LandAmerica settlement hard swallow for former customers

Talk about being between a rock and a hard place.

LandAmerica’s former 1031 exchange customers can either battle themselves for the shrinking scraps of the bankrupt company or collect some money now and hope two other lawsuits recover the rest of their money.

And that second part could take years.

Around 350 customers who used the Richmond-based company have until Nov. 10 to vote on a plan that divides the bankrupt company’s current assets and lays out how future proceeds will be divided.

And while some victims abhor the settlement and feel robbed, legal fees will keep eating into that dwindling sum – by the millions – if the plan is not approved.

Typically 1031 exchanges allowed a customer who sold a property to set aside the funds and put them into a new property within a few months of closing. That allowed them to save on federal taxes. LandAmerica had a subsidiary which was an approved 1031 Exchange. But the company invested around $200 million in auction-rate securities and when those investments froze, the company couldn’t return money to customers.

Customers who set money with LandAmerica but did not specify exactly how it be held will get $0.25 for every dollar they transferred to LandAmerica.

Customers who put funds in segregated accounts will get will get $0.70 on each dollar they set aside, and customers who specified their funds be put in escrow will get $0.97 on each dollar they put with LandAmerica.

“This was negotiated by various parties in mediation,” said Ron Page, an attorney with Cantor Arkema who represents a handful of former customers. “What underlies the different payments is the stronger argument that the funds were never co-mingled, and the court took a very stringent view of tracing.”

The LandAmerica 1031 Exchange (called LES in the bankruptcy case) will have $109 million after administrative expenses are paid.

Tom Ebel,  a lawyer with Sands Anderson Marks & Miller who represents several exchangers, said that it’s no longer useful to litigate against other exchangers or against the company.

“We need to turn the remaining resources to collect from the parties who created the problem,” Ebel said.

If more money is recovered through the existing suits, then the commingled exchangers will get a bigger chunk of those funds to compensate their smaller settlement now, Ebel said.  It’s still possible that they will eventually get all their money back, although lawyers watching the case can’t say how likely that may be.

Former customers will get checks by the end of the year, Page said, or a little more than a year after the company declared bankruptcy. That is, if they vote for the plan. (BizSense will have a story on the first day of that hearing in mid-November.)

Each victim is dealing with it differently, say attorneys representing the exchangers.

But it has been a crushing blow for Rosanna Passantino. The 51-year-old from New Jersey set aside $350,000 from the sale of one house to buy a new day care in a neighborhood with lots of young families, she said.

Her lawyer handled the whole transaction and did not put the money into a segregated account. That means she would collect an initial payment of $87,500.

Passantino is collecting public assistance and having stress attacks.

“I cannot begin to explain what kind of situation I’m in,” said Passantino.

“I am just trying to survive and stay afloat, but instead of coming to our rescue, it seems to be worsening our situation. I don’t believe what I hear; it’s a nightmare we all want to wake up from.”

“I don’t have money to spend on gasoline. Everything I worked for over 30 years is gone. I can’t reinstate the business, and I can’t relocate it.”

The trust for the bankrupt company will try to get more funds from the directors and officers of the company and from SunTrust, which sold LandAmerica the now-problematic investments.

The company invested around $200 million in auction-rate securities, which in this case were bundles of student loans. The interest rate was slightly higher on the ARS than other investments and they were thought to be as safe as money markets.

Only they weren’t.

Then the LES Trust will continue to litigate against SunTrust, for recommending and selling the Auction-Rate securities, which are still very hard to value. The law firm Jenner & Block will litigate that case.

When the auction-rate security market froze early last year, several local wealth management firms, such as Davenport & Co., had client money tied up in the investments. They lent their clients the money. Had SunTrust done the same thing, LandAmerica would likely still be in business. The company even sent Treasury Secretary Hank Paulson a letter before filing for bankruptcy protection, pleading for a loan.

And this week the bankruptcy court said it is trying to sell some of the securities for 48.2 percent of their original value. The first sale is for $9.6 million. Most experts say that the college loans themselves are doing fine (although that may be in jeopardy now that the economy is slowing) but that there aren’t buyers for the so-called tranches of notes.

Those funds will get divided by the exchangers, as will funds from the lawsuits against SunTrust and the directors, including CEO Ted Chandler.

Aaron Kremer is the BizSense editor. Please send news tips to Editor@richmondbizsense.com.