Fraudulent Transfer Litigation - The Eleventh Circuit Court of Appeals Deals a Blow to Lenders

 A highly significant ruling involving fraudulent transfers recently decided by the Eleventh Circuit could have a far-reaching impact on distressed lending and investing.   In Senior Transeastern Lenders v. Official Committee of Unsecured Creditors (In re TOUSA, Inc.), 2012 WL 1673901 (11th Cir. May 15, 2012), the Eleventh Circuit Court of Appeals reversed the district court and upheld the bankruptcy court’s ruling that liens granted by TOUSA’s subsidiaries to lenders constituted fraudulent transfers. In general terms, a fraudulent transfer is a conveyance by a debtor of property to a third party to place intentionally that asset out of reach of a creditor or creditors, or a conveyance made by the debtor to a third party for less than reasonably equivalent value, which conveyance was made while the debtor was insolvent or caused the debtor to become insolvent.  

TOUSA, a Florida company, and its subsidiaries were once one of the largest homebuilders in the country. TOUSA had borrowed large amounts of money during the boom years prior to the collapse in the housing market. TOUSA defaulted on its loans to its original lenders, with whom TOUSA reached a settlement with those lenders in the amount of $421 million. TOUSA borrowed $500 million of new money to pay the $421 million settlement. In conjunction with the new $500 million loan, certain of TOUSA’s subsidiaries guaranteed the new loans and provided security interests in their assets. None of those subsidiaries, however, received any of the proceeds from the new loans.

Less than six months after the new loans, TOUSA and most of its subsidiaries filed for protection under Chapter 11 of the Bankruptcy Code. The Unsecured Creditors Committee in those cases filed a lawsuit to avoid the liens and guarantees made by TOUSA’s subsidiaries, arguing that the subsidiaries’ guarantees and liens provided to the new lenders constituted fraudulent transfers because the subsidiaries did not receive reasonably equivalent value in exchange. In ruling for the Creditors’ Committee that the subsidiary liens and guarantees should be avoided, the Eleventh Circuit rejected the argument of the lenders that the subsidiaries received indirect value from providing the liens and guarantees because the new loans enabled the subsidiaries to avoid defaulting on bond and bank obligations. 

The Eleventh Circuit's decision in TOUSA could have serious implications in the distressed financing industry.  Transactions involving debtors with subsidiaries will need to be structured to avoid the TOUSA fraudulent transfer problems.  TOUSA could chill the availability of rescue financing for distressed entitities, although the full implications of the decision will not be known for some time.


Until Death Do Us Part

Commencing January 1, 2012, legal, real estate and insurance professionals will be required to advise clients of KRS 381.280 which creates a forfeiture of property rights for the taking of the life of a party in interest to the same prior to such parties executing deeds and other documents in question. It works like this: take the life (and actually be convicted of a felony) of your spouse, heirs, beneficiaries under wills, trusts or insurance policies or a joint tenant with right of survivorship and you will loose your interest in the property which you shared with the dearly departed. There are several exceptions to the general rule; see the text of the statute at the link provided above.  To all of our friends who are lawyers, real estate and insurance professionals, please take note and prepare for the education of your clients.                       


2011: Year of the Hotel ?

Jones Lang LaSalle seems to think so.  We hope that they are right.  As reported by Bloomberg JLL is forecasting a 25% increase in hotel/hospitality industry activity in the 2011.  The drivers are REIT money and foreign investors looking for investments which can still be acquired at reasonable discounts while the U.S. economy recovers from its troubles.  Business travel is up and all signs are indicating that the hotel/hospitality/travel industry is stabilizing.  Foreign investors usually consider first tier metropolitan areas for investment, but they should not discount the opportunities in the second tier metropolitan areas.

Resale Fees ?

Recently, The New York Times  published an article entitled Resale Fees That Only Developers Could Love . The article does a nice job describing what resale fees are and how they are created and even the securitization of future resale fees so we will not go into it here.  Briefly, resale fees run with the land as covenants binding all subsequent owners to their conditions.  The typical place you would find them, if created for a project, would be in the project declarations of covenants, conditions and restrictions.  Since this is a somewhat novel concept just starting to receive the attention of law makers and regulatory agencies, if you are a developer considering resale fees, make sure that your state does not prohibit them and that your buyers have full disclosure of the issue to avoid any possible future problems.  Also, lenders might consider the existence of resale fees and receiving an assignment of the same as collateral for a project's financing.  Creative and novel so caveat emptor !

Transfer Fee Covenants ?

Ohio House Bill 292, which prohibits the future creation of transfer fee covenants, was signed into law on June 14, 2010 and will become effective on September 13, 2010. Transfer fee covenants in effect prior to September 13, 2010 are not affected by the new law.

