The United States Bankruptcy Court ruled on April 15, 2009 that in the case of LandAmerica Exchange Services the accounts of the exchangers will be treated as assets of the bankruptcy estate. LES apparently used a master account-subaccount technique, rather than completely independent, segregated accounts, such as used by All States 1031. Although this ruling was a preliminary ruling, the Court touched upon a major issue that faces exchangers when selecting a Qualified Intermediary.
I taught a seminar a few years ago where one of the attendees told me he had exchanged about $2 billion of properties over the course of the previous two years. He used LandAmerica for his qualified intermediary. I explained to him about commingled accounts and why he should use All State 1031. He said he would continue to use LandAmerica for his exchanges because that handled his title work and he trusted them. I sensed the “bigger is better” attitude. I forget his name, so I’m not sure if he is on the list of LandAmerica’s creditors.
During my tenure as President of the Federation of Exchange Accommodators, I constantly pressed for rules and regulations requiring the use of segregated accounts and a complete ban on commingled accounts. I was slammed by the representatives of the big qualified intermediaries for failing to understand their business model and was told that it was not possible to use segregated accounts in big QIs. I wanted the FEA’s lobbyists to urge the IRS to adopt these positions, as well as to require all exchange funds to be held in completely liquid accounts. Again, I was put in my place by the big QIs.
Those chickens are coming home to roost. Not only did LandAmerica Exchange commingle clients’ funds, but they “invested” the exchange funds in illiquid investments, for the sole purpose of creating greater profits for LES, and doing so by putting their clients’ exchange funds at risk.
LandAmerica was not the only QI commingling clients’ funds and making illiquid investments. Most of the big QIs do so today. Most of the clients have no idea how much of a risk is being taken with their money. I’ve spoken with several of the exchangers who lost their life savings to LandAmerica. I hope to never have these conversations again, but I have a feeling that if QIs continue to commingle funds and make illiquid risky investments, more exchangers will lose their money.
Tags: 1031, All States, bankruptcy, commingle exchange security, FEA, Federation of Exchange Accommodators, funds, investment, LandAmerica, QI, qualified intermediary
Your statements are incorrect, misleading and self-serving. In short, it is clear that you have extrapolated for the purpose of disparaging larger QIs.
You imply that the court’s ruling was premised upon a distinction between master/segregated sub accounts and individual segregated accounts. This is incorrect. The only issue before the court was “whether the parties intended to create a trust despite the absence of express language to do so” (Memorandum Opinion, Case No. 08-35994-KRH, p.16). Regarding the issue of “segregated” accounts, the court stated that “the requirement of Segregated Accounts may provide evidence on the traceability of the funds, but that alone does not create a trust. (p.19).
Lori, thanks for taking the time to read our blog and providing your valuable comments. The LandAmerica case is quite enlightening on several levels. I respectfully disagree with your characterization of my statements, except the part about them being self-serving. As an independently owned QI, we take every opportunity to distinguish All States 1031 from our competition.
I tend to focus on the areas that our customers are concerned with, such as safety and security of their exchange funds. What we have chosen to do is to hold the exchange proceeds in the safest, most liquid, investment possible. To this end, we establish a new separate segregated money market FDIC-insured account for every exchangor. We use only those accounts that can be completely liquidated at a moment’s notice. I have been told by those who operate several of the larger QIs that our model is not possible. Yet, we do it every day. So, I sleep well at night knowing that I have done everything possible to provide the highest level of protection for my customers. The same standard that I wish the IRS would impose on all QIs.