The Real Deal Miami

Tousa bankruptcy grinds on with broad implications

By Sally Apgar | December 22, 2009 04:28PM

The legal tussles surrounding the lengthy, messy bankruptcy of builder Tousa got a bit of clarity last week, when a judge said Starwood Land Ventures could collect a $1.8 million breakup fee if it failed to acquire the Hollywood-based homebuilder. But only a bit, said commercial lenders, who are pondering how the case could affect the business more broadly.

The fee ruling followed an earlier commentary from U.S. Bankruptcy Judge John Olson, who slammed the lending and due diligence practices of Tousa’s syndicate of prominent banks. He said Citigroup, Wells Fargo and Bank of America had committed wrongdoings so egregious as to be called a “fraudulent conveyance,” and ordered that they pay back Tousa’s subsidiaries, whose assets secured the loan, more than $400 million.

Olson’s 182-page ruling, issued in federal court in Fort Lauderdale, is being appealed. Spokespeople for each bank declined to comment, citing the pending appeal.

The rise of Starwood as a likely new owner of Tousa is the ultimate aim. While the breakup fee could serve as a further inducement for Starwood, a Bradenton-based residential real estate investment firm, Olson’s comments make many lenders nervous. The detailed ruling attacks some of their basic lending practices, including the hiring of solvency experts. Tousa declared bankruptcy in January 2008.

“[The ruling] is a bit of a shocker,” said Mark Edelstein, a partner in the New York office of Morrison & Foerster’s Distressed Real Estate Group. Edelstein said he typically represents lenders and did not have a role in the Tousa case. He said some legal tactics used by the lending industry may need to be reconsidered if the court decision stands.

In his Oct. 13 ruling, Olson also criticized how Tousa CEO Antonio “Tony” Mon, Citibank and advisors AlixPartners and Lehman Brothers stood to make millions of dollars in fees only if the banks’ loan, totaling $500 million, went through.

Mon did not return calls seeking comment.

Olson wrote that Tousa and its subsidiaries were likely insolvent before the loan was made but that the new debt burden made it impossible to stay afloat financially.

Olsen called the lenders “grossly negligent” and said they were “not acting in good faith.’

Edelstein said Olson “drew a road map of the right way and the wrong way to do due diligence. And he’s basically saying: ‘Lenders you were lax and lazy. So don’t say you acted in good faith when, in fact, there is evidence that you knew the numbers [Tousa gave showing solvency] were wrong.’”

At issue was a $500 million loan the banks granted to Tousa on July 31, 2007 that was secured by the assets of Tousa’s subsidiaries. About $420 million was used to settle litigation between homebuilder Transeastern and one of Tousa’s subsidiaries that had defaulted on debt incurred in 2005 to finance a joint home building project, that Olson called “a disastrous business venture.”

Tousa and most of its subsidiaries filed for Chapter 11 bankruptcy protection only six months later on Jan. 29, 2008 with assets of $2.3 billion and liabilities of $2.2 billion. Creditors sued Tousa, saying it forced subsidiaries to take on debt to settle litigation for which they had no responsibility.

E-mails between Tousa’s top executives before the disastrous loan forecast a mind-blowing downturn in the Florida housing market and the need to stockpile cash to “traverse the 2007 valley of [possible] death.”

A month before the loan was made, Tousa’s Mon wrote a confidential memo that said the $500 million loan would so overleverage the company and its subsidiaries that they would have “barely enough oxygen to survive” and that he foresaw it possibly “crashing and burning.” Mon had a $4.5 million bonus riding on the loan going through.

Olson said the lenders’ failure to challenge the upbeat financial projections was “either gross negligence or a willful decision — motivated by a desire to generate fee income — to turn a blind eye toward the obvious reality that Tousa was in a death spiral.”

Olson noted that Citi “harbored significant doubts about Tousa’s solvency, but motivated by the prospect [of a $15 million fee], pressed forward,” and blasted Alix, which was hired to determine solvency. Alix’s analysis was “seriously flawed,” and “blindly relied on Tousa’s [own] unsupportable financial projections.”

Tousa agreed to pay Alix $2 million if Alix found Tousa solvent and less than half of that fee if it found Tousa insolvent. Lehman collected about $2.9 million.

“In most fraudulent conveyance actions, the dollars are far smaller,” said Edelstein, the attorney. “Here you have large, well-known national banks with large amounts of money purportedly having done their (due diligence) analysis.”

He said Olson’s ruling “is a wake-up call to the lending industry of how they hire experts for solvency opinions.”