ordered the disgorgement $403 million in principal amount of the total funds paid to the Transeastern Lenders and further held that the Transeastern Lenders would have to pay prejudgment interest on the full amount of that disgorgement.
[Id.
at 177], The Bankruptcy Court justified this remedy on the basis that “a complete recovery from only one set of Defendants ... would mean that the other set of Defendants would retain the benefits obtained in the avoided transfer. In effect, one set of Defendants would obtain a windfall, at the expense of the other set of Defendants.”
[Id.
at 176],
Following the Order, the Defendants moved the Bankruptcy Court to stay proceedings pending appeals. [Bankr.ECF Nos. 666, 669, 671], On October 30, 2010, the Bankruptcy Court granted the stays conditioned on the Defendants posting nearly $700 million in bonds or cash. [Bankr.ECF No. 723]. The Transeastern Lenders’ aggregate bond amount was $531,182,705.
[Id.
at 8]. On May 28, 2010, the Bankruptcy Court entered an order changing the judgment against the Tran-seastern Lenders to extend the date through which prejudgment interest would accrue from October 13, 2009 to May 28, 2010, and it simultaneously entered final judgment directing the disgorgement of specific amounts of money from certain Defendants. [Bankr.ECF Nos. 985, 986]. The Transeastern Lenders assert that this seven-and-a-half month extension increased the prejudgment interest award against them by nearly $23 million. [ECF No. 18 in Case No. 10-61478].
III. THE NATURE OF THESE APPEALS
In the instant primary appeal proceeding concerning liability (Case No. 10-
*642
60017), the Transeastern Lenders present the following questions:
• Whether the Transeastern Lenders can be compelled to disgorge to the Conveying Subsidiaries funds paid by TOUSA to satisfy a legitimate, uncontested debt, where the Conveying Subsidiaries did not control the transferred funds.
• Whether the Transeastern Lenders are liable for disgorgement as the entities “for whose benefit” the Conveying Subsidiaries transferred the Liens to the New Lenders, where the Tran-seastern Lenders received no direct and immediate benefit from the Lien Transfer.
39
[Transeastern Lenders’ Br., p. 5].
In addition, the Transeastern Lenders challenge several of the Bankruptcy Court’s pretrial orders and orders following its findings of liability. In particular, the Transeastern Lenders appeal the following orders: (1) Order Granting the Debtor’s Motions to Strike their Counterclaim and Third Party Complaint; (2) Order Granting the Committee’s Motion for Summary Judgment on the Defendant’s Affirmative Defenses of Substantive Consolidation, Single Business Enterprise, and Alter Ego; (3) Order Granting in Part the Committee’s Motion to Set Payment Amounts as Against the Senior Transeastern Lenders; and (4) Order Granting Final Judgment on Counts VII-XVIII of the Third Amended Complaint. [Bankr.ECF Nos. 508, 513, 985, 986].
A subset of the First Lien Term Lenders also filed a Motion to Intervene in these proceedings, which I have granted. [ECF Nos. 74, 109 in Case No. 10-60017]. The Intervenors present the following three issues for appeal:
• Whether the Bankruptcy Court had jurisdiction to order the distribution of property of the estate recovered from a defendant in an action for fraudulent conveyance under Section 548 of the Bankruptcy Code.
• Whether the Bankruptcy Court had the power under the Bankruptcy Code to order distribution of property of the estate to the Term Lenders as equitable credit for the hundreds of millions of dollars they had previously transferred to the estates.
• Whether the Bankruptcy Code’s remedial scheme relies on a clear error of judgment or erroneous legal standard sufficient to qualify as an abuse of discretion.
[Intervenor’s Br., p. 5],
Because I reverse the Bankruptcy Court on the issue of liability as to the Transeast-ern Lenders, I need not address the issues raised on appeal as they relate to remedies. [Transeastern Reply Br., p. 23 n. 29 (“If this Court reverses the bankruptcy court’s findings of liability against the Transeastern Lenders, it need not consider the issues relating to remedies.”) ].
40
Likewise, by reversing the Bankruptcy Court’s Order in all aspects as it relates to the liability of the Transeastern Lenders, this Order also renders the Transeastern
*643
Lenders’ appeals concerning the Bankruptcy Court’s pretrial orders also moot.
41
For these reasons, I confine my analysis to the first two issues raised by the Transeastern Lenders, namely (1) whether the Transeastern Lenders can be compelled to disgorge to the Conveying Subsidiaries funds paid by TOUSA to satisfy a legitimate, uncontested debt, where the Conveying Subsidiaries did not control the transferred funds, and (2) whether the Transeastern Lenders are liable for disgorgement as the entities “for whose benefit” the Conveying Subsidiaries transferred the Liens to the New Lenders, where the Transeastern Lenders received no direct and immediate benefit from the Lien Transfer. As discussed in more detail below, I answer both of these questions in the negative.
IV. LEGAL STANDARD
In bankruptcy appeals, a district court conducts a
de novo
review of the bankruptcy court’s legal determinations.
Trusted Net Media Holdings, LLC v. The Morrison Agency, Inc. (In re Trusted Net Media Holdings, LLC),
550 F.3d 1035 , 1038 n. 2 (11th Cir.2008);
Cohen v. United States,
191 B.R. 482, 484 (Bankr.S.D.Fla. 1995). This includes “conclusions regarding the legal significance accorded to the facts.”
Cohen,
191 B.R. at 484 .
In contrast, district courts apply the “clearly erroneous” standard of review on a bankruptcy court’s findings of fact. Fed. R. BankR.P. 8013;
Trusted Net Media,
550 F.3d at 1038 n. 2. The “clearly erroneous” standard requires reversal “when the record lacks substantial evidence to support [the factual findings] such that an appellate court’s review of the evidence results in a firm conviction that a mistake has been made.”
Blohm v. Comm’r,
994 F.2d 1542, 1548 (11th Cir. 1993). Whether a transfer was made for reasonably equivalent value is generally a question of fact to be reviewed under the “clearly erroneous” standard.
Nordberg v. Arab Banking Corp. (In re Chase & Sanborn Corp.),
904 F.2d 588, 594 (11th Cir. 1990); 2 Collier Bankruptcy Manual ¶ 548.05[1][b], at 548-18 (Henry J. Sommer & Lawrence P. King, 3d ed. rev. 2002).
This case presents a distinct issue on appeal because the Bankruptcy Court’s Order is practically a verbatim adoption of the Committee’s Proposed Findings of Fact and Conclusions of Law submitted after the trial. As the Appellants have pointed out, “of the Committee’s 448 proposed findings and conclusions, the Bankruptcy Court adopted 446 in whole or in part, while adopting
none
of the defendants’ over 1,600 proposed findings.... The Bankruptcy Court also added approxi
*644
raately 10 new paragraphs and removed a few of the Committee’s footnotes.” [First Lien Br., p. 23 & n. 21 (emphasis in original) ].
The Appellants have submitted “redline” comparisons between the Committee’s Proposed Findings of Fact and Conclusions of Law and the Bankruptcy Court’s Order, which demonstrate that “[o]f the more than 53,000 words in the Decision, approximately 92% directly overlap with the Proposed Findings.” [2d Lien Reply Br., p. 2 n. 3]. Even though the Bankruptcy Court had a Joint Stipulation of Facts from the Parties that it could have relied on in its Order, it chose instead to adopt the facts submitted by the Committee. [Bankr.ECF No. 542; Op., pp. 1-128;
see also
Transeastern Lenders’ Br., p. 53 (“The Defendants collectively submitted over 500 pages of post-trial submissions, yet
not a single
case, exhibit or other piece of evidence cited by them appears in the Opinion unless and to the extent it was also cited by the Committee.”) (emphasis in original) ].
