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Securities and Exchange Commission v. Nadel

United States District Court, M.D. Florida, Tampa Division

February 20, 2018




         BEFORE THE COURT are 1) Wells Fargo's Motion for Order Directing Receiver to Turnover Rents from Rite Aid Property (Dkt. 1332), the Receiver's Objection (Dkt. 1342), Wells Fargo's Notice of Supplemental Authority (Dkt. 1344), Wells Fargo's Request for Judicial Notice (Dkt. 1345), Wells Fargo's Reply (Dkt.1350), and the Receiver's Response to Reply (Dkt. 1351), and 2) Wells Fargo's Motion for Payment of Certain Fees and Costs as Administrative Expenses (Dkt. 1334), the Receiver's Objection (Dkt. 1343), Wells Fargo's Reply (Dkt. 1349), and the Receiver's Response to Reply (Dkt. 1352). After careful review and consideration of the arguments and submissions of the parties, the Court concludes that the motion to turnover rents should be granted and the motion for fees and costs should be granted in part and denied in part.


         The Loan

         In 2005, Scoop Real Estate L.P. (Scoop), a relief Defendant in these receivership proceedings, purchased the Rite Aid property by borrowing $2, 655, 000.00 from Wells Fargo.[1] The promissory note was secured by a Deed of Trust and an Assignment of Rents.[2] Under both the Deed of Trust and the Assignment of Rents, the rents were assigned to Wells Fargo but Scoop retained the right to collect the rents prior to any default.[3] Once a default occurred, Scoop's right to rents automatically terminated per the terms of the Assignment of Rents.

         If a default occurred under any one of the three loan documents, a default occurred on all.[4] Of the possible events of default, it is uncontroverted that on January 20, 2009, the day before this receivership proceeding was filed, Scoop signed a voluntary consent to an injunction.[5] The consent states that it is entered into voluntarily and with full knowledge of the terms set forth in the attached proposed Order of Preliminary Injunction.[6] The proposed order, which was entered January 21, 2009, contemplated the appointment of a receiver, freezing of assets, and disgorgement of profits.[7] These acts constituted a default under the terms of the Deed of Trust and therefore the loan.[8] Thus, one would assume that Scoop defaulted on the loan prior to the creation of the receivership or, at the very least, upon its creation on the day this lawsuit was filed, the same day on which the preliminary injunction and the order appointing the Receiver were entered.[9]

         This assumption, however, must be viewed in the context of these receivership proceedings and the borrowed principles of bankruptcy law. “[I]pso facto clauses which purport to entitle a creditor to call due an indebtedness solely on account of a bankruptcy filing[, ]” or in this case, the institution of receivership proceedings, are disfavored. In re Price Oil, Inc., 2006 WL 3313781, at *3 (Bankr. M.D. Ala. Nov. 14, 2006) (citations omitted). After the receivership action was filed, Wells Fargo could not seek to foreclose on its security interest without violating this Court's injunction.[10] See SEC v. Byers, 671 F.Supp.2d 531, 540 (S.D. N.Y. 2009).

         The Receivership Proceedings

         Upon appointment of the Receiver, he took possession of the commercial building on the Rite Aid property, and Wells Fargo notified the Receiver on March 17, 2009, that Scoop was in default on the loan.[11] Wells Fargo timely filed a proof of claim in these receivership proceedings as to the Rite Aid property, claiming a security interest in the property and the rents.[12] In 2012, when this Court ruled on the Receiver's proposed plan for claims determination, it reserved ruling on various objections made by Wells Fargo, including those directed to the Rite Aid property.[13] On the Receiver's later motion to approve the sale of the Rite Aid property, and over objection filed by Wells Fargo, this Court approved the sale in May 2012.[14] The order provided that all claims, liens and encumbrances relating to the Rite Aid property “shall be transferred to the proceeds of the sale” and title would be free and clear.[15] The proceeds from the sale were $2, 229, 463.15, and after splitting costs associated with the property, Wells Fargo received $2, 224, 563.15 in June 2017.[16] The gap between the sale and the disbursement was attributable to litigation over whether Wells Fargo conducted itself in good faith.[17]

         Wells Fargo as a Secured Creditor

         This Court has not previously ruled directly on Wells Fargo's claim as to the Rite Aid property.[18] Wells Fargo has not waived its right to the rents through any lack of objections in these proceedings. With recent guidance from the Eleventh Circuit in this case, it is clear that Wells Fargo as a secured creditor did not have to file a notice of claim in the receivership, although it did with respect to the Rite Aid property, to protect its preexisting state property rights. SEC v. Wells Fargo Bank, N.A., 848 F.3d 1339 (11th Cir. 2017). “[A] federal district court cannot order a secured creditor to either file a proof of claim and submit its claim for determination by the receivership court, or lose its secured state-law property right that existed prior to receivership.” Id. at 1345.

