As a title agent, I am required to keep client funds in a special Interest On Trust Account ("IOTA").  Funds in the IOTA account are kept segregated from our operating account.  The logic is simple - its not my money; it belongs to the clients.  Commingling client funds with company funds is expressly prohibited.  As a fiduciary, I owe the clients a duty to protect their money. 

Assume for the sake of argument that I get a hot stock tip, or Archie, at the local racetrack tells me that "Easy Money" in the fifth race is a "sure thing."  What do you assume would happen if I "borrowed" money from my IOTA account to make the investment, or place the para-mutual wager, and I lose it? (Would it even make a difference if I made money?)  I am guessing that I would not "pass go" and I would not collect $200 as I proceed straight to jail.

So, explain to me why a national underwriter, like LandAmerica, was allowed to put about $400 million of client money, held for 1031 exchange transactions, into commingled accounts that invested in auction-rate securities.  It sounds like LandAmerica was gambling with client funds.  When the securities became illiquid, the company collapsed and filed bankruptcy.  LandAmerica's agents could certainly never get away with commingling escrow funds - so why would LandAmerica do such a thing?

Customers use 1031 Exchange services to avoid capital gains taxes when they sell property.  Section 1031 of the Tax Code provides that:

No gain or loss shall be recognized on the exchange of property held for productive use in a trade or business or for investment if such property is exchanged for property of like kind which is to be held either for productive use in a trade or business or for investment.

There are some exceptions. But, basically, Section 1031 allows a taxpayer to sell property held for productive use in a business or for investment purposes and reinvest the proceeds in similar property and carry forward their basis in the new property, thereby delaying the capital gains tax.  To qualify, the proceeds must be held by a qualified intermediary, such as LandAmerica's 1031 Exchange Services, and the new property must be identified withing 45 days after the taxpayer sells the property relinquished in the exchange, and the new property must be purchased within 180 days.

According to a Wall Street Journal Online article, LandAmerica's Collapse Leaves Investors Looking for Cash, the company was investing its clients' money in auction-rate securities and when the securities became "illiquid" it notified its customers in a letter.

In the [bankruptcy] filing, the company said it had put much of the money it was holding for real-estate investors into commingled accounts that invested in auction-rate securities that have become illiquid. LandAmerica had guaranteed the money. The auction-rate securities market seized earlier this year. LandAmerica informed customers in a letter last week that it had "taken every reasonable step possible to avoid" the illiquidity problem.

Now, hundreds of LandAmerica's clients will not be able to complete their 1031 exchanges before the 180-day deadline and they will face severe tax consequences.  With LandAmerica in bankruptcy, it seems unlikely they will recover their losses from the company.  Worse yet, it appears that the company continued to accept 1031 exchange business months after the liquidity problems began.

For some good commentary on the debacle, see Thomas Smicklas's article, GMAC Restructuring Leaves SmartNotes Holders in the Lurch.

And speaking of shame, LandAmerica, the erstwhile gold-plated Title and Land Exchange company has completely screwed thousands of 1031 tax deferred property escrow account holders waiting to exchange property through their "top rated land exchange program" by selling the profitable portions of LandAmerica to Fidelity and throwing their 1031 tax deferred exchange investors who assumed escrow funds were held in trust for immediate release (so said the company) under the bus by declaring that portion of the company insolvent and throwing it into a Chapter 11 reorganization.

Clients were informed in a one page statement that the President of the company was "sorry" this happened, and referred the victims of this incredibly crafty screwing to a phone number, which repeated the letter in a Stalin-esque manner. If Congress ever wanted to investigate fraud and mismanagement of funds placed in trust, this would be it. Hundreds of millions of dollars placed in LandAmerica's 1031 tax deferred swindle are likely lost. To add insult to injury, any monies returned to the customers will receive a full tax treatment, blowing the 1031 intent.

According to the WSJ article, LandAmerica didn't disclose its poor investment strategies to its customers.  A few companies however, had insisted that its money be segregated in regular bank accounts.  Only about 50 of the 450 investors involved had segregated accounts.

This seems like quite a double-standard to me.  LandAmerica would never permit its title insurance agents to handle escrow funds with such careless disregard.  But, LandAmerica "guaranteed" the funds it played with, so I guess that's okay.  Remind me, what is the company's guarantee worth in bankruptcy?  It seems like LandAmerica adopted a "do as I say, not as I do" policy regarding client funds.

Someone should be going to jail... but who? 

Robert A. Franco
SOURCE OF TITLE