Matson v. Alpert (In re Landamerica Fin. Grp., Inc.), Bankruptcy No. 08–35994.

• Decision Date: 01 March 2012
• Docket Number: Adversary No. 11–03168.,Bankruptcy No. 08–35994.
• Citation: 470 B.R. 759
• Court: U.S. Bankruptcy Court — Eastern District of Virginia
• Parties: In re LANDAMERICA FINANCIAL GROUP, INC., et al., Debtors. Bruce H. Matson, Trustee of the LFG Liquidation Trust, Plaintiff, v. Janet A. Alpert, et al., Defendants.

470 B.R. 759

In re LANDAMERICA FINANCIAL GROUP, INC., et al., Debtors.
Bruce H. Matson, Trustee of the LFG Liquidation Trust, Plaintiff,
v.
Janet A. Alpert, et al., Defendants.

Bankruptcy No. 08–35994.
Adversary No. 11–03168.

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

March 1, 2012.

[470 B.R. 771]

Jeffrey Sabin, Mark Elliott, Bingham McCutchen, New York, NY, Robert W. Best, LeClair Ryan, A Professional Corporation, Richmond, VA, for Plaintiff.

Saul Pilchen, Skadden, Arps, Slate, Meagher & Flom LLP, Washington, DC, Scott Fredericksen, David Hickerson, Foley & Lardner, Washington, DC, Charles McAleer, Miller & Chevalier, Washington, DC, Gary Bryant, Wilcox and Savage, Norfolk, VA, John Eklund, Calfee, Halter and Griswold, Cleveland, OH, for Defendants.

MEMORANDUM OPINION
KEVIN R. HUENNEKENS, Bankruptcy Judge.

Before the Court are several separate motions ¹ filed by the Defendants to dismiss

[470 B.R. 772]

this adversary proceeding pursuant to Federal Rule of Civil Procedure 12(b)(6) (“ Rule 12(b)(6)”), as made applicable to this proceeding by Federal Rule of Bankruptcy Procedure 7012(b). A hearing on the motions was held on November 17, 2011. At the conclusion of the hearing, counsel for the parties requested leave to file supplemental legal memoranda, the last of which was filed with the Court on December 15, 2011. The Court thereupon took the motions under advisement. For the reasons set forth below, the Court will deny the motions in part and grant the motions in part.

The Court has subject-matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. §§ 157 and 1334 and the general order of reference from the United States District Court for the Eastern District of Virginia dated August 15, 1984. The Court has exclusive jurisdiction over this matter under Article XV of the Joint Chapter 11 Plan of LandAmerica Financial Group and its Affiliated Debtors (the “Joint Chapter 11 Plan”).

This is a core proceeding under 28 U.S.C. § 157(b)(2)(B), (C), (H), and (O), in which final orders or judgments may be entered by a bankruptcy court. Venue is appropriate in this Court pursuant to 28 U.S.C. §§ 1408 and 1409.

In reviewing a motion to dismiss under Rule 12(b)(6), the Court must take as true the factual allegations in the Trustee's complaint. Bass v. E. I. DuPont de Nemours & Co., 324 F.3d 761, 764 (4th Cir.2003).

Statement of Facts The Parties

LandAmerica Financial Group (“LFG”) is a corporation organized under the laws of the Commonwealth of Virginia with offices throughout the United States and in Mexico, Canada, the Caribbean, Latin America, Europe, and Asia. LFG's primary business involved the facilitation of residential and commercial real estate sales. LFG was the third-largest title insurance underwriter in the United States. LFG issued title insurance policies primarily through two principal title underwriting subsidiaries, Commonwealth Land Title Insurance Company and Lawyers Title Insurance Corporation. LFG also owned two other title insurance underwriters, Commonwealth Land Title Insurance Company of New Jersey and United Capital Title Insurance Company.

LandAmerica 1031 Exchange Services, Inc. (“LES”) was a wholly-owned subsidiary of LFG organized under the laws of the State of Maryland. LES's principal business was serving as a qualified intermediary for like-kind property exchanges consummated by taxpayers pursuant to § 1031 of the Internal Revenue Code. LES accounted for less than one percent of the revenue of LFG and its subsidiaries.

Plaintiff Bruce H. Matson (the “LFG Trustee” or “Plaintiff”) was appointed as a fiduciary responsible for implementing the provisions of the Joint Chapter 11 Plan confirmed by this Court by order entered February 16, 2010. The Plan established

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a liquidating trust (the “LFG Trust”), and appointed the LFG Trustee as a fiduciary responsible for administering the LFG Trust.

Defendant Janet Alpert (“Alpert”) served as a member of the LFG Board of Directors. Alpert also served as a member of LFG's Investment Funds Committee, a committee of the LFG Board of Directors (the “Investment Funds Committee”).

Defendant Gail K. Caruso (“Caruso”) served as a member of the LFG Board of Directors and also served as a member of the Investment Funds Committee and the LFG Audit Committee, a committee of the LFG Board of Directors (the “Audit Committee”). On or about May 13, 2008, Caruso became Chairman of the Investment Funds Committee.

