in the united states district court - hollister &...

IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF SOUTH CAROLINA

ANDERSON DIVISION IN RE: LANDAMERICA 1031 EXCHANGE ) SERVICES, INC., INTERNAL REVENUE ) SERVICE § 1031 TAX DEFERRED ) EXCHANGELITIGATION ) ) ) ) _______________________________________ )

MDL No. 8:09-mn-02054-JFA

Southern District of California C.A. No. 3:09-cv-00054

District of South Carolina C.A. No. 8:09-cv-00415

PLAINTIFFS’ MEMORANDUM IN OPPOSITION TO DEFENDANT SUNTRUST BANKS, INC.’S MOTION TO DISMISS PLAINTIFFS’

SECOND AMENDED CONSOLIDATED COMPLAINT

8:09-mn-02054-JFA Date Filed 12/16/10 Entry Number 136 of 40

TABLE OF CONTENTS Table of Authorities ........................................................................................................................ iii I. INTRODUCTION ........................................................................................................................... 1 II. PRIOR PROCEEDINGS ................................................................................................................. 1 III. STATEMENT OF FACTS .............................................................................................................. 2

A. Allegations Relating to Knowledge from February 2008 to Early October 2008. ...............................................................................................................................5 B. Allegations Relating to SunTrust Knowledge from Early October 2008 to November 26, 2008........................................................................................13

IV. LEGAL STANDARD .............................................................................................................................15 V. ARGUMENT................................................................................................................................. 16 A. Plaintiffs have Sufficiently Pled the Actual Knowledge Element

of their Aiding and Abetting Breach of Fiduciary Duty Claim ........................................ 18 B. Plaintiffs have Sufficiently Pled the Underlying Fiduciary Duty ..................................... 21

1. LES as Agent................................................................................................................21 2. LES was a Fiduciary Based on its Duties as QI................................................... 24 3. LES was a broker................................................................................................. 25 4. LES was a Trustee .......................................................................................................26

a. The Exchange Agreements created an express trust under which LES held the Exchange Funds for the benefit of each Exchanger ...............................................................................26

b. LES’s Declarations That it Held the Exchange Funds in Trust Were Sufficient to Create a Trust. .....................................................31 5. Exchange Agreement Disclaimer Language ..............................................................32 C. Plaintiffs have Sufficiently Pled the Immediate Right to Possession Element of their Conversion Claim. ................................................................................. 33 D. Plaintiffs’ Allegations are Sufficient to Support a Civil Conspiracy Claim. .................... 34 VI. CONCLUSION.............................................................................................................................. 34

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TABLE OF AUTHORITIES

Cases Page

Acordia of Virginia Insurance Agency, Inc. v. Genito Glenn, L.P., 263 Va. 377, 560 S.E.2d 246 (2002)........................................................................................................ 21 Airlines Reporting Corp. v. Pishvaian, 155 F. Supp. 2d 659, 664 (E.D. Va. 2001) ...................................... 27 Alderson v. Commissioner of Internal Revenue Service, 317 F. 2d 790, 795 (9th Cir. 1963) ....................... 29 Ashcroft v. Iqbal, ____U.S. ___, 129 S.Ct. 1937 (2009).................................................................... 2, 5, 16 Banks v. Mario Indus., 274 Va. 438, 452-453, 650 S.E.2d 687 (2007) ........................................................ 24 Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007).............................................................................. 2, 5, 16 Cahaly v. Benistar Property Exchange Trust Co., 885 N.E. 2d 800 (Mass. 2008) ....................................... 4 Christian v. Bullock, 215 Va. 98, 205 S.E.2d 635 (1974) .......................................................................... 20 City of North Myrtle Beach v. Hotels.com L.P., C.A. No.: 4:06-CV-3063, 2007 U.S. Dist. LEXIS 85886, *6-7 (D.S.C. Sept. 30, 2007) .................................................................. 16 Cody v. United States, 348 F. Supp. 2d 682, 692 (E.D. Va. 2004)............................................................... 27 Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3 (4th Cir. 1971) ........................................................... 24 Cook v. Garcia, Case No. 96-55285, 1997 U.S. App. LEXIS 5980, *4 (9th Cir. Cal. Mar. 27, 1997) ................................................................................................................... 29 Dameron v. Old Republic National Title Insurance Company, 155 F.3d 718, 722 (4th Cir. 1998) ......................................................................................................................................... 27 DeGroot v. Exchanged Titles (In re Exchanged Titles), 159 B.R. 303 (Bankr. C.D. Cal. 1993)..................................................................................................................... 29, 30 Erickson v. Pardus, 551 U.S. 89, 93-94 (2007) ............................................................................................ 16 Frontier Pepper’s Ferry, LLC v. LandAmerica 1031 Exch. Servs. (In re LandAmerica Fin. Group, Inc.), 2009 Bankr. LEXIS 4133, (Bkrptcy. D. Va. 2009).................................... 16, 18, 20, 32 Gifford v. Dennis, 237 Va. 193, 198, 335 S.E.2d 371 (1985)....................................................................... 31 Gordonsville Energy, L.P. v. Virginia Elec. and Power Co., 257 Va. 344, 355-356, 512 S.E.2d 811, 818

(1999) ` ......................................................................................................................................... 19 Hartzell Fan, Inc. v. Waco, Inc., 256 Va. 294, 300, 505 S.E.2d 196 (1998) ................................................. 21 Millard Refrigerated Servs. v. LandAmerica 1031 Exch. Servs. (In re LandAmerica Fin. Group, Inc.), 412

B.R. 800 (Bankr. E.D. Va. 2009)............................................................................................................. 18

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Murphy v. Holiday Inns, Inc., 216 Va. 490, 492-93, 219 S.E.2d 874 (1975)............................................. 33 Rachel Thomas, and Others v. C.W. House, and Others, 145 Va. 742, 746, 134 S.E. 673 (1926)................ 27 Siegel v. Boston (In re Sale Guar. Corp.), 220 B.R. 660 (B.A.P. 9th Cir. 1998)............................................ 30 State of Washington v. Grimes, 111 Wn. App. 544, 46 P.3d 801 (2002) ..................................................... 29

Statutes 26 U.S.C. §1031.............................................................................................................................. 1 Virginia Code §54.1-2103 ............................................................................................................ 25 Virginia Code §54.1-2108 ............................................................................................................ 26 Virginia Code §54.1-2131 ............................................................................................................. 26 Virginia Code §54.1-2100 ............................................................................................................. 25 Virginia Code §54.1-2107 ............................................................................................................. 25

Regulations Treas. Reg § 1.1031(k)-1(g)(4)(iv)(A)........................................................................................... 20 Treas. Reg §1.1031(k)-1 .......................................................................................................... 25, 29 Treas. Reg. §1.1031(k)-1(f)(2)....................................................................................................... 22 Treas. Reg. §1.1031(k)-1(g)(4)...................................................................................................... 22 Treas. Reg. §1.1031(k)-1(g)(4) and (g)(8) ..................................................................................... 23 Treas. Reg. §1.1031(k)-1(g)(4)(i) .................................................................................................. 24 Treas. Reg. §1.1031(k)-1(k)(2)..................................................................................................... 23 Treas. Reg. §1.1031(k)-1(k)(2)(i). ................................................................................................ 23 Treas. Reg. §1.1031(k)-1(n) .................................................................................................... 19, 33

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Secondary Sources Restatement (Second) Agency §§ 77-78....................................................................................... 19 Restatement (Third) Trusts §5 ......................................................................................... 27, 28, 30 Restatement (Third) Trusts § 45 ................................................................................................... 31 Restatement (Third) Torts §§ 77-78 ............................................................................................. 19

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1

Plaintiffs oppose Defendant SunTrust Banks, Inc.’s Motion to Dismiss Plaintiffs’ Second

Amended Consolidated Complaint as follows:

I. INTRODUCTION.

This action involves claims against a bank for actively assisting an IRC §1031 exchange

accommodator in breaching fiduciary duties the exchange accommodator owed to its exchange clients.

The bank is SunTrust Banks, Inc. (“SunTrust”), a nationally recognized federally-insured depository

bank. The exchange accommodator is LandAmerica 1031 Exchange Services (“LES”), an entity

engaged in the business of acting as a “qualified intermediary” (“QI”) for its clients conducting tax-

deferred exchanges of real property pursuant to Internal Revenue Code Section 1031 (26 U.S.C. §1031).

The exchange clients are roughly 400 or so putative class members, including the seven named

plaintiffs, who entrusted Exchange Funds received from the sale of their “relinquished” properties

(“Exchange Funds”) to LES with the expectation that LES would safeguard the funds during the period

prior to the closing on the like-kind “replacement” properties to complete their IRC §1031 tax-deferred

exchanges.

LES used SunTrust as its depository bank for the safekeeping of plaintiffs’ and other exchange

customers’ Exchange Funds. All Exchange Funds were run through the LES account at SunTrust.

Plaintiffs have sued SunTrust because the bank knew about the fiduciary obligation LES owed to

plaintiffs to safeguard their Exchange Funds yet, despite this knowledge, actively facilitated LES in

numerous acts which amounted to misappropriation of plaintiffs’ and other exchangers’ Exchange

Funds.

II. PRIOR PROCEEDINGS.

This consolidated action is before the Court pursuant to the Order of the Judicial Panel on

Multidistrict Litigation, filed on June 12, 2009. Following the consolidation, plaintiffs filed their

Amended Consolidated Complaint on August 4, 2009. SunTrust moved to dismiss all claims on

multiple grounds. Guided in large part by the tenets of Ashcroft v. Iqbal, ____U.S. ___, 129 S.Ct. 1937


(2009) and Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007), this Court dismissed plaintiffs’ claims

“without prejudice and with leave to refile pursuant to Twombly and Iqbal should the Customers find

themselves able to support their complaint with factual matter bearing on the elements the court

identified.” Dkt. 107, at 21. This action is presently stayed as to the individual defendants pursuant to

the notice of injunction filed on December 4, 2009.

Plaintiffs filed the Second Amended Consolidated Complaint (SACC) on August 19, 2010.

