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

OPINION AND ORDER ON APPEALS BY TRANSEASTERN LENDERS

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 *621 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 *625 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 *628 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, *636 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