The QI File

Failure modes · not legal advice

What happens if a qualified intermediary fails

“Fail” here means the QI cannot complete the exchange as promised — insolvency, a freezing of accounts, theft, or an operational collapse. It is not a grade we assign to living firms. Treasury’s deferred-exchange rules are about whether you are treated as receiving the cash. They are not a federal receivership for exchangers. This page cites the regulation, one reported bankruptcy decision, and two named public fraud matters. It does not invent recovery percentages, and it does not tell you a current firm is next. The URL /qualified-intermediary-failures/ redirects here.

Compare QIsCheck custody controls

The tax safe harbor is not a bailout

Treas. Reg. §1.1031(k)-1(g)(4) describes when an intermediary is a qualified intermediary for the deferred-exchange safe harbor. Paragraph (g)(3) describes a qualified escrow account and a qualified trust. Paragraph (g)(6) limits the taxpayer’s right to receive, pledge, borrow, or otherwise obtain the benefits of the money before the exchange period ends. Those sentences are about constructive receipt for federal income tax.

They do not say the IRS will retrieve your proceeds if the QI’s estate is in bankruptcy court. They do not say a “segregated” sub-account the QI solely controls is automatically yours. Ask how the account is titled and who can instruct the bank. Seequalified escrow vs qualified trustandsegregated vs commingled.

What one court did with “segregated” QI accounts

In Millard Refrigerated Services, Inc. v. LandAmerica 1031 Exchange Services, Inc., 412 B.R. 800 (Bankr. E.D. Va. Apr. 15, 2009), exchangers argued that funds sitting in accounts identified to their exchanges were not property of the LandAmerica 1031 Exchange Services bankruptcy estate. The court held that the accounts at issue — including sub-accounts that used taxpayer identification and were described as segregated — remained property of the estate where the QI had sole control and the exchange documents disclaimed a property interest in the taxpayer.

That holding is fact-specific. It is the reason this directory refuses to treat a marketing word like “segregated” as a rating, and the reason we will not invent a recovery percentage from later commentary. If a firm cites LandAmerica in a sales deck, ask what is different about your account title, who the bank takes instruction from, and whether a qualified escrow holder or trustee — not the QI alone — is on the signature card.

1031 Tax Group — Edward H. Okun (named criminal case)

The Fourth Circuit’s unpublished disposition in United States v. Okun, 453 F. App’x 364 (4th Cir. 2011), recites that Edward Hugh Okun formed 1031 Tax Group, acquired qualified-intermediary companies, and was convicted after a jury trial on twenty-three counts arising from a scheme the court described as “Ponziesque,” with losses in excess of $125 million. The Department of Justice superseding indictment against Okun and Lara Coleman describes those QI acquisitions and transfers of client exchange funds. Contemporary press (Associated Press via the San Diego Union-Tribune, March 19, 2009) reported the Richmond jury’s guilty verdict on 23 counts.

Those are public charging, verdict, and appellate facts. This page does not invent a recovery percentage for 1031 Tax Group exchangers and does not treat any current directory firm as a successor.

Southwest Exchange — Donald McGhan (named criminal and SEC matter)

The U.S. Attorney’s Office for the District of Nevada announced on September 14, 2009, that Donald McGhan, owner of Southwest Exchange, Inc. — described in that release as a qualified intermediary — was sentenced to 10 years in prison and ordered to pay approximately $97 million in restitution to 134 victims. A June 8, 2009 USAO release states McGhan pleaded guilty to four counts of wire fraud. The SEC’s litigation release LR-21816 (January 14, 2011) describes transfers from Southwest Exchange Corp. used to fund MediCor, Southwest’s January 2007 collapse, and approximately $97 million owing to clients.

Those are the government’s published numbers. This page does not convert them into a “typical QI loss” statistic.

Bonds and E&O are claims, not cashiers

Fidelity / crime coverage and errors-and-omissions insurance respond, if at all, after a loss, subject to the actual policy. State facilitator statutes sometimes require a minimum bond, a cash or letter-of-credit deposit, or a qualified-escrow alternative. Those minima are not your firm’s current limit, and a statutory claim path is not a wire that lands next week.

The QI File records insurance only when a firm’s own page is cited. Ask for certificates now. Do not assume a parent guaranty covers your file until you read the instrument.

State “not subject to execution” language

Some facilitator statutes say exchange funds are not subject to execution on a claim against the facilitator — for example California Financial Code §51009, Nevada NRS 645G.360, and Colorado §6-1-721 on the texts we cite on thestate bonding overview. That is state statutory language about claims against the facilitator. It is not a holding that a federal bankruptcy estate cannot reach a QI-controlled account. LandAmerica is the reported counterexample on QI-controlled “segregated” cash. Counsel has to apply both. This page will not collapse them into a slogan.

What to put in writing before there is a failure

  • Legal entity on the agreement, account title, TIN, and who the bank will take a wire instruction from.
  • Whether a qualified escrow holder or trustee is a required signer — not only an internal dual-control memo.
  • Current insurance certificates and any parent guaranty that actually names the exchange account or the QI entity.
  • Independent verify instructions you can use without calling the salesperson’s cell.

The printable list is on thedue-diligence checklist.

FAQ

If my QI fails, do I automatically keep the exchange funds?

No. Whether proceeds are property of a bankruptcy estate depends on how the account was titled and controlled, what the exchange documents said, and what the bank’s records show. In Millard Refrigerated Services, Inc. v. LandAmerica 1031 Exchange Services, Inc., 412 B.R. 800 (Bankr. E.D. Va. 2009), the court treated certain QI-controlled “segregated” sub-accounts as estate property. That is a reported decision, not a prediction for your file.

Does a state statute that says funds are not subject to a claim against the facilitator guarantee recovery in bankruptcy?

No. Language like California Financial Code §51009, Nevada NRS 645G.360, or Colorado §6-1-721 is about execution on a claim against the facilitator under that statute. It is not a federal bankruptcy holding and is not a substitute for account control. Ask counsel. Do not treat the sentence as insurance.

Will the fidelity bond or E&O policy just pay me?

Bonds and professional-liability policies are claim processes with named insureds, deductibles, exclusions, and limits. They are not a cashier’s check. The QI File does not invent coverage amounts. Ask for current certificates before you wire, and treat recovery as uncertain if a failure occurs.

Were LandAmerica, 1031 Tax Group, and Southwest Exchange the same failure?

No. They are three named public matters: LandAmerica 1031 Exchange Services’ 2008 bankruptcy (Millard is one reported decision on those accounts); Edward H. Okun’s 1031 Tax Group fraud convictions (affirmed, United States v. Okun, 453 F. App’x 364 (4th Cir. 2011)); and Donald McGhan’s Southwest Exchange wire-fraud guilty plea and 2009 sentence (U.S. Attorney, District of Nevada). Different facts. None of them is a prediction about a firm in this directory.

Related

Sources

This page is not tax, legal, or investment advice. It does not predict recovery in any current matter.