They have alleged extensive additional factual matters drawn from materials produced in conjunction

with the LandAmerica Bankruptcy.1 SunTrust moves to dismiss the current complaint. Its moves to

dismiss the aiding and abetting breach of fiduciary duty claim in its entirety based on a prior order of the

United States Bankruptcy Court for the Eastern District of Virginia. SunTrust contends the order

precludes any finding of a fiduciary duty owed plaintiffs by LES.

In the alternative, SunTrust moves to dismiss the claims of three of the seven named plaintiffs

on the ground that the factual allegations as to SunTrust’s actual knowledge of LES’s breach of

fiduciary duty, prior to October 16, 2008, are deficient.2 The flip-side of SunTrust’s argument is that it

appears to concede, or fails to make an argument otherwise, that the allegations of the current complaint

meet the requirements of Twombly and Iqbal for exchanges funded from October 16, 2008 forward.

SunTrust moves to dismiss the conversion claim, saying that the complaint still does not

demonstrate a right to “immediate possession” of the Exchange Funds at the time of the conversion. It

moves to dismiss the conspiracy claim, asserting that the facts currently pled do not show an

“agreement” between SunTrust and LES, or any underlying tort.

III. STATEMENT OF FACTS.

1 The materials were to plaintiffs by the Bankruptcy Trustee pursuant to a stipulation.

2 SunTrust moves to dismiss plaintiffs Leaping Eagle LLC, Denise J. Wilson and Angela M. Arthur on the ground that their Exchange Agreements were executed prior to October 16, 2008; however, for reasons discussed below, the critical date is when LES received the Exchange Funds, not the date of the exchange agreement.

2


This Court is familiar with the basic facts underlying the loss by hundreds of LES exchange

customers of millions of dollars in IRC §1031 Exchange Funds entrusted to LES. The Exchange Funds

were used by LES to pay off prior exchanges as its exchange business tanked in 2008. LES fell over the

cliff financially when the auction rate securities (ARS) market it had relied on to turn quick profits on

customer Exchange Funds froze, leaving it with a $290.5 million shortfall in its ability to close the

exchange transactions of its earlier customers. LES used the incoming Exchange Funds from its newer

clients to pay off the aging exchange obligations it owed to its prior exchange clients. SunTrust knew

LES was acting as a fiduciary, but moved plaintiffs’ and other exchangers’ funds anyway to allow LES

to close these older exchange transactions. In doing so, SunTrust knowingly facilitated LES in

breaching the fiduciary duties LES owed to plaintiffs and other similarly situated exchange customers.

The 400 exchange customers who comprise the class funded IRC their §1031 exchanges with

LES during the 180-day period prior to LES’s bankruptcy, filed on November 26, 2008. Their

Exchange Funds were run through LES’s account at SunTrust Bank. The seven named plaintiffs paid

over to LES a total of $2,149,274.45 from August 27, 2008 through November 14, 2008:

Name of Plaintiff Date of Exchange

Agreement Date Equity

Relinquished to LES Amount Leapin Eagle, LLC 07/31/08 08/27/08 $468,372.67 Wilson, Denise J. 09/22/08 10/02/08 $98,599.31 Arthur, Angela M 10/01/08 10/15/08 $466,781.73 Terry Plaintiffs 10/29/08 11/10/08 $731,608.61 Hays, Vivian 11/11/08 11/14/08 $383,912.13

Tota $2,149,274.45 (SACC ¶3).

The critical issues of fact in this litigation are: (1) what SunTrust knew about LES’s fiduciary

obligations to its exchange customers; (2) what SunTrust knew about LES’s post-February 2008

insolvency and wrongful diversion of incoming Exchange Funds; and (3) when SunTrust acquired its

knowledge of these matters. Plaintiffs have now alleged, for example, that:

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(i) LES provided SunTrust with SEC filings by LFG declaring the Exchange Funds were fiduciary funds held for the benefit of exchange customers and not property of LES/LFG because on the Revolving Credit Agreement required that LFG submit the filings to SunTrust (SACC ¶98, 99, 100-102, 107);

(ii) SunTrust knew the character of the Exchange Funds as fiduciary funds, as reflected by its characterization in October 2008 of the LES account 3318 as LES’s “safekeeping account” for the Exchange Funds (SACC ¶110);

(iii) SunTrust had the form LES Exchange Agreement based on an email to SunTrust in October 2008 confirming transmission of the same3 (SACC ¶124);

(iv) From late September, 2008 forward SunTrust had detailed information showing the history of incoming and outgoing Exchange Funds, on a transaction by transaction basis, as shown by emails confirming transmission of such data (SACC ¶¶20, 22, 23, 97, SACC Exhibits 6-8);

(v) SunTrust, at least by October and November, 2008, had the detailed breakdown of all LES assets, including cash, ARS and other investments, and had been shown that the LES shortfall between all assets and amounts due on pending exchanges exceeded $200 million based on emails and letters and financial documents transmitted by such communications (SACC ¶¶96, 97, 108-125, SACC Exhibits 3, 6-12, 18, 24-27);

(vi) In the four days before LFG/LES filed bankruptcy, SunTrust processed wire transfers that moved $46 million -- all but $1 – out of LES’s “safekeeping account at SunTrust to an LES account at another institution (SACC ¶125);

(vii) The detailed content of negotiations between LFG and SunTrust for a forbearance agreement, LES’s solicitation of SunTrust for a loan that incoming Exchange Funds would be used to repay and SunTrust’s knowledge of LFG/LES’s attempts at a merger as its last ditch effort to avoid going under (SACC ¶¶17, 18, 115, Exhibits 7, 8).

Plaintiffs have supported these and dozens of other additional allegations showing SunTrust’s

knowledge of and participation in LES’s wrongdoing, with letters, emails and financial documents

plaintiffs were able to access from outside sources that cure any pleading defects previously identified by

3 SunTrust, in its prior Reply in Support of Motion to Dismiss, said of Cahaly v. Benistar Property Exchange Trust Co., 885 N.E. 2d 800 (Mass. 2008) (Cahaly II): “Not until it was discovered Merrill Lynch had a copy of the exchange agreement was the plaintiffs’ evidence sufficient to establish actual knowledge and Merrill Lynch’s possession of the exchange agreement was key to the decision to grant a new trial: ‘[T]he exchange agreement makes abundantly clear the nature of the §1031 transaction and Benistar’s role as an intermediary.’ Here, plaintiffs implicitly concede that SunTrust did not have a copy of the Exchange Agreement and was otherwise ignorant of its terms.” (Emphasis added). Dkt. 86, p. 9. Of course, SunTrust did have a copy of the Exchange Agreement, was not ignorant of its terms, and plaintiffs now definitively allege this knowledge.

4


this Court. See, generally, SACC ¶¶3, 10-11, 17-18, 20-25, 56, 63, 64, 94, 96-125, Exhibits 1, 3, 4, 6-12,

14, 15, 18, 24-27.

SunTrust contends plaintiffs have not come forward with allegations rendering it plausible that

SunTrust knew LES was breaching fiduciary duties owed to exchange customers by taking their money

and paying exchanges of prior exchange customers (and thereby losing the ability to pay future exchanges

absent an influx of new exchange money) “prior to, at the earliest, October 16, 2008.” Dkt. 135-1, p. 19.

SunTrust ignores dozens of explicit, detailed allegations of fact clearly creating the “facial plausibility”

that allows this Court “to draw the reasonable inference that the defendant is liable for the misconduct

alleged.” Iqbal, 129 S. Ct. at 1949 (citing Twombly, 550 U.S. at 556).

SunTrust, in moving to dismiss the claims of the three plaintiffs who signed exchange

agreements with LES before mid-October, 2008, states “Plaintiffs’ new allegations . . . involv[e] only

conduct on or after October 16, 2008.” SunTrust inexplicably ignores the entire 9-page section of the

SACC entitled: “Specific Evidence of SunTrust's Knowledge that LES was Operating a Ponzi

Scheme Using the SunTrust 3318 Account from February 2008 to Early October 2008.” (SACC

¶¶96 – 110; also ¶¶111-115). The vast majority of these allegations are new and very detailed, even

though the bottom line stated in Iqbal is that “‘[d]etailed factual allegations are not required, but

allegations must be more than ‘labels and conclusions,’ or ‘a formulaic recitation of the elements of a

cause of action[.]’” Iqbal, 129 S. Ct. at 1949 (quoting Twombly, 550 U.S. at 555). Plaintiffs have alleged

regarding the period SunTrust says they ignored, facts that make SunTrust’s contention implausible that it

did not have the requisite knowledge.

A. Allegations Relating to Knowledge from February 2008 to Early October 2008.

Plaintiffs’ Exchange Funds passed through account 3318 operated by LES at SunTrust. All of

the commingled exchange customers’ Exchange Funds were deposited in this account, generally by wire

transfers received from banks disbursing sales proceeds from the disposition of exchangers' relinquished

properties. Incoming wires consisted of individual exchange customer deposits and transfers of Exchange

5


Funds back in from LES’s SunTrust investment accounts. Outgoing wires were to close individual

exchanges and to sweep the Exchange Funds remaining at the end of the day into higher yielding

investments accounts - AIM, Dreyfus, Sweep and AIM Overnight. The typical wire instructions sent to

SunTrust by LES contained the name of the exchanger, the exchange file number, the wire amount, and

the date received. Thus, the information received and acted on by SunTrust identified the exchangers

depositing the money and the exchangers receiving the money. (SACC ¶¶96, 97, SACC Exhibit 15).

SunTrust knew the purpose of and use for account 3318 by LES as a QI. It knew the size of the

account, the frequency of the wires in and out. It called 3318 account LES’s “safekeeping” account.

(SACC ¶¶97, 110). It also had the due diligence duties under the Anti-Money Laundering Compliance

programs under the USA Patriot Act of 2001 (“Patriot Act”). SunTrust had an Operational Risk

Management division assigned to detect client fraud on third parties that implemented procedures for

SunTrust to know its customers’ businesses. SunTrust also knew the purpose and use of account 3318

because it had its own QI subsidiary that treated Exchange Funds as fiduciary funds on deposit at the QI.

(SACC ¶97).