The “clearly erroneous” standard of review for factual findings is relaxed in circumstances where a lower court adopted one party’s proposed order verbatim.
Amstar Corp. v. Domino’s Pizza, Inc.,
615 F.2d 252, 258 (5th Cir.1980). This practice has been heavily criticized and discouraged by the U.S. Supreme Court and by the Eleventh Circuit.
See, e.g., Anderson v. Bessemer City,
470 U.S. 564, 572 , 105 S.Ct. 1504 , 84 L.Ed.2d 518 (1985) (“We, too, have criticized courts for their verbatim adoption of findings of fact prepared by the prevailing parties.... ”);
United States v. El Paso Nat’l Gas Co.,
376 U.S. 651 , 656 n. 4, 84 S.Ct. 1044 , 12 L.Ed.2d 12 (1964) (“Many courts simply decide the case in favor of the plaintiff or the defendant, have him prepare the findings of fact and conclusions of law and sign them. This has been denounced by every court of appeals save one. This is an abandonment of the duty and the trust that has been placed in the judge by these rules. It is a noncompliance with Rule 52 specifically and it betrays the primary purpose of Rule 52 — the primary purpose being that the preparation of these findings by the judge shall assist in the adjudication of the lawsuit. I suggest to you strongly that you avoid as far as you possibly can simply signing what some lawyer puts under your nose. These lawyers, and properly so, in their zeal and advocacy and their enthusiasm are going to state the case for their side in these findings as strongly as they possibly can. When these findings get to the courts of appeals they won’t be worth the paper they are written on as far as assisting the court of appeals in determining why the judge decided the case.”) (citing J. Skelly Wright, Seminars for Newly Appointed United States District Judges 166 (1963));
Chudasama v. Mazda Motor Corp.,
123 F.3d 1353 , 1373
&
n. 46 (11th Cir.1997) (“frowning upon” bankruptcy court for issuing order with verbatim adoption of one party’s findings and ordering case to be re-assigned on remand because of “utter lack of an appearance of impartiality” that “beliefs] the appearance of justice to the average observer”);
Colony Square Co. v. Prudential Ins. Co. of Am. (In re Colony Square Co.),
819 F.2d 272, 274-76 (11th Cir.1987) (“The dangers inherent in litigants ghostwriting opinions are readily apparent.... The quality of judicial decisionmaking suffers when a judge delegates the drafting of orders to a party; the writing process requires a judge to wrestle with the difficult issues before him and thereby leads to stronger, sounder judicial rulings.”);
see also S. Pac. Commc’n Co. v. AT & T Co.,
740 F.2d 980, 995 (D.C.Cir.1984) (discussing the practice of “extensively copying the proposed findings of fact and conclusions
*645
of law prepared by counsel” and stating that “[c]onfidence in the integrity of the judicial process inevitably suffers when judges succumb wholesale to this practice”).
It is also well-established that when the factual record allows but one “resolution of the factual issue,” remand is unnecessary.
Pullman-Standard, v. Swint,
456 U.S. 273, 292 , 102 S.Ct. 1781 , 72 L.Ed.2d 66 (1982) (“[WJhere findings are infirm because' of an erroneous view of the law, a remand is the proper course unless the record permits only one resolution of the factual issue.”);
Media Servs. Grp., Inc. v. Bay Cities Commc’n, Inc.,
287 F.3d 1326 , 1330 (11th Cir.2001) (same);
Nix v. WLCY Radio/Rahall Commc’ns,
738 F.2d 1181, 1187 (11th Cir.1984) (same);
see also Reynolds v. Giuliani,
506 F.3d 183, 197 (2d Cir.2007) (same);
S. Indus. of Clover, Ltd. v. Kattan,
148 Fed.Appx. 5, 7 (2d Cir.2005) (same);
United States. v. Microsoft Corp.,
253 F.3d 34, 94 (D.C.Cir.2001) (same).
Y. DISCUSSION
The Transeastern Lenders were paid an outstanding debt by the party that owed it. As acknowledged at oral argument, “there was no dispute in this litigation that the amounts paid by TOUSA to the Transeastern Lenders, were, in fact, owed,” and “[njobody has contended that the guarantees [on the Revolver debt] weren’t valid obligations of TOUSA that arose to at least the level that was paid.” [Appeal Hr’g Tr. 20:23-21:2], Because TOUSA entered bankruptcy more than ninety days after that payment, the payment is not an “avoidable preference” under 11 U.S.C. § 547 (b)(4)(A), and the Bankruptcy Court did not conclude that it was. Instead, the Bankruptcy Court concluded the payment was a “fraudulent transfer” under § 548.
Section 548 authorizes avoidance of “fraudulent transfers,” defined to include — as relevant here — the transfer “of an interest of the debtor in property” if the debtor “received less than a reasonably equivalent value in exchange for such transfer,” and “was insolvent on the date that such transfer was made.” § 548(a)(1). In arguing to the Bankruptcy Court, the Committee lumped all Appellees together under the “fraudulent transfer” umbrella, although this case actually involved different transfers involving different parties with different legal implications. It is undisputed that TOUSA’s repayment to the Transeastern Lenders was made in one of a series of multi-party transactions that took place on July 31, 2007. Those transactions involved three distinct asset transfers:
1. TOUSA caused certain of the Conveying Subsidiaries to convey the liens on their real property assets and become obligated to a collection of financial entities referred here as the New Lenders.
2. In exchange for the liens and the obligations, the New Lenders loaned funds and provided credit facilities, the New Loans, to TOUSA; and
3. TOUSA used the funds from the New Lenders in part to satisfy its $421 million debt to the Transeastern Lenders.
The Bankruptcy Court found the Transeastern Lenders liable under Section 548 on
two
different bases of liability,
for two distinct fraudulent transfers:
(1) as direct transferees of the New Loan proceeds paid in satisfaction of a valid antecedent debt; and (2) as entities “for whose benefit” the Conveying Subsidiaries transferred the liens to the New Lenders. In essence, the Bankruptcy Court found that the Conveying Subsidiaries had a property interest in the New Loan proceeds that TOUSA
*646
transferred to the Transeastern Lenders, received only minimal value in exchange for relinquishing that property, and were insolvent. Accordingly, the Bankruptcy Court voided the entire transfer and ordered the Transeastern Lenders to disgorge the funds received in satisfaction of the undisputed debt they were owed. [Op., p. 180-81]. The Bankruptcy Court’s Opinion adopted both of the Committee’s theories of liability in the same language used in the Committee’s post-trial papers with only the barest of word changes, and without attempting to harmonize these two mutually exclusive theories.
A. The Bankruptcy Court’s “Direct Transferee” Theory of the Transeastern Lender’s Liability Is Legally Incorrect
Addressing the “direct transferee” theory of liability, the Transeastern Lenders argue that the Conveying Subsidiaries did not have a property interest in the New Lenders’ loan proceeds because they had no control over those proceeds, and even if they did have a minimal interest — as the Bankruptcy Court concluded — the benefits they received from the debt repayment were reasonably equivalent in value to that minimal interest.
