Fate of LandAmerica customers’ funds still in the air

Customers of LandAmerica 1031 Exchange Services Inc. will have to wait a little longer to find out whether their money belongs to them or the bankrupt company's estate.

That was the primary question discussed during a nearly four-hour hearing in U.S. Bankruptcy Court in Richmond yesterday.

"The court has heard a lot today and I want to digest this," Bankruptcy Court Judge Kevin R. Huennekens said. "It is not an easy answer."

The exchange company and its parent, Henrico County-based LandAmerica Financial Group Inc., filed for bankruptcy protection Nov. 26.

Since then, customers of the exchange company have filed complaints in bankruptcy court claiming the money is not part of the estate and that LandAmerica committed fraud and breach of contract.

The exchange company held proceeds from the sale of investment property as a way for investors to defer capital gains taxes. The investors had 180 days to buy a similar property in which to reinvest, according to Internal Revenue Service regulations.

Bankruptcy court records show the exchange company owes $419.2 million to about 450 customers.

Exchange customer money was held in escrow, in segregated accounts or lumped together in commingled accounts with money from other customers.

Rather than hearing each customer complaint, Huennekens ordered that test cases be tried in order to determine how to handle different classes of claims.

One class of cases involved segregated account holders.

Nebraska-based Millard Refrigerated Services Inc., which placed about $28 million in segregated accounts, was the first test case to be considered. In a request for summary judgment, Millard requested the money be deemed outside the estate and that LandAmerica be ordered to make the money available.

New York attorney Robert S. Friedman, representing Millard, argued that the agreement between his client and exchange company used words implying the money would be held on behalf of the customer and that it ultimately belonged to them.

The unsecured creditors committees for the exchange and parent companies, along with LandAmerica, claim the money belongs to the estate. Nowhere in exchange documents do the words "trust," "trustee," "beneficiary" or "fiduciary" appear, said Keefe M. Bernstein, a Texas attorney for the unsecured creditors committee.

"Millard's trying to, after the fact, fundamentally change the contract," he said. "It's asking the court to read in a relationship that is not there."

If the money belongs to customers, it cannot be used as part of estate funds to pay off creditors. If the money goes to the estate, it is unclear how exchange customers will fare.

A big creditor of the exchange company is LandAmerica Financial Group, which claims it is owed $68.2 million for making a series of loans to the subsidiary.

The segregated account holders, including Millard, are considered to have the strongest case, said Ronald A. Page Jr., with the Richmond firm Cantor Arkema P.C.

If Huennekens rules against Millard, that could, in effect, mean exchange customers' commingled money also will be part of the estate, he said.

"It would be very persuasive if Millard's funds were held part of the estate," Page said.

Hearings related to the commingled test cases are scheduled for April 16.

Contact Emily C. Dooley at (804) 649-6016 or .