LandAmerica 1031 Exchange Services discontinued its 1031 exchange operations today and permanently closed it doors due to liquidity problems in its 1031 exchange investment portfolio.  LandAmerica 1031 Exchange Services invested in Auction Rate Securities that became completely illiquidy earlier this year.  LandAmerica was unable to meet the liquidity needs of its 1031 exchange clients and was forced to permanently close its doors.  Press release.  It is anticipated that LandAmerica and LandAmerica 1031 Exchange Services will file for bankruptcy protection this week. 

Bill, seems to me that LandAm (Parent-Holding Co) was to be aquired by Fidelity (11-7-08), but then the deal was dropped by Fidelity (11-21-08). Word has it when Fidelity did their due diligence, they saw these ARS investments the LandAm1031 "subsidiary" was investing their clients' Relinquished Funds into. These ARS fund's principal is safe, but their liquidity is the issue. The actual written "Exchange Agreements" LandAm1031 uses states the clients' funds: "...are deposited in an account maintained at SunTrust bank, Richmond, VA, which bears interest...." A cursory view of SunBank shows they are FDIC insured and have $171 billion in assets, which is reassuring. An average investor would think this is prudent and the funds will not be there long in a Section 1031 deal.

HOWEVER, it turns out some if not all of these "Exchange Funds" were placed and managed by the Brokerage Services of SunBank, called: "Sun Trust Robinson Humphrey," and "Smith Barney-Citi-Group." 1031 exchange clients had no control over this decision, have no ownership rights to these, nor can they even access these accounts to terminate the 1031! The question is: how did all this happen? Who made the executive decision to invest exchage funds in illiquid ARS? 1031 exchanges have "tight" identity deadlines, like 45 day ID periods. Yet, a Bankruptcy Court can "recover" or suck back a "done" 1031 deal closed 90 days BEFORE a bankrupty filing! Some clients will actually wind up "paying twice" for the same dirt + capital gains on cash they never got!

NOW, Fidelity and LandAm announce the newest "deal." It sure looks like Fidelity is going to just buy and grab the "cream" of LandAm's operations as $300 million cash cows, and then LandAm files Bankruptcy proceedings on their 1031 subsidiary, saying: "...you 1031 clients of ours are '...going under the wheels of the Bankruptcy bus" because "we" made bad decisions in $290 million ARSs. Wow! a $300 million "wash." A "Back-Door" merger without the "toxic" ARS funds. LandAm1031 clients get hosed! LandAm parent gets big cash infusion and unloads the "toxic" ARSs. This reeks of connivance or fraud! How can LandAm (Holding Co) pull this stunt getting the $300 million if the subsidiaries like LandAm1031 are controlled/owned by LandAm the "Parent?" Should not this $300 million "flow" down to the LandAm 1031 clients?  If you were "burned" in this, what would you do, Bill?

Hi Woody,

You have made many good points, and provided a good summary of the events so far.  There are certainly many legal issues involved here, and many more that have probably not even come out yet. And, as you pointed out, LandAmerica and LandAmerica 1031 Exchange Services both filed for bankruptcy protect since my initial post.  So, hopefully this discussion board thread will help the victims of the LandAmerica 1031 Exchange bankruptcy filing communicate with each other and share ideas and thoughts on how best to respond.

The investment language in their 1031 exchange agreement will certainly be key in what they were permitted to do versus what they actually did to determine if there was any breach of contract and/or fiduciary duty.  Aside from the legal or fiduciary issues is the issue of the prudent investor rule or requirement.  Is the Auction Rate Security a prudent investment for an extremely short-term type transaction like a 1031 exchange?  We were approached by countless securities brokers when the Auction Rate Securities first came out.  We chose not to implement them because we did not want to stray from our ultra conservative approach of using only commercial bank deposit accounts with commericial banks that have agreed to allow us to review their financials at least quarterly to ensure that we can adequately protect our clients' 1031 exchange funds.  But, we were also concerned that the ARS was a brand new and untested security and we are always skeptical of "Wallstreet's" new gimics.  Wallstreet gets way too creative for investors' own good.

The disclosure of SunTrust Bank I think is a problem as well.  Using just the name SunTrust Bank is deceptive and misleading as to what the 1031 exchange funds are really invested in.  It should have been fully disclosed as to which entity the funds are really held with.  It would also be interesting to know if SunTrust Bank was the brokerage firm that talked them into these securities in the first place.  I would also like to know the answer to your question as to which executive actually made this horrible decision.  It certainly increased their yield (and therefore the risk to the investor). 

