LandAmerica unit offers a test case

-- Customers of LandAmerica 1031 Exchange Services Inc. want their money back.

More than 50 complaints have been filed in U.S. Bankruptcy Court in Richmond since the company filed for Chapter 11 protection in late November.

What happens in bankruptcy court here likely will have legal implications for more than those who filed the complaints. A ruling could set precedent and affect future bankruptcy court decisions.

"I think [the LandAmerica] case could conceivably make law or provide interpretation of the law, and how money is treated nationwide," said Richmond attorney Kevin J. Funk, with the firm Cantor Arkema P.C., which is representing 35 clients against LandAmerica's exchange company.

"Oftentimes you see bankruptcy and other types of litigation prompting new types of regulation."

The exchange company is a subsidiary of Henrico County-based LandAmerica Financial Group Inc., which also filed for Chapter 11 protection.

A hearing is slated for tomorrow in bankruptcy court on a number of issues, including one relating to exchange customers.

At the time of the filing, LandAmerica's exchange company held money for 450 customers amounting to $383.6 million.

Those customers placed the money from the sale of investment property with LandAmerica's exchange company for a short period of time while looking to reinvest the funds into a similar property. If they satisfied certain Internal Revenue Service requirements, the sellers deferred capital gains taxes.

Those customers, now alongside other exchange company creditors, are vying for whatever cash is available in the estate. The exchange company listed assets and liabilities of between $101 million to $500 million in its bankruptcy filing.

Cantor Arkema clients, owed about $35 million, represent the majority of exchange customer complaints filed.

. . .

At issue is how proceeds from an exchange company are treated in bankruptcy court, Funk said.

While exchange customers are represented by a committee of unsecured creditors, they claim to be different. They did not provide a service or do work for the company. Rather, they put money with the firm in adherence with IRS code, exchange customers say.

The complaints seek a ruling by Bankruptcy Judge Kevin R. Huennekens that the money placed with the LandAmerica exchange company is not part of the estate, according to court filings.

If the investors' funds are not part of the estate, customers - not other creditors - should have access to it, they claim.

"We feel that we entered into a fiduciary relationship with LandAmerica and not a creditor-type relationship," said Goochland County resident Kellie Lineberry.

She and her husband, Tom, sold a rental property in September in anticipation of buying a property on North Carolina's Outer Banks. They identified a replacement property within the required 45 days, which was before the bankruptcy filing. They are required to close on the new property by February.

The couple have contacted an attorney but have not proceeded with a suit.

Other customers have hired lawyers.

. . .

Yet these complaints face a challenge, said Nathan B. Oman, an assistant professor at the College of William and Mary's Marshall-Wythe School of Law.

Complaints filed in bankruptcy court are subject to court regulations and decisions made by the judge. They usually are simpler and happen faster than in other courts, though the definition of what is considered property of an estate in bankruptcy court is fairly broad, he said.

Whatever happens, the ruling will carry weight, lawyers say.

"The decisions that come out of these bankruptcy court panels can be enormously influential simply because they may be the only ruling on an issue," Oman said. "If you have an opinion out of one court, it is very likely judges will follow it."

. . .

Tomorrow, a number of motions will be heard, possibly including one relating to how the claims of exchange customers should be handled.

Exchange funds went into basically four types of accounts - in separate accounts, separate counts with escrow, comingled accounts that earned interest for the customer, or comingled accounts that earned interest for the company.

The judge said during a hearing Dec. 16 that he wanted to have one trial for each of the types of exchange customers. The outcome of each trial likely would determine how claims in each category are handled, said Charles R. Gibbs, counsel for the unsecured creditors' committee who works at the law firm of Akin Gump Strauss Hauer & Feld in Dallas.

"What happens depends on how the judge rules on these test cases," Gibbs said.

. . .

The complaints against LandAmerica 1031 argue the company breached contract and stole personal property. The Cantor Arkema claims also include fraud charges, which means punitive damages can be attached, Funk said.

Millmar Holdings, based in Manakin-Sabot, is one Cantor Arkema client. The holding company for a custom-home builder placed nearly $4.9 million with the exchange company and is one of the top 20 unsecured creditors.

The company wants $6.52 million for money owed plus interest and fees. It also is seeking at least $11.52 million in punitive damages for fraud.

The more money sought, the better the return when it comes to divvying up money in a bankruptcy case, Oman said.

Secured creditors, such as banks, will get the first shot at the money. Unsecured creditors, including the vendors and exchange customers, come next, but within that category there is a ranking.
Contact Emily C. Dooley at (804) 649-6016 or .