The Transeastern Lenders correctly point out that Section 548 applies only to a transfer “of an interest
of the debtor
in property.” 11 U.S.C. § 548 (a)(1). The threshold question under this provision is whether each transfer was in fact property of the debtor.
United States v. Kapila,
402 B.R. 56, 60 (S.D.Fla.2008) (discussing how § 548 requires the trustee to show a transfer of an interest
of the debtor
in property). For purposes of Section 548, the fraudulent conveyance claimed against the Transeastern Lenders applied only to “property” the Conveying Subsidiaries had in the New Loan proceeds which were transferred by TOUSA to the Transeastern Lenders in settlement of the antecedent debt.
The Transeastern Lenders contend on appeal that the Conveying Subsidiaries never had any property interest in the New Loan proceeds, and thus transferred nothing to the Transeastern Lenders. They are correct as a matter of law based on the undisputed record below. The Bankruptcy Court could not find that the Conveying Subsidiaries received the proceeds of the New Loans, or had power to distribute them, or designate who would receive the loan proceeds. The factual record establishes without contradiction that the power lay
exclusively
with TOU-SA, as the New Loan Agreements expressly provided.
Without any factual dispute in the record, both the First and Second Lien Term Loan Agreements directed that the proceeds of the New Loans be used to satisfy the Transeastern Settlement. Specifically, Section 4.12 of the agreements required the proceeds of the loans to be used to fund the “Acquisition,” defined as “the contribution by the ‘Administrative Borrower’ [TOUSA] to the Transeastern JV Entities of an amount necessary to discharge all amounts of outstanding indebtedness of the Transeastern JV Entities.” [Trial. Exh. 360 §§ 1.1, 4.12], Under the totality of the circumstances, the Bankruptcy Court’s findings and legal conclusions were neither “logical” nor “consistent with the equitable concepts underlying bankruptcy law.”
Nordberg v. Societe Generate (In re Chase & Sanborn Corp.),
848 F.2d 1196, 1199 (11th Cir.1988).
The Eleventh Circuit has made clear that “our court adopted the control test to determine whether a debtor had possession of property allegedly recoverable under section 548.”
Id.
Referring to its earlier ruling in
Nordberg v. Sanchez (In re Chase & Sanborn Corp.),
813 F.2d 1177
*647
(11th Cir.1987), the court stated: “We agree that
In re Chase & Sanborn Corp.,
establishes a general framework for analysis that can be utilized in this case.”
In re Chase & Sanborn Corp.,
848 F.2d at 1199 . The court noted that the issue which troubled it was not whether the property in question went to the alleged transferee, but whether it came
from
the debtor, the alleged transferor.
Id.
It ruled “that the trustee could not recover the funds because, ‘[although the debtor corporation had possession of the funds in controversy by virtue of the transfer to the account,
the record demonstrates that the debtor corporation did not have sufficient control over the funds to warrant a finding that the funds were the debtor corporation’s property.” Id.
(emphasis added). The Eleventh Circuit explained that “the test articulated by our court is a very flexible, pragmatic one; in deciding whether debtors had controlled property subsequently sought by their trustees, courts must look beyond the particular transfers in questions to the entire circumstances of the transaction.”
Id.
(citing
In re Chase & Sanborn Corp.,
813 F.2d at 1181-82 ) (internal quotation marks omitted).
In the earlier
Chase
decision, the Eleventh Circuit held that a transfer is avoidable under Section 548
only
if the debtor exercised
actual control
over the property transferred.
In re Chase & Sanborn Corp.,
813 F.2d at 1181-82 (“For these reasons, we conclude that where a transfer to a noncreditor is challenged as fraudulent, more is necessary to establish the debtor’s control over the funds than the simple fact that a third party placed the funds in an account of the debtor with no express restrictions on their use. In determining whether the debtor had control of funds transferred to a noncreditor, the court must look beyond the particular transfers in question to the entire circumstance of the transactions.”). The rationale was that, without the requisite control, the subject property could not have been used by the debtor to pay another creditor, and the transfer thus did not decrease the value of the debtor’s estate.
The Eleventh Circuit’s control test encompasses two elements: (1) the power to designate which party will receive the funds, and (2) the power to actually disburse the funds at issue to that party. In other words, control means control over identifying the payee, and control over whether the payee will actually be paid.
Tolz v. Barnett Bank of S. Fla. (In re Safe-T-Brake of S. Fla., Inc.),
162 B.R. 359, 365 (Bankr.S.D.Fla.1993). In determining the totality of the circumstances, control does not exist where the loan from the third party was conditioned on payment to a particular creditor.
Howdeshell of Ft. Myers v. Dunham-Bush, Inc. (In re Howdeshell of Fort Myers),
55 B.R. 470, 474-75 (Bankr.M.D.Fla.1985).
The Bankruptcy Court erred by failing to apply the Eleventh Circuit’s control test to the totality of the circumstances as established by the actual documents governing the transactions. Rather, it dismissed the test, expressly rejecting as “clearly wrong” the proposition that “control” is an essential element of any property interest under Section 548. [Op., p. 157]. The Bankruptcy Court expressed the view that a control test “would negate the paradigmatic example of a fraudulent transfer, in which the owner of an insolvent corporation transfers corporate funds to a personal account for his personal use” because the owner’s
de facto
control over the funds cannot vitiate the corporation’s control over, and property interest in, the funds.
[Id.
at 158].
The Bankruptcy Court compounded its error in not applying the “control test” by relying on the Bankruptcy Code’s deflni
*648
tion of “transfer” and fraudulent transfers as including “involuntary” and “indirect transfers.” [M (citing 11 U.S.C. §§ 101 (54)(D), 548(a)(1)) ]. According to the court, “[t]hese definitions leave no doubt that a debtor may own property even if the debtor has no power to prevent some other party from transferring the property.” [Id]. The Bankruptcy Court is legally incorrect in its interpretation, and further incorrect in concluding that the Conveying Subsidiaries had a property interest sufficient for the Code requirements because they were co-borrowers on the New Loans.
[Id.
at 156]. The Bankruptcy Court reasoned that “each of the co-borrowers has a property interest in the funds,” because if that were not true, then the “property would belong to no one.”
Id.
(quoting
United States v. Craft,
535 U.S. 274, 285 , 122 S.Ct. 1414 , 152 L.Ed.2d 437 (2002) (internal quotation marks omitted)).
42
Here, the circumstances of the transactions clearly demonstrate that the Conveying Subsidiaries did not control the funds transferred to TOUSA. The record on appeal establishes without contradiction that the property involved did belong to someone,
ie.,
TOUSA, who, as the primary borrower, was the only party with actual authority under the New Loan documents to control the loan proceeds’ distribution. The New Loans made this clear in specifying that proceeds were to be used in satisfying the Transeastern Settlement. TOU-SA’s Executive Vice President and Chief of Staff confirmed the same:
Q Now, is it your understanding that the conveying subsidiaries had any control over where the funds that were lent from Citibank actually went?
A No. I mean this was a corporate decision.
Q And is it also accurate to say that the funds could not have been used by the conveying subs for any purpose other than funding the settlement? Is that right?
A No, they had no control over them.
[Bankr.Hr’g Tr. 1711:22-1712:7].