I understand that clients were provided with a guarantee by LandAmerica that the 1031 exchange funds would be available.  I would like to see a copy of this guarantee.  The majority of guarantees that I have reviewed are really worthless and more or less just a marketing ploy.  They are written with sufficient "loop holes" so that the parent company can get out of the guarantee under many circumstances.  However, if the guarantee holds up then the parent company has some liability, which I think they realize and explains why their parent company filed bankruptcy. 

However, the bankruptcy court has to approve the sale of the operating title insurance companies to Fidelity before the transaction can be completed.  There may be some value here, but we will have to wait and see. I hope the bankruptcy trustee will be able to apply the sale proceeds toward the client's claims in order to recover all of the 1031 exchange funds. 

The other issue is whether the Auction Rate Securities market will regain its liquidity so that the ARS's full market value can be realized.  I have my doubts about this.  There will be too many investors that will not be willing to take that risk on for fear that the market will freeze and become illiquid again.  They will most likely be sold at a steep discount at some point in the future.  Time will tell.

It is too soon to know exactly what path would be best, but I would immediately retain legal counsel to review your specific circumstance and determine what can be done.  You may want to see if you know others who are also involved in this failure and pool your resources.  What ever action is taken will most likely and probably should be certified as a class action on behalf of all LandAmerica 1031 Exchange investors. 

There may be ways to complete your 1031 exchange if you have other resources (cash) that you can contribute into a new 1031 exchange.  We have already opened a few for some of the LandAmerica 1031 Exchange clients.  Unfortunately, most of those harmed will not have sufficient resources in order to add cash and complete their 1031 exchange.

I would be happy to brainstorm more if you like.  Feel free to call me.

Thank you, Bill! You are "right on the money" as usual. 

I will give you a call to discuss these cases.

Hi Bill,

Its been long while between chats.  We're not doing any 1031's right now, but should be early next year and will be in touch.  I was distressed about the LandAm 1031 fiasco and stumbled upon this page while researching.  I'm not sure what this security is that seems to be the problem, but my ?? is are they allowed to put client money into something like this?  Will anyone go to jail for this? 

Hi Greg,

We look forward to working with you early next year. 

The Auction Rate Security is a security that was touted as being equivalent to cash and as safe as cash.  We looked at them a number of years ago whent they first came out, but chose to stay clear of them.  See my post above for more information on those.  There is plenty of information on the Internet about Auction Rate Securities.  Just Google the name and you'll find all sorts of articles on it.  The "auctions" essentially failed in February 2008, which resulted in these securities becoming frozen or illiquid and therefore worthless.  Some or all of the value may come back when liquidity returns to the auction market, but only time will tell.

I'm not sure that anyone will go to prison on this one.  There was no theft of funds, just very poor judgment or lack of judgment in my opinion.  Common sense tells you when a an investment is paying significantly more interest than other money market mutual funds or commercial bank deposit accounts, but is touted as safe as cash, etc., that it is not as safe as cash.  The increased interest is compensation for increased risk.  However, it does appear there was certainly breach of contract and probably fiduciary duty based on the contact language that has been referenced in a number of blog posts.  Again, time will tell. 

Talk to you next year.

sorry to hear everything...really horrible...i'm not in landam 1031...using another facilitator...but wondering if any other companies have invested in the same securiteis...how do we know...whta do we do...what if teh one i'm using ahs invested too.....thxs.

Yes, some other 1031 exchange Qualified Intermediaries have invested in Auction Rate Securities.  You need to ask your prospective 1031 exchange Qualified Intermediary or the Qualified Intermediary you are already with specifically whether they have invested in Auction Rate Securities or currently hold any Auction Rate Securities.  I would ask them to list exactly what type of securities they do in fact own and compare it to your written 1031 Exchange Agreement to see if the securities are permitted.  You can always change 1031 exchange Qualified Intermediaries if your relinquished property (sale) has not closed yet, but if your Qualified Intermediary already has your 1031 exchange funds then it gets a little more challenging.  Changing Qualified Intermediaries mid-stream has never been recommended, and most will not do it, but if the concern is about the financial viability of the Qualified Intermediary then it might make sense to do so. 

I have not heard of anyone filing any suit yet or meeting to discuss options, etc. You might want to contact/email those that have posted on this discussion board/forum or those that have posted on the forums located on The 1031 Exchange Institute to see if you can get together and discuss your options.

