412 B.R. 800 (Bkrtcy.E.D.Va. 2009), 08-35994-KRH, In re LandAmerica Financial Group, Inc.

Docket Nº:Bankruptcy 08-35994-KRH.
Citation:412 B.R. 800
Opinion Judge:KEVIN R. HUENNEKENS, Bankruptcy Judge.
Party Name:In re LANDAMERICA FINANCIAL GROUP, INC., et al., Debtors. v. Landamerica 1031 Exchange Services, Inc., Defendant. Millard Refrigerated Services, Inc., Plaintiff, Adversary No. 08-03147-KRH.
Attorney:Craig A. Wolfe, Kelley Drye & Warren LLP, New York, NY, David J. Ervin, Kelley, Drye & Warren, LLP, Washington, DC, for Plaintiff. Dion W. Hayes, John H. Maddock III, Richard Francis Blair, McGuireWoods LLP, Richmond, VA, for Defendant.
Case Date:April 15, 2009
Court:United States Bankruptcy Courts, Fourth Circuit

Page 800

412 B.R. 800 (Bkrtcy.E.D.Va. 2009)

In re LANDAMERICA FINANCIAL GROUP, INC., et al., Debtors.

Millard Refrigerated Services, Inc., Plaintiff,

v.

Landamerica 1031 Exchange Services, Inc., Defendant.

Bankruptcy No. 08-35994-KRH.

Adversary No. 08-03147-KRH.

United States Bankruptcy Court, E.D. Virginia, Richmond Division.

April 15, 2009

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[Copyrighted Material Omitted]

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Craig A. Wolfe, Kelley Drye & Warren LLP, New York, NY, David J. Ervin, Kelley, Drye & Warren, LLP, Washington, DC, for Plaintiff.

Dion W. Hayes, John H. Maddock III, Richard Francis Blair, McGuireWoods LLP, Richmond, VA, for Defendant.

MEMORANDUM OPINION

KEVIN R. HUENNEKENS, Bankruptcy Judge.

Before the Court are the cross-motions for partial summary judgment of Plaintiff Millard Refrigerated Services, Inc. (" Millard" ), and of Interveners The Official Committee of Unsecured Creditors of LandAmerica Financial Group, Inc. (the " LFG Committee" ) and The Official Committee of Unsecured Creditors of LandAmerica 1031 Exchange Services, Inc. (the " LES Committee; " together with the LFG Committee, the " Committees" ). The question presented by the cross motions is whether certain exchange funds deposited into a bank account of Defendant LandAmerica 1031 Exchange Services, Inc. (" LES" or the " Debtor" ) for the purpose of facilitating three like-kind exchange transactions constitute property of the bankruptcy estate of LES.1 For the reasons set forth below, the Court answers this question in the affirmative.

This case is one of over 85 adversary proceedings that have been brought, so far, by former customers of LES in connection with its Chapter 11 bankruptcy case. Each of these former customers asserts that money deposited into the bank accounts of LES to facilitate like-kind exchanges was held in trust for its benefit and should be returned to it. As of the Petition Date, the Debtor had approximately 450 uncompleted exchange transactions. Each of these uncompleted exchange transactions was governed by a separate exchange agreement executed by LES and its former customer.

The Debtor identified two primary types of exchange agreements that LES utilized in the course of its operations: (a) agreements that included language contemplating that the applicable exchange funds would be placed into an account or sub-account associated with the relevant customer's name (the " Segregated Account Agreements" ); and (b) agreements that did not include this " segregation" language

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(the "Commingled Account Agreements"). Approximately 50 of the uncompleted exchange transactions involved Segregated Account Agreements while the remaining approximately 400 of the uncompleted exchange transactions involved Commingled Account Agreements.

The Court entered a protocol order on January 16, 2009, wherein the Court stayed the litigation in all but five of the over 85 adversary proceedings (the " Protocol Order" ). Each of the five select cases, which were allowed to proceed on an expedited basis, presented legal and factual issues that were common to certain of the other adversary proceedings. Three of the select cases were representative of customers who had Commingled Account Agreements: those with type A agreements, those with type B agreements, and customers with hybrid agreements under which both cash and non-cash proceeds were transferred to LES.2 Two of the select cases were representative of customers who had Segregated Account Agreements: customers with escrow account agreements and customers with segregated exchange agreements. The Millard adversary proceeding currently before the Court is the adversary proceeding selected to be the representative case for customers with segregated exchange agreements.

By Order entered February 10, 2009, the Court divided the litigation involving the five select cases into phases and limited the scope of the first phase to tracing of exchange funds, contractual interpretation of the exchange agreements, the existence of an express trust and the existence of a resulting trust. In the Millard adversary proceeding, the case presently before the Court, hearing was conducted on the cross motions for partial summary judgment on April 7, 2009, at which counsel for Millard, counsel for the LFG Committee, counsel for the LES Committee, and counsel for the Debtor all presented argument. Pursuant to the terms of the Court's Protocol Order, all of the parties to the stayed adversary proceedings were permitted to file amicus briefs advocating their respective positions in this case.

This Memorandum Opinion sets forth the Court's findings of fact and conclusions of law pursuant to Rule 7052 of the Federal Rules of Bankruptcy Procedure.3 The Court has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157(a) and 1334 and the General Order of Reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. This is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (M) and (O), in which final orders or judgments may be entered by a

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bankruptcy judge. Venue is appropriate in this Court pursuant to 28 U.S.C. § 1409(a).

Issues Presented

Millard contends that it is entitled to partial summary judgment with respect to Count I (Declaratory Relief) and Count II (Injunctive Relief) of its Complaint against LES because its exchange funds were held in three segregated sub-accounts of LES established and maintained for the benefit of Millard. Millard contends that the exchange funds held in the segregated accounts are held in trust and, therefore, are not property of the Debtor pursuant to 11 U.S.C. § 541(d). Thus, it argues that the exchange funds should be turned over to Millard in their entirety, outside of the bankruptcy pro rata distribution system.

The Committees and the Debtor counter that the exchange funds were held by LES pursuant to the terms of exchange agreements executed by Millard and LES. The three exchange agreements at issue here, they argue, set forth the complete agreement and understanding of the parties plainly and unambiguously. The Committees point out that under the terms and provisions of the exchange agreements, Millard disclaimed all " right, title and interest" in and to the exchange funds and provided LES with exclusive rights of " dominion, control and use" with respect to the exchange funds. From this they argue that it was the clear intention of the parties not to create a trust arrangement. The Committees and the Debtor assert that Millard vested LES with full authority over the exchange funds and, in so doing, Millard transferred clearly more than bare legal title to the exchange funds. They conclude that the contractual relationship established between Millard and LES was not one of trustee and beneficiary; rather, they assert that the relationship was, and continues to be, one of debtor and creditor. Thus, they argue that while the Debtor may be contractually obligated to perform the exchange transactions on Millard's behalf, its failure to do so would render it liable only for the breach of its contract and under no other theory of liability. They argue that Millard should receive the same pro rata treatment as all of the other former exchange customers of LES.4

Undisputed Facts

The material facts are not in dispute. Millard is a Georgia corporation engaged in the refrigerated warehouse and distribution business. It maintains 35 locations throughout the country. LES is a wholly owned subsidiary of LandAmerica Financial Group, Inc. (" LFG" ). On November 24, 2008, LES ceased doing business as a qualified intermediary for like-kind exchanges. On November 26, 2008 (the " Petition Date" ), LES filed, along with LFG, a petition for relief under Chapter 11 of the United States Bankruptcy Code in this Court. The LES Committee and the LFG Committee both are statutory committees appointed in the respective bankruptcy cases of LES and LFG. The Committees

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were each granted leave to intervene in this action.5

Prior to the Petition Date, LES was a qualified intermediary for like-kind exchanges consummated by taxpayers pursuant to § 1031 of the Internal Revenue Code, 26 U.S.C. § 1031 (" 1031 Exchange" ). A 1031 Exchange allows a taxpayer to defer the payment of tax that otherwise would be due upon the realization of a gain on the disposition of business or investment property. Id. In the typical transaction, an exchanger such as Millard assigns its rights as seller under a purchase agreement for the disposition of business or investment property to a qualified intermediary such as LES. The purchaser of the relinquished property transfers the net sales proceeds directly to the qualified intermediary.

Under § 1031, the exchanger must identify like-kind replacement property within 45 days. The exchanger has 180 days to close on the replacement property. Id. The qualified intermediary purchases the replacement property and then transfers the replacement property to the exchanger. In the event that the replacement property is not identified or the closing is not completed within the specified time periods, then the qualified intermediary pays an amount equal to the net sales proceeds it realized from the sale of the relinquished property to the exchanger. This series of transactions is governed by a written exchange agreement executed by the exchanger and the qualified intermediary.6

Beginning in 1992, LES maintained a general, multipurpose checking account at SunTrust Bank, Inc. (" SunTrust" ). This checking account was titled in LES' own name, bearing an account number with the last four digits " 3318." LES used this account as its general operating account. The SunTrust account received cash (i) in the form of certain customers' exchange funds, (ii) in the form of service fees charged to customers, (iii) in the form of interest,...

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