         Wells Fargo's secured rights, including the right to rents, in the Rite Aid property existed pursuant to the terms of the loan documents before the receivership was formed. The provision in the Assignment of Rents automatically terminating the borrower's right to collect rents upon an event of default was triggered one day before the filing of this action when Scoop consented to the appointment of a receivership and other relief, or the day the receivership was filed. Wells Fargo argues its right to rents became absolute upon the consent or the filing of the receivership, both events of which are defaults under the terms of the loan. See In re Grandfather Mountain L.P., 1997 WL 34740256, at *6 (M.D. N.C. Jan. 29, 1997) (relying on state authority that North Carolina is a title theory state where mortgagee receives legal title, not a lien, for security purposes and also noting that a conditional absolute assignment entitles lender automatically to access to rents upon default); In re Jason Realty, L.P., 59 F.3d 423, 428 (3d Cir. 1995) (holding that bank as assignee of rents under the loan documents had conditional absolute assignment which became absolute upon default of the debt, and rents were therefore not part of bankruptcy estate); First Fidelity Bank, N.A. v. Eleven Hundred Metroplex Assocs., 190 B.R. 510, 512 (S.D. N.Y. 1995) (holding that debtor did not have interest in rents at time bankruptcy petition filed because under the terms of the assignment of rents, absolute title passed to lender upon debtor's prepetition default regardless of purpose of assignment).[19] Without deciding the precise moment Wells Fargo became entitled to the rents, at this point in the proceedings, after the declared default in March 2009, Wells Fargo possesses a right to the rents. Even if Wells Fargo holds a lien, as opposed to title, to the rents, this Court's orders regarding the sale of the property did not extinguish the pre-existing state property rights, or if perceived as such an attempt, were unsuccessful.[20]

         The rents at issue were paid on the property after the appointment of the Receiver, and the Receiver is holding $1, 322, 923.00 attributed to those rents which Wells Fargo now seeks.[21] The Receiver has reserved the amount of the rents throughout these proceedings. The Receiver seems to argue that the rents should be denied because Wells Fargo is not entitled to post-receivership interest, attorney's fees and costs, and is limited to the $2, 655, 000.00 originally claimed of which $2, 224, 563.15 has already been disbursed to Wells Fargo from the sale of the Rite Aid property.[22] This motion seeks rents pursuant to the Assignment of Rents, however, not interest or attorneys' fees relating to the loan or a deficiency claim. Finally, the Receiver urges that $297, 657.72 should be withheld from the rents in the name of equity because the Receiver made payments on the loan through October 2009 when those rents were collected.[23] Wells Fargo did not respond. Without more, the Court grants the turnover of rents in the full amount.


         In addition to the rents, Wells Fargo seeks as an administrative expense $568, 622.74 in attorneys' fees ($527, 548.10) and costs ($41, 074.64) incurred in these receivership proceedings. The attorneys' fees were incurred by Wells Fargo in these receivership proceedings in monitoring its various security interests. The costs were awarded by another district court in the case resolving Wells Fargo's liability with respect to the Ponzi scheme ($40, 312.94) and by the Eleventh Circuit in the case resolving whether Wells Fargo was required to file a proof of claim to protect its various security interests ($761.70). Wells Fargo argues that they constitute an administrative expense which should be paid prior to any further distribution to the holders of lower priority claims, including the investors.

         The theory of recovery as an administrative expense in this case is founded on the “fundamental fairness” that Wells Fargo should be made whole. Wells Fargo accuses the Receiver of using “aggressive litigation tactics” and making “baseless challenges, ” which visited an unfairness on Wells Fargo for litigating battles that it has now won.[24] Wells Fargo asks this