Germinaro v. Fid. Nat'l Title Ins. Co.

• Decision Date: 21 February 2017
• Docket Number: Civil Action No. 14-1202
• Parties: JOSEPH J. GERMINARO, an individual, and GABRIELLA P. GERMINARO, an individual, Plaintiffs, v. FIDELITY NATIONAL TITLE INSURANCE COMPANY, and COMMONWEALTH LAND TITLE INSURANCE COMPANY, Defendants.
• Court: U.S. District Court — Western District of Pennsylvania

JOSEPH J. GERMINARO, an individual,and GABRIELLA P. GERMINARO, an individual, Plaintiffs, v. FIDELITY NATIONAL TITLE INSURANCE COMPANY,and COMMONWEALTH LAND TITLE INSURANCE COMPANY, Defendants.

Civil Action No. 14-1202

UNITED STATES DISTRICT COURT FOR THE WESTERN DISTRICT OF PENNSYLVANIA

February 21, 2017

Judge Nora Barry Fischer

MEMORANDUM OPINION

I. INTRODUCTION

In this civil action, Joseph and Gabriella Germinaro ("Plaintiffs") have sued Defendants Fidelity National Title Insurance Company ("FNTIC"), as successor to Lawyers Title Insurance Corporation ("LTIC"),¹ and Commonwealth Land Title Insurance Company ("CLTIC") for alleged violations of the Racketeer Influenced and Corrupt Organizations Act, 18 U.S.C. §1961, et seq. ("RICO"). The suit arises out of Plaintiffs' unsuccessful attempt to effectuate a tax-deferred land exchange ("§1031 exchange") pursuant to Section 1031 of the Internal Revenue Code, 26 U.S.C. §1031.

In November 2008, as part of the §1031 exchange, Plaintiffs entrusted approximately $831,187 to LandAmerica 1031 Exchange Services, Inc. ("LES"), a "qualified intermediary" under the Internal Revenue Code. Approximately one week later, LES -- then a sister-corporation to LTIC and CLTIC -- filed for bankruptcy. As a result, Plaintiffs were unable to complete their §1031 exchange and sustained financial loss.

In this lawsuit, Plaintiffs allege that LTIC, CLTIC, and LES - together with their parent company, LandAmerica Financial Group, Inc. ("LFG") and various corporate officers - operated a Ponzi scheme as part of a RICO "enterprise." Plaintiffs aver that, as part of this scheme, LTIC and CLTIC induced the Plaintiffs to entrust their money to LES while making misrepresentations about and/or fraudulently concealing the fact that: (a) LES was on the brink of insolvency; (b) Plaintiffs' funds were being commingled with those of other LES customers; (c) Plaintiffs' funds were being used to complete the exchanges of LES' pre-existing customers; and (d) Plaintiffs were at substantial risk of losing their funds by placing them with LES. Plaintiffs further maintain that LTIC and CLTIC injected cash into LES for the purpose of allowing LES to make "lulling payments" and thereby perpetuated the Ponzi scheme.

Presently pending before the Court is the Defendants' Motion for Summary Judgment (Doc. No. 124) and the Plaintiffs' Motion for Partial Summary Judgment on the issue of liability (Doc. No. 119). For the reasons that follow, Defendants' motion will be granted and Plaintiffs' motion will be denied.

II. FACTUAL BACKGROUND²

A. IRC 1031'S ALLOWANCE OF DEFERRED CAPITAL GAINS

Section 1031(a) of the Internal Revenue 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 solely for property of like kind which is to be held either for productive use in a trade or business or for investment." 26 U.S.C. §1031(a)(1). Under this provision, the seller of an investment property (i.e., a "relinquished property") may defer his or her capital gains on the taxable proceeds of the sale ("exchange funds") if those funds are used to purchase a like-kind property (a "replacement property"). To qualify for this tax-deferred treatment, the property owner must identify the like-kind replacement property within 45 days of the sale of the relinquished property and must close on the purchase of the replacement property within 180 days from the sale of the relinquished property. Id. at §1031(a)(3).

In order to obtain the tax deferral benefit provided by Section 1031, the property owner must not actually or constructively receive the proceeds of the sale of the relinquished property. See 26 C.F.R. §1.1031(k)-1(f). The Internal Revenue Service has defined four "safe harbors" which will ensure a determination of non-receipt, to wit: a "qualified escrow account," a "qualified trust," a "qualified intermediary," or certain security or guarantee arrangements. See id. §1.1031(k)-1(g). Under the U.S. Treasury's regulations, a "qualified intermediary" ("QI") is defined, in relevant part, as someone who: "[e]nters into a written agreement with the taxpayer(the "exchange agreement") and, as required by the exchange agreement, acquires the relinquished property from the taxpayer, transfers the relinquished property, acquires the replacement property, and transfers the replacement property to the taxpayer." 26 C.F.R. §1.1031(k)-1(g)(4)(iii)(B).

