Test cases ahead for LandAmerica

A U.S. Bankruptcy Court judge agreed yesterday to hear five test cases of people who can't get their investments from LandAmerica Financial Group Inc.

Hundreds of investors, many of them individuals whose livelihoods rely on the funds, still don't know if or when they will get their money back from the Henrico County firm that declared bankruptcy in late November. More than $300million could be at stake.

The test cases will set the precedent for dealing with all funds in LandAmerica's 1031 Exchange, which offers a tax shelter used by people who buy investment properties.

"Once we resolve the test cases, the other cases will resolve in a similar pattern," Judge Kevin Huennekens said. "The one thing that jumps out at me is the protocol is realistic. It's a very aggressive plan as far as getting the case resolved."

In all, 450 customers had $383.6 million invested in accounts at LandAmerica 1031 Exchange Services Inc. when LandAmerica filed for bankruptcy protection.

Fifty investors had money in segregated or separate accounts. The other 400 had commingled accounts, where their money was mixed in with money from other investors and possibly with company money.

The different accounts complicate the matter, because some funds might be considered held in trust and therefore more readily available, while other funds might be considered part of the bankruptcy estate.

If the money is part of the estate, those investors would compete with other creditors for whatever cash is available.

It is possible that all the money could be considered held in trust, the judge said. The test cases are supposed to determine just how that issue will play out.

The judge agreed to hear cases from two segregated account holders, two commingled account holders and one whose money was in a promissory note from the property buyer.

Funds in exchange services are supposed to be liquid, so investors can get their money at any time.However, LandAmerica invested some exchange money in auction-rate securities. That market froze up in February, making the securities impossible to sell.

"It's a shameful situation," said Stephen H. Noble, an investor from Clearwater, Fla., who flew in for the hearing.

Noble had $1million from the sale of a hospital and nursing home business. His money was in one of the 50 segregated accounts.

"I am not wiped out, but it certainly hurts," he said.

Noble dealt with the LandAmerica exchange a year ago, parking money there from another sale to avoid paying capital gains until he could find a similar property to buy.

He had no problem with that transaction. But he said the company must have known it was running out of money in October, when he invested the $1million there.

"I really do think this is a Ponzi scheme," where new money was used to pay off old money that was frozen in auction-rate securities, Noble said.

The clock is ticking for investors, who have 180 days to reinvest their money to get the tax break. Not only do they not have access to their money -- nor do they know if they will get any or all of their money back -- but they might have to pay taxes on it.

"We're obviously going to miss our deadline of Feb. 9," said Kellie Lineberry, a Goochland County resident.

She and her husband, Tom, sold rental property in September so they could buy a house on North Carolina's Outer Banks. "It looks like we won't be able to go through with it."

Jay S. Geller, an attorney from Portland, Maine, who represents about six clients whose money was held in commingled accounts, said he applauds the court ruling.

"I understand the court's decision to bring order to chaos and to address these thing quickly to minimize damages," he said. But he said he is concerned that the test case approach may not provide for adequate representation for people whose money is in commingled accounts.

Commingled account money is generally in smaller amounts than those held in segregated or separate accounts.

What's more, the debtors' and creditors' committee costs will be paid from the bankruptcy estate, while account holders must pay their own court costs, Geller said.

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