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LandAmerica 1031: The Missing Link Lost but then Found!

Posted By Cliff Tuttle | January 6, 2009

Posted by Cliff Tuttle

The Post on the LandAmerica 1031 debacle, posted on November 27, 2008, continues to draw comments, the latest today.

The commenter brought to my attention that the link at the end of the post, to a LandAmerica 1031 website, was broken. Thus, the juicy irony at the other side of the link would be lost to readers who are just finding my post. Fortunately, I was able to capture this little masterpiece for posterity.

To summarize, Fidelity National, now the largest title insurance conglomerate in America, was planning in November to acquire rival LandAmerica, but declined because LandAmerica’s 1031 subsidiary was defaulting on its obligations to customers by failing to bring escrowed funds in its care to the closing table when required by agreement.

The 1031 reference is to the Section of the Internal Revenue Code which recognizes a “like kind exchange” of real estate as a non-taxable event. Section 1031 sanctions a double transaction whereby a “qualified intermediary” takes the proceeds from a sale, holds it for the seller and then delivers it to closing of a qualified transaction where the funds are used to purchase the second property. Even though there are in reality two separate transactions, IRC Sec. 1031 permits them to be treated as though the properties were exchanged.

LandAmerica 1031 was investing some of its escrow funds in securities that must be liquidated by sale at auction. When the stock market crashed . . . you guessed it! No auction bidders, no funds. So LandAmerica 1031 started defaulting and then closed its doors.

Armed with this information, the reader was asked to click a link that no longer works. Here is what used to be on the other end of the link:

“Recent defalcations and insolvencies by closely held § 1031 qualified intermediaries highlight the risks of choosing a qualified intermediary (QI) that lacks sufficient liquidity, capital reserves, and governance, to make it an appropriate financial counterparty. The risks are so great that the IRS (in Fact Sheet 2008-18) cautioned taxpayers to beware of QI bankruptcy when selecting a QI, and the possibility of a being unable to timely acquire replacement property. Now a state appellate decision out of Minnesota highlights that the risks of choosing
the wrong QI do not end when a taxpayer receives its replacement property.

In Rechtzigel Trust v. Fidelity (2008 Minn.App. LEXIS 220), the underlying facts involve a taxpayer that received her replacement property roughly a month and a half prior to the QI’s bankruptcy, and yet she was compelled to pay $102,412.20 in connection with the QI’s
bankruptcy! In the Rechtzigel case, the taxpayer’s QI received in excess of $600,000 in connection with taxpayer’s disposition of relinquished property, and later the QI disbursed in excess of $600,000 in connection with taxpayer’s acquisition of replacement property.

According to the court, unbeknownst to the taxpayer, the QI engaged in financially risky practices. Whether cause and/or effect, the QI was using funds from the taxpayer’s exchange to fund obligations of other taxpayers’ exchanges and vice versa. In the court’s words, the
QI’s financing arrangement collapsed and the QI filed for federal bankruptcy protection.

The bankruptcy trustee thereafter commenced a “preference action” against the taxpayer, seeking to recover from the taxpayer in excess of $600,000 that the QI used to purchase the replacement property. The bankruptcy trustee’s theory was that the payment by the QI for the replacement property was a transfer for
the benefit of a creditor within 90 days of filing bankruptcy and that it could therefore be avoided (recovered) under federal bankruptcy law by the bankruptcy court. The taxpayer was eventually forced to settle with the bankruptcy trustee for $102,412.20 and had no success in recovering the monies from the defendant in the case.

The case is a strong reminder for taxpayers and their advisors to diligently investigate and wisely choose their intermediary, or the exchange fee they end up paying may be a lot more than they bargained for.”

In the end, LandAmerica filed bankruptcy and immediately (same day) made a new agreement to sell its crown jewels: Lawyer’s Title, Commonwealth Title and another title subsidiary Fidelity. LandAmerica 1031 was thrown into a separate bankruptcy, where it will apparently be liquidated. The Fidelity-LandAmerica transaction was closed recently and everybody lived happily ever after except the customers of LandAmerica 1031.

CLT

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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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