Insurers targeted in Southwest Exchange case

The 150 real estate investors who lost $95 million with the collapse of Southwest Exchange in January may be able to recover some money from deep-pocketed third parties — insurance companies and an insurance brokerage firm that sold a bond to the failed company.

Robert Brace, a Santa Barbara, Calif., attorney for plaintiffs in the Southwest Exchange cases, is arguing that an insurance brokerage, Brown & Brown of California, allowed Southwest Exchange to take out misleading advertisements. He said the ads suggested real estate investors could rely on bonds as protection of their assets. He also claimed an “evidence of insurance” document was misleading.

Brace argued that the insurance companies are responsible for misrepresentations made by insurance broker Brown & Brown.

Lawrence Borys, an attorney for Brown & Brown, defended the insurance brokerage.

“They had nothing to do with the creation of the ads,” he said.

Brown & Brown was not contacted by Southwest Exchange until August 2006, Borys said. Brown & Brown then agreed to essentially replace and copy insurance coverage Southwest Exchange previously had obtained from another insurance brokerage, Borys said.

The insurance brokerage was asked to provide evidence of insurance to Southwest Exchange and did so, Borys said.

Brace, who sued Southwest Exchange in federal court, made arguments about the insurance companies’ liability Friday in court papers. The papers opposed a defendant’s motion to dismiss the request for an injunction.

Asked if he believed the brokerage and insurance companies were liable for damages, Brace said: “I guarantee it.”

Other attorneys also are pursuing the insurance companies.

Plaintiffs attorney Brad Johnston mentioned Brown & Brown and insurance companies as defendants in the master complaint filed in Clark County District Court against Southwest Exchange. The master complaint noted the $50 million fidelity bond and accuses Southwest Exchange and Brown & Brown of making false statements about the bond.

Tina Yan, an attorney for defendant United States Fire Insurance, declined to comment. Federal Insurance Co. and Great American Insurance Co. were the other insurance companies.

Southwest Exchange of Henderson served as an accommodator or intermediary for real estate investors who wanted to delay income taxes from the gain on sale properties. Section 1031 of the federal law allows real estate investors to direct a buyer to send proceeds from the sale directly to an accommodator and later direct the accommodator to use the money to buy another property.

If the real estate investor doesn’t touch the money, he may be able to defer taxes on the profit from the sale until later. However, investors who entrusted money to Southwest Exchange found their money was gone and Southwest Exchange was insolvent in January. The Henderson financial services company was put into receivership in February.

The issue about liability of insurance companies arose in federal court in Las Vegas where Brace is seeking an injunction against further misleading advertisements. The defendants are asking the judge to dismiss the request for an injunction.

Brace’s clients argue that Brown & Brown approved an ad in which Southwest Exchange touted a $50 million bond. The ad says transactions are “secured by a $50 million bond.”

Yet, the bond protects Southwest Exchange not the clients of Southwest Exchange, the plaintiffs said.

” … Plaintiffs would naturally interpret the phrase to mean that (Southwest Exchange) was ‘bonded’ for the plaintiffs’ benefit as creditors of (Southwest Exchange),” the court papers state.

United States Fire challenged the request for injunction. It said there are no future acts that could be stopped with an injunction, because Southwest Exchange is no longer in business. Brace argued that others continue issuing misleading “evidence of insurance” statements.