Without dispute, the Conveying Subsidiaries lacked any right to retain the New Loans in their estates, and clearly the funds were not intended to pay off any debt of the Conveying Subsidiaries.
The eventual use of the New Loan Proceeds was to repay the earlier Transeastern Loans incurred by TOUSA and owed as a valid, antecedent debt to the Transeastern Lenders. The transfer was part of a larger, complicated scheme involving numerous entities. In this context, there was no payment of funds to the Conveying Subsidiaries, and they could not use the funds for their own purposes. The overwhelming evidence was that TOUSA, and not the Conveying Subsidiaries, controlled the transfer at issue.
See In re Chase & Sanborn,
813 F.2d at 1182 (finding no control by the debtor under similar circumstances). Accordingly, I conclude that the funds were not the property of the debtor and the transfer is not avoidable under a “direct transfer” theory. To conclude otherwise would confer on the Committee a windfall at the expense of a valid antecedent lender who was innocent of any intent to diminish the assets of the debtor.
See id.
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In its Appeal Brief, the Committee offered no substantive response to the Transeastern Lenders’ position that the Conveying Subsidiaries never had any property interest in the New Loan proceeds, and thus transferred nothing to the Transeastern Lenders. Indeed, the Committee conceded in its brief:
The Conveying Subsidiaries did not directly receive any of the borrowed funds, as the credit agreements expressly required that the funds be paid out to settle the Transeastern litigation against their parent. Rather than going to the Conveying Subsidiaries, the money was transferred by the lenders to Universal Land Title, Inc. (which is a TOUSA subsidiary, but not one of the Conveying Subsidiaries) which disbursed the funds to the various parties to the settlements. [Committee’s Br., p. 94 (citing Op., p. 105)].
The Transeastern Lenders claim in their Reply Brief that the Committee has abandoned its first theory of liability. The Appellants state this “retreat” undermines the Bankruptcy Court’s adoption of the Committee’s position “as if the bankruptcy court’s opinion — drafted by the Committee — did not even make such a ruling.” [Transeastern Reply Br., p. 1]. At oral argument, the Committee stated that it had not abandoned its argument, although it conceded it did not spend “a lot of time trying to justify [this] alternative ground.” [Appeal Hr’g Tr. 92:20-22]. Instead, the Committee urges consideration of its main argument in support of the Bankruptcy Court’s ruling that the Transeastern Lenders are the entities “for whose benefit” the Conveying Subsidiaries transferred the Liens to the New Lenders. While I find merit in the Transeastern Lenders’ position that the Committee has abandoned its first theory, I need not decide the issue on this basis alone. This is because I already have concluded that the Bankruptcy Court committed clear error by incorrectly applying the Eleventh Circuit’s “control test” to the totality of the circumstances and finding that the Conveying Subsidiaries lacked the requisite property interest in the New Loan proceeds.
However, before turning to the Committee’s “for whose benefit” theory of liability, I still must consider the Transeastern Lenders’ alternative position that even assuming the Conveying Subsidiaries had an interest in the New Loan proceeds, there is still no Section 548 liability because it is clearly erroneous that the Conveying Subsidiaries did not receive reasonably equivalent value in exchange for the transfer of that interest. This issue raises substantial arguments which overlap with positions taken by the First and Second Term Lenders on appeal.
B. The Bankruptcy Court Committed Clear Error, and Legally Erred, in Finding No Reasonably Equivalent Value for Any Direct Transfer of the Conveying Subsidiaries’ Interest in the New Loan Proceeds to the Transeastern Lenders or in the Transfer of the Liens to the First and Second Lien Holders
Section 548 of the Bankruptcy Code
excludes
avoidance of any transfers made of an interest of the debtor in property that was incurred on or within two years before the date of the filing of the petition,
if the debtor “received less than a reasonably equivalent value in exchange for such transfer or obligation.”
11 U.S.C. § 548 (a)(l)(B)(i)-(ii) (emphasis added). Under Section 548(a)(1), the party alleging a fraudulent transfer bears the burden of proving that the debtor did not receive reasonably equivalent value in exchange for the property transferred and obligations incurred.
See In re Chase & Sanborn Corp.,
904 F.2d at 593-94 (“The
*650
burden of proving lack of ‘reasonably equivalent value’ under 11 U.S.C.A. § 548 (a)(2)(A) rests on the trustee challenging the transfer.”). I conclude that the Bankruptcy Court erred in finding that the Committee had met its burden applying both a
de novo
and clear error standard of review.
i. The Bankruptcy Court Erred by Not . Finding Reasonably Equivalent Value When It Found that the Conveying Subsidiaries Had a Property Interest in the Proceeds of the Term Loans, and, Alternatively, by Not Measuring “Reasonable Equivalent Value” Against the Conveying Subsidiaries’ So-Called “Minimal Interest” in the Loan Proceeds
The Bankruptcy Court held that “the Conveying Subsidiaries had a property interest in the loan proceeds ... but the
value
of that property interest to the Conveying Subsidiaries was
minimal
because they had been forced to enter into a contractual commitment that the borrowed funds would be paid to others, principally the Senior Transeastern Lenders.” [Op., p. 159 (emphasis added) ]. The Bankruptcy Court further held that “the Conveying Subsidiaries did not receive reasonably equivalent value in exchange for the transfer [and] ... did not receive either ‘property’ or the ‘satisfaction of securing of a present or antecedent debt
of the debtor.’
”
[Id.
(citing 11 U.S.C. § 548 (d)(2)(A)) (emphasis added) ]. The Bankruptcy Court then stated:
Because Plaintiff demonstrated the absence of any direct benefits to the Conveying Subsidiaries, the Senior Transeastern Lenders had the burden of producing evidence that the Conveying Subsidiaries received “indirect” benefits that were tangible and concrete, and to quantify them value with reasonable precision. The Senior Transeastern Lenders failed to produce such evidence. However, regardless of which party had the burden of producing evidence of indirect benefits, the evidence taken as a whole clearly established that there were no significant indirect benefits .... [T]he Conveying Subsidiaries did not receive reasonably equivalent value in exchange for the transfer to the Senior Transeastern Lenders.
[Id.
at 159-60],
To begin with, it is difficult to reconcile the Bankruptcy Court’s holding that the “Conveying Subsidiaries did not receive any
direct benefits
in exchange for the value they gave up in the July 31 Transaction because they received none of the proceeds of the loans they became obligated to repay,”
[Id.
at 105], with the further parallel holding in connection with the Transeastern Claims that the Conveying Subsidiaries actually
did
receive the proceeds of the loans they became obligated to repay.
[Id.
at 155-56]. In particular, observing that the Conveying Subsidiaries were co-borrowers of the Term Loans, the Bankruptcy Court held, “[i]f the funds are lent to co-borrowers (rather than to a single borrower), each of the co-borrowers had a property interest in the funds.”
[Id.].
The Bankruptcy Court further observed that “[t]here can be no serious doubt that if the Conveying Subsidiaries had retained the borrowed funds ... those funds would have been included within the debtors’ estate when the petition was filed.”
[Id.
at 155],
Given the Bankruptcy Court’s express finding that the “Conveying Subsidiaries had a property interest in the loan proceeds,”
[Id.
at 159], it was error to conclude that reasonably equivalent value did not exist as a matter of law. To avoid this result, the Bankruptcy Court reasoned that the “value of that property interest to
*651
the Conveying Subsidiaries was
minimal
because they had been
forced
to enter into a contractual commitment that the borrowed funds would be paid to others, principally to the Senior Transeastern Lenders.”
