LandAmerica subsidiary facing suits

Days before LandAmerica 1031 Exchange Services Inc. declared bankruptcy, the troubled business was still accepting money from customers.

Now that money is tied up and allegations of fraud, misconduct and breach of contract have been leveled against the unit, a division of Henrico County-based holding company LandAmerica Financial Group in U.S. Bankruptcy Court.

"These are people sitting behind big desks stealing people's money," said Vivian Hays, an Idaho resident who on Nov. 14 entrusted $383,900 to the LandAmerica company. "They took money right up until they closed their doors."

Hays sold a commercial building in California and had not located another property to invest her money, so she placed her money with LandAmerica's 1031 exchange company.

Exchange companies allow people who sell property to put their money in trust with an intermediary while they look for a similar investment. Since the profit is not realized, it's a legal way to defer capital gains taxes. The intermediaries are called 1031s, after the Internal Revenue Service code authorizing them.

LandAmerica officials would not comment on the pending litigation.

Because of the Chapter 11 bankruptcy filings Nov. 26 of LandAmerica's holding company and exchange service company, money held by the firms is tied up while creditors, a judge and attorneys wrangle over how the assets are allocated.

Richmond attorney Bruce Arkema said he has 15 to 20 clients who placed money with the 1031 company and have been blocked from accessing their funds. One client transferred nearly $1 million to the LandAmerica subsidiary two days before the filing.

Next week, Arkema, a Cantor Arkema PC attorney, plans to file claims against the 1031 business.

Others have already done so. In the past 2½ weeks, 11 lawsuits have been filed against the subsidiary. Nine claim breach of contract and two assert fraud claims and request punitive damages.

"These matters are in litigation and therefore we are unable to offer any comment," Lloyd Osgood, senior vice president of brand resources, wrote in an e-mail.

Several hearings will be held Tuesday in U.S. Bankruptcy Court in Richmond. The pending sale of LandAmerica's primary title insurance subsidiaries to Fidelity National Financial is on the docket as is a motion to authorize LandAmerica to settle some claims from the 1031 company.

Many exchange companies put customer money into a dedicated bank account, said Hugh Pollard, vice president and regional manager for First American Exchange Co., an exchange company based in Chicago and not related to LandAmerica.

LandAmerica, which according to bankruptcy filings owes 450 customers more than $330 million, handled money differently.

Some customer money -- $138.6 million -- went into individual client accounts. Other money was invested in Treasury bonds and auction-rate securities, which were traditionally good investments, bankruptcy filings show.

When global markets seized, the market to buy the auction-rate securities disappeared. It meant that LandAmerica could not sell the $201.7 million in securities it held, according to bankruptcy filings.

It is unclear in the filings why some customer money went into accounts while other money was invested.

Hays and others have said they thought their money would be held and not invested.

"Once [LandAmerica 1031 Exchange Services] knew there was no market for [auction-rate securities], I would think they have a duty to no longer take exchanges or to tell you," Arkema said.

In the months leading to the bankruptcy filing, the holding company lent its subsidiary $65 million, also according to bankruptcy filings. But the holding company had money troubles of its own because of the sluggish housing market.

LandAmerica Financial Group went looking for buyers or someone who could provide an infusion of cash. Fidelity considered merging but then walked away from the deal. Days later, LandAmerica agreed to sell a majority of its title insurance subsidiaries to Fidelity rather than merge the entire company and filed for bankruptcy protection.

In court, attorneys will argue whether LandAmerica owns the money people entrusted to the 1031 exchange business. That is key because it could mean that money is up for grabs when it comes to creditors.

Of the complaints filed, all seek to halt the sale of LandAmerica's title insurance subsidiaries for fear it will decrease the total assets.

The claimants face a strict timeline. Under IRS rules, a person must identify a new property to reinvest the proceeds within 45 days after a sale closes. Within 180 days, the sale of the next property must close. If that doesn't happen, the 1031 client is responsible for taxes. Several exchange clients have deadlines coming up.

"The time sensitivities here are tremendous," said Craig A. Wolfe, a New York attorney representing several clients in suits against LandAmerica 1031.

One client could be hit with $3 million in taxes, Wolfe said.

"It would certainly be harmful, seriously harmful," he said. "This is money, cash, that was being held in trust that nobody ever dreamed would not be available."
Contact Emily C. Dooley at (804) 649-6016 or .