Shearman And Sterling

Financial Restructuring & Insolvency, Columns

Nov 02, 2009

The TOUSA Decision: Death of the Savings Clause?

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In a recent case that sent shockwaves through the lending community, the United States Bankruptcy Court for the Southern District of Florida (the “Court”) issued a 182-page decision in Official Committee of Unsecured Creditors of TOUSA, Inc. v. Citicorp N. Am., Inc., setting aside obligations incurred and liens granted by subsidiaries of TOUSA, Inc. (the “Parent”) under certain loan agreements and guarantees. While the Court addressed many issues relating to fraudulent conveyance and preference theories, its most notable holding was its unqualified rejection and invalidation of so-called “savings clauses” in upstream guarantees. If followed by other courts, the decision will have profound consequences for many lenders and debtors alike. Moreover, unless the decision is reversed on appeal, it is sure to open the floodgates to litigation against lenders who receive guarantees predicated upon savings clauses. We believe that neither the proper application of the Bankruptcy Code (“Code”) nor a correct reading of the underlying documents supports the Court’s conclusion regarding the invalidation of savings clauses and that the TOUSA decision does not advance any policy underlying fraudulent conveyance laws.

 Read the full memo, “The TOUSA Decision: Death of the Savings Clause?”

Authors and Contributors

Fredric Sosnick

Partner

Financial Restructuring & Insolvency

+1 212 848 8571

+1 212 848 8571

New York

Malcolm K. Montgomery

Partner

Real Estate

+1 212 848 7587

+1 212 848 7587

New York

Maura O’Sullivan

Partner

Finance

+1 212 848 7897

+1 212 848 7897

New York