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Abbreviated Ponzi Case Argued at Third Circuit

Attorneys for title insurers accused of furthering a Ponzi scheme for nine months argued Monday at the Third Circuit that conduct must last at least a year to trigger civil racketeering charges.

PHILADELPHIA (CN) – Attorneys for title insurers accused of furthering a Ponzi scheme for nine months argued Monday at the Third Circuit that conduct must last at least a year to trigger civil racketeering charges.

The suit by homeowners Joseph and Gabriella Germinaro is one of several involving LandAmerica 1031 Exchange Services, a company that filed for bankruptcy in 2008 and was promptly met with dozens of adversary proceedings from former customers. Prior to its collapse, LandAmerica worked with sellers of investment properties who would face capital-gains taxes unless they could use the proceeds f the sale to acquire a replacement property.

LandAmerica entered into thousands of exchange agreements, keeping exchange funds from home sales in escrow with its insurers until its customers found a replacement property that could be acquired with the deposited funds.

Without homeowners’ knowledge, though, LandAmerica invested those funds in risky auction-rate securities. Former customers say LandAmerica resorted to a Ponzi-like scheme when the ARS market froze following the 2008 credit crunch, using money from new customers to pay off the old ones.

The Germinaros meanwhile were unable to complete their tax-deferred land exchange because LandAmerica shut down on Nov. 26, one week after the couple closed on their relinquished property.

They have fought for the last four years to hold two of LandAmerica’s sister companies liable, claiming that the cash Fidelity National Title Insurance Company and Commonwealth Land Title Insurance injected into LandAmerica amounted to “lulling payments” that kept LandAmerica’s liquidity problems under wraps.

Precedent dictates that “a RICO plaintiff must allege a series of related predicates lasting a substantial period of time,” however, and the conduct here spanned just nine months, from the time the ARS market froze in February 2008 to LandAmerica’s November bankruptcy filing.

Setting the stage for the Germinaros’ appeal, U.S. District Judge Nora Barry Fischer awarded the title insurance companies summary judgment last year.

Her ruling called the precedent consistent “that a pattern of  alleged racketeering lasting less than one year does not, as a matter of law, constitute a ‘substantial period of time.’”

At a hearing before a three-judge appeals panel this morning in Philadelphia, Michael Denver, an attorney for the Germinaros, argued that the racketeering pattern went back six years prior to the ARS market freeze when LandAmerica misled customers about holding their funds in a bank.

“These investors were trying to tuck their money away safely,” not have LandAmerica use their funds in escrow as an investment in potentially risky markets, said Denver, an attorney with Hollister & Brace in Santa Barbara, California.

But U.S. Circuit Judge Kent Jordan seemed skeptical, noting that the customer contracts never explicitly stated the money would remain in the bank accounts during the entire escrow period. “How can you be mislead if you read something that is clear,” Jordan asked.

Denver also urged the court to not let LandAmerica and its sister companies off the hook because they resorted to bankruptcy so swiftly.

“They deserve no benefit due to the fact that they ran out of money before the 365 days,” he said.

Judge Jordan pointed again, however, to the terms of the deal the Germinaros reached with LandAmerica. While the investments may have been imprudent, or grounds for a contract lawsuit, he voiced doubt that they could sustain a RICO claim.

“That’s the deal you struck,” Jordan said. “Everybody knew it walking in. Isn’t that the end point of the discussion [for making RICO claims]?”

Erica Calderas, who represents the two insurers, meanwhile said the Germinaros failed to make any racketeering allegations specifically regarding the six years prior to the ARS market freeze.

“RICO is hard to allege and we want to make sure it is alleged properly,” said Calderas, of the firm Hahn Loeser & Parks.

In addition to claiming that LandAmerica’s bankruptcy cost them their exchange deposit worth more than $831,000, the Germinaros said the conspiracy kept them from closing on a property that is now worth more than $9 million.

The Germinaros received more than $400,000 in damages after suing LandAmerica in bankruptcy court, but they were unable to recover funds that had been lost due to the property’s increase in value.

Categories: Appeals Business Consumers

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