Junior Creditors Gain Clout
The article discusses a recent fraudulent conveyance ruling against senior lenders to Florida homebuilder TOUSA, Inc. In October, TOUSA's junior creditors won a $600 million judgment against Citigroup, JPMorgan Chase and other senior lenders when a bankruptcy judge ruled that a loan made six months before TOUSA filed for bankruptcy in January 2008 was a fraudulent conveyance.
The decision marks the latest in a string of corporate bankruptcy decisions that have helped junior creditors at the expense of debtholders higher up in the capital structure. Many experts in the field, including Mr. Monaghan, see this trend as an indication that junior creditors are gaining leverage against senior lenders in bankruptcy cases. "What could be perceived as a major re-sorting of priorities is occurring. The list of cases in which the document-based expectations of senior lenders were undercut reads like a Who's Who of high-profile cases. While each of the decisions can be viewed as separate and fact-specific, the fact that there are so many decisions in such high-profile cases tends to set a tone," he said.