Defendant Theodore L. Chandler, Jr. (“Chandler”) served as Chairman of the LFG Board of Directors, and as President and Chief Executive Officer of LFG. Chandler also served as a member of LFG's Risk Committee, a committee of LFG management (the “Risk Committee”).

Defendant Michael Dinkins (“Dinkins”) served as a member of the LFG Board of Directors and as a member of the Investment Funds Committee.

Defendant Charles H. Foster, Jr. (“Foster”) served as a member of the LFG Board of Directors and as a member of the Investment Funds Committee. Foster had served formerly as Chairman of the LFG Board of Directors and Chief Executive Officer of LFG.

Defendant John P. McCann (“McCann”) served as a member of the LFG Board of Directors and as a member of the Audit Committee. McCann had served formerly as Chairman of the Investment Funds Committee until May 13, 2008.

Defendant Diane M. Neal (“Neal”) served as a member of the LFG Board of Directors and as a member of the Audit Committee.

Defendant Robert F. Norfleet, Jr. (“Norfleet”) served as a member of the LFG Board of Directors and as a member of the Audit Committee.

Defendant Robert T. Skunda (“Skunda”) served as a member of the LFG Board of Directors and as a member of the Audit Committee.

Defendant Julius P. Smith, Jr. (“Smith”) served as a member of the LFG Board of Directors and as a member of the Investment Funds Committee.

Defendant Thomas G. Snead, Jr. (“Snead”) served as a member of the LFG Board of Directors and as Chairman of the Audit Committee.

Defendant Eguene P. Trani (“Trani”) served as Lead Director of the LFG Board of Directors. The duties of the LFG Lead Director included, inter alia, ensuring that the Board operated independently of management and that the Directors received on a timely basis the reports, background materials and resources necessary or desirable to assist them in carrying out their responsibilities. The Lead Director was also responsible for making recommendations about the retention of consultants reporting to the entire Board.

Defendant Marshall B. Wishnack (“Wishnack”) was a member of the LFG Board of Directors.

Defendant G. William Evans (“Evans”) served as Executive Vice President and Chief Financial Officer of LFG and as a member of the Risk Committee. Defendant Evans also served as a member of the LES Board of Directors.

Defendant Michelle H. Gluck (“Gluck”) served as Executive Vice President and

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Chief Legal Officer of LFG. Gluck had served as the Meeting Chair of the Risk Committee until June 2008, at which time she began serving as Chairperson of the Risk Committee.

Defendant Pamela K. Saylors (“Saylors”) served as a member of the LES Board of Directors. Beginning on April 3, 2008, Saylors also served as (i) President of the Commercial Services Division of LFG, (ii) President of LES, and (iii) a member of the Risk Committee.

Defendant Jeffrey C. Selby (“Selby”) served until April 3, 2008, as (i) President of LES, (ii) a member of the LES Board of Directors, and (iii) as President of the Commercial Services Division of LFG.

Defendant Christine R. Vlahcevic (“Vlahcevic”) served as Senior Vice President and Corporate Controller of LFG and as a member of the Risk Committee.

Defendant Stephen Connor (“Connor”) served as Senior Vice President of LFG. Connor also served as Senior Vice President of LES and as a member of the LES Board of Directors. Connor was responsible for managing the day-to-day operations of LES.

Defendant Brent Allen (“Allen”) served as a Vice President and National Underwriting Counsel of LES.

Defendant Ronald B. Ramos (“Ramos”) served as Senior Vice President and Treasurer of LFG and as Vice President and Treasurer of LES.

The Business Operation of LES

LES operated as a “qualified intermediary” under § 1031 of the Internal Revenue Code (“Tax Code”). Section 1031 of the Tax Code permits a taxpayer to defer all or a portion of the gains from the disposition of business or investment property under certain circumstances. To qualify for this tax treatment, the taxpayer must structure the transaction as an exchange of one property for another of “like kind.” LES entered into agreements with its customers (the “Exchangers”) to facilitate these 1031 “like kind” exchanges (“Exchange Agreements”).

Under the Exchange Agreements, the net proceeds from the sale of the taxpayer's property (the “Exchange Funds”) would be transferred to LES. LES would then maintain exclusive possession and control over the Exchange Funds and any interest earned on the Exchange Funds, until the taxpayer identified a “like kind” replacement property (the “Replacement Property”). See Millard Refrigerated Services, Inc. v. LandAmerica 1031 Exchange Services, Inc., 412 B.R. 800 (Bankr.E.D.Va.2009). LES was required within 180 days to either use the Exchange Funds to purchase the identified Replacement Property or disburse the Exchange Funds to the taxpayer (the “Exchange Obligation”). LES's general business practice was to commingle the Exchange Funds it received from the sale of one Exchanger's property with the Exchange Funds received in connection with the 1031 transactions of other customers. LES maintained a general multipurpose checking account at SunTrust Bank for use as its general operating account (the “Operating Account”). The commingled Exchange Funds were deposited into this Operating Account.

To maximize its revenues, LES invested the commingled Exchange Funds held in its Operating Account in a variety of short term...