Parent of Commonealth Land Title and Lawyers Title in Bankruptcy

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					Everything Matters: Real Estate Alert

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NOVEMBER 26, 2008

Parent of Commonwealth Land Title and Lawyers Title in Bankruptcy
LandAmerica Financial Group, Inc. (NYSE: LFG) (LandAmerica) and its subsidiary, LandAmerica 1031 Exchange Services, Inc. (LandAmerica 1031 Exchange), have filed a voluntary petition for bankruptcy protection in Richmond, Virginia, under Chapter 11 of the United States Bankruptcy Code. LandAmerica’s two most prominent underwriting subsidiaries are Commonwealth Land Title Insurance Company (Commonwealth) and Lawyers Title Insurance Company (Lawyers Title). These recent events may affect Commonwealth and Lawyers Title policyholders, in addition to stakeholders of escrow and other accounts held by these companies. As discussed in this Alert, it is too soon to tell whether either or both of these underwriters will be able to satisfy claims. Please call any attorney in our real estate or insurance groups for advice on how to protect your interests and, if necessary, file a claim. LandAmerica also announced today the signing of a stock purchase agreement for the sale of Lawyers Title, Commonwealth and another subsidiary of LandAmerica, United Capital Title Insurance Company (United), to Fidelity National Financial, Inc. (NYSE: FNF) (Fidelity), a national title insurance company that includes Chicago Title Insurance Company, Fidelity National Title Insurance Company and Ticor Title Insurance Company. According to Fidelity, Chicago Title will acquire Commonwealth for $158.6 million and Fidelity National Title will acquire Lawyers Title and United for $139.4 million, for a total purchase price of $298 million. As stated in papers filed in connection with the bankruptcy action, 08-35994 KRH (Bankr. E.D. Va.), the principal purpose of the Chapter 11 filing is to effectuate the transaction contemplated in the Fidelity stock purchase agreement. LandAmerica has filed a motion requesting that the Bankruptcy Court approve the sale of the subsidiaries and has requested a hearing on that motion no later than December 11, 2008. The closing of the sale may occur as early as late December, subject to regulatory and Bankruptcy Court approvals. LandAmerica and Fidelity had previously entered into an agreement to merge the companies, but Fidelity terminated the agreement last week after conducting its due diligence.
Global Web Site » US Offices » US Real Estate Practice » DLA Piper’s real estate practice group has handled some of the most complex, high-profile real estate transactions and litigation matters in the nation, striving to help our clients create and implement effective strategies for addressing their real estate-related business needs. Today’s events are still developing; however, the effects are broad among the commercial real estate industry. If you are affected by these events, or think that you may be, please feel free to contact one of the DLA Piper attorneys listed below: Frank DeVito Jay Epstien Fred Klein Barbara Trachtenberg Stephen W. Schwab Carl Poedtke III


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These developments come on the heels of financial turmoil at LandAmerica. On November 24, Fitch Ratings downgraded LandAmerica’s Issuer Default Rating from BBB- to B, and LandAmerica’s insurance subsidiaries’ (including Lawyers Title, Commonwealth and United) Insurer Financial Strength Rating from BBB+ to BB due to LandAmerica’s significant year-to-date losses, decreased shareholder equity, illiquidity in its portfolio and a breach of its loan covenants.1 Also on November 24, LandAmerica 1031 Exchange notified its customers that it was terminating its operations, reportedly due to illiquidity in the investments that it made with exchange funds it was holding for its customers. In addition, the Nebraska Insurance Commissioner, who is the insurance regulator for both Lawyers Title and Commonwealth,2 informed those insurers on November 18 that, based on the reductions in statutory surplus reported in 3Q statutory financial filings, the regulator had found them to be in a “hazardous financial condition” under Nebraska law. On November 24, the State of Nebraska filed petitions for rehabilitation of both Lawyers Title and Commonwealth under the Nebraska Insurance Code. Both Lawyers Title and Commonwealth have consented to the rehabilitation petition, and hearings on the petition are scheduled for today (November 26, 2008). LandAmerica is seeking approval from the Bankruptcy Court and Nebraska regulator to operate its business in the ordinary course and to permit the stock sale on an expedited basis. LandAmerica also views the rehabilitations under the Nebraska Insurance Code as a temporary administrative step to assist in the stock sale to Fidelity. LandAmerica has stated that Lawyers Title and Commonwealth are entirely “solvent,” but, as discussed below, certain steps will be taken that may be adverse to policyholders and other creditors. Whether the stock sale of Lawyers Title and Commonwealth will be sufficient to rehabilitate those entities remains to be seen.