Transfer fee covenants create revenue streams for real estate developers. A transfer fee covenant is created by a seller (the “Covenantor”), usually a real estate developer or builder. It requires subsequent buyers of the Covenantor’s grantee to pay a transfer fee back to the original Covenantor each time the property is sold. Transfer covenant fees generally range from 1% to 3% of the purchase price of the property and are payable to the Covenantor. 

Covenants often provide for a lien in favor of the Covenantor if the transfer fees are not paid. If recorded, the lien makes financing for future purchasers difficult because the lien created by the transfer fee covenant takes priority over the interest of a subsequent lender.

Transfer fee covenants may create problems for subsequent owners. The covenants require subsequent owners to pay the transfer fee to the original Covenantor, but as time passes, it may be difficult to determine to whom and where the fee should be paid. Transfer fee covenants also pose potential title problems because the covenant may only be contained in the original deed and could be missed during a title exam if the exam covers a shorter period of time than the typical 99-year existence of a transfer fee covenant.     

Creditors should obtain thorough title exams prior to issuing a loan or proceeding with a foreclosure action to avoid any potential problems created by existing permitted transfer fee covenants.

Cuyahoga County Land Bank Update

In what has become an ongoing series here on the UB REAL Blog, we wanted to issue another update on the now year old Cuyahoga County Land Reutilization Corporation, better known as the land bank.  Over the past six months, the Cuyahoga County Land Bank has obtained more properties and received millions in funding from the federal government.

A South Euclid lot donated to the Cuyahoga County Land Bank is soon to become one of the program’s community gardens. As of January 13, 2010, the property is the first of its kind to complete both the acquisition and disposition processes. The 50x108 lot, located at 3915 Warrendale Road, was given a market value of $22,800.



Continue Reading...

Buy Swampland in Florida? Or, just a Bad Case of Buyer's Remorse? Discontent with Interstate Land Sales Full Disclosure Act



 “I have some prime swampland in Florida to sell you” is a slang expression used to poke fun at the gullibility of a person. This saying is based on events of the 1960s and 1970s where local scammers would attempt to induce out of state purchasers to acquire “lucrative” land which, in reality, turned out to be worthless, undevelopable plots. The federal Interstate Land Sales Full Disclosure Act (“Act”), 15 U.S.C. §§1701, et. seq., passed by Congress in 1968 and patterned after the Securities Law of 1933, was a reaction to that and other scams involving the sale of land. The Act was intended to provide a mechanism to inform buyers of land and to curb fraud and misrepresentation by sellers. In short, the Act forbids a “developer” or “agent” (for purposes of this article, a “seller”) who uses interstate commerce to sell or lease any nonexempt “lot” without first filing an acceptable “statement of record” with the U.S. Department of Housing and Urban Development and delivering to the buyer, prior to the sale, a “property report” which meets the requirements of the Act. When a buyer brings an action against a seller under the Act, the remedy sought, more times than not, is complete rescission of the purchase (as opposed to damages or equitable relief). While not all land sales require compliance with the Act (such sales being exempt under §1702 of the Act), for those sales and sellers that do fall under the jurisdiction of the Act, failure to comply can have serious consequences.


            Despite the Act’s good intentions, sellers and their advisors are citing three related concerns with the structure and application of the Act:


            (1) Buyer’s Remorse. Sellers argue that instead of shielding buyers from unscrupulous sellers, the Act is being used by buyers to combat buyer’s remorse. This is especially true for buyers of investment properties or vacation homes who are looking for a way out of purchases and construction contracts made prior to the downturn in the real estate market. Sellers are arguing that the Act is being used as a vehicle by buyers – even sophisticated buyers who went into the transaction with their eyes wide open – to leave the seller holding the bag and incurring the buyer’s loss on a bad real estate investment.  


            (2) The Punishment Doesn’t Fit the Crime. Related to the first point is the seller’s second argument that outright rescission of the transaction, is an unfair, even severe, remedy for a situation where the developer or agent unintentionally failed to comply with the Act and where no fraud or misrepresentation was alleged. Instead of fraud and misrepresentation, recent litigation under the Act has focused on the following issues: whether the Act applied to a particular transaction, availability of exemptions, including partial exemptions, under the Act; and whether a limitation period contained in the Act bars a suit. To quote another saying, sellers contend that “the punishment doesn’t fit the crime”.   An appropriate middle ground on this issue remains to be seen.


            (3) Even Courts are Conflicted. Combine the above two points with the fact that there is a conflict in the courts over the interpretation of the Act, and it leaves sellers and their advisors playing an elaborate guessing game (or, perhaps a game of “Russian Roulette”) in navigating the complexities of the Act. In addition to being knowledgeable about the Act and the regulations promulgated thereunder, sellers must also be vigilant to consult local applicable case law on interpretation of the Act. It is for these reasons that some practitioners believe Congress must revisit the Act and update or modify it accordingly.


