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Don’t Gamble with your exchange funds!

June 13, 2009

Folks that were using LandAM as their exchangor when LandAm filed for bankruptcy, LOST their exchange funds!

This keeps happening! A few years ago some of the exchange companies went under and the people with their funds in an exchange lost those funds.

Don’t let this happen to you:

You may have heard that LandAmerica Financial Group, Inc. and its subsidiary LandAmerica 1031 Exchange Services (LES) filed for bankruptcy protection in November, 2008. As a result, investors who had exchange accounts with LES were unable to access their funds.

Recently, the bankruptcy court issued two rulings which found that the exchange funds held by LES in either a commingled account or a separate sub-account did not belong to the individual Exchangors, but must instead be included in the bankruptcy estate. As a result, these exchange deposits became part of the general pool of money that is available to pay all the creditors of LES.

So what went wrong for the LES clients? How is First American Exchange Company different?

Most importantly, there was a provision in the LES exchange agreement where the clients explicitly gave up all right, title and interest in the exchange funds to LES. Such language is not contained in any of the exchange documents used by First American Exchange Company.

LES held some funds in a master account with sub-accounts used to identify each client’s funds. The majority of the funds were held, commingled, in the LES operating account. At First American Exchange we never commingle client funds, nor do we use a master/sub-account structure. We set up an individual account for each client at an FDIC insured bank, identified with our client’s name and tax identification number. Our clients receive all the interest earned on the account as reported on the 1099 issued directly by the bank. Funds are released only after receiving a written direction from our client.

LES invested a large portion of exchange funds in auction rate securities, which had become illiquid. First American does not invest exchange funds in securities. Client funds are only placed in fully liquid demand deposit accounts in highly rated banks. Deposits are monitored on a daily basis by our corporate treasury department.

Finally, the court held that state law determines whether exchange funds are a part of the bankruptcy estate, and in this case the court looked to Virginia law. First American’s exchange agreement is governed by California law, which provides that exchange funds held by a Qualified Intermediary are not subject to attachment by the intermediary’s creditors. This law helps protect exchange funds from outside claims.

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