Judge weighs LandAmerica exchange company case

Customers of LandAmerica 1031 Exchanges Services Inc. probably will become creditors of the bankrupt company, although the judge did not rule definitively yesterday.

Attorneys for three customers argued yesterday in U.S. Bankruptcy Court in Richmond that their clients had temporarily parked money with the exchange firm and the money was essentially held in trust and should be separate from the estate.

Judge Kevin R. Huennekens said that what troubles him is a reference in the exchange agreements that gave the exchange company the sole use, possession and control of the money.

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

An exchange company holds proceeds from the sale of investment properties as a way for investors to defer capital gains taxes. Investors have 180 days to buy similar properties.

Records show that the exchange firm owes $419.2 million to about 450 customers. Five test cases were set up to streamline claims of fraud and breach of contract.

Huennekens said he would not rule yesterday. However, he said he expected that his decision would be consistent with what he has decided already.

Late Wednesday, he ruled that Nebraska-based Millard Refrigerated Services Inc. did not have a trust or escrow agreement with the exchange firm and the exchange funds were property of the estate.

The Millard case was considered key to the other three test cases before the court, because the $28 million in that account was held separately.

It was not held in commingled accounts, as were the three cases before the judge yesterday. In commingled accounts, money from any number of exchange customers is mixed with company money.

"I would hope that he would consider our arguments that the money was held in an escrow arrangement," said attorney Kevin J. Funk with Cantor Arkema. Funk represents Frontier Pepper's Ferry, a developer in Miami with $800,000 at stake.

He argued that the only purpose for the transaction was to do a 1041 exchange according to Internal Revenue Service regulations. Huennekens said that when he looks at the agreement he doesn't see any reference to a trust or beneficiary use.

Contact Carol Hazard at (804) 775-8023 or .