[Id.
at 159 (emphasis added) ]. But given the finding that there was a property interest, the
use
of the proceeds is irrelevant under the statute.
Beemer v. Heller & Co. (In re Holly Hill Med. Ctr., Inc.),
44 B.R. 253, 256 (Bankr.M.D.Fla.1984) (“The criterion for whether a debtor received reasonably equivalent value cannot in any instance be whether the debtor used sound judgment in exploiting what it received to the best advantage.... Whether borrowed money is used brilliantly or wasted by the recipient does not inflate or reduce its value from the lender’s standpoint....”).
Furthermore, the record fails to establish that the Conveying Subsidiaries were “forced” to do anything, in that the Board of Directors of each Conveying Subsidiary — all of which had directors that were not on the TOUSA Parent board — approved the use of the loan proceeds to fund the Transeastern Settlement because they concluded that the settlement was in the best interests of the TOUSA enterprise. As TOUSA’s Executive Vice President and Chief of Staff testified during the bench trial:
Q Now, in signing those resolutions— we are going to get back to the resolutions themselves — but in signing those resolutions, did you conclude that the transaction was in the best interest of each of those subsidiaries?
A Yes, I thought the transaction was in the best interest of the company as a whole and each of its subsidiaries.
Q And you believed that the financing that was associated with the transaction was in the best interest of each of the subsidiaries; is that right?
A Yes, sir.
Q And is it your belief that each of the TOUSA subsidiaries benefitted from the transaction?
A Yes, sir.
[Bankr.Hr’g Tr. 1718:10-1719:22;
see also id.
at 527:1-29:25, 1592:1-25; Trial Exhs. 374-76, 501-31, 2163 (resolutions or consents approving the July 31 Transaction on behalf of the Conveying Subsidiaries as co-borrowers) ].
If the Conveying Subsidiaries did receive a property interest, and a direct benefit from the transfer of the full New Loan proceeds as a result, the analysis need not go further. But assuming that the Bankruptcy Court was correct that the
use
of the proceeds was relevant, it is necessary to next consider whether, as claimed by the Senior Transeastern Lenders, the Bankruptcy Court erred by comparing
the total value of the loan proceeds
— rather than the Conveying Subsidiaries’ “minimal” interest therein — to the benefits received by the Conveying Subsidiaries. Specifically, the Bankruptcy Court decided that to the extent the Conveying Subsidiaries received any value at all, it was
minimal
and did not come anywhere near the $403 million of obligations they incurred collectively. [Op., p. 105].
In essence, the Transeastern Lenders argue with merit that if the value of the property interest transferred from the Conveying Subsidiaries to the Tran-seastern Lenders was “minimal,” then the measure of reasonably equivalent value must be whether the Conveying Subsidiaries received “minimal” value in return. This is because reasonably equivalent value must be measured in terms of the value of the
debtors’ interest in the property conveyed. See Kittay v. Peter D. Leibowits Co., Inc. (In re Duke & Benedict, Inc.),
*652
265 B.R. 524, 531 (Bankr.S.D.N.Y.2001) (noting that the relevant inquiry for analyzing reasonably equivalent value is not “the value of the property that was conveyed, but the value of the
debtor’s interest in the property conveyed
” (emphasis added)). Accordingly, the Transeastern Lenders argue that
the bar, for purposes of “reasonably equivalent value” is lower
as to them than as to the First and Second Lien Lenders because the Transeastern Lenders had received property from the Conveying Subsidiaries that was of “minimal” value. [Appeal Hr’g Tr. 107:19-21 (“You said it exactly right. Wherever their bar is, ours is much lower. That’s what we’re saying, and so we accept all of their arguments.”) ]. It follows that if the Transeastern Lenders received valuable property from the Conveying Subsidiaries, then the value of this very same property could not have been deemed “minimal” when it was previously transferred from the New Lenders to the Conveying Subsidiaries as part of the July 31 Transaction.
But even assuming the Bankruptcy Court further erred in not measuring “reasonably equivalent value” correctly as to the Transeastern Lenders (in terms of the transfer of the loan proceeds to the Transeastern Lenders), this does not end the inquiry. This is because the Bankruptcy Court further found the Transeastern Lenders liable for the transfer of the Liens to the New Lenders under Section 550 of the Bankruptcy Code as being the “entity for whose benefit such transfer was made.” [Op., p. 151]. Thus, the Transeastern Lenders still could be liable under Section 550 unless the Conveying Subsidiaries also received “reasonably equivalent value”
in exchange for the transfer of the Liens to the New Lenders.
At oral argument, the Transeastern Lenders acknowledged that, absent other circumstances, Section 550 could be triggered if the Lien Transfer was avoided as to the New Lenders, even if the Transeastern Lenders did not engage in a fraudulent transfer themselves. [Appeal Hr’g Tr. 109:21-23 (Mr. Leblanc: ‘Your Honor, there are circumstances, to be sure, where you are a direct recipient of a transfer where there still can be liability under 550.”) ].
Therefore, there is reason to examine the “reasonably equivalent value” issue in depth. Regardless if the bar is lower or is the same as between the Transeastern Lenders and the New Lenders,
if
the Conveying Subsidiaries received a reasonably equivalent value in exchange for each such transfer, there is
no
fraudulent transfer for Section 548 purposes. If there is no fraudulent transfer under Section 548, then the condition precedent to 11 U.S.C. § 550 (a) is not met, and the Bankruptcy Court erred for this reason alone in finding the Transeastern Lenders liable for disgorgement under Section 550(a) as “the entity for whose benefit” such transfer
(i.e.,
the transfer of liens or New Loan proceeds) was made. [Appeal Hr’g Tr. 111:10-21 (“[I]f it’s determined that the First and Second Lien Holders are not held to have committed a fraudulent transfer under 548 ... [i]t is completely over for us....”) ].
Section 550 spells out the condition precedent. It provides: “Except as otherwise provided in this section,
to the extent that a transfer is avoided under section ... 54-8 ... of this title,
the trustee may recover, for the benefit of the estate, the property transferred....” This means that, if the transfer is
not
avoided, the trustee may not recover under Section 550. The Eleventh Circuit made this clear in
IBT International, Inc. v. Northern (In re International Administrative Services, Inc.),
408 F.3d 689, 703 (11th Cir.2005) when it held:
*653
In fraudulent transfer actions, there is a distinction between avoiding the transaction and actually recovering the property or the value thereof
By its language, 11 U.S.C. § 544 (b) indicates that the transaction must first be avoided before a plaintiff can recover under 11 U.S.C. § 550 . This demarcation between avoidance and recovery is underscored by § 550(f), which places a separate statute of limitations on recovery actions; it provides that a suit for recovery must be commenced within one year of the time that a transaction is avoided or by the time the case is closed or dismissed, whichever occurs first.
Id.
at 703 (internal citations omitted) (emphasis added).
As discussed in detail below, the Bankruptcy Court erred as a matter of law and fact in refusing to recognize as reasonably equivalent value the indirect benefits to the Conveying Subsidiaries from the July 31 Transaction. Thus, I conclude that Section 550 is not triggered as to the Transeastern Lenders.
