| |||||||||||||||||||||||
| |||||||||||||||||||||||
 In The Deal NewsWeekly Evan Flaschen, head of the financial restructuring group at Bracewell & Giuliani LLP, argues that frivolous bankruptcy litigations are crowding out claims that actually have some merit.
What a difference a year makes. Residential homebuilders were flying high just a year ago, but now they are dropping faster than an auctioneer's gavel. The latest casualties are from across the country: Tousa Inc., which filed for Chapter 11 bankruptcy in Fort Lauderdale, Fla., Empire Land LLC, which filed in Los Angeles, and Kimball Hill Inc., which took the plunge in Chicago. There are dozens more where they came from, and the list of other Builder 100 companies on the brink is longer than the line of politicians holding press conferences to blame everyone (but themselves) for the subprime mortgage crisis.
And where there are bankruptcies these days, the bankruptcy litigation blame game seems certain to follow.
Tousa, for example, accessed the capital markets for $500 million on July 31, 2007, as part of a complicated series of transactions intended to put the corporate group on firmer financial ground. Then the subprime mortgage crisis morphed into the credit crisis -- unfortunate timing indeed. Why buy new when you can buy existing homes for half the price? However, if you believe pleadings filed by a small group of disgruntled subordinated bondholders, Tousa's new debt "undeniably rendered [Tousa] insolvent or further insolvent and will be avoided as textbook constructive fraudulent conveyances." Sounds to me like they need to buy a new textbook. But Tousa's official creditors' committee is reading from the same script and has now requested permission from the court to bring the fraudulent transfer litigation on behalf of Tousa's estate. Yet this was high-quality, syndicated first- and second-lien term debt obtained from a blue-chip lineup of sophisticated financial institutions. The sky caved in the world over, not just for Tousa. As the 3rd Circuit said, more or less, in the Owens Corning substantive consolidation litigation, "That's how the financial markets work, so quitcherbellyaching." Back when LBOs were more common than CLOs are today, selective fraudulent transfer litigation made sense. Some courts agreed, such that fraudulent transfer allegations began to strike fear in lenders' hearts, often leading to healthy settlements in favor of the unsecured creditors. These days, on the other hand, the litigators would have us believe that fraud is the rule, not the exception, as though there is an Enron heart beating in every debtor CEO's chest and as though the nationally recognized professional firm that issued the solvency opinion in connection with the Tousa financing was the primary culprit in Mel Gibson's conspiracy theory. (I much preferred Mel in "Mad Max" and "Lethal Weapon" and its sequels.) Nor is it just fraudulent transfer allegations that tickle the bankruptcy litigator's fancy. "Lender liability," "deepening insolvency," "equitable subordination," "recharacterization" -- who can keep up? Which is exactly the weakness. Just as playing too many Deep Purple songs at full blast numbed my high school brain, too many lender liability claims asserted at too high a decibel level have deafened judges even in those situations where there is actually some merit to the claims. I am not saying that all bankruptcy litigation is frivolous or that secured lenders never make mistakes or never overstep the metes and bounds. What I am saying is that when 75% of Chapter 11 cases include threatened or actual litigation by committees and more junior classes against more senior classes, can you really expect the courts to remain so focused that they can actually see the occasional diamond in the rough? Adding to this is the current reality of substantial credit-crisis-induced value dissipation, not just among homebuilders but throughout the land of Chapter 11. More and more often, the second-lien loans are now the fulcrum security, not the bonds, so the lenders are going to be hammering even harder to nail down their senior recovery. As a result, it's no longer "What will it take to settle this thing?" Instead, the current refrain is "Whatever it is you think you are selling, we aren't buying it." Which, come to think of it, brings us around full circle to homebuilders. Evan Flaschen is the head of the financial restructuring group at Bracewell & Giuliani LLP. Categories Deal Video
    Community
 Elsewhere on The Deal.comDealwatchThe Deal MagazineCorporate Dealmaker
The Deal VideoCategories
Blog roll
Archives
| |||||||||||||||||||||||
|
|
|
|
|
©Copyright 2009, The Deal, LLC. All rights reserved. Please send all technical questions, comments or concerns to the Webmaster.
