LandAmerica offers repayment plan to bankruptcy court

LandAmerica Financial Group's plan to pay off most of the people who entrusted it with tax-shelter funds is to go after the banks and brokers who sold it an obscure kind of investment.

The plan the Henrico County-based insurer filed with the U.S. Bankruptcy Court in Richmond on Wednesday night says most investors who put millions of dollars into its 1031 exchange accounts will be paid after a relative few who arranged special security for their funds.

The investors who arranged special deals will receive 97 cents for every dollar they invested, the plan says. Another group will split at least $50 million.

The rest, amounting to 400 of the 450 people who had parked money in 1031 exchange tax shelters at LandAmerica, will share what's left -- and a pro-rata share of any payments LandAmerica trustees get from the banks and brokers who sold it a kind of high-interest-rate investment called auction-rate securities. The market in those collapsed in February 2008.

"I think it's significant that this is the result of a mediated settlement," said Kevin Funk, a lawyer with the Henrico County law firm of Cantor Arkema who is representing some of the 1031 investors.

"We're all on the same page; now we can look forward to how to increase the size of the bankruptcy estate," he said, using the term for the amount of money creditors will split.

Funk said it is too early to say how much the majority of 1031 investors will receive. That will depend on whether trustees end up suing the banks and brokers over the auction-rate securities, or reach a settlement or win funds from LandAmerica's insurance policies covering it for mistakes its directors and officers made.

But some fear it won't be much.

"It looks like most of the victims are just going to get crumbs," said Paul Buses, a Californian whose wife placed money with a LandAmerica in August 2008, just a few weeks before the company's deepening financial woes led to it scrambling to find a way to keep paying its bills.

The plan, if accepted by creditors and approved by U.S. Bankruptcy Judge Kevin R. Huennekens, would bar participating creditors from suing LandAmerica's former officers.

LandAmerica specialized in title insurance and other real estate-related services such as 1031 exchanges, an Internal Revenue Service-sanctioned transaction that allows investors to avoid capital gains taxes on real estate sales if they reinvest the money in similar property within six months.

By the time LandAmerica filed for bankruptcy last November, 450 exchange customers had more than $419 million in the company's 1031 exchange accounts. The 400 people who did not arrange special security for their funds had placed nearly $193 million of that total.

LandAmerica had used the 1031 investors' money to buy about $200 million of auction-rate securities. The company has blamed the collapse of the market for auction-rate securities for its bankruptcy.

In addition to the auction-rate securities, LandAmerica still has some funds from the sale last year of its title insurance companies for $247 million. Those companies provided roughly 85 percent to 90 percent of its revenue.

Since then, LandAmerica sold other operations for about $58 million, its bankruptcy court filings reported. The company said it could raise up to an additional $61 million from other sales.

But LandAmerica owes more than the 1031 funds -- an additional $365 million of notes and bonds, the holders of which also have a claim on the company. The Internal Revenue Service and the Pension Benefit Guaranty Corp., the federal entity that backs underfunded pension plans, also have claims.

Committees of various creditors, including one representing the 1031 investors, are recommending that people owed money vote to accept the LandAmerica plan.

But some of the 400 investors who did not arrange special security for their 1031 funds object.

Their committee is dominated by those who had arranged extra security, while the plan doesn't challenge what some creditors believe were excessive sums paid for lawyers, consultants and LandAmerica officials who didn't protect the interests of the majority of 1031 investors.

"The foxes are still in the henhouse," Buses said.

Contact David Ress at (804) 649-6051 or dress @timesdispatch.com.