C. The Bankruptcy Court Erred as a Matter of Law and Fact in Refusing To Recognize as Reasonably Equivalent Value the Indirect Benefits to the Conveying Subsidiaries from the July 31 Transaction
i. The Bankruptcy Court’s Ruling on Indirect Benefits
Initially, the Bankruptcy Court found that “the Defendants failed to carry their burden of producing evidence of indirect benefits that were tangible and concrete, and of quantifying the value of those benefits with reasonable precision.” [Op., p. 145]. In so ruling, the Bankruptcy Court improperly shifted the burden of proof to the Senior Transeastern Lenders and other Defendants. Under established case law, “the burden of proving lack of ‘reasonably equivalent value’ under [Section 548(a)(2)(A)] rests on the trustee challenging the transfer.”
In re Chase & Sanborn Corp.,
904 F.2d at 593 -94 (citing
Gen. Elec. Credit Corp. v. Murphy (In re Duque Rodriguez),
895 F.2d 725 , 726 n. 1 (11th Cir.1990)).
Next, the Bankruptcy Court held that, under the language of Section 548(a)(1)(B)(1), an indirect benefit is cognizable only if three requirements are satisfied. First, the benefit must be received, even if indirectly, by “the debtor,”
ie.,
by an individual Conveying Subsidiary. Second, the “value” received must only encompass “property,” which is limited to some kind of enforceable entitlement to some tangible or intangible article. Third, property must have been received “in exchange for” the transfer or obligation, such that any “property that a Conveying Subsidiary would have enjoyed regardless of the July 31 Transaction cannot be regarded as property ‘in exchange for’ the transfer or obligation.” [Op., pp. 146-47].
While I conclude that the Bankruptcy Court erroneously disregarded the Appellants’ factual and legal arguments concerning the “identity of interest doctrine” in analyzing reasonably equivalent value,
43
I need not reach that issue or
*654
resort to conflating all of the TOUSA entities for the purpose of assessing “value,” because the record establishes beyond dispute that the Conveying Subsidiaries
themselves,
as compared to only the TOU-SA Parent, received indirect economic benefits, constituting reasonably equivalent “value,” in exchange for their lien transfers. Accordingly, for purposes of this analysis, I accept the Bankruptcy Court’s conclusion that the indirect benefit must be received by
each debtor.
Nonetheless, I conclude that the Bankruptcy Court committed legal error in holding that the “avoidance of default and bankruptcy by the Conveying Subsidiaries” is as a matter of law “not property and therefore is not cognizable as ‘value’ ” under Section 548 of the Bankruptcy Code. [Op., p. 148].
44
This holding — which raises pure questions of law regarding the interpretation of Section 548 of the Bankruptcy Code — is subject to
de novo
review.
See United States v. Andino,
148 Fed.Appx. 828, 829 (11th Cir. 2005) (reviewing a district court’s interpretation of statutory definition contained in criminal statute under
de novo
standard);
Miami Police Relief & Pension Fund of Coral Gables, Ltd. v. Tabas (In re Fla. Fund of Coral Gables, Ltd.),
144 Fed. Appx. 72, 74 (11th Cir.2005) (holding that the standard of review regarding the meaning of certain portions of the Bankruptcy Code “is properly characterized as a mixed question of law and fact”) (citing
Matter of Holloway,
955 F.2d 1008, 1014 (5th Cir.1992) (calling the same “ultimately [a] question of law”));
Official Labor Creditors Comm. v. Jet Fla. Sys., Inc. (In re Jet Fla. Sys., Inc.),
80 B.R. 544, 546 (S.D.Fla.1987) (noting that definition of term under the Bankruptcy Code is subject to
de novo
review).
45
ii. The Bankruptcy Court Erred in Narrowly Limiting the Meaning of “Value” Under the Bankruptcy Code
The Bankruptcy Code does not define “reasonably equivalent value.” In-
*655
stead, it defines the term “value” for purposes of the fraudulent transfer provision as “property, or satisfaction or securing of a present or antecedent debt of the debt- or.” 11 U.S.C. § 548 (d)(2)(A). In order to determine whether a debtor received “reasonably equivalent value,” a court must look at what “value” the debtor received in return for the transfer.
See Mellon Bank, N.A. v. Official Comm. of Unsecured Creditors of R.M.L., Inc. (In re R.M.L., Inc.),
92 F.3d 139, 149 (3d Cir.1996) (“[B]efore determining whether the value was ‘reasonably equivalent’ to what the debtor gave up, the court must make an express factual determination as to whether the debtor received any value at all.”). A court must then determine whether the value received is reasonably equivalent; this will depend on the facts of each ease.
See In re Chase & Sanborn Corp.,
904 F.2d at 593 (addressing guarantee as reasonably equivalent value for loan and noting reasonably equivalent value is largely a question of fact).
The compelling legal error here is that the Bankruptcy Court, citing no case law
46
relied (in a footnote) on the definition of property in WebsteR’s DiC-tionaey, to conclude that the Conveying Subsidiaries could not have received “property” unless they obtained some kind of enforceable entitlement to some tangible or intangible article. [Op., p. 148 n. 55]. Based on this dictionary definition of property, the Bankruptcy Court concluded that “avoiding default” and “bankruptcy” does not constitute “property” and, therefore, cannot constitute “value.” [Op., p. 148]. The Bankruptcy Court’s interpretation and definition of a term in the Bankruptcy Code is subject to
de novo
review.
See Morgan v. United States (In re Morgan),
182 F.3d 775, 777 (11th Cir.1999) (per curiam) (noting that the interpretation, meaning, and application of Bankruptcy Code are questions of law subject to
de novo
review);
Affordable Bail Bonds, Inc. v. Sandoval (In re Sandoval),
541 F.3d 997, 1000 (10th Cir.2008) (same);
Gitto v. Worcester Tel. & Gazette Corp. (In re Gitto Global Corp.),
422 F.3d 1, 8 (1st Cir.2005) (same);
Travelers Prop. Cas. Corp. v. Birmingham-Nashville Express, Inc. (In re Birmingham-Nashville, Exp., Inc.),
224 F.3d 511, 514 (6th Cir.2000) (same);
In re Lewis,
199 F.3d 249, 251 (5th Cir. 2000) (same);
Arnold & Baker Farms v. United States (In re Arnold & Baker Farms),
85 F.3d 1415, 1421 (9th Cir.1996) (same);
In re Jet Fla. Sys., Inc.,
80 B.R. at 546 (same).
But it is not a dictionary definition that controls. Rather, Congress has left it to the courts to determine the scope and meaning of “reasonably equivalent value.” This guidepost has been succinctly addressed in
In re R.M.L., Inc.,
92 F.3d at 148 , where the Third Circuit agreed that “[t]he mere ‘opportunity’ to receive an economic benefit in the future constitutes ‘val
*656
ue’ under the Code.” The court further explained:
Accordingly, we turn first to the appropriate method of determining reasonably equivalent value. The concept of reasonably equivalent value unfortunately has not been defined in the Code. As the Supreme Court noted in
BFP v. Resolution Trust Corp.,
“[o]f the three critical terms ‘reasonably equivalent value’, only the last is defined: ‘value’ means, for purposes of § 548, ‘property, or satisfaction or securing of a ... debt of the debtor’....” 511 U.S. 531 , 114 S.Ct. 1757 , 128 L.Ed.2d 556 (1994) (quoting 11 U.S.C. § 548 (d)(2)(A)). Thus, “Congress left to the courts the obligation of marking the scope and meaning of [reasonably equivalent value].”
