Company offers to buy claims from LandAmerica unit’s creditors

A New Jersey company is offering to buy claims against a bankrupt subsidiary of LandAmerica Financial Group Inc. for pennies on the dollar.

Hain Capital Group has been calling and mailing letters to creditors of LandAmerica 1031 Exchange Services Inc., which filed for bankruptcy protection in late November along with its parent company.

The investment company offered in late February to buy claims for 20 cents per each dollar owed.

But after a court hearing this month, the bid fell to 15 cents, said Kellie Lineberry, an exchange customer from Goochland County.

"The offer is not enough," said Rosanna Passantino, a New Jersey resident who last fall placed more than $350,000 from the sale of a property with the exchange company to take advantage of a tax deferment.

"It's another rip-off," she said of the Hain offer. "It's another company trying to take advantage of us."

The practice of buying or trading claims, known as vulture investing, is legal but unregulated. Claims traders bank on the notion they will buy claims for less than they eventually get settled for.

Proponents say it offers creditors a way to get money back fast, takes the uncertainty out of waiting for a claim and removes the burden of dealing with bankruptcy court rules, attorneys and paperwork.

A creditor selling a claim is taking a gamble because it is hard to say how a creditor will fare in bankruptcy court, said Nathan Oman, an assistant law professor at the College of William and Mary.

Robert M. Lawless, a bankruptcy law professor at the University of Illinois, said: "There is a concern and a history of unsophisticated creditors of these bankrupt companies selling claims for less than they possibly should."

In its letter to creditors, Hain Capital assured fair treatment and said it was a member of Trade Claims Buyers Association.

Neither Lawless nor Oman knew of such a group. A Web site could not be found and the group does not appear to be registered with Better Business Bureau or Guidestar, which tracks nonprofits.

An official from Hain did not return two phone calls or an e-mail.

To judge a claim, creditors should try to get an estimate of what the return will be once the bankruptcy debt is processed. Where they stand in terms of priority is a factor, too. Creditors should also deduct for attorney fees, Lawless said.

The popularity of buying and selling claims has increased over the past decade, said Barry E. Silbert, CEO of SecondMarket Inc. in New York. SecondMarket allows creditors to auction off claims to the highest bidder, adding transparency to the market, he said.

In 2008, SecondMarket tracked 309 large bankruptcy cases and recorded 2,937 traded claims with a face value of more than $1 billion, said Christopher Moon, director of SecondMarket's bankruptcy claims market.

"Very often, there are people who will swoop in and buy claims in bankruptcy," said Richmond attorney Kevin J. Funk of Cantor Arkema P.C.

The LandAmerica exchange company's bankruptcy case could set precedent, and Funk said it is too soon to tell how creditors will fare. "There are questions that still haven't been answered," he said.

Just what is part of the LandAmerica 1031 Exchange Services estate is undecided and has to do with the nature of the company.

The 1031 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.

The process is required by Internal Revenue Service regulations, though there is no industry oversight.

Bankruptcy records show that the company owes $419.2 million. Exchange customers claim their money was held in trust and not part of the estate. LandAmerica disagrees.

At least one customer did take Hain's offer out of fear there would be no money left in the estate. Others are waiting.

"We just decided it might be better to stick it out," Lineberry said. "We've got to take our chances."

In other LandAmerica news:

• Los Angeles-area firm Partner Engineering and Science Inc. bought another subsidiary, LandAmerica Assessment Corp., for $2 million yesterday. The division handled construction-project monitoring and environmental assessment.

• Another subsidiary, LandAmerica Title Co., filed for Chapter 11 protection Friday and listed assets of up to $10 million and liabilities of up to $50 million, court records show. That unit primarily served customers in Southern California and closed Jan. 31.

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