SunTrust was not just a depositor bank for LES, it was a major creditor for LES’s parent

company. On July 28, 2006, SunTrust entered into a Revolving Credit Agreement with LES’s parent,

LFG (LandAmerica Financial Group, LLC). SunTrust was a lender and acted as administrative agent for

four other participating banks on a $200 million line of credit. Conditions precedent on the loan included

the production by LFG of audited financial statements for LFG and its subsidiaries (including LES) for

2004 and 2005, as well as the unaudited quarterly statement ending March 31, 2006. Loan covenants

required LFG to provide SunTrust with year-end audited financial statements and quarterly unaudited

financial statements. The covenants were consistent with the financial reporting obligations and

underwriting requirements stated in SunTrust’s 10-K for the period ending December 31, 2007:

Credit risk refers to the potential for economic loss arising from the failure of SunTrust clients to meet their contractual agreements. . . We manage and monitor extension of credit risks through the initial underwriting process and periodic reviews. (Emphasis added.)

6


(SACC ¶98).

By July 28, 2006 (pursuant to the express terms of the Revolving Credit Agreement between

LFG and SunTrust) SunTrust received LFG’s Form 10-K for the fiscal year ended December 31, 2005,

which disclosed to SunTrust that the money on deposit in account 3318 consisted of other peoples’ money

held by LES in a fiduciary capacity. The 2005 10-K from LFG, in SunTrust’s possession and thus known

by it as of July 28, 2006, stated:

Off Balance Sheet Arrangements:

Additionally, we [LES] facilitate tax-deferred property exchanges for customers pursuant to Section 1031 of the Internal Revenue Code. As a facilitator and intermediary, we hold the proceeds from sales transactions until a qualified acquisition occurs. These deposits totaled $1,111.7 million, and $1,399.7 million at December 31, 2005 and 2004, respectively. These exchanges require us, using the customer’s funds, to acquire qualifying property on behalf of the customer and take temporary title to the customer’s property until a qualifying acquisition occurs. Due to the structure utilized to facilitate these transactions, like-kind exchanges are not considered assets of LandAmerica and are not included in the accompanying consolidated balance sheets. However, we remain contingently liable for the transfers of property, disbursement of proceeds and the return on the proceeds at the agreed upon rate. (Emphasis added).

(SACC ¶99).

All subsequent 10-Ks and 10-Qs filed by LFG with the SEC and sent to SunTrust pursuant to the

contractual obligations assumed by LFG contained the same or similar disclosures of the nature and

character of the Exchange Funds as fiduciary funds belonging to the exchange customers. Thus, the

Exchange Funds, which exceeded one billion dollars at the inception of the loan, were not to be considered

by LFG, LES, SunTrust or any other trade creditor as assets available to LFG or LES to satisfy obligations

owed to non-exchangers. SunTrust was told, and thus knew, that the Exchange Funds were fiduciary

funds and did not belong to LES.

The line of credit was issued on July 28, 2006 and LFG drew $100 million of the $200 million

line of credit on October 10, 2007. (SACC ¶100). The $100 million LFG was not used to expand

operations or put to productive uses but, rather, was used to pay off other creditors of LFG. (SACC ¶103).

7


By November 29, 2007 (just 50 days after accessing the $100 million), LFG was in default on

the line of credit. LFG and SunTrust entered into an amendment to the Revolving Credit Agreement,

reducing certain financial covenants LFG could not satisfy because of its dire financial condition, thus

avoiding having to disclose LFG’s default to the public. (SACC ¶104).

LFG’s 10-K for the period ending December 31, 2007, which was given to SunTrust pursuant to

the disclosure obligations contained in the Revolving Credit Agreement, disclosed that by January 2008,

LFG was in economic trouble. In early 2008, SunTrust knew through documents provided to it by LFG

that: (i) LFG’s operating income had declined $300 million in 2007; (ii) LFG suffered a pre-tax loss of

$81 million in 2007 compared to a profit of $154 million in 2006; (iii) LFG was required to close or

consolidate 285 offices; and (iv) LFG had to terminate 3,200 full-time employees or 22% of its work

force. (SACC ¶102).

At the same time LFG was encountering financial trouble, LES became insolvent with the

collapse of the ARS market and the freeze of the $290.5 million of commingled Exchange Funds invested

in ARS. Of that amount, $152 million in ARS were sold to LES by SunTrust’s subsidiary and the

remainder were acquired through Smith Barney. (SACC ¶105).

Without a market for ARS, there was no market value for the ARS other than at a fire-sale price.

Soon after the collapse of the market, Smith Barney discussed loaning LES money, with the ARS as

collateral valued at only .25 of par. SunTrust discussed allowing LFG to access $50 million under the

Revolving Credit Agreement, provided LES received “not less than $90.2 million [less than 1/3 of par] of

net cash proceeds from the sale of the Auction Rate Securities held by the 1031 Exchange Co.” (SACC

¶106). No such sale occurred and LFG reported to SunTrust that it was financially impaired in its 10-Q

filing ending March 31, 2008. (SACC ¶107).

In response to the collapse of the ARS market at LES and the significant decline in the overall

financial strength of LFG, SunTrust and LFG entered into a Second Amendment to the Revolving Credit

Agreement on June 30, 2008. The Second Amendment reduced the loan commitment from $200 million

8


to $150 million and disclaimed that any of the other four participating banks could rely on SunTrust’s

underwriting of the LFG loan. At this point in June 2008, already anticipating a possible bankruptcy by

LFG/LES, SunTrust provided in the agreement that it was authorized to file bankruptcy proofs of claim on

behalf of all the lenders in that eventuality. The Second Amendment avoided declaring LFG in default

and allowed LES to stay in business and continue soliciting new Exchange Funds to keep paying off prior

exchange commitments. (SACC ¶107).

In the summer of 2008, the liquidity crisis at LES was intensifying. Incoming Exchange Funds

from new exchange customers deposited into the 3318 account declined while outgoing Exchange Funds

withdrawn from the 3318 account to fund older exchanges increased. The Exchange Fund Balances in the

3318 account at SunTrust declined dramatically from January 2008 to September 2008. (SACC ¶108).

On September 30, 2008 LES forwarded to SunTrust approximately five inches of financial

documents detailing all exchanges from May 6, 2008 through September 29, 2009, by names,

addresses, dollars amounts, dates, aging schedules etc. (SACC ¶108 and SACC Exhibit 7). The

October 7, 2008 Gluck letter to SunTrust, considered by this Court in its prior Order (Dkt. 107, at 10-

11), takes on added significance in the context of the massive, financial document dump received by

SunTrust on September 30, 2008. Based on the September 30, 2008 disclosures, SunTrust could have

had no doubt what LFG corporate counsel Michelle Gluck meant when she asked SunTrust Deputy

General Counsel and Senior Vice President Brian Edwards if SunTrust or its subsidiaries would

repurchase the ARS or provide full liquidity through a non-recourse loan because LES was running out

of money, other than the frozen ARS. At this point, Mr. Edwards of SunTrust knew the full context of

her comments when she told him:

• LES has “used its remaining non-ARS investments to satisfy ongoing customer obligations”;

• There are “no non-ARS investments left at LES”; and

• Virtually “all of the remaining escrow investments consist of ARS.”

9


(SACC ¶112 and SACC Exhibit 9). (Emphasis added).

The Gluck letter disclosed to SunTrust what it already knew, that LES had no assets of any kind

to complete pending 1031 Exchanges because the ARS were frozen. SunTrust knew from the account

records and the detailed exchange information provided on September 30, 2008, that the incoming

Exchange Funds being deposited into the 3318 account was the money being used to complete older,

pending exchanges. (SACC ¶120).

This Court previously noted that the Exchange Funds in the 3318 account were more accurately

described as “deposits,” while the Gluck letter referenced LES’s depletion of “non-ARS investments.”

As shown by SACC ¶96 and Exhibit 4, the Exchange Funds in account 3318 were the only “non-ARS

investments.” LES, through SunTrust, swept the Exchange Funds from account 3318 each night into

higher yielding investment accounts and then swept the Exchange Funds back into the 3318 account the

next day. Also, as shown by Exhibit 4 to the SACC, account 3318 was never a deposit account but,

rather, was a money market fund. (See SACC Exhibit 4 account statement with the disclaimer: “the

funds held are not a deposit.” (Emphasis added)).

After informing SunTrust that LES was completely out of money, Gluck, on October 10, 2008,

again wrote to SunTrust’s General Counsel, Brian Edwards, to request on behalf of LES a line of credit in

the amount of $152 million (the par value of the ARS sold to LES by SunTrust’s subsidiary) “to pay, when

due, amounts due customers in LandAmerica’s 1031 Exchange Company.” She stated that any new line

of credit “would only be drawn upon at times when [LES] does not have cash or non-ARS securities to

meet such payment obligations…” She further informed SunTrust that LES intended to repay the line of

credit with future exchange funds coming into the Exchange Fund account, stating “[t]o the extent inflows

into [LES] exceed out-flows, draws on the line would be repaid.” (SACC ¶115 and Exhibit 10).

(Emphasis added).4

4 This Court, in its previous Order, noted that plaintiffs’ complaint did not factually support knowledge by SunTrust that LES intended to use future customers’ money to complete existing exchanges. Dkt. 107 at 10-11. In this October 10, 2008 correspondence, LES informed SunTrust not only that it was using the “in-

10


Less than a week later, using the same type of documents provided to SunTrust on September 30,

2008, LES prepared and sent to SunTrust a cash flow analysis and a Commingled Exchange Funds

Balances Report that showed:

Exchange Funds in the 3318 Account, Inflows and Outflows

Month Inflows Outflows Difference

March 2008 $303mm $382mm ($79mm) April $181mm $247mm ($66mm) May 2008 $327mm $382mm ($55mm) June 2008 $160mm $189mm ($29mm) July 2008 $145mm $201mm ($56mm) August 2008 $l06mm $138mm ($32mm) September 2008 $142mm

Total: ($62mm)

($379mm)

2008 Commingled Balances maintained in accounts at SunTrust

January $ 837mm February $ 695mm

March $ 616mm April $ 550mm May $ 495mm June $ 466mm July $ 411mm

August $ 379mm September $ 318mm

(SACC ¶109).

