Bond holders and other creditors of bankrupt TOUSA won a significant victory in U.S. Bankruptcy Court Tuesday. A bankrupcty court judge ruled that TOUSA was already insolvent and certain lenders should have known it before they loaned the company more than $500 million related to its acqusition of Transeastern, a Florida land developer.

Judge John K. Olson of the U.S. bankruptcy court's Southern District of Florida ruled that some of the company's assets were fraudulently conveyed to creditors just six months before the company filed for Chapter 11 bankruptcy protection in January 2008. Olson has ordered financial institutions to funnel more than $600 million back into the bankrupt companies to be divvied up among its bond holders and other unsecured creditors. The exact amount and how it will be divided has not yet been determined, but among the lenders that will be forced to turn over funds include Citigroup, Bank of America, Wells Fargo and CIT Group.

"The bondholders and the rest of the unsecured creditors were looking at basically no recovery unless we were successful with this litigation," said Daniel Golden, a counsel representing the company's unsecured creditors.

TOUSA did not comment on the ruling.

TOUSA's biggest troubles began shortly after it paid $560 million, top dollar at the peak of the market in the summer of 2005, to invest in a joint venture called Transeastern, which owned and developed lots in Florida.

Within a year, as the market eroded, particularly in Transeastern's Florida markets, it was clear that the venture couldn't pay off its debts.

The lenders sued, asking for their money back. In reaction, TOUSA borrowed more money to pay off those lenders, taking out another loan for roughly $560 million to pay off those creditors and bring the joint venture wholly onto TOUSA's books.

The judge's Oct. 13 ruling claims that move constituted "fraudulent conveyance" because TOUSA was already technically insolvent before it borrowed the money to pay off Transeastern's obligations and became even more so afterwards.

As a result, he ordered those original lenders to "disgorge" roughly $403 million plus an estimated $80 million in interest to TOUSA, where it will be distributed to bond holders and other unsecured creditors. The lenders who gave TOUSA the loan to pay off the original Transeastern lenders were ordered to turn over interest, fees and payd owns and professional fees they've received since the loan was instituted in 2007, said Golden.

More than $200 million in tax refunds that were turned over to lenders also will be turned back.

The more than 170 page judge's ruling offers documentary evidence that provides insight into how TOUSA's management was responding to the housing downturn in the spring and summer of 2007. The documents show TOUSA was already looking at bankruptcy scenarios even before it borrowed to pay off the Transeastern debt.

It was discussing hiring a restructuring officer for the company, was issuing memos and warnings that the transaction would put the company's debt-to-equity ratio at 70%/30% and that it would need an infusion of cash either through selling equity or bringing in a partner.

Stephen Wagman, the company's chief financial officer who had just been hired by TOUSA in the spring of 2007, wrote that taking on debt to pay off the Transeastern lenders would severely compromise the company's ability to survive and come out of the housing downturn because it would leave the company heavily indebted and with little cash on hand.

The company filed for bankruptcy protection within six months of paying off the Transeastern lenders.

The document also clearly showed some of the obstacles CEO Tony Mon faced from the company's majority owners, the Stengos family in Greece, which held two-thirds of the company's stock in trying to recapitalize the company by issuing more stock or bringing in a potential company buyer. They were steadfastly against diluting their share in the company.

The documents also show that companies and executives were given bonuses and incentives to consummate the transaction. Half of Mon's 2007 incentive bonus of $4.5 million was contingent on successfully resolving the Transeastern transaction.