LandAmerica unit wants funds access

A LandAmerica Financial Group Inc. subsidiary wants access to customer funds to pay vendors and expenses while going through Chapter 11 bankruptcy proceedings.

LandAmerica 1031 Exchange Services Inc. filed the request in U.S. Bankruptcy Court in Richmond and said if it is not granted, the company may be forced into Chapter 7 liquidation bankruptcy.

The difference could affect how creditors are treated, said Nathan B. Oman, an assistant professor at the College of William and Mary's Marshall-Wythe School of Law.

Chapter 7 bankruptcies have a clearer set of rules when it comes to how creditors are paid. Chapter 11 restructuring bankruptcies are more flexible, and creditors are said to fare better.

"There is more freedom in Chapter 11 with regard to how different classes of creditors are treated," Oman said.

The subsidiary of the Henrico County-based LandAmerica needs the money to pay, among others, a consultant working to help shut the company down, attorneys fees, and a service that collects documents and converts them into an electronic format.

Calls to LandAmerica's attorney in New York, Paul V. Shalhoub, were not returned. Dallas attorney Charles R. Gibbs, who represents the committee of unsecured creditors, also could not be reached for comment.

The parent company and the subsidiary filed for bankruptcy protection Nov. 26. What assets are included in the estate is a contentious point between exchange customers and the company.

Under Internal Revenue Service guidelines, property owners can defer capital-gains taxes on the sale of investment property if they park the funds with a third party -- the exchange company -- until they can reinvest the money in a similar property.

If the deal on a second purchase does not occur within 180 days, the investor will be taxed.

Customers claim their money was being held in trust and is not a part of the estate that can be used to repay creditors; LandAmerica disagrees.

"We're arguing that there really isn't any property in the estate," said Richmond attorney Ronald A. Page Jr., from the firm Cantor Arkema, which represents dozens of exchange customers.

At the time of the LandAmerica bankruptcy filing, 450 customers had placed more than $419.2 million with the company (the company had previously said the amount was $383.6 million). The money has been tied up since then.

"It's not right for them to have any access to it," said David Ash, a Los Angeles man who placed $2.74 million with the company in late November after selling two buildings. "If we can't have access to it, why should they?"

Exchange-customer money went into separate accounts or was lumped into one commingled account. The company wants access to money in the commingled accounts, which amounts to $247 million.

LandAmerica said there is enough money after customer claims are deducted. Commingled customer claims amount to $191.7 million, according to court documents.

A hearing on the request will be held Feb. 23 before Judge Kevin R. Huennekens.

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