The Commingled Exchange Funds Balances included: the $290.5 million in ARS, the 3318

account balances, and the SunTrust investment account balances. These balances declined from $837

million in January to $318 million in September, 2008. The September 2008 $318 million balance -- less

the $290.5 million in ARS -- left only $27.5 million to pay $291 million in exchange liability. (SACC

flows” for that purpose, but also that any overages would be diverted to SunTrust to repay the requested loan. LES could only “not have cash or non-ARS securities to meet such payment obligations” if it was spending all incoming cash, including the incoming Exchange Funds.

11


¶108; see also SACC ¶21). This analysis was submitted to SunTrust on October 16, 2008, including

documentation of the $291 million pending exchange liability. On that date, SunTrust knew that LES was

showing a $ 263.5 million cash shortfall, even with LES using every dollar of the current exchange money

it held to fund prior exchange obligations. Id.

Given the dramatic depletion of non-ARS funds remaining on deposit in the SunTrust 3318

account, LES, beginning in September 2008, was forced to seek from LFG a series of wire transfers into

the 3318 account at SunTrust, with the knowledge of SunTrust:

September 25, 2008 –October 17, 2008 Wire Infusions to LES from LFG to delay Collapse:

Date of Transfer To /From Amount

09/25/08 to LES from LFG $35,000,000 09/30/08 to LFG from LES ($15,000,000) 10/08/08 to LES from LFG $10,000,000 10/14/08 to LES from LFG $10,000,000 10/17/08 to LES from LFG $10,000,000 10/17/08 to LES from LFG $15,000,000

Total net: $65,000,000 (SACC ¶109).

The money transferred to LES’s SunTrust 3318 account by LFG was used by LES to fund wire

transfers out of the 3318 account to close escrows for pending §1031 exchanges that could not otherwise

have closed. This was because those exchange customers’ funds had been spent to close prior exchangers’

transactions. Those prior exchange customers’ transactions could not otherwise have closed because their

funds were tied up in the illiquid $290.5 million in ARS. (SACC ¶110 and page 5 of Exhibit 18). From

all the numerous financial disclosures LES and LFG provided to SunTrust, SunTrust was aware of these

transfers when LFG made them to LES and aware of the use of the proceeds to fund exchanges that LES

otherwise would have defaulted on because it had already spent those customers’ Exchange Funds.

LES was on the verge of collapse by September 2008. During this time period, LFG was

imploring SunTrust for financial assistance, which necessarily included disclosing to SunTrust all of the

12


financial constraints under which both LFG and LES were operating. After the end of the third quarter

of 2008, LES/LFG and SunTrust were engaging in multiple communications daily because by

September 30, 2008, LFG was again in default on the credit facility covenants. Emails and letters

detailing LES and LFG’s financial status and lack of liquid assets were exchanged almost daily during

October and November 2008 between LFG/LES and SunTrust and these communications document

multiple meetings and conference calls between SunTrust and LES/LFG during this time period for the

purpose of providing SunTrust with complete information concerning LFG and LES’s assets (liquid and

non-liquid), liabilities, and obligations. (SACC ¶111).

B. Allegations Relating to SunTrust Knowledge from Early October 2008 to November 26, 2008.

While SunTrust has made no argument at all contesting that the facts stated in the SACC show

the requisite knowledge by SunTrust after October 15, 2008, a recitation of what occurred from mid-

October to the date of bankruptcy provides context and renders it even more plausible that similar

communications and exchanges of documents were occurring from July 2008 on.

As noted above, on October 16, 2008, LES gave SunTrust a detailed cash flow analysis

demonstrating unequivocally that it was spending every incoming dollar of Exchange Funds to pay off its

obligations to prior exchangers and was still on the verge of collapse with a $263.5 million cash shortfall.

LES had disclosed to SunTrust that no assets of any kind existed to complete pending §1031

transactions, except the funds tied up in ARS, and it corroborated the disclosure of obvious insolvency

with an Executive Summary, the balance sheets for LES, and the Commingled SunTrust Account

Balances as of September 30, 2008. (SACC ¶¶108, 116-118, Exhibits 6, 27).

The Executive Summary confirmed what SunTrust already knew, that the $290.5 Million of

ARS was illiquid and since February of 2008 LES outflows had exceeded inflows by over $400 Million.

The Executive Summary concluded by informing SunTrust: “[h]owever, it is likely that during the 4th

quarter there will be a timing difference between inflows and outflows requiring liquidity on a portion of

the $290.5 Million in auction rate securities.” (SACC ¶117, Exhibit 6)

13


On October 22, 2008 LFG emailed to SunTrust a document entitled “Bank Group Request.”

(SACC Exhibit 11). This document unequivocally confirmed the October 10, 2008 statement that LES

would not have the cash to pay exchangers. The Bank Group Request said “[t]he funds remaining at

[LFG] are not sufficient to meet holding company [LFG] needs and provide additional funds to [LES].”

The LFG Bank Group Request then went on to state:

As of October 17th, 2008, [LES] held approximately $40 million of cash and liquid assets in addition to the Auction Rate Securities. Liabilities for funds held on behalf of customers at that date totaled approximately $257 Million.

(SACC ¶118). SACC Exhibits 3, 6-12, 24-27, compile communications during October and November 2008 [to

the extent plaintiffs have been able to procure such communications without discovery] between SunTrust

and LES/LFG occurring virtually daily, showing exchanges of extensive financial documents, negotiations

for a forbearance agreement, and SunTrust in the loop regarding the Hail Mary merger attempt that

ultimately triggered bankruptcy when Fidelity declined to go forward with the merger at the end of its due

diligence period. All the while SunTrust continued processing wire transfers out of the 3318 account to

facilitate LES paying its prior obligations so that LES would remain standing as long as possible. During

this entire time SunTrust had actual knowledge that the funds were fiduciary funds because LES had told it

so and because the funds were in what SunTrust termed LES’s “safekeeping account.”

When LFG, on October 23, 2008, sought repayment of its $65 million cash infusion from LES

from out of account 3318, SunTrust initially refused to authorize the transfer because:

As I [Brian Edwards of SunTrust] stated in my letter [to Michelle Gluck of LFG], the reason why the transfer was not processed yesterday is relatively simple. You recently have stated in writing that the money used to purchase the securities in LES’s safekeeping account was money held “in escrow as a fiduciary” on behalf of LES’s customers. In addition, you have made us aware of the facts that suggest that LES may have violated its fiduciary duty and/or otherwise acted improperly with respect to these customers.

(SACC ¶110 and Exhibit 24). (Emphasis added).

14


At the same time LFG was detailing LES’s insolvency and its dire liquidity crisis, it was

reiterating LES’s fiduciary relationship with its Exchangers. The following statement was made on behalf

of LFG by Defendant Theodore Chandler, LFG’s Chief Executive Officer, on or about October 16, 2008

in the “Executive Summary” forwarded to SunTrust:

LandAmerica 1031 Exchange Services, Inc. has served as qualified intermediary in accordance with IRS Section 1031 Exchange regulations since 1992. LandAmerica serves in a fiduciary capacity for those individuals, limited partnerships, small businesses, and corporations wishing to defer taxable capital gains on the sale of investment real estate. When participating in a 1031 exchange, the taxpayer has 180 days from the sale of relinquished property to close on the purchase of replacement property.

(SACC ¶122, Exhibit 6). (Emphasis added). By at least this time SunTrust also had in hand the LES form Exchange Agreement,5 which

provided that the exchange customers agreed to LES depositing the Exchange Funds at SunTrust Bank

and required that exchangers acknowledge the Exchange Funds might exceed the deposit insurance

covering the SunTrust account. (SAC ¶¶3, 10, 11, 64, 123, 124, Exhibits 1, 3, 4) Of course, SunTrust

knew that account 3318 not only was not an FDIC-insured account at all, as shown by the account

statement at SACC Exhibit 4, but that it was facilitating wire transfers of the incoming Exchange Funds

daily to pay off other parties to which LES was obligated. Yet SunTrust continued with business as

usual vis-à-vis the 3318 account.

Between November 21, 2008 and November 25, 2008, on the eve of LES’s bankruptcy,

SunTrust, with full knowledge, assisted LES in cleaning out the 3318 “safekeeping” account of all but

$1. SunTrust processed in this time period seven transfers totaling $46 million from account 3318 to an

LES account at Smith Barney, again, not an FDIC-insured account. (SACC ¶125, Exhibit 18).

Immediately after the transfers, LES filed for bankruptcy and claimed the $46 million as its property to

use to pay legal fees and administrative costs in the bankruptcy case.

IV. LEGAL STANDARD.

5 Discovery will uncover when SunTrust first had access to the Exchange Agreement.

15


Federal Rule of Civil Procedure 8(a)(2) requires “a short and plain statement of the claim

showing that the pleader is entitled to relief.” The United States Supreme Court has recently stated:

“Specific facts are not necessary; the statement need only ‘give the defendant fair notice of what the . . .

claim is and the grounds upon which it rests.’” Erickson v. Pardus, 551 U.S. 89, 93-94 (2007) (citations

omitted). The Supreme Court has also recently noted:

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to “state a claim to relief that is plausible on its face.” A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged. The plausibility standard is not akin to a “probability requirement,” but it asks for more than a sheer possibility that a defendant has acted unlawfully.

Ashcroft v. Iqbal, 129 S. Ct. at 1949 (Citations omitted, emphasis added).

The Supreme Court said in Bell v. Twombly: “once a claim has been stated adequately, it may be

supported by showing any set of facts consistent with the allegations in the complaint.” Bell Atl. Corp. v.

Twombly, 550 U.S. at 563.

“The purpose of a motion to dismiss is simply to test the sufficiency of the complaint because it

does not resolve contests surrounding the facts, the merits of a claim or the applicability of defenses; and,

in testing the sufficiency of the complaint, the court must draw all reasonable inferences from those facts

in favor of the plaintiff.” City of North Myrtle Beach v. Hotels.com L.P., C.A. No.: 4:06-CV-3063, 2007

U.S. Dist. LEXIS 85886, *6-7 (D.S.C. Sept. 30, 2007) (citations omitted) (Exhibit 1 – appendix of cases).

V. ARGUMENT.

A. Plaintiffs have Sufficiently Pled the Actual Knowledge Element of their Aiding and Abetting Breach of Fiduciary Duty Claim.