            In summary, sellers who deal in and with real estate transactions would like to see changes to the Act to bring it in line with the lessons that have come to light in the past forty years, including, most notably, those derived from the issues discussed above. Nevertheless, the other side of the same coin is the admonishment to sellers to make review of and compliance with (if required) the Act a standard part of any real estate development project and to seek out professional help when needed. Don’t create an unintended escape hatch for a buyer in an otherwise solid, well-planned and executed development project.

First-Time Homebuyer Temporary Federal Tax Credit Extended and Expanded

On November 6, 2009, President Obama signed the Worker, Homeownership and Business Assistance Act of 2009. The new law extends the first-time homebuyer temporary federal tax credit for qualifying home purchases to April 30, 2010 and expands the eligibility requirements for purchasers.

Under the new law an eligible taxpayer must buy, or enter into a binding contract to buy, a principal residence on or before April 30, 2010 and close on the home by June 30, 2010. The new law also authorizes the credit for long-time homeowners buying a replacement principal residence and raises the income limitations for qualified homeowners claiming the credit.  

Homebuyers who purchased a home in 2008, 2009 or 2010 may be able to take advantage of the first-time homebuyer credit. The credit:

  • Applies only to homes used as a taxpayer's principal residence.
  • Reduces a taxpayer's tax bill or increases his or her refund, dollar for dollar.
  • Is fully refundable, meaning the credit will be paid out to eligible taxpayers, even if they owe no tax or the credit is more than the tax owed.

Under the new law, the maximum credit amount remains at $8,000 for a first-time homebuyer (single person or married filing jointly or $4,000 for married persons filing separate returns). A “first-time buyer” is a purchaser who has not owned a primary residence during the three years up to the date of purchase.

The new law also provides a “long-time resident” tax credit of up to $6,500 to others who do not qualify as “first-time homebuyers” (single person or married filing jointly or $3,250 for married persons filing separate returns). To qualify as a “long-time resident,” a buyer must have owned and used the same home as a principal or primary residence for at least five consecutive years of the eight-year period ending on the date of purchase of a new home as a primary residence.

For all qualifying purchases in 2010, taxpayers have the option of claiming the credit on either their 2009 or 2010 tax returns. To claim the credit, a taxpayer must file Form 5405 with the Internal Revenue Service, which you file with your original or amended individual federal income tax return.

Income Limits Increased under New Law

The new law raises the income limits for people who purchase homes after November 6, 2009. The full credit will be available to taxpayers with modified adjusted gross incomes (MAGI) up to $125,000, or $225,000 for joint filers. Those with MAGI between $125,000 and $145,000, or $225,000 and $245,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

For homes purchased prior to Nov. 7, 2009, existing MAGI limits remain in place. The full credit is available to taxpayers with MAGI up to $75,000, or $150,000 for joint filers. Those with MAGI between $75,000 and $95,000, or $150,000 and $170,000 for joint filers, are eligible for a reduced credit. Those with higher incomes do not qualify.

New Requirements under the New Law

The new law contains new restrictions on purchases after Nov. 6, 2009:

  • Dependents are not eligible to claim the credit.
  • The purchase price of the home cannot be more than $800,000.
  • A purchaser must be at least 18 years of age on the date of purchase.

For Members of the Military

Members of the Armed Forces and certain federal employees serving outside the U.S. have an extra year to buy a principal residence in the U.S. and still qualify for the credit. An eligible taxpayer must buy or enter into a binding contract to buy a home by April 30, 2011, and close on the purchase no later June 30, 2011.


The Dreaded Transfer on Death Deed

Ohio’s Transfer on Death Statute became effective at the beginning of 2002. Prior to the law being passed, there was much buzz in the real estate and trusts and estates legal community about why Ohio did not have a vehicle permitting owners of real estate to transfer real property on death to a named beneficiary, thereby avoiding probate of the property. After all, bank accounts could be transferred by naming a transfer on death beneficiary. Why could the same not be done for real estate? Ohio’s transfer on death statute had several problems, most notably the ambiguity with respect to whether or not joint tenants could be transfer on death grantors and, if so, what was the effect of the death of one, but not all, joint tenants? The debate and discussion became so heated that a multiple choice question was circulated on the Ohio State Bar Association’s Real Property Listserv suggesting five different vesting possibilities with the sixth multiple choice answer being “I don’t give a rat’s @$$. I have heard entirely too much on this topic and I want to be left alone.” Choice 6 knocked all others out of the ballpark.      

