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U.S. Trustee Objects to Third-Party Releases in LandAmerica's Reorganization Plan
The National Law Journal
November 17, 2009
The U.S. trustee in LandAmerica Financial Group Inc.'s Chapter 11 bankruptcy proceeding is objecting to the company's reorganization plan because it releases nearly everyone involved, including lawyers, from liability for negligent actions.
In the Nov. 12 objection, filed in In re LandAmerica Financial Group Inc. in the Eastern District of Virginia, U.S. Trustee W. Clarkson McDow Jr. stated that the releases do not comply with the bankruptcy code or case law.
LandAmerica filed for protection in November 2008 after its Section 1031 exchange business collapsed due to its auction-rate securities investments. Pursuant to Section 1031 of the Internal Revenue Code, the IRS allows taxpayers to defer capital gains on certain kinds of property sales if the seller uses the proceeds to buy other property within a set time frame. In February 2008, the market for auction-rate securities -- bonds with interest rates set at periodic auctions -- stalled when major brokerage houses stopped propping up the market by buying securities when demand waned.
The company's reorganization plan, filed on Oct. 24, would release LandAmerica directors and officers who were on board before the bankruptcy. It also would release numerous parties for their actions during the bankruptcy, including officers, directors, employees, agents and attorneys.
McDow noted that "several circuits ban non-debtor releases outright," including the U.S. courts of appeals for the 9th and 10th circuits. He also wrote that other circuits, such as the 4th, which governs the Eastern District of Virginia, "do not endorse a wholesale use of such releases."
He further concluded that cases involving LandAmerica and its subsidiaries do not involve "unique circumstances" that justify releases for third parties. "At the very least, standards of professionalism dictate that attorneys should not shield themselves from liability resulting from carrying out their duties," McDow wrote.
McDow cited the Virginia Rules of Professional Conduct, which bars lawyers from making agreements with their clients to limit their liability for malpractice, unless the lawyer is also an employee of the client.
He also noted that while Virginia rules imply that a client can release a lawyer from liability after the lawyer has provided services and committed malpractice, the bankruptcy plan isn't structured that way. "This Court should not allow this broad release to take place at least as it applies to attorneys," McDow wrote
The U.S. trustee is objecting to a standard provision of Chapter 11 plans, said Rachel Strickland, a business reorganization and restructuring partner at New York's Willkie Farr & Gallagher who represents LandAmerica.
Strickland also said the language conforms to case law because it does not cover acts or omissions stemming from gross negligence, willful misconduct, intentional fraud or criminal conduct.
"Although exculpation provisions of this sort can be found in virtually every Chapter 11 plan confirmed across the country, an exculpation provision is particularly appropriate in the LandAmerica case given the repeated baseless accusations that have been made against all of the participants in these cases -- including absurd allegations suggesting that even the U.S. trustee and the court facilitated criminal conduct," Strickland said.
U.S. trustee spokeswoman Jane Limprect said the office would not comment.
Lawyers at several law firms working on the case did not respond to requests for comment, including LandAmerica's lawyers at McGuireWoods and Williams Mullen of Richmond, Va.
Bingham McCutchen, which is representing the Official Commitee of Unsecured Creditors, declined to comment because the case is pending, said spokeswoman Claire Papanastasiou. The committee's other lawyers at LeClairRyan did not respond to requests for comment.
Lawyers at Akin Gump Strauss Hauer & Feld and Richmond's Tavenner & Beran represent the Official Committee of Unsecured Creditors of LandAmerica 1031 Exchange Services Inc., one of the company's subsidiaries. They also did not return calls.
The U.S. trustee's objection follows numerous creditors' objections to the lawyers' fees for working on the case.
An ad hoc group of individual creditors has filed dozens of pro se objections to the attorney fee requests since August. The creditors are individuals or small businesses that deposited money with a LandAmerica subsidiary while attempting to qualify for Internal Revenue Code Section 1031 exchanges.