SunTrust’s Motion to Dismiss the aiding and abetting breach of fiduciary duty claim is based on

(1) the purported failure of the SACC to adequately allege SunTrust’s actual knowledge of LES’s

breach of fiduciary duty, prior to October 16, 2008; and that (2) fiduciary duties on the part of LES

cannot be alleged because the LES/LFG Bankruptcy Court’s order regarding property of the Bankruptcy

Estate purportedly disposes of the issue.

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The facts chronicled above meet and exceed the plausibility standards of Iqbal and Twombly.

SunTrust virtually concedes the point as of October 16, 2008, unless its strategy is to sandbag in its

opening brief and focus on the later period in a reply. Thus, the claims of Gerald Terry, Ann Robbins,

Jane Evans and Vivian Hays, all of whom funded LES with their Exchange monies after October 16,

2008, are clearly sound in this regard.

As a preliminary matter, plaintiffs believe that the conceded showing of actual knowledge as of

October 16, 2008, renders it unnecessary at this juncture for the Court to impose a bright-line date

restriction on the aiding and abetting claim. Once sufficient facts have been pled to show the tort,

plaintiffs should be allowed discovery to establish exactly how far back SunTrust had the requisite

knowledge to support the claim.6 Plaintiffs have been able to plead, without benefit of discovery from

SunTrust, very detailed communications showing direct, actual knowledge by SunTrust by the end of

September and throughout October and November 2008, that LES was out of money and spending

incoming Exchange Funds to pay prior exchange obligations.

The fact that detailed financial disclosures of a type that clearly demonstrated LES’s breach of

fiduciary duty were being provided to SunTrust during LFG/LES’s downward financial spiral of

October/November 2008, renders it more than plausible that the same type of information, to which

plaintiffs have not yet gained access, was required by SunTrust during June/July 2008 when LFG/LES’s

financial condition became so dire that the revolving credit line was reduced, the financial covenants

were amended, and SunTrust appears to have been contemplating the possibility of a LFG/LES

bankruptcy. It is, in fact, implausible to assume that SunTrust did not take a look at LES’s accounts and

asset flow until as late as October 2008. 6 In fact, the case going forward on behalf of at least Terry, Robbins, Evans and Vivian Hays will require discovery during the time period between the purchase of the ARS and the Bankruptcy. It would indeed be anomalous if any plaintiffs were dismissed at this stage, only to have discovery confirm actual knowledge by SunTrust back to July 2008. To avoid such a scenario, if this Court considers it appropriate to enter a dismissal of any plaintiff based on date parameters, plaintiffs respectfully request dismissal without prejudice. Otherwise a class could be certified and recovery obtained on behalf of the entire group of 400 exchangers except for plaintiffs prematurely excluded at the pleading stage.

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In any event, if a bright-line date is appropriate that does not go back to July 2008, plaintiffs

believe that the latest cut-off, solely for the purposes of this Motion, would be September 30, 2008,

when LES transmitted to SunTrust the five inches of financial documents detailing all exchanges from

May through September 29, 2008. All plaintiffs other than Leaping Eagle caused their Exchange Funds

to be paid over to LES after this date and should not be dismissed based on failure to sufficiently pled

actual knowledge by SunTrust.

B. Plaintiffs have Sufficiently Pled the Underlying Fiduciary Duty.

SunTrust seeks dismissal of the aiding and abetting breach of fiduciary duty claim, asserting the

Bankruptcy Court for the Eastern District of Virginia ruled that the $46 million in Exchange Funds LES

had left when it declared bankruptcy was property of the Bankruptcy Estate. The Bankruptcy Court, in

Millard Refrigerated Servs. v. LandAmerica 1031 Exch. Servs. (In re LandAmerica Fin. Group, Inc.), 412

B.R. 800 (Bankr. E.D. Va. 2009), and Frontier Pepper’s Ferry, LLC v. LandAmerica 1031 Exch. Servs.

(In re LandAmerica Fin. Group, Inc.), 2009 Bankr. LEXIS 4133 (Bkrptcy. D. Va. 2009), addressed the

issue of fiduciary duty when it resolved ownership of the funds in favor of LES.

SunTrust does not argue that the Bankruptcy Court’s order, in a proceeding in which the

plaintiffs were neither parties nor allowed to participate, creates a res judicata or collateral estoppel effect.

It does not cite to any authority that this Court is bound by the outcome in the Bankruptcy Court or even

that it is precedent. Rather, SunTrust states “unless this Court determines that the Bankruptcy Court erred,

this Court must dismiss plaintiffs’ aiding and abetting breach of fiduciary duty claim against SunTrust.”

Plaintiffs urge this Court to reject the notion that it is bound, in this Multidistrict Litigation

involving 400 putative class members who lost millions of dollars in Exchange Funds, by the findings and

conclusions of the Bankruptcy Judge who was dealing solely with a bankruptcy issue and applying

bankruptcy presumptions, in a proceeding over which the litigants herein could not participate. Plaintiffs

have previously briefed, at length, abundant grounds to disregard the bankruptcy order, and incorporate

their prior arguments in that regard rather than restating them in full herein. Exhibit 2: Plaintiffs’

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Memorandum in Opposition to Motion to Dismiss of Defendant SunTrust Banks, Inc. (Dkt. 67, pp. 19 –

33). These arguments note:

(i) The issue before the Bankruptcy Court was a question of bankruptcy law – the application of Section 541 of the Bankruptcy Code providing for “creation of a bankruptcy estate;”

(ii) The Bankruptcy Court’s conclusions were all guided by application of the Bankruptcy

Code definitions and presumptions that “[i]n line with the broad definition of ‘property of the estate,’ money held in a bank account in the name of the debtor is presumed to be property of the bankrupt estate,” and that “inclusion of exchange funds in the bankruptcy estate furthers primary policies of bankruptcy law – equitable distribution of property among similar creditors with a collective action to avoid separate claims of 450 trusts” (emphasis added);

(iii) The Bankruptcy Court’s strong reliance on the disclaimer language in the Exchange

Agreements – that LES was not undertaking any duties not expressly set forth in the Exchange Agreements – based on a misstatement of the law; 7

(iv) The Bankruptcy Court’s reliance on the disclaimer language in the Exchange

Agreements when no party briefed or argued non-waiveable statutory duties;

(v) The Bankruptcy Court’s strong reliance on the “dominion and control” language in each Exchange Agreement, when no party briefed or argued Treas. Reg. §1.1031(k)-1(n), which precludes such inferences for any purposes other than the tax deferral analysis;

(vi) The issue of agency status, and thereby fiduciary status, of qualified intermediaries was

not fully briefed in the Bankruptcy proceeding, as shown below;

(vii) The issue of LES’s status as a “broker” with commensurate duties, as defined under Virginia law, was never briefed in the Bankruptcy Court nor considered by the Bankruptcy Judge;

(viii) The Bankruptcy Court’s exclusion of extrinsic evidence of LES’s portrayal of the

Exchange Funds as fiduciary funds, held for the benefit of exchangers, rather than its own property (in SEC filings, marketing materials, communications to regulators and communications to SunTrust), when the Exchange Agreement, at best, is ambiguous. 8

7 See, e.g. Gordonsville Energy, L.P. v. Virginia Elec. and Power Co., 257 Va. 344, 355-356, 512 S.E.2d 811, 818 (1999) (requiring knowledge of the right to be waived and an intention to waive it); Restatement (Third) of Torts §§ 77-78 (implied duties of a trustee can’t be waived despite language in the document purporting to do so).

8 For example, there is an inherent conflict and an ambiguity arising between the provisions of the Exchange Agreement that limit LES’s role to that of a QI under the applicable Treasury Regulations and limit the purpose of the Agreement as solely to facilitate the §1031 exchange and the Bankruptcy Court’s conclusion that the “dominion and control” provision of the Exchange Agreement transferred both legal and beneficial title to the Exchange Funds to LES. This is because the Treasury Regulation makes clear that only legal title

19


Perhaps the most compelling defect in the Bankruptcy Court’s order is the finding that the

Exchange Agreement granted LES the absolute right to use Exchange Funds entrusted to it for any

purpose, including “to operate its business activities without any limitations whatsoever.” Frontier

Pepper’s Ferry, at *35. The primary goal in the construction of written contracts is to determine the intent

of the contracting parties, and intent is to be determined from the language involved, surrounding

circumstances, the occasion, and apparent object of the parties. Christian v. Bullock, 215 Va. 98, 205

S.E.2d 635 (1974). Yet it is simply inconceivable that any property owner would knowingly have

consented to provide LES with a 180-day unsecured loan, on nominal, (below federal rate) interest, so that

LES, at its sole discretion, could take their Exchange Funds to fund other exchanges, make payroll, hand

out bonuses, or buy jets.

Under the Bankruptcy Court’s analysis, which SunTrust adopts, if LES executives took the

money to Las Vegas and doubled it, the profits went to LES. But if LES lost the money, it was simply in

breach of a contract to return the money. No reasonable person would suggest that this was the paradigm

contemplated by these exchange transactions involving hundreds of thousands up to millions of dollars.

During the 180-day exchange window, there clearly was no intended assumption of the risk on the safety

of the Exchange Funds by the LES’s exchangers customers, other than the risk of bank failure on funds

exceeding the FDIC limit, a risk explicitly disclosed in the Exchange Agreement.

This Court should not summarily dispose of the overarching issue of fiduciary duty on motion to

dismiss based on a court decision from another jurisdiction, that does not raise any issue of collateral

estoppel, res judicata, or even binding precedent. The allegations of the SACC, including the terms

need pass to accomplish the purpose of the §1031 exchange transaction through the QI mechanism. Treas. Reg § 1.1031(k)-1(g)(4)(iv)(A). This conflict and ambiguity required consideration of extrinsic evidence and the extrinsic evidence shows LES consistently and unequivocally characterized the Exchange Funds as fiduciary funds, held for the benefit of exchange customers, and not the property of LES. (SACC ¶¶12, 15, 26, 94, 99, 110, 112, 122, 124, 139, 143, 161, 167, 168, 171, 218, 221, 226, SACC Exhibits 6, 7, 9, 19, 24).

