Late the night of Nov. 25, LandAmerica Financial Group, Inc. and its subsidiary, LandAmerica 1031 Exchange Services, Inc., filed a Chapter 11 petition in the U.S. Bankruptcy Court for the Eastern District of Virginia ("Bankruptcy Court"), seeking bankruptcy protection for both entities. The action does not cover Commonwealth Land Title Insurance Company or Lawyers Title Insurance Company, two LandAmerica subsidiaries that are each domiciled in the State of Nebraska. Under the federal Bankruptcy Code, these insurance company subsidiaries cannot be debtors in the federal bankruptcy proceeding. The LandAmerica subsidiaries together comprise the country's third largest underwriter of title insurance.

By separate agreement, LandAmerica agreed to sell Commonwealth to Chicago Title Insurance Company as well as Lawyers and United Capital Title Insurance Company to Fidelity National Financial Inc. The proposed sales will require approval of the Bankruptcy Court and various state insurance regulators. LandAmerica filed a first day motion in the Chapter 11 proceeding seeking expedited approval of the sales, which could occur as early as late December. The motion to approve the sales is on the agenda of matters to be heard by the Bankruptcy Court beginning at 11 a.m. EST on Nov. 26.

The Nebraska Department of Insurance ("the Department") issued a statement on Nov. 24 that, based on the latest statutory accounting reports received by the Department from the insurers, both Commonwealth and Lawyers are solvent and are continuing to write title insurance. However, while the sale agreement is pending, representatives of the Department have confirmed that the Department instituted proceedings the week of Nov. 24 to place both Commonwealth and Lawyers into rehabilitation under state insurance laws. A hearing is expected the afternoon of Nov. 26. A rehabilitation would allow both insurers to continue business as usual, but with enhanced oversight by the Department. At this time, the Department has indicated that it is not pursuing a liquidation of either insurer. Lawyers acquired Transnation Title Insurance Company earlier this year and assumed its obligations by merger. We will provide additional information on the implications of the Nebraska insurance regulatory issues once we confirm what level of oversight the Department obtains.

LandAmerica and its subsidiaries have reported a decline in financial position in recent weeks. The situation became more tenuous on Friday, Nov. 21, when Fidelity elected not to proceed with an acquisition of LandAmerica after completing its due diligence review. Shares of LandAmerica fell 88 percent in trading the Monday following Fidelity’s announcement. LandAmerica 1031 Exchange Services abruptly issued a press release announcing that it had ceased operations, citing investments in auction rate securities as a reason for being unable to meet all of its obligations as qualified intermediary to taxpayers under exchange agreements. LandAmerica also confirmed that it is not in compliance with loan covenants in its existing credit agreements with its lenders. Fitch Ratings downgraded LandAmerica’s insurance subsidiaries to a BB rating.

What Does this Mean for Real Estate Owners, Investors and Lenders?

We recommend that you complete a review of your property files to determine which properties may have title insurance through a LandAmerica insurer to (i) identify any existing cash escrows held by the LandAmerica insurers, (ii) identify any projects with construction funds being disbursed through a LandAmerica company, and (iii) determine any active claims pending against any of the LandAmerica insurers. Those projects with current cash escrows and ongoing needs to disburse funds through a LandAmerica insurer or prosecute claims against a LandAmerica insurer should be closely monitored as the proposed sales move forward. If you are currently a party to an exchange agreement with LandAmerica’s exchange subsidiary that is a debtor in the bankruptcy, we would be happy to discuss a course of action.

Assuming Commonwealth and Lawyers are placed into rehabilitation in Nebraska, both companies should be able to continue business as usual, subject to enhanced oversight by the Department of Insurance. No assets of the title insurance subsidiaries, including any escrows held by the subsidiaries in a fiduciary capacity, would be captured by the bankruptcy estate of LandAmerica. However, until the sales to Fidelity and Chicago are complete, we recommend that you monitor the progress of the sale agreement closely and carefully consider how funds are being handled in the course of transactions. If the sales do not occur and the title insurers are forced into a liquidation in Nebraska, then cash escrows and funds disbursed through a LandAmerica insurer could be captured through the Nebraska proceedings.

Even if you have no active projects with a LandAmerica insurer, if you hold a title policy written by a LandAmerica insurer, then you should still monitor the proposed sales. Acquisition of the LandAmerica title insurance obligations by rival Fidelity should alleviate concerns of insureds over a possible failure of the LandAmerica insurers and impact on the value of title policies issued by the LandAmerica companies.