As the filing of Chapter 11 cases continues to be rare, state court alternatives for liquidation of assets continue to grow in popularity. State court alternatives typically provide a more expeditious and less expensive forum for secured lenders to direct the liquidation of their collateral—for example, state court receivership sales avoid the United States Trustee

               On November 26, 2008, LandAmerica Financial Group, Inc. (“LandAmerica”) and its affiliate, LandAmerica 1031 Exchange Services, Inc. (“LES”) filed for Chapter 11 protection from creditors.  LES abruptly ceased its 1031 exchange intermediary business two days prior to the bankruptcy filing and LandAmerica sold its Lawyers Title and Commonwealth Title underwriting subsidiaries to Fidelity Title and Chicago Title shortly after the petition date. 

Monday, April 6, was the deadline for creditors in each case to file their bankruptcy claims.  A review of the filed claims in each case tells quite a tale of woe, with the 1031 exchange customers of LES hit exponentially hard. 

As a 1031 intermediary, LES held proceeds from the sale of its customer’s “relinquished property” for 180 days or until “replacement property” was purchased if earlier.  For an extended period, LES had been investing its customer’s sales proceeds in auction rate securities (“ARS”), the market for which froze in February 2008.  By November, LandAmerica could no longer fund the cash needs for replacement property purchases and this led to the Chapter 11 filing.

Customers who were in the middle of their 180-day replacement period awoke to find that their cash proceeds were not only unavailable (and likely tied up long term in illiquid investments) but that they would not be able to obtain their planned tax deferral under Section 1031 of the Revenue Code.  If that was not injury enough, many of these customers already had replacement properties firmly under contract and suffered the insult of potential breach lawsuits by the sellers of those properties. 

One LES creditor’s claim is reflective of the many similarly situated customers.  Deblu Realty Corporation had almost $1.5 million deposited with LES from the sale of relinquished property, but its proof of claim was not only for that amount but for $373,000 in lost deferral of taxes (at capital gains rates), $3.7 million in potential lost profits on the thwarted acquisition of replacement property as well as yet to be determined amounts for alternate financing costs and legal fees. 

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