20


contained in the Exchange Agreement attached to it as Exhibit 1, set forth facts sufficient for a jury to find

a fiduciary relationship between LES and plaintiffs.

1. LES as Agent.

Each Exchange Agreement contains a “choice of law” clause which states that Virginia law

applies. (SACC Exhibit 1, ¶11). Under Virginia law, an agent is one who represents the principal in the

creation and performance of contracts with third parties, and subject to the control of the principal.

Acordia of Virginia Insurance Agency, Inc. v. Genito Glenn, L.P., 263 Va. 377, 560 S.E.2d 246 (2002).

The control element of agency in this case is clear given that the exchange customer dictated: (i) the

identification of the relinquished property; (ii) the transferee of the relinquished property; (iii) the date and

arrangement for the transfer of the relinquished property; (iv) the sales price on the relinquished property;

(v) all other terms of the sales contract on the relinquished property; (vi) the manner, timing and content of

the events and documents necessary to close the relinquished property, including bills of sales,

assignments of leases, security deposits; (vii) the identification of the replacement property; (viii) the

purchase price on the replacement property; (ix) the date and arrangement for the transfer of the

replacement property; (x) all other terms of the sales contract for the replacement property.

Virginia courts also recognize a class of “special” agent:

A special agent is one who is authorized to perform one or more specific acts in pursuance of particular instructions, or within restrictions necessarily implied from the stated acts to be performed. The powers of a special agent must be strictly construed. The authority of a special agent must be ascertained from the terms of the instrument itself. No authority will be implied from the terms of the instrument, except that authority indispensable to the exercise of the powers expressly conferred.

Hartzell Fan, Inc. v. Waco, Inc., 256 Va. 294, 300, 505 S.E.2d 196 (1998) (citations omitted).

It is clear that LES was acting as a special agent charged with carrying out the specific functions

necessary to accomplish a tax-compliant IRC §1031 Exchange for the benefit of its exchange customers.

LES’s specific and limited functions were to receive the Exchange Funds, hold the Exchange Funds and

then buy the replacement property identified by the exchange customers by applying the Exchange Funds

to that purchase, for the purpose of consummating the exchange transactions. The exchange customers

21


contracted with LES for that entity to act “solely for the purpose of facilitating [their] exchange[s] of

relinquished property for the replacement property.” (SACC Exhibit 1, ¶6(b)).

Paragraph 1(a) of the Exchange Agreement specified that LES would transfer the relinquished

property, as directed by plaintiffs, and obtain replacement property, as directed by plaintiffs. In ¶2(a),

“LES agree[d] to hold and apply the Exchange Funds” from the transfer of the plaintiffs’ relinquished

property. Under ¶4, LES agreed to hold the Exchange Funds pending certain dates and directives of the

plaintiffs consistent with Internal Revenue Code §1031. In ¶5(b), LES agreed to acquire and transfer to

the plaintiffs’ the replacement properties as identified and directed by the plaintiffs. Paragraph 6(b) limits

the subject matter of the agreement to facilitation of the §1031 exchange transactions. The LES-drafted

Acknowledgment associated with the Exchange Agreements and signed by exchange customers recited

“LES is required to hold the Exchange Funds including Taxpayer’s earnings thereon, if any, until the

Termination Date.” (SACC Exhibit 17). (Emphasis added).

Thus, LES agreed, for a fee, to act for its more than 400 exchange clients, as a corporate QI on

their behalf, to consummate the transfer of relinquished property, to receive and hold the proceeds, to

acquire the replacement property with the proceeds, and then convey back the identified replacement

property. These are actions of a special agent.

A review of the controlling Treasury Regulations confirms that LES was acting as the plaintiffs’

agent for the purpose of completing the exchange transactions. The issue raised by §1031 is how much

taxpayer dominion and control over Exchange Funds will constitute “property or money received,” which

would be a taxable gain to the recipient.

Treas. Reg. §1.1031(k)-1(f)(2) provides that the general rules of constructive receipt stated in

§§1.451-1(a) and 2(a) apply “except as provided in paragraph (g).” (Emphasis added). Treas. Reg.

§1.1031(k)-1(g)(4) states the QI “is not considered the agent of the taxpayer for the purposes of Section

1031(a) [the subsection on actual or constructive receipt]. . .” even if the QI is considered the agent of the

Exchanger under state law. (Emphasis added). “The determination of whether the taxpayer is in actual or

22


constructive receipt of the money. . . is made as if the QI is not the agent of the taxpayer.” Id. (Emphasis

added). Under this regulation, at (g)(4)(iv)(B) and (C), the language verifies that the QI can be the agent

of a party to the transaction. In addition, the Treasury Regulation notes:

The exchange agreement entered into by B and C satisfied the requirements of paragraph (g)(4)(iii)(B) of this section… This result is reached for purposes of this section regardless of whether C was B’s agent under state law.

§1.1031(k)-1(g)(8), Ex. 4 sub- (ii). (Emphasis added).

An enactment must be interpreted, if possible, in a manner that gives meaning to every word.

See, e.g., First Virginia Bank v. O’Leary, 251 Va. 308, 467 S.E.2d 775 (1996); Monument Assoc. v.

Arlington County Bd., 242 Va. 145, 149, 408 S.E.2d 889 (1991). The use of the words “as if,” “is not

considered,” “for the purpose of,” and “regardless of whether” in Treas. Reg. §1.1031(k)-1(g)(4) and

(g)(8) are meaningless other than in recognition that the QI may actually be acting as the agent of the

exchange customer under the common law for all other purposes.

Also, Treas. Reg. §1.1031(k)-1(k)(2) directs that “the agent of the taxpayer at the time of the

transaction” is disqualified from serving as an intermediary. The Regulation then provides an exception

from the agency disqualification by stating: “[s]olely for purposes of this paragraph (k)(2), performance of

the following services will not be taken into account – (i) Services for the taxpayer with respect to

exchanges of property intended to qualify for non-recognition of gain or loss under section 1031.” Treas.

Reg. §1.1031(k)-1(k)(2)(i). Paragraph (k)(2)(i) thus permits a QI to act as agent for the exchange

customer, to perform those tasks necessary for the purposes of qualifying the exchange under §1031,

without triggering the disqualification.

Far from exempting a QI from agency law, §1.103(k)-1(k)(2)(i) recognizes the QI generally will

be acting as agent of the taxpayer in the transaction, evoking the common law and statutory fiduciary

duties. It is clear that the Regulation contemplates that the exchange customer and QI relationship

operates on parallel planes – “as if” there is no agency relationship for the 1031 tax analysis, but according

to state law for all other purposes. For purposes of analyzing the QI’s duty to protect the exchange

23


customer’s funds, as clearly was the intention of the plaintiffs, the other exchangers and LES, state law

applies to the relationship.

Virginia case law is very clear that a principal/agent relationship is a fiduciary relationship.

Banks v. Mario Indus., 274 Va. 438, 452-453, 650 S.E.2d 687 (2007). Under Restatement (Second)

Agency §13, “[a]n agent is a fiduciary with respect to matters within the scope of his agency.”

There is nothing incompatible with the QI being an agent, broker or trustee for the purposes of

fiduciary duties involving safekeeping of Exchange Funds while being treated “as if” not an agent for the

actual/constructive receipt analysis required under the tax law, and that is exactly what the Regulation

provides. Treas. Reg. §1.1031(k)-1(g)(4)(i) does not abrogate the principal-agent relationship and the

commensurate fiduciary duties LES owed its exchange customers as the Bankruptcy Court concluded.

2. LES was a Fiduciary Based on its Duties as QI.

The very nature of the exchange transaction creates a fiduciary relationship based on trust,

confidence and fidelity.

LES was an “intermediary,” which is defined by the §1031 statute as requiring the transfer of

only legal title. The Exchange Agreement provided LES “was entering into this Exchange Agreement

solely for the purpose of facilitating taxpayer’s exchange of the relinquished property for the

replacement property.” (SACC Exhibit 1, ¶6(b)). Thus, any assumption by LES of more than bare legal

title to the proceeds exceeds the stated purpose and intent of the Exchange Agreement.

The function of a qualified intermediary is also defined by “usage of trade.” In particular, the

Federal of Exchange Accommodator’s use of the term “intermediary” is admissible to define the intended

meaning of the term. See Columbia Nitrogen Corp. v. Royster Co., 451 F.2d 3 (4th Cir. 1971). The FEA

defines an “intermediary” as a “fiduciary” in its Code of Ethics, which LES agreed to bind itself to by

being an active member. (SACC ¶¶94, 198). LES’s frequent and consistent declarations to this effect

confirm this understanding. (SACC ¶¶ 12, 15, 26, 94, 95, 99, 110, 112, 122, 124, 139, 143, 171, 161,

167, 168, 218, 221, 226 and SACC Exhibits 6, 7, 9, 19, 24).

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Also, as noted above, the terms of Treas. Reg. §1.1031(k)-1 do not negate, but rather affirm, the

agency relationship that arises based on the functions served by the QI.

3. LES was a Broker

The LES Exchange Agreement and interrelated closing documents bring LES within the

statutory definition of “broker” under Virginia law. Virginia Code §54.1-2100 defines “real estate broker”

as follows:

‘Real estate broker’ means any person or business entity, including, but not limited to, a partnership, association, corporation or limited liability company, who, for compensation or valuable consideration (i) sells or offers for sale, buys or offers to buy, or negotiates the purchase or sale or exchange of real estate, including units or interest in condominiums, cooperative interest as defined in § 55-426, or time-shares in a time-share program even though they may be deemed to be securities, or (ii) leases or offers to lease, or rents or offers for rent, any real estate or the improvements thereon for others. (Emphasis added).

Virginia Code §54.1-2107 states:

One act for compensation or valuable consideration of buying or selling real estate of or for another, or offering for another to buy or sell or exchange real estate, or leasing, or renting, or offering to rent real estate, except as specifically excepted in § 54.1-2103, shall constitute the person, firm, partnership, co-partnership, association or corporation, performing, offering or attempting to perform any of the acts enumerated above, a real estate broker or real estate salesperson. (Emphasis added).