In re Morris Commc’ns NC, Inc.,
914 F.2d 458 , 466 (4th Cir.1990).
The lack of a more precise definition has led to considerable difficulty. This definitional problem is exacerbated in cases where, as here, the debtor exchanges cash for intangibles, such as services or the opportunity to obtain economic value in the future, the value of which is difficult, if not impossible, to ascertain. Because such intangibles are technically not within § 548(d)(2)(A)’s definition of “value,” courts have struggled to develop a workable test for reasonably equivalent value.
See generally In re Young,
82 F.3d 1407 (8th Cir.1996) (determining whether debtors obtained “value” in exchange for charitable contributions to church);
In re Chomakos,
69 F.3d 769 (6th Cir.1995) (examining whether debtors obtained “value” in exchange for $7,710 in gambling losses),
cert. denied,
517 U.S. 1168 , 116 S.Ct. 1568 , 134 L.Ed.2d 667 (1996);
In re Morris Comm’ns NC, Inc.,
914 F.2d at 458 (attempting to determine “value” of shares in corporation whose only asset was a license application pending before the FCC that had a one in twenty-two chance of approval);
In re Fairchild Aircraft Corp.,
6 F.3d 1119 , 1125-26 (5th Cir.1993) (deciding whether money debt- or spent in failed attempt to keep commuter airline afloat conferred “value” on the debtor).
Id.
at 148 (emphasis added).
In addition, the Bankruptcy Court’s narrow dictionary definition of property is contrary to the meaning of the term in the Bankruptcy Code. The legislative history for the Bankruptcy Reform Act of 1978 provides that “[although ‘property’ is not construed in [Section 102 of the Code], it is used consistently throughout the Code
in its broadest sense,
including cash, all interests in property, such as liens,
and every kind of consideration
including promises to act or forbear to act as in section 548(d).” Statements by Legislative Leaders, 124 Cong. Rec. 11,089 (1978),
reprinted in
1978 U.S.C.C.A.N. 6439, 6508.
47
The Bankruptcy Court’s narrow definition of “property” is also contrary to Supreme Court precedent holding that “property” is broadly defined to include “all legal or equitable interests of the debtor,” and that “[t]he term ‘property’ has been construed most generously and an interest is not outside its reach because it is
novel or contingent
or because enjoyment must be postponed.”
Segal v. Rochelle,
382 U.S. 375, 379 , 86 S.Ct. 511 , 15
*657
L.Ed.2d 428 (1966) (emphasis added);
see also Kokoszka v. Belford,
417 U.S. 642, 646 , 94 S.Ct. 2431 , 41 L.Ed.2d 374 (1974) (same);
Perry v. Sindermann,
408 U.S. 593, 601 , 92 S.Ct. 2694 , 33 L.Ed.2d 570 (1972) (“ ‘[P]roperty’ denotes a broad range of interests that are secured by ‘existing rules or understandings.’ ”);
Lines v. Frederick,
400 U.S. 18, 19 , 91 S.Ct. 113 , 27 L.Ed.2d 124 (1970) (same);
Kapila v. United States (In re Taylor),
386 B.R. 361, 368 (Bankr.S.D.Fla.2008) (citing
Segal
and noting that “[subsequent Court of Appeals decisions have confirmed the continuing vitality of
Segal
under the Bankruptcy Code”).
The Bankruptcy Court’s Order is contrary to well-established case law which holds that indirect benefits may take many forms, both tangible and intangible.
See Ministries v. Hayes (In re Hannover Corp.),
310 F.3d 796, 801 (5th Cir.2002) (holding that the “arc of § 548 easily encompasses as ‘value’ ” an exchange of cash for a right to buy or sell property at a future point in time);
Christians v. Crystal Evangelical Free Church (In re Young),
82 F.3d 1407, 1415 (8th Cir.1996) (holding that district court correctly “did not define ‘value’ only in terms of tangible property or marketable financial value”),
vacated on other grounds,
521 U.S. 1114 , 117 S.Ct. 2502 , 138 L.Ed.2d 1007 (1997);
Cordes & Co., LLC v. Mitchell Co., LLC,
605 F.Supp.2d 1015, 1022 (N.D.Ill.2009) (“Indirect benefits can include a wide range of intangibles.”);
Creditors’ Comm. of Jumer’s, Castle Lodge, Inc. v. Jumer (In re Jumer’s Castle Lodge, Inc.),
338 B.R. 344, 354 (C.D.Ill.2006) (“[I]ndirect benefits constitute ‘value’ and can include a wide range of intangibles such as: corporation’s goodwill or increased ability to borrow working capital; the general relationship between affiliates or ‘synergy’ within a corporate group as a whole; and a corporation’s ability to retain an important source of supply or an important customer.”);
see also
5 Collier ON Baneruptoy ¶ 548.05, at 548-67 (Alan N. Resnick & Henry J. Sommer eds, 16th ed. 2006) (“The nature of the value that is received need not be a tangible, direct economic benefit. An indirect economic benefit can suffice, so long as it is ‘fairly concrete.’ ”); 4 Collier on Bankruptcy ¶ 548.09, at 548-111 (Lawrence P. King ed., 15th ed. rev. 1996) (“Whether value has been given for a transfer depends on all the circumstances of the case.”).
The Bankruptcy Court’s narrow definition of “value” also purports to exclude “economic benefits” from being considered. It stated that “section 548 does not refer to ‘benefits,’ whether direct or indirect.” [Op., p. 147]. While Section 548 does not use the word “benefits,” that does not mean that “economic benefits” may not be considered in determining whether the debtor received “value” in a complicated, multiple-party transaction. This conclusion is directly supported by the Eleventh Circuit’s clear pronouncement, in
In re Duque Rodriguez,
that Section 548(a)(2) “does not authorize voiding a transfer which confers an
economic benefit upon the debtor, either directly or indirectly.” In re Duque Rodriguez,
895 F.2d at 727 (emphasis added) (citing
Rubin v. Mfr. Hanover Trust Co.,
661 F.2d 979 , 991 (2d Cir.1981)). Quoting from
Rubin,
the Eleventh Circuit recognized that in such a situation, “the debtor’s net worth has been preserved, and the interests of the creditors will not have been injured by the transfer.”
Id.
at 726.
Of importance, and contrary to the Bankruptcy Court’s legal conclusion,
Rodriguez
recognized, in a three-party transaction, that, among other things, a debtor’s reprieve from foreclosure, with the accompanying right to continue its operations,
could
confer an indirect “economic bene
*658
fit.”
Id.
at 728 (“Only if Domino [the debtor] shared in the enjoyment of either of these benefits can the payments have conferred an ‘economic benefit’ upon Domino such that its net worth was preserved by the payment.”) (citing
Rubin,
661 F.2d at 987).
48
As recognized in
Rubin,
and addressed on a limited basis in
Rodriguez,
“three-sided transactions such as those at issue here present special difficulties.”
Rubin,
661 F.2d at 991. The standard laid down by the Second Circuit in
Rubin
when dealing with such indirect benefit cases is that the consideration given to the third person must ultimately land in the debtor’s hands or otherwise confer an economic benefit upon the debtor — provided that the value of the benefit received by the debtor approximates the value of the property transferred by the debtor.
Id.
at 991-92.
