Real Estate: LandAmerica Bankruptcy — No, Not Over Claims or Market Decline; Its All About Like Kind Exchanges under IRS Code Section 1031!

Posted By Cliff Tuttle | November 27, 2008

Posted by Cliff Tuttle

On November 7, Fidelity National Financial, Inc. announced acquisition of its competitor LandAmerica Financial Group. Fidelity is the holding company for two of the largest title insurance companies in the nation and LandAmerica the parent of three others. A merged Fidelity and LandAm would control almost half of the title insurance market in the nation. LandAm was rumored to be having financial troubles, which its CEO ascribed to “the unprecedented credit freeze and depressed real estate market.”

Then, last Friday, FNF announced that it had exercised a “contractual due dilligence termination right.” Translation: They looked at the books and didn’t like the deal.

But it wasn’t until Wednesday, November 26, that the real reason became public information. In a press release clearly written by securities lawyers, LandAm announced the deal with FNF was on again, but with a twist. Fidelity had entered an agreement to purchase LandAm’s title insurance subsidiaries, Lawyers Title, Commonwealth and United Capital. Quoting the press release: “In order to facilitate the closing of the transactions under the Stock Purchase Agreement and protect the Company’s remaining assets following the recent announcement of the termination of its 1031 exchange business, the Company and its subsidiary LandAmerica 1031 Exchange Services, Inc. (“1031 Exchange Company”) have filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the Eastern District of Virginia (“Bankruptcy Court”) in Richmond Virginia. In conjunction with the filings, the Company is seeking a motion for expedited approval of the transactions contemplated by the Stock Purchase Agreement. None of the other many businesses of Land America are seeking bankruptcy protection.”

This cryptic pronouncement appears to have caused a lot of turmoil among customers. One title agent reported receiving numerous calls. He recommended that orders with LandAm be cancelled and placed with First American. By mid-afternoon, LandAmerica was circulating a memorandum to customers reassuring them that their underwriters’ claims reserves are backed by over $1.1 billion in cash and investments. “If we are liable for a claim,” it stated, “we can pay it.”

As far as it went, the customer memorandum was correct. Title insurance and claims were not the problem. The problem was the LandAm subsidary mentioned in the press release. LandAmerica’s 1031 exchange company terminated business on Monday and notified its customers that it would have problems meeting its customers’ withdrawals.

Section 1031 of the Internal Revenue Code permits “like kind exchanges” of real estate to be conducted tax free if the requirements set forth in the regulations were strictly followed. Instead of selling a piece of commercial real estate, realizing a taxable capital gain, followed by another purchase, the IRC permits the “exchange” of one piece of real estate for another through a “qualified intermediary.”

The qualified intermediary (known as a “QI”) collects the money from the sale, keeps it for a while, and brings it to purchase the new property. Like other title companies, LandAm operated a side business handling 1031 exchanges as a QI. Compared to its large and lucrative title insurance business, the 1031 business was lunch money.

If LandAm’s 1031 Company had just deposited the money in a bank account, I wouldn’t be telling the story and you wouldn’t be reading it. Instead, the 1031 customers’ money was invested in securities that had to be sold at auction to be liquidated. And guess what? Because of the current economic situation, there was a serious shortage of bidders. So, LandAm 1031 couldn’t bring funds to the closing table on the second leg of 1031 exchange transactions.

But Chapter 11 offered a way out. The bankruptcy trustee would declare the obligations to the 1031 creditors (both current ones and those transacted in the past 90 days) to be “preferences” under the Bankruptcy Act and “avoid” them. With the 1031 creditors reduced to the level of the other general creditors of the 1031 company, the trustee can pay them off at the same rate on the dollar as he/she pays everybody else. Meanwhile, FNF purchases LandAm’s title insurance subsidiaries and LandAm emerges as a healthy company with other healthy subdiaries. Everyone makes out pretty well, except the poor customers who trusted LandAm 1031.

Now, armed with the foregoing information, read the LandAm bulletin to its customers about the dangers of trusting a QI who might become insolvant in the next 90 days here. I guess, LandAm’s customers can’t say that they were never warned.

CLT

Welcome

CLIFF TUTTLE has been a Pennsylvania lawyer for over 45 years and (inter alia) is a real estate litigator and legal writer. The posts in this blog are intended to provide general information about legal topics of interest to lawyers and consumers with a Pittsburgh and Western Pennsylvania focus. However, this information does not constitute legal advice and there is no lawyer-client relationship created when you read this blog. You are encouraged to leave comments but be aware that posted comments can be read by others. If you wish to contact me in privacy, please use the Contact Form located immediately below this message. I will reply promptly and in strict confidence.

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