In apparent recognition that these Code provisions cast a very broad net, the Virginia Legislature

codified certain exceptions to the real estate broker definition. See, §54.1-2103. A QI is not, however, on

the list of exemptions.

LES, by the Exchange Agreement, was paid to facilitate the like-kind exchanges, which included

accepting assignment of the contracts of sale, and purchasing and transferring the identified replacement

properties. Pertinent provisions of the Exchange Agreement provide:

i. LES is to facilitate the like-kind exchange of real property. (Exchange Agreement, ¶ 1(a));

ii. LES is to acquire from the exchange client the relinquished property. (Id. at ¶

1(a)); iii. LES is to acquire the replacement property in a purchase transaction. (Id. at ¶

1(a));

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iv. LES is to make payments from the Exchange Funds to acquire the replacement

property. (Id. at ¶ 2(b)); v. LES is to convey the replacement property to the exchange client. (Id. at, ¶ 1(a));

and vi. LES is assigned the exchange client’s rights under the sales contract to sell the

relinquished property. (Id. at ¶ 1(b)). (Emphasis added).

The LES-drafted Exchange Agreement provisions make it crystal clear that LES’s conduct falls

within the definition of real estate broker under Virginia law, which imposes statutory duties regarding

the holding and handling of funds pursuant to §54.1-2108:

No licensee or any agent of the licensee shall divert or misuse any funds held in escrow or otherwise held by him for another. . . . (Emphasis added).

By the specific language of the Exchange Agreements, as well as the accompanying

Acknowledgement, LES was required to “hold and apply” the Exchange Funds according to the

Agreement and was to “make payments from the Exchange Funds to acquire the replacement property.”

(SACC Exhibit 1, ¶2(a), 2(b), SACC Exhibit 17). The Exchange Agreement provided that LES “was

entering into this Exchange Agreement solely for the purpose of facilitating taxpayer’s exchange of the

relinquished property for the replacement property.” (SACC Exhibit 1, ¶6(b)). Section 54.1-2131,

regarding brokers engaged by sellers, requires, among other things, that the broker:

(1) “Account in a timely manner for all money and property received by the licensee in which the seller has or may have an interest;” and

(2) “Disclose to the seller material facts related to the property or concerning the transaction of which the licensee has actual knowledge.”

LES was, thus, subject to all of these statutory fiduciary duties regarding the handling of the

Exchange Funds.

4. LES was a Trustee.

a. The Exchange Agreements created an express trust under which LES held the Exchange Funds for the benefit of each Exchanger.

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Under Virginia law, “an express trust may arise from ‘words or circumstances which

unequivocally show an intention that the legal estate was vested in one person, to be held in some manner

or for some person on behalf of another . . . .’” Cody v. United States, 348 F. Supp. 2d 682, 692 (E.D. Va.

2004) (citations omitted). Whether an express trust has been created does not turn on the use of particular

words or phrases like “trust” or “trustee.” Rachel Thomas, and Others v. C.W. House, and Others, 145 Va.

742, 746, 134 S.E. 673 (1926). Rather, “the Court has an obligation to go beyond the terminology used in

an effort to determine the substance of the relationship between the parties.” Airlines Reporting Corp. v.

Pishvaian, 155 F. Supp. 2d 659, 664 (E.D. Va. 2001). See Restatement (Third) of Trusts §5.

The Bankruptcy Court focused on the absence of words such as “trust” or “escrow.” Yet in the

case of Dameron v. Old Republic National Title Insurance Company, 155 F.3d 718, 722 (4th Cir. 1998)

(citations omitted), such words were deemed unnecessary, holding: “An express trust is created when

the parties affirmatively manifest an intention that certain property be held in trust for the benefit of a

third party. An express trust may be created ‘without the use of technical words.’”

In Dameron, the Fourth Circuit held:

The language of the parties’ agreements and the circumstances under which the Lenders advanced their funds to Dameron leave no doubt that the parties intended Dameron to act merely as an intermediary. There was plainly no expectation that Dameron would keep the Lenders’ funds after closing or that he would develop any equitable interest in the funds. In fact, under Virginia law, a trust fiduciary is prohibited from acquiring an equitable interest in trust property adverse to his principal. Therefore, under Virginia law and the law of trusts generally, we have no doubt that an express trust was created.

Dameron, 155 F.3d at 722 (citations omitted). (Emphasis added).

Dameron describes virtually the exact experience of the Exchangers herein. Of course, in this

case the plaintiffs expressly limited LES’s role “to act merely as an intermediary.”

The LES Exchange Agreements do not describe a gift, a loan, a bailment, or a purchase. The

Exchange Agreements describe a personal service contract, whereby the exchange customers paid

approximately $1000 for services rendered by LES.

Restatement (Third) Trusts §5 at 57 describes the creation of a trust:

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If property is transferred by one person to another and the transferee agrees to sell that property and to pay its proceeds or a certain amount of proceeds to a third person, ordinarily a trust of the property is created.

By the LES exchange agreement, relinquished property was transferred, by the Exchanger, to

LES, and LES, as the transferee, agreed to sell that property and agreed to pay its proceeds or a certain

amount of proceeds to a third person, the seller of the replacement property. This is the specific situation

where the Restatement concludes that a trust of the property is ordinarily created. The Restatement

describes only one exception:

If, however, property is transferred by one person to another, who agrees in consideration thereof to assume a personal liability to a third person, a contract for the benefit of the third person and not a trust is created.

Id. at 57 (emphasis added).

LES did not assume but disclaimed personal liability to the third party seller of the replacement

property. While ¶2(a) of the Exchange Agreement states, “LES shall make payments from the Exchange

Funds to acquire the replacement property,” paragraph 5(a) provides that LES assumes no liability or

other obligations “in connection with the acquisition of any property” because the exchanger “shall

assign its rights, but not its obligations, under the replacement property contract to LES.” The same

paragraph of the Exchange Agreement goes on to provide that LES’s only obligation was to the Exchanger

and that obligation was to hold and then deliver the Exchange Funds to the seller of the replacement

property. The Exchange Agreement clearly creates a trust and not a contract for the benefit of another.

LES explicitly acknowledged in the Exchange Agreements that its role with respect to the

Exchange Funds was limited. Paragraph 6(a) of each Exchange Agreement recites that “LES has entered

into this Exchange Agreement with the intention of being a ‘qualified intermediary’ within the meaning of

Section 1.1031(k)-1(g)(4)(iii) of the Regulations and both parties acknowledge that the Exchange

Agreement is intended to satisfy the ‘safe harbor’ provisions of Section 1.1031(k)-1(g) of the

Regulations.” Id. Subsection (b) of ¶6 goes on to provide that “LES is entering into this Exchange

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Agreement solely for the purpose of facilitating taxpayer’s exchange of the relinquished property for

the replacement property.” Id.

Because LES’s “sole” purpose was to comply with the Treasury Regulations to defer a tax, it is

necessary to examine what interest the regulations require the taxpayer transfer to the QI in order to

effectuate a tax-deferred exchange. As previously acknowledged by SunTrust, the requirement for a

§1031 Exchange is that “the seller of property is prohibited from taking actual or constructive legal title of

the proceeds at any time during the 1031 exchange. . . .” SunTrust Memo (Dkt. 55-1) at pp. 3-4. The

regulation at Treas. Reg §1.1031(k)-1 subsection (g)(4)(iv)(A) provides that “an intermediary is treated as

acquiring and transferring property if the intermediary acquires and transfers legal title to that property.”

Id. (Emphasis added). The reference to “legal title” demonstrates a clear legislative intent that the

transfer of equitable title to the QI is never necessary. Courts have agreed that §1.1031(k)-1 does not

require the taxpayer to transfer its equitable interest to the QI. “A taxpayer need not abandon all equitable

interest in the proceeds from the downleg property for a transaction to qualify as a non-taxable event under

section 1031.” Cook v. Garcia, Case No. 96-55285, 1997 U.S. App. LEXIS 5980, *4 (9th Cir. Cal. Mar.

27, 1997); see, also, State of Washington v. Grimes, 111 Wn. App. 544, 46 P.3d 801 (2002). Instead of

requiring the taxpayer to abandon all equitable interest in the proceeds, the regulations only require that the

taxpayer not be in “actual or constructive receipt.” DeGroot v. Exchanged Titles (In re Exchanged Titles),

159 B.R. 303, 306 (Bankr. C.D. Cal. 1993) (quoting Alderson v. Commissioner of Internal Revenue

Service, 317 F. 2d 790, 795 (9th Cir. 1963)).

Thus, as the regulations make clear and SunTrust acknowledges, the §1031 exchange transaction

does not require anything other than transfer of legal title to the QI and there is no rationale under §1031 or

the regulations for transfer of anything more. LES explicitly limited it purpose in the transaction to

serving as QI to accomplish a tax-compliant exchange and that is all the exchange customers agreed to.

Any interpretation of the Exchange Agreement to transfer more than the requisite legal title defeats the

intent of the parties and is simply wrong.

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Courts have analyzed exchange transactions in just this way and have concluded that the

bankruptcy estate of a QI does not include the beneficial interest in the property transferred to the debtor to

effectuate the exchange. In In re Exchanged Titles, Inc. the court noted that the parties’ real intent in

transferring the property was solely to effectuate a Section 1031 exchange so that the taxpayer retained the

equitable interest in the transferred property. DeGroot v. Exchanged Titles (In re Exchanged Titles), 159

B.R. 303 (Bankr. C.D. Cal. 1993). In this case, the Exchange Agreements plain language recites that the

parties’ sole intent was to effectuate the Section 1031 exchange. See, also, Siegel v. Boston (In re Sale

Guar. Corp.), 220 B.R. 660 (B.A.P. 9th Cir. 1998).

Paragraph 2(c) of the Exchange Agreement does state that LES shall have “sole and exclusive

possession, dominion, control and use of all Exchange Funds.” However, this control provision was

expressly limited by the requirement that LES deposit the Exchange Funds at SunTrust in the FDIC-

insured account and further by the requirement that LES hold and apply the funds to acquisition of

replacement property, and by the acknowledgement provision that “LES is required to hold the

Exchange Funds . . . until the Termination Date.” The Exchange Agreement at ¶3(a) stated:

Taxpayer acknowledges and agrees that the amount of the Exchange Funds may be in excess of the maximum amount of the deposit insurance carried by the depository institution indicated above [SunTrust] . . . .