In
Rubin,
the bankruptcy trustee of two debtor corporations sought to recover as a fraudulent transfer under § 67d of the Bankruptcy Act certain funds and securities pledged to secure loans made to affiliates of the debtor corporations.
Id.
at 980-81. The general rule regarding transfers by a bankrupt for the benefit of a third party was stated by the Second Circuit in that case as follows:
Accordingly, courts have long recognized that “[transfers made to benefit third parties are clearly not made for a ‘fair’ consideration,” and, similarly, that “a conveyance by a corporation for the benefit of an affiliate [should not] be regarded as given for fair consideration as to the creditors of the conveying corporations.” 4 Colliee ON Bankruptcy ¶ 67.33, at 514.1-514.2 (14th ed. 1978) (citing cases).
Rubin,
661 F.2d at 991.
Yet, there is a well-recognized exception to the general rule:
The cases recognize, however, that a debtor may sometimes receive “fair” consideration even though the consideration given for his property or obligation goes initially to a third person. As we have recently stated, although “transfers solely for the benefit of third parties do not furnish fair consideration” under § 67(d)(1)(e), the transaction’s benefit to the debtor “need not be direct; it may come indirectly through benefit to a third person.”
Id.
(citing
Klein v. Tabatchnick,
610 F.2d 1043, 1047 (2d Cir.1979);
accord Williams v. Twin City Co.,
251 F.2d 678, 681 (9th Cir.1958);
McNellis v. Raymond,
287 F.Supp. 232, 238-39 (N.D.N.Y.1968),
aff'd in relevant part,
420 F.2d 51 (2d Cir.1970)).
The Eleventh Circuit has not yet had the opportunity to consider the application of the “reasonably equivalent value” test
*659
to the intricacies and complexities of the factual circumstances like the July 31 Transaction at issue. 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). In two opinions, the Third Circuit reconfirmed that indirect potential,
intangible
benefits, although incapable of precise measurement and quantification, can confer “value” for purposes of Section 548(a)(2) of the Code.
See Mellon Bank, N.A. v. Metro Commc’ns, Inc.,
945 F.2d 635 (3d Cir.1991),
cert. denied,
503 U.S. 937 , 112 S.Ct. 1476 , 117 L.Ed.2d 620 (1992);
see also In re R.M.L., Inc.,
92 F.3d at 151 (“Significantly, the court in
Metro Communications, Inc.,
went on to discover several potential, intangible benefits, that, although incapable of precise measurement, conferred value on Metro despite their failure to materialize.”).
Likewise, the Seventh Circuit, in
Leibowitz v. Parkway Bank & Trust Co. (In Re Image Worldwide, Ltd.),
139 F.3d 574 (7th Cir.1998), applied a similar analysis in a comparable case involving an “upstream” guarantee, where a subsidiary guarantees the debt of its parent. The Seventh Circuit recognized that requiring a direct flow of capital to a cross-guarantor subsidiary (or, such as in this case, Conveying Subsidiary co-borrowers) to avoid a finding of a fraudulent transfer, may well be inhibitory of contemporary financing practices, and that often such guarantees (or co-borrowing practices) are legitimate business transactions, and are not made to frustrate creditors.
See id.
at 578 . Under such circumstances, courts performing a fraudulent transfer analysis have been increasingly willing to look at whether a guarantor, or co-borrower transferor, received indirect benefits from the transfer or obligation. As noted by the Seventh Circuit:
However, requiring a direct flow of capital to a cross-guarantor to avoid a finding of a fraudulent transfer is inhibitory of contemporary financing practices, which recognize that cross-guarantees are often needed because of the unequal abilities of interrelated corporate entities to collateralize loans. Often, these guarantees are legitimate business transactions, and not made to frustrate creditors. In recognition of this economic reality, courts have loosened the old rule that transfers primarily for the benefit of a third party invariably give no consideration to the transferor. Thus, even when there has been no direct economic benefit to a guarantor, courts performing a fraudulent transfer analysis have been increasingly willing to look at whether a guarantor received indirect benefits from the guarantee if there has been an indirect benefit. [0]ne theme permeates the authorities upholding guaranty obligations: that the guaranty at issue was the result of arm’s length negotiations at a time when the common enterprise was commercially viable.
Generally, a court will not recognize an indirect benefit unless it is fairly concrete. The most straightforward indirect benefit is when the guarantor receives from the debtor some of the consideration paid to it. But courts have found other economic benefits to qualify as indirect benefits. For example, in
Mellon Bank, N.A. v. Metro Communications, Inc.,
the court found reasonably equivalent value for a debt- or corporation’s guarantee of an affiliate’s debt when the loan strengthened the corporate group as a whole, so that the guarantor corporation would benefit from synergy within the corporate group. The
Mellon
court stated that indirect benefits included intangibles
*660
such as goodwill and an increased ability to borrow working capital.
Telefest
indicated that indirect benefits to a guarantor exist when the transaction of which the guaranty is a part may safeguard an important source of supply, or an important customer for the guarantor. Or substantial indirect benefits may result from the general relationship between affiliates. In
Xonics,
we recognized the ability of a smaller company to use the distribution system of a larger affiliate as an indirect benefit as well.
Id.
at 578-79 (internal citations and quotation marks omitted).
Contrary to the Bankruptcy Court’s legal conclusion, the weight of authority supports the view that indirect, intangible, economic benefits, including the opportunity to avoid default, to facilitate the enterprise’s rehabilitation, and to avoid bankruptcy, even if it provided to be short lived, may be considered in determining reasonable equivalent value. An expectation, such as in this case, that a settlement which would avoid default and produce a strong synergy for the enterprise, would suffice to confer “value” so long as that expectation was legitimate and reasonable. The touchstone is whether the transaction conferred
reasonable
commercial value on the debtor. Again, resort to
In re R.M.L., Inc.,
is helpful in formulating the correct legal analysis:
The question, then, is how to determine whether an investment that failed to generate a positive return nevertheless conferred value on the debtor. We think our decision in
Metro Communications, Inc.
answers this question implicitly.
We held there that the mere expectation that the fusion of two companies would produce a strong synergy (an expectation that turned out to be inaccurate in hindsight) would suffice to confer “value” so long as the expectation was “legitimate and reasonable. ” Thus, so long as there is some chance that a contemplated investment will generate a positive return at the time of the disputed transfer, we will find that value has been conferred.
We think our analysis appropriately balances a creditor’s interest in estate preservation against a debtor’s legitimate, pre-bankruptcy efforts to take risks that, if successful, could generate significant value and, possibly, avoid the need for protection under the Code altogether.
As we noted above, requiring that all investments yield a positive return in order to find that they conferred value on the debtor would be unduly restrictive. But so, too, would a rule insulating from § 548’s coverage investments that, when made, have zero probability of success.
The best solution, therefore, is to determine, based on the circumstances that existed at the time the investment was contemplated, whether there was any chance that the investment would generate a positive return. In this way creditors will be protected when an irresponsible debtor invests in a venture that is obviously doomed from the outset.
In re R.M.L., Inc.,
92 F.3d at 152 (emphasis added) (internal citations omitted).
What is key in determining reasonable equivalency then is whether, in exchange for the transfer, the debtor received in return the continued opportunity
to
financia

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Source: Frix Law Library, https://www.frixlaw.com/law-library/cases/2193929. Public record. Not legal advice.