The 1031 exchange clients will most likely be the largest creditor class of the LandAmerica 1031 Exchange Services bankruptcy filing, so the 1031 exchange clients should be represented by counsel in order to protect their interest throughout the Landam 1031 exchange bankruptcy procedures.

Can you explain in more detail how a person can finish their 1031 if they have sufficient cash. About 10 days ago I contacted LandAmerica as to when they would wire my money ( I had decided not to reinvest my money in property but rather to cash out ) on Dec 3, 08. A couple days later Federal Express delivered an envelope from LandAmerica stating they were out of business. I need help, if you can offer assistance, please E-mail me and I will give you my phone number. I thank you in advance. JIm Williamson E-mail  jimew@embarqmail.com

Hi Jim,

Yes, I will email you my contact information and we can discuss.  There are a number of possible ways that a taxpayer can complete the 1031 exchange with another Qualified Intermediary provided they have sufficient funds to contribute into the 1031 exchange.  There is no full proof way, however, given that LandAmerica 1031 Exchange Services has filed for bankruptcy protection.  They are more than likely not in a possible to execute any kind of assignment of their 1031 exchange agreement.  I would be happy to discuss these options with you, just give me a call.  You can reach me at (619) 615-4210 (office).

A civil complaint ("adversary proceeding") has been filed in the Richmond, VA Bankruptcy Court by a current Sec. 1031 Exchange Client of LandAm 1031 Exchange Services. It is "Lubexpress Land /Operating Co., Inc." The suit alleges, inter alia, on 10-3-2008, LandAm 1031 Exchange agreed to be the QI for plaintiff and received $ 9,000,000.00, "...to be held in trust in Citibank Insured MMA, maintained at Citibank, NYC...." Thus, it looks like this client was only ONE OF 50 OUT OF OVER 450 LandAm 1031 clients who even KNEW about a separate, segregated QI account.  This is gleaned from the filed affidavit of "Wm. G Evans, CFO of LandAm 1031,' which was filed in Bankruptcy Court recently. This lawsuit asks for a declaratory judgment, injunction from commingling these funds, return of funds to complete the 1031, or a "turn over" of client funds, or damages of $9 million, conversion, intentional interference with contract, and other relief. 

The actual Bankruptcy Court initial filing only requires them to list their "Top 20 Creditors" which they show as "contracts." These clients range from a well-known REIT pegged at $ 77 million for one exchange, down to the "20th" listed creditor at $2.6 million. There are a few famous people on this list. They must file a supplemental list of creditors later.

Interesting to note already is a filed "Objection" by the LandAm 1031 electric power company, "Dominion," whose attorneys say they had "no notice" of Land Am 1031's representations in writing to the Bankruptcy Court that electric utility should continue because they can pay their bills, rather than posting a bond or C/D, or surety. I think the electric bill is $96,000.00 for 2 months. The power company lawyers blast LandAm 1031 for not following Bankruptcy Codes and Rules, as I read it. Not a good sign.

I agree, Bill, existing clients of LandAm 1031 need to hire competent counsel. A good idea would be to "pool" their resources, as a really good Richmond, VA "Creditor's Rights" Counsel bills at $300/400 per hour. This will be a "big scrap." I am seeking a really good lawyer.

My understanding, Bill, is Exeter can maybe help these creditor/claimants out with what amounts to a "substitute" 1031 exchange, no? 

Ask me why--I have money tied up with LandAm 1031 also. I also have access to the Bankruptcy Court's docket there. The two Land Am cases have been "consolidated" to one case, entitled: "Land America Financial Group, Inc. et. al. -Jointly Administered Chapter 11 Case(s) Number 08-35994, Judge Kevin R. Huennekens, presiding. 

Hope this helps.

Hello Bill,

If you are one of these people that was with Land America 1031 exchange, what can you do and where do you go to get help? Can you can give me any direction. What is the smart thing to do.

Thank you for your time,

Retired,

Fred 

Woody or Bill,

We have a segregated account.  Do you know if the ruling in the lawsuit filed by LubeExpress would apply to all customers with segregated accounts?  Also, if you are one of the 50 who have segregated accounts, please contact me so we can join efforts in filing a lawsuit.  My email is mkallner@reddevelopment.com

Mike 

Hi Mike,

The action was filed by LubeExpress, so I doubt it would apply to any other clients or provide relief to any other client.  I would retain a creditor's rights attorney to ensure that your interests (and 1031 exchange funds) are protected and preserved as best as possible.