LandAmerica to Seek to Recover Funds from Completed 1031 Exchanges?

Richmond, Virginia.  The Richmond Bankruptcy Court’s summary judgment rulings in the LandAmerica 1031 Exchange Services, Inc. bankruptcy case potentially opens the door for LandAmerica to recover the exchange funds it transferred to complete its customers’ 1031 exchanges during the 90 day preference period.  The preference period is defined as the 90 days prior to a bankruptcy filing.  The applicable preference period in the LandAmerica case would run from Thursday, August 28, 2008 until its bankruptcy filing on Wednesday, November 26, 2008.


If the exchange funds at issue in the LandAmerica case are found to be property of LandAmerica, then LandAmerica’s transfer of these funds to complete its customers’ 1031 exchanges could be preferential transfers under the Bankruptcy Code.  The Bankruptcy Code permits a trustee (or a debtor in possession) to recover from creditors payments made shortly before the bankruptcy filing where the payment gave the creditor more than other, similarly situated, creditors would get through the bankruptcy process.The preference statutes are simply an attempt to achieve equity between creditors. Creditors are almost always better off attempting to get payment of their claims from their debtors and dealing with any efforts to recover the money when, and if, such attempts are made in bankruptcy.


Bankruptcy Code §547 defines a preference as

1.                 Payment on an antecedent (as opposed to current) debt;

2.                 Made while the debtor was insolvent;

3.                 To a non insider creditor, within 90 days of the filing of the bankruptcy;

4.                 That allows the creditor to receive more on its claim than it would have, had the payment not been made and the claim paid through the bankruptcy proceeding.   


Defenses to preference actions

Defenses to the recovery of a preference are found in 11 U.S.C. 547(c).  They include:

1.                 contemporaneous exchanges; 

2.                 payments made in the ordinary course of the business of the debtor and the creditor on ordinary business terms;  and

3.                 security interests that secure debts that bring new value to the debtor.

4.                 amounts of subsequent credit extended and unpaid.


These defenses need to be raised in an answer to a preference complaint. The burden of proof lies with the creditor to establish that despite the elements of a preference; the transfer is protected by one or more of these defenses.