 A new Senate bill was introduced on April 30 which throws out the old transfer on death statute, getting rid of transfer on death deeds entirely, and replacing them with a transfer on death affidavit. In fact, the bill actually answers many of the questions that those of us in the real estate business have been debating since the law’s inception. For example, it makes very clear that joint tenants may name a transfer on death beneficiary. It also clarifies that upon the death of one joint tenant, the property is owned by the remaining joint tenants. In the event that there is a transfer on death affidavit in effect upon the death of the last joint tenant, the property transfers to the beneficiary. The bill cleans up the confusion of transferring on death to the trustee of a trust when the trustee of the trust may change. It also addresses ambiguities left open in the original statute with respect to a spouse’s dower interest.


In fact, the new bill is so well drafted that I thought it was the perfect fix. That is, until I described the changes to my trusts and estates colleagues. They expressed the concern that they will now have to do a full title search on every individually owned piece of real property in every estate to confirm that there is no transfer on death affidavit of record. Previously, they only obtained the last deed of record which would contain the transfer on death beneficiary, if any. As a real estate attorney who regularly orders title commitments, I believe that this is a small price to pay for the clarity that the statute brings to the dreaded transfer on death deeds. Hopefully it will put a stop to multiple choice questions on the Real Property Listserv.       

Combating Mortgage Fraud

Effective June 1, 2009 all residential properties (single family homes, condominium units and buildings with up to four units) in Cook County, Illinois will become subject to the amendments to the Illinois Notary Public Act contained in Illinois Public Act 095-0988 (the "Act") in an effort to combat mortgage fraud in Illinois residential real estate transactions.  The practical effect of the Act is that Illinois notaries will have to comply with the Act for all covered Cook County conveyances.

The Act is a pilot program applicable only to Cook County real property conveyances from June 1, 2009 through July 1, 2013.  The Act will require Illinois notaries to take and save a copy of the right thumbprint of all individuals selling residential property in Cook County.  The Act provides that if a right thumbprint is not available, alternative digits can be used.  The thumbprint record must be saved by the notary for seven years and is not subject to copying or inspection under the Freedom of Information Act.  The Act proscribes a Notarial Record form for the collection and retention of the record of the thumbprint.  The Act does not exclude developers of individual condominium units in multi-unit projects from the fingerprinting requirements.  Developers who do not want their in-house notaries to be bothered with the Act's record retention requirements should plan on attending closings at a title insurance company for at least the next five years !








It was reported this week in Crain’s Cleveland Business that the Blue Heron Golf Club in Medina County is for sale.  The golf course, only four years old and ranked in 2006 as one of the best new courses in the country, is surrounded by a residential development consisting of more than 400 home sites. 

 According to Crain’s, the broker for Blue Heron does not believe the fact that the course is on the market will negatively impact the sale of lots in the surrounding development.  He is most likely correct.  The general state of the economy is doing that job just fine on its own, thank you very much. 

Residential developers and new home builders have been two players in the market hit hardest by the current credit crisis and rising unemployment. 

 Data just released today (April 16) by the U.S. Census Bureau and HUD estimates single family building permits issued nationally in March 2009 were down 7.4% from the revised February figures, and down 42% from one year ago.  Estimates for February had been up slightly over those for January 2009.

 While March housing starts are estimated to be unchanged from those in February 2009, they were down a whopping 49.6% from March 2008 national levels.  Total single family units under construction, both nationally and in the Midwest, have declined each of the last 12 months.

 While sale rumors - - now confirmed - - may not have hurt new home sales in the adjoining subdivisions, the sale of the Blue Heron course cannot help unless the sale is to another operator intent on maintaining the property as a golf facility.  That issue can turn on what is or is not required by title covenants, documents which are often ignored by home buyers.

Park use is one alternative which could complement neighboring residential development.  The 2007 sale of Orchard Hills Golf Course to the Geauga Park District is a prime example of a golf course being converted to a use that successfully preserves the green spaces and recreational aspects of the property.  

Continue Reading...

Title Insurance: A Closing Checklist Must

I continue to be amazed at the reaction I get when I recommend to clients that they purchase title insurance as part of a real estate transaction. Granted I could be considered biased as I am a licensed title insurance agent, clerked in law school by searching titles in Franklin and the surrounding counties and spent the first 2 years of my legal career as an underwriting attorney for Chicago Title at their headquarters in Chicago. Generally, lending clients have accepted title insurance as a must; but not all developers and residential purchaser's have seen the light; notwithstanding the Erpenbeck situations which arise from time to time.

So, if you are not yet convinced that title insurance should be a necessary component of your due diligence and closing requirements, below is a list of 73 reasons why you should change your mind which has been assembled by Stewart Title and Lawyers Title at their website Know Your  Most of these items can be located by a search of the public records, but not all.


Continue Reading...