Germinaro v. Fidelity National Title Insurance Co., 061418 FED3, 17-1640

Docket Nº:17-1640
Opinion Judge:JORDAN, Circuit Judge.
Attorney:Michael P. Denver [ARGUED] Hollister & Brace Counsel for Appellants Erica L. Calderas [ARGUED] Dennis R. Rose Hahn Loeser & Parks Counsel for Appellees
Judge Panel:Before: JORDAN, ROTH, Circuit Judges and MARIANI , District Judge.
Case Date:June 14, 2018
Court:United States Courts of Appeals, Court of Appeals for the Third Circuit




No. 17-1640

United States Court of Appeals, Third Circuit

June 14, 2018


ARGUED April 30, 2018

On Appeal from the United States District Court for the Western District of Pennsylvania (D.C. No. 2-14-cv-01202) District Judge: Hon. Nora B. Fischer

Michael P. Denver [ARGUED] Hollister & Brace Counsel for Appellants

Erica L. Calderas [ARGUED] Dennis R. Rose Hahn Loeser & Parks Counsel for Appellees

Before: JORDAN, ROTH, Circuit Judges and MARIANI [*] , District Judge.


JORDAN, Circuit Judge.

Joseph and Gabriella Germinaro appeal from the grant of summary judgment against them on their claim that Fidelity National Title Insurance Company ("FNTIC") and Commonwealth Land Title Insurance Company ("CLTIC") violated the Racketeer Influenced and Corrupt Organizations Act ("RICO"). We will affirm.



LandAmerica 1031 Exchange Services, Inc. ("LES") assisted customers who desired to gain tax advantages by exchanging one piece of real property for another pursuant to 26 U.S.C. § 1031. By acting as a qualified intermediary under the Internal Revenue Code, LES facilitated such exchanges.2 LES was a subsidiary of LandAmerica Financial Group, Inc. ("LFG") and had two relevant sister companies, Lawyers Title Insurance Corporation ("LTIC") and CLTIC, both of which were also LFG subsidiaries.

LES entered into thousands of land exchange agreements with customers. Although the parties dispute whether LES had a single "form agreement, " most of the agreements contained common language. (J.A. at 9.) The terms of those agreements stated that LES would acquire the relinquished property from the customer and convey back to that customer the replacement property. LES "agree[d] to hold and apply" the proceeds from the sale of the relinquished property "in accordance with the terms and conditions of [the] [e]xchange [a]greement." (J.A. at 920.) That included "mak[ing] payments from the [e]xchange [f]unds to acquire the [r]eplacement [p]roperty" on behalf of the customer. (J.A. at 920.) The agreements expressly stated that "LES shall have sole and exclusive possession, dominion, control and use of all [e]xchange [f]unds, including interest, if any, earned on the [e]xchange [f]unds[.]" (J.A. at 921.) Furthermore, the customer was given "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, call for, receive, pledge, borrow or otherwise obtain the benefits of any of [the] [e]xchange [f]unds" before the exchange was completed. (J.A. at 921.)

LES agreed to "deposit the [e]xchange [f]unds in an account maintained at SunTrust Bank" and guaranteed customers they would "receive interest" on those funds at a specified rate. (J.A. at 921.) That interest would be applied to the cost of the replacement property or paid to the customer after the exchange was completed. "LES unconditionally guarantee[d] the return and availability of the [e]xchange [f]unds and the guaranteed interest" stated in the agreement. (J.A. at 922.) Customers "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[.]" (J.A. at 921.)

LES's exchange agreements further set out LES's contractual duties in Paragraph 6. That part of the agreement said "LES has entered into [the] [e]xchange [a]greement with the intention of being a 'qualified intermediary' within the meaning of Section 1.1031(k)-1(g)(4)(iii) [of Title 26 of the Code of Federal Regulations] … and shall use its best efforts to retain that status until all of the [e]xchange [f]unds have been disbursed in accordance with" the agreement. (J.A. at 924.) LES expressly stated that it was "entering into [t]he exchange agreement solely for the purpose of facilitating [the customer's] exchange of the relinquished property for the replacement property." (J.A. at 924 (emphasis omitted).)