Insurer Receivership/Rehabilitation
Rehabilitation is a formal process undertaken pursuant to state statutes. In Nebraska, the court appointed rehabilitator is given broad powers and duties, including the ability to “take such action as he or she deems necessary or appropriate to reform and revitalize the insurer.” In doing so, the rehabilitator has “all the powers of the directors, officers, and managers of the insurer,” whose authority is suspended except as re-delegated by the rehabilitator. The rehabilitator is charged with developing a plan for the corporation’s rehabilitation and submitting it to the court for approval. Any plan must be, in the judgment of the court, “fair and equitable to all parties concerned.” The Nebraska rehabilitator has submitted a proposed plan of rehabilitation that will involve transferring the existing assets and liabilities of each of the insurers into a “liquidating trust.” Among other things, the plan calls for cancelling all outstanding stock and equity interests so that newly issued stock and equity interests can be issued and transferred to a buyer with demonstrated qualifications to operate the insurers. Per the proposed plans, immediately upon the sale, the rehabilitation proceedings will be converted to liquidation proceedings,


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The privilege of corporate death. The receiver solicits proof of claims from all policyholders and other creditors whose contracts have been transferred to the trust, and marshals all estate assets for pro rata distribution according to statutory priorities. These generally include expenses of administration; secured claims; policyholder claims; taxes; general creditors; and equity holders. In most instances, a claim in a lower class may not be paid until all claims in the classes ahead have been paid in full. It is possible that the proposed rehabilitation plan may be updated in light of the stock purchase agreement that was announced earlier today.

Policyholders Should Follow Developments Closely
Policyholders are well advised to follow the receivership proceedings closely and to prepare for the unexpected. Although the proposed transaction with Fidelity may result in the rehabilitation being shortlived, policyholders should review their policies and assess the potential impact of an insurer’s downgrading or receivership. Again, we cannot yet determine whether any existing title policies will be transferred to the liquidating trust, or remain with the insurer or be transferred (e.g., by novation) to Fidelity. The most recent events suggest that policyholders, escrow depositors and other creditors of affected LandAmerica title insurer subsidiaries should take immediate steps to determine whether they have transactions or escrows involving any of the LandAmerica insurance subsidiaries, where those entities are regulated, and what laws are applicable to potential regulatory action. Policyholders’ rights under existing policies and customers’ ability to access escrowed funds and documents may vary depending on the circumstances and the type of regulatory action ultimately taken. Because this is an evolving situation, the ability to access funds and documents and to make claims on policies is subject to change. Upon conversion of the rehabilitation to liquidation, Nebraska Insurance Code Section 44-1989(2) directs that “[s]ecurity and escrow funds held by or on behalf of a title insurer shall not become general assets and shall be administered as secured creditor claims…” Although this is a bit of good news for customers of the companies, the distribution of assets among the secured creditors may be time-consuming, and steps should be taken so that the benefit of this provision is not lost. In addition, Nebraska Insurance Code Section 44-1989(3) provides that “[t]itle insurance policies that are in force at the time an order of liquidation is entered shall not be cancelled except upon a showing to the court of good cause by the liquidator.” This is more good news for policyholders. Interested parties should maintain a close vigil regarding the rehabilitation and the orders issued by the Nebraska courts with respect to Lawyers Title and Commonwealth. Further, parties doing business with other LandAmerica insurance subsidiaries will want to closely monitor any actions taken by regulators in other jurisdictions. Dla Piper insurance layers will have up-to-date information about this while there presiding are pending.

Exchange Funds That are Held by LandAmerica 1031 Exchange Services, Inc. Could be in Jeopardy


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For taxpayers who have exchange funds at LandAmerica 1031 Exchange, the automatic stay imposed by the Bankruptcy Court in connection with the Chapter 11 filing will require Court approval of the release of any funds. Accordingly, it is highly unlikely that those funds will be immediately available, and they may not be available in time for the scheduled exchange closings, if any. According to bankruptcy filings made by LandAmerica, there are approximately 450 taxpayers with pending exchange transactions. In addition to negatively affecting the contractual obligations of those taxpayers to close on the purchase of identified replacement properties, the unavailability of exchange funds may disqualify the transaction from favorable Section 1031 tax treatment or have other adverse tax consequences. These taxpayers should contact their tax advisors immediately to discuss how to proceed with their exchange transactions.

Effect of Bankruptcy of LandAmerica Financial Group, Inc. and LandAmerica 1031 Exchange Services, Inc.
LandAmerica’s and LandAmerica’s 1031 Exchange’s bankruptcy filing did not include the insurance subsidiaries because they are prohibited from seeking bankruptcy protection under the federal bankruptcy code. Accordingly, although the sale of the stock of Lawyers Title and Commonwealth will require Bankruptcy Court and insurance regulatory approval, those insurance subsidiaries may continue to transact business while the Chapter 11 proceeding is pending, depending on what develops in the rehabilitation proceedings described above.
1 “Fitch Downgrades LandAmerica’s IFS to ‘BB’; on Watch Negative,” November 24, 2008, Fitch, Inc. available at print=1&pr_id450377 2 We note that two of LandAmerica’s insurance subsidiaries, Commonwealth Land Title Insurance Company of New Jersey and United Capital Title Insurance Company, are not regulated by the State of Nebraska Department of Insurance and are instead regulated by the laws of New Jersey and California, respectively. In the interest of time, this Alert focuses on the larger subsidiaries, Lawyers Title and Commonwealth, and the laws and regulations applicable to them.

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