May 18 (Reuters) - Unfortunately, there's all too often an inverse relationship between a decision's significance and its readability. That's been true at every stage of the rollercoaster litigation between the bankrupt home builder Tousa and the distressed debt hedge funds that bought up Tousa bonds. The stakes are huge. The hedge funds claim that Tousa's $421 million pre-Chapter 11 deal with secured lenders was a fraudulent conveyance, so the money belongs to them. The courts that have considered the issue -- first a federal bankruptcy judge, then a district court, and now the 11th Circuit Court of Appeals -- all know they're setting important precedent on the ability of bankruptcy trustees and creditors to void payments to lenders by distressed companies in the run-up to Chapter 11. And the litigation has been filled with drama, with the $421 million swinging back and forth after each new ruling.

If only the whole thing weren't so complex.

Here's the story, which is really the only way to understand the rulings, including this week's landmark 11th Circuit opinion. Tousa was once the 13th-largest home builder in the United States. It grew fast through highly leveraged acquisitions, which meant that by July 2007 the company had $1.2 billion in debt, including money it borrowed for its attempted 2006 acquisition of the Florida home builder Transeastern Properties. That deal went bad when the housing market dried up, and Tousa defaulted on the Transeastern loans. In 2007 the lenders sued, claiming $2 billion in damages.

In an effort to stave off bankruptcy, Tousa reached a $421million settlement of the case. It financed the settlement with loans amounting to $500 million from Citigroup and other banks. Those loans were guaranteed by Tousa subsidiaries that hadn't previously been encumbered by obligations to lenders.

The settlement only bought Tousa a few months, and in January 2008 the home builder filed for Chapter 11. Soon thereafter the bondholders -- led by Aurelius Capital and its lawyers at Robbins, Russell, Englert, Orseck, Untereiner & Sauber -- sued to undo what they claimed was a fraudulent transfer of the company's value to the banks. The hedge funds argued that when Tousa took out that $500 million secured loan, it put more of its creditors' money at risk than needed.

After a 13-day trial in 2009, U.S. Bankruptcy Judge John Olson in Miami agreed. In a ruling that became the talk of the vulture fund community -- with some using the words "troubling" and "controversial" to describe it -- Olson concluded that Tousa was already insolvent when it made the deal that essentially put its subsidiaries in the grip of its bank lenders. The deal made it "inevitable" that Tousa would file for bankruptcy, Olson said, and the transaction "was still the more harmful option." Because Tousa received no value for the deal, the judge ruled, it was a fraudulent conveyance and the $421 million had to be restored to the creditors.

The lenders appealed, and in February 2011 U.S. District Judge Alan Gold in Miami reversed Olson in a decision that was highly critical of the bankruptcy court. Gold said Olson had narrowly defined "value" in a way that could be "inhibitory of contemporary financing practices." Value could include indirect benefits like avoiding bankruptcy, the district court wrote. "Inherently, these benefits have immense economic value that ensure the debtor's net worth has been preserved, and, based on the entirety of this record, were not disproportionate between what was given up and what was received," Gold concluded.

In its ruling on Tuesday, a three-judge panel of the 11th Circuit ducked the question of whether avoiding bankruptcy confers value on a company. But the appeals court reversed Gold after determining that Olson "did not clearly err" in his findings. Writing for a panel that also included Judges Gerald Tjoflat and Peter Fay, Judge William Pryor said Olson held that even if avoiding bankruptcy was a legitimate reason, "the almost certain costs of the transaction of July 31 far outweighed any perceived benefits." As for the lenders' contention that they didn't need to investigate how Tousa was securing the loan, Pryor wrote that "every creditor must exercise some diligence when receiving payment from a struggling debtor."

How significant is the ruling? We've already received at least three client alerts focusing on the risk to upstream lenders in just the few days since the 11th Circuit decision.

Bondholder counsel Lawrence Robbins of Robbins, Russell declined to comment. Andrew Leblanc of Milbank, Tweed, Hadley & McCloy, who represented the lenders, did not respond to a request for comment.

(Reporting by Nate Raymond)

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