Joseph and Gabriella Germinaro entered into an exchange agreement with LES dated October 22, 2008. The Germinaros wanted to exchange an investment property located in Pittsburgh worth about $831, 187 for another property located in the area. They chose LES because they had conducted a successful § 1031 exchange with LES's predecessor company in 2002-03. Their exchange agreement was nearly identical to the form exchange agreements described above, except that their agreement stated: [The Germinaros] will receive interest on the [e]xchange [f]unds at an annualized rate equal to 100% of the intended Federal Funds Rate as announced by the Federal Open Market Committee less seventy five basis points (-75 bps), compounded daily, adjusting as the Federal Funds Rate does, one day following the same, during the Exchange Period (the "Growth Factor") from the first business day following LES'[s] receipt of funds via wire transfer to the LES account in Richmond, Virginia that it maintains at SunTrust Bank for the purpose of collecting taxpayers' exchange funds … to the day of withdrawal. LES and [the Germinaros] agree that the Growth Factor, if not applied to the acquisition of the Replacement Property identified by [the Germinaros] … shall be paid to [the Germinaros] after the Termination Date. LES unconditionally guarantees the return and availability of the [e]xchange [f]unds and the guaranteed interest rate stated above.

(J.A. at 1170.)

The general practice at LES was to hold all exchange funds in a single, commingled account at SunTrust Bank (the "3318 Account"). Customers could specifically request that LES place their funds in a segregated account, but that was not the default process. The exchange funds in the 3318 Account were the main source for financing LES's daily operations, such as paying operating expenses, paying dividends to LFG, obtaining replacement properties, or returning funds to customers whose § 1031 exchanges could not be completed. Additionally, the exchange funds were invested at LFG's discretion. The Germinaros thought LES was going to place their exchange funds into a segregated account with its own account number, based on earlier conversations that Mr. Germinaro had with an LTIC attorney and an LES agent. But LES appears to have had a different understanding because a segregated account was not mentioned in the exchange agreement and the funds were placed in the 3318 Account.

Unfortunately, the Germinaros entered the exchange agreement with LES at an inopportune time. A liquidity problem that had been plaguing LES for several months, as a result of having a large portion of its investment portfolio it could not sell during the 2008 financial crisis, finally drove operations to a halt just one week after LES closed on the sale of the Germinaros' relinquished property.

The liquidity problem had its roots in a specific investment strategy. Beginning in 2002, LFG, which performed the treasury functions for LES, routinely invested the exchange funds from the 3318 Account in Auction Rate Securities ("ARSs"). ARSs are "debt instrument[s] with a long-term maturity for which the interest rate is regularly set through an auction process that is typically held every 7, 14, 28[, ] or 35 days." (J.A. at 13 n.6.) Although all securities involve some level of risk that prevent a return from being a "guarantee, " (J.A. at 5252-53), ARSs were generally thought of as "a high grade, relatively low risk investment, " (J.A. at 40). The ARSs that LES purchased consisted "entirely of debt instruments backed by student loans, substantially all of which [were] guaranteed by the United States government." (J.A. at 370.)

But in February 2008, the ARS market suddenly froze and LES's investments became illiquid. LES concluded that it had "liquidity exposure to [those] securities to the extent that it would be required to utilize [those] securities to satisfy the purchase of properties." (J.A. at 371.) Thus, it began using new, incoming exchange funds to satisfy older, existing exchange obligations.

Overtime, that approach proved untenable. LES ultimately ceased operations, and both LFG and LES "filed voluntary petitions for [Chapter 11] bankruptcy on November 26, 2008." (J.A. at 5276.) One week after the Germinaros' property was sold, they received notice that LES was "accepting no new customers and … terminating its operations." (J.A. at 5291.)

When LFG and LES filed for bankruptcy, FNTIC agreed to acquire all of LTIC's stock and Chicago Title Insurance Company agreed to acquire all of CLTIC's stock. LTIC, CLTIC, and the Germinaros all participated in the bankruptcy proceedings. The bankruptcy court issued two pertinent decisions as part of adversary proceedings initiated by LES exchange customers. In its first ruling, the court held that exchange funds deposited into segregated accounts were property of the bankruptcy estate rather than LES's customers. Millard Refrigerated Servs., Inc. v. LandAmerica 1031 Exch. Servs., Inc. (In re LandAmerica Fin. Grp., Inc.), 412 B.R. 800, 816-17 (Bankr. E.D. Va. 2009). In its second ruling, the court held the same for exchange funds deposited into the commingled 3318 Account. Frontier Pepper's Ferry, LLC v. LandAmerica 1031 Exch. Servs., Inc. (In re LandAmerica Fin. Grp., Inc.), Bankr. No. 08-35994, Adversary Nos. 08-03148, 08-03171, 09-03023, 2009 WL 1269578, at *1, *4, *15 (Bankr. E.D. Va. May 7, 2009). According to the court, those rulings were derived from the "plain, unambiguous language of the [e]xchange [a]greements, " and thus "[t]he objective language of the [e]xchange [a]greements precludes consideration...

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