There is no possible construction of the LES-drafted Exchange Agreement statement regarding

FDIC insurance that is consistent with an agreement that the Exchange Funds could be withdrawn from

the SunTrust account and used for any and all LES purposes. At no time did LES possess legal and

equitable title to the Exchange Funds to use freely on its own account.

The fact that LES paid a tiny amount of interest to the Exchangers does not create a debtor-

creditor relationship. The interest paid was “merely such interest or other earnings as the funds, being

invested, may earn” and does not defeat the trust analysis. Restatement (Third) Trusts, §5 at 60. The

payment of interest by LES to the Exchangers, equal to the Federal Funds Rate less 150 basis points, is not

reasonable consideration for LES to have unfettered use of the Exchange Funds as an unsecured 180-day

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loan. The provision for this below market interest could not morph a trust relationship into an unsecured

loan by the Exchangers to financially strapped LES. The intention of the parties was to create a trust, not a

loan. No other interpretation is plausible.

b. LES’s Declarations That it Held the Exchange Funds in Trust Were Sufficient to Create a Trust.

Trusts may be created by a declaration from the owner of the property that he or she holds the

property as trustee for one or more persons. Id. at §10, p. 145. Even assuming arguendo that the

Exchange Agreements, by their literal language, transferred both legal and equitable title to the Exchange

Funds to LES, LES still declared that it held the Exchange Funds in trust for the benefit of the Exchangers.

Restatement (Third) Trusts, § 45. If anything, such contract language would merely create an ambiguity

that would require consideration of manifestations of intent to resolve. A declaration of trust by LES

creates a trust enforceable by the Exchangers as beneficiaries. LES made declarations of trust on its

website, in its marketing materials, through its parent in filings with the SEC representing that Exchange

Funds were not assets that belonged to LES, to other regulators, to SunTrust, and to the exchangers in the

Exchange Agreements by declaring that the sole purpose of the agreement was to facilitate the exchange

transaction (not acquired full legal and equitable title). SACC ¶¶12, 15, 26, 94, 95, 99, 110, 112, 122,

124, 139, 143, 171, 161, 167, 168, 218, 221, 226, SACC Exhibits 6, 7, 9, 19, 24. SunTrust clearly got

the point, referring to the account 3318 as LES’s “safekeeping account” for Exchange Funds.

In addition to express trusts, Virginia recognizes resulting trusts. Plaintiffs have set forth the law

of resulting trusts in detail in their prior Memorandum in Opposition to Motion to Dismiss, Dkt. 67, at pp.

33-34. In short, a resulting trust is because “one who advances the purchase money for real property is

entitled to its benefits.” Gifford v. Dennis, 237 Va. 193, 198, 335 S.E.2d 371 (1985). This basic precept

of Virginia law applies here. Under the exchange agreements, the exchanger transferred title to the

relinquished property (property the exchangers had paid for) to LES and allowed LES, acting solely as

facilitator and intermediary, to sell the property and receive the consideration for the sale (the Exchange

Funds) solely for the purpose to acquiring replacement property for the exchange customer. Under the

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circumstances Virginia law presumes that the property or funds are impressed with a resulting trust. Id.

The burden then shifts to establish a gift or some other legally cognizable purpose for the transfer because

of the lack of consideration. Id.9

5. Exchange Agreement Disclaimer Language

The Bankruptcy Court in the Frontier Pepper’s Ferry opinions, and SunTrust in its prior

briefing, focus on the language of the Exchange Agreement that provides that “LES has undertaken to

perform only such duties as are expressly set forth herein, and no additional duties or obligations shall

be implied hereunder or by operation of law or otherwise.” Frontier Pepper’s Ferry at *16; Dkt. 55, p.

11. However, LES’s fiduciary duties as agent, broker and trustee, arise from the Exchange Agreement,

as well as by operation of regulatory statutes that cannot be disclaimed.

The Exchange Agreement sets forth the duty of LES to deposit the Exchange Funds with

SunTrust. It references the protections of an account protected by deposit insurance. It lays out LES’s

duties to hold and to apply the Exchange Funds for the benefit of the exchange customer. The

Agreement describes LES’s role as that of a QI under the Treasury Regulations, with all meaning that

phrase entails, including its agency (and thus fiduciary) function. The Exchange Agreement describes

LES’s duty to facilitate the transaction solely for the purpose of complying the Treasury Regulations,

which passes only legal title (meaning beneficial title remained with the exchangers) and consummating

the exchange transaction. Finding that LES had a fiduciary duty “to hold” the Funds for the benefit of

the Exchange customers does not in any way go beyond what is called for by the four corners of the

Exchange Agreement.

In addition, the statutes regulating brokers in the state of Virginia would be completely

toothless if opt-out by contract were allowed. Brokers cannot avoid the regulatory intent of the state

Legislature with a “no implied duties,” clause any more than attorneys can opt out of their fiduciary

9 The Bankruptcy Court subordinated the burden-shifting rules of the Virginia law of resulting trusts to the bankruptcy presumptions applicable to defining property of the bankruptcy estate, considerations not present here.

32


duties to clients with such a clause in their retainer agreements. Any other conclusion would simply be

against public policy. Also, under Virginia law, “when an agreement, considered as a whole, establishes

an agency relationship, the parties cannot effectively disclaim it by formal ‘consent.’” Murphy v.

Holiday Inns, Inc., 216 Va. 490, 492-93, 219 S.E.2d 874 (1975).

Clearly, based on the above analysis, there are myriad bases from which the fiduciary duties

owed by LES to its exchange customers sprang, including the Exchange Agreement itself, the agency

relationship, its status as qualified intermediary with all that function entails based on the trust and

confidence reposed in the QI, the broker status of LES under Virginia statues, the creation of a trust

based on the exchange agreement, the declarations of LES as well as the nature of the transaction.

Consequently, SunTrust’s claim that there was no fiduciary duty to be breached has no merit.

C. Plaintiffs have Sufficiently Pled the Immediate Right to Possession Element of their Conversion Claim.

SunTrust concedes that plaintiffs, on day one of the exchange transaction, had the right to

identify replacement property and direct the Exchange Funds to its purchase In fact exchange

transactions can and often are completed in a day. For example, contemporaneously with signing an

exchange agreement a property owner may assign the contract of sale, identify the replacement property

and provide notice of a closing of the relinquished and replacement property for the same day. In such

case the receipt of Exchange Funds by LES would be subject to the immediate control and direction of

the exchanger to apply the funds on the exchanger’s behalf to purchase the replacement property.

In addition, the Treasury Regulation specifically limits its provisions on actual and

constructive receipt to the tax analysis. The regulation says:

No inference with respect to actual or constructive receipt rules outside of 1031[26 USCS § 1031]. The rules provided in this section relating to actual or constructive receipt are intended to be rules for determining whether there is actual or constructive receipt in the case of a deferred exchange. No inference is intended regarding the application of these rules of the purposes of determining whether actual or constructive receipt exists for any other purpose.

26 C.F.R. 1.1031(k)-1(n).

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As LES was the agent (and broker and trustee) for exchangers for all other purposes than the

1031 tax analysis, as such, it was also in actual and constructive receipt of the Exchange Funds on

behalf of the exchange customers for all purposes other than the same tax analysis. Consequently, the

possession of LES was the possession of the exchanger. When it spent the exchanger’s funds it did so in

derogation of the possessory rights of the plaintiffs and the exchangers and committed a conversion.

D. Plaintiffs’ Allegations are Sufficient to Support a Civil Conspiracy Claim.

SunTrust seek dismissal of the conspiracy claim on the ground that plaintiffs have merely stated

in conclusory terms that a conspiracy existed. It also contends plaintiffs have not sufficiently pled an

underlying tort. SunTrust ignores the myriad factual assertions that precede the statement of the cause

of action and are incorporated therein. (SACC ¶208). Also, for the reasons stated above, the underlying

tort, the breach of fiduciary duty of LES, is sufficiently pled.

The communications between SunTrust and LES, detailed at SACC ¶¶3, 10-11, 17-18, 20-25,

56, 63, 64, 94, 96-125 and Exhibits 3, 6-12, 18, 24-27, and particularly the description of SunTrust’s

transfer of all of LES’s assets but $1, totaling $46 million, from the LES safekeeping account at

SunTrust to a Smith Barney account, in the 4 days prior to the LES bankruptcy, show concerted action

necessary to go forward on a conspiracy claim. For these reasons, SunTrust’s assertions regarding the

conspiracy claim are without merit.

VI. CONCLUSION.

Plaintiffs’ claims are sufficiently pled and SunTrust’s Motion to Dismiss should be denied.

/s/ JAMES R. GILREATH . James R. Gilreath, Fed. ID No. 2101 William M. Hogan, Fed. ID No. 6141 THE GILREATH LAW FIRM, P.A. 110 Lavinia Avenue (29601) Post Office Box 2147 Greenville, South Carolina 29602 (864) 242-4727 Telephone (864) 232-4395 Facsimile [email protected] [email protected]

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mailto:[email protected]


35

Cheryl F. Perkins, Fed. ID No. 4969 Charles W. Whetstone, Jr., Fed. ID No. 4604 WHETSTONE MYERS PERKINS & FULDA, LLC 601 Devine Street (29201) Post Office Box 8086 Columbia, South Carolina 29202 (803) 799-9400 Telephone (803) 799-2017 Facsimile [email protected] [email protected] Robert L. Brace, CBN. 122240 Michael P. Denver, CBN.199279 HOLLISTER & BRACE P.O Box 630 Santa Barbara, California 93102 (805) 963-6711 Telephone (805) 965-0329 Facsimile [email protected] [email protected] Thomas Foley, CBN. 65812 Robert A. Curtis, CBN. 203870 FOLEY, BEZEK, BEHLE & CURTIS, LLP 15 W. Carrillo Street Santa Barbara, California 93101 (805) 962-9495 Telephone (805) 962-0722 Facsimile [email protected] [email protected]

December 16, 2010 ATTORNEYS FOR PLAINTIFFS, AND ALL Greenville, South Carolina. OTHERS SIMILARLY SITUATED








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