B. THE ALLEGED &QUOTENTERPRISE&QUOT PARTICIPANTS

At times relevant to this lawsuit, LFG was a holding company that, along with certain of its subsidiaries, provided insurance and real estate services nationwide. (P1.)³ LES was a subsidiary of LFG that provided services, including acting as a QI, for customers who desired to effectuate §1031 exchanges. (P2.) LTIC and CLTIC were Nebraska-regulated title insurers and subsidiaries of LFG that provided title insurance and related real estate services in numerous states. (P3, P4.)

During times relevant to this lawsuit, LFG and its various subsidiaries had a number of interlocking officers and directors. Prior to November 26, 2008, when LFG and LES filed for bankruptcy (P1, P2), Theodore Lindy Chandler, Jr. ("Chandler") served as Chief Executive Officer and Chairman of the Board of Directors for LFG, LTIC, and CLTIC. (P6, P8, P9.) G. William Evans ("Evans") served as the Chief Financial Officer for LFG, director for LES, and Senior Executive Vice President for LTIC and CLTIC. (P6-P9.) Michelle Gluck ("Gluck") was the General Counsel of LFG as well as Executive Vice President for LTIC and CLTIC. (P6, P8, P9.) Ronald B. Ramos ("Ramos") was the Senior Vice President and Treasurer for LFG and provided financial oversight for LES. (P7; Ramos Dep. at 14:12-25, Doc. No. 129-13.) PamelaSaylors ("Saylors") was an Executive Vice President for LTIC and CLTIC. (P8, P9.) Peter A. Kolbe ("Kolbe") was the Senior Vice President and Government Affairs Counsel for LFG, LTIC and CLTIC. (P6, P8, P9.) Stephen Connor ("Connor") was the Chief Operations Officer and a director of LES. (P7.)

C. LES'S EXCHANGE AGREEMENTS

Prior to filing for bankruptcy in 2008, LES functioned as a QI that performed §1031 exchanges for customers across the country. (P2.) Defendants LTIC and CLTIC had a physical presence in larger cities across the country and would offer LES's marketing materials to its customers in those locations. (P70.)

In the years preceding its bankruptcy, LES entered into thousands of exchange agreements with its customers (referred to at times as "exchangers"), a sample of which is included within Plaintiffs' appendix of exhibits. (See Pls.' Ex. 58, Doc. Nos. 122-26 and 122-27, referred to hereafter as the "form exchange agreement" or "form agreement.")⁴ Under the terms of the form exchange agreement, LES agreed to acquire the relinquished property from the customer and convey the replacement property to the customer. (Pls.' Ex. 58, Form Exchange Agreement ¶1(a).) LES agreed to "hold" the exchange funds from the customer's sale of the relinquished property and "make payments from the [e]xchange [f]unds to acquire the [r]eplacement [p]roperty" on behalf of the customer. (Form Exchange Agreement ¶2(a) and (b).) In the interim, LES would have "sole and exclusive possession, dominion, control and use of all [e]xchange [f]unds," including any interest earned thereon. (Id.¶2(c).) The customer wouldhave "no right, title, or interest in or to the [e]xchange [f]unds or any earnings thereon" and "no right, power, or option to demand ... or otherwise obtain" same, during the pendency of the exchange period. (Id.)

Upon its receipt of the exchange funds, LES agreed to "deposit" the funds "in an account maintained at SunTrust Bank in Richmond, Virginia." (Form Exchange Agmt. ¶3(a).) LES guaranteed the customer a certain specified rate of interest on the funds deposited which, if not applied toward the purchase of the replacement property, would be paid to the customer at the end of the exchange period. (Id.) Pursuant to Paragraph 3(a) of the form agreement, the customer "acknowledge[d] and agree[d] that the amount of the [e]xchange [f]unds may be in excess of the maximum amount of deposit insurance carried by the depository institution indicated . . . ;" but regardless of this, "LES unconditionally guarantee[d] the return and availability of the [e]xchange [f]unds and the guaranteed interest rate stated" in the exchange agreement. (Id.)

Paragraphs 4(a)-(b) of the exchange agreement set forth the procedures by which LES's customers would identify their replacement properties. (Form Exchange Agmt. ¶4.) Paragraphs 5(a)-(b) set forth the terms under which LES would acquire the replacement property and transfer it to the customer. (Id. ¶5.)

LES's contractual duties were set forth in Paragraph 6 of the form agreement. Subparagraph 6(a) stated that "LES has entered into this [e]xchange [a]greement with the intention of being a 'qualified intermediary' within the meaning of [Treasury Regulation] Section 1.1031(k)-1(g)(4)(iii) . . . and shall use its best efforts to retain that status until all of the [e]xchange [f]unds have been disbursed in accordance with this [e]xchange [a]greement." (Form Exchange Agreement ¶6(a).) Subparagraph 6(b) reiterated that "LES is entering into this[e]xchange [a]greement solely for the purpose of facilitating [the customer's] exchange of the [r]elinquished [p]roperty for the [r]eplacement [p]roperty." (Id. ¶6(b).) It acknowledged that the customer was executing the exchange agreement based on the advice of his or her legal and tax advisers. (Id.) Subparagraph 6(c) limited LES's duties and obligations under the agreement by providing:

LES shall only be obligated to act as an intermediary in accordance with the terms and conditions of this [e]xchange [a]greement and shall not be bound by any other contract or agreement, whether or not LES has knowledge

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