Bankruptcy Judge Mike Nakagawa on Wednesday dismissed an involuntary bankruptcy petition, allowing a Clark County district judge to continue with a receivership for Southwest Exchange.
Failed Southwest Exchange was an accommodator or intermediary that helped real estate investors delay income taxes on gains from the sale of properties by rolling over the proceeds into new properties.
Under federal law, investors must not touch the money or they lose the chance to defer income taxes on their gain. So they rely on companies like Southwest Exchange to hold the proceeds while they seek a replacement investment.
Southwest became insolvent and shut down in late January. About 150 investors were awaiting the release of $96 million when the company collapsed.
Some money went to Europe and other money went to South America, said Anthony Zmaila, attorney for the receiver.
Brad Johnston, who represents real estate investors, said money from Southwest Exchange’s clients was transferred to other companies as part of a fraudulent scheme.
“This is more than anything a scheme to steal money and the use of bogus entities to steal money,” Johnston said.
Clark County District Judge Elizabeth Gonzalez has extended the receivership to include 15 companies and she may add more companies to the list later, Zmaila said.
William Brownstein, a Santa Monica, Calif., attorney representing Southwest Exchange investor Marcia Romano, filed the motion asking for Southwest Exchange to be put into involuntary bankruptcy. Such a move would allow Nakagawa to resolve the matter instead of Gonzalez.
At the hearing, Brownstein suggested suspending the bankruptcy matter but wanted the judge to retain authority to recover so-called preferential payments made within 90 days of Southwest Exchange’s collapse. Bankruptcy judges may order those who get paid within that time to return the money for the benefit of all creditors.
Romano entrusted a large portion of her life savings to Southwest Exchange, Brownstein said.
“A lot of people in this case are in Ms. Romano’s position,” Johnston said. “They have lost their life savings.”
Nakagawa dismissed the bankruptcy, reading from related case decisions and saying transferring the case to bankruptcy court would be uneconomical and inefficient. The judge noted that there may be possible claims totaling $1.5 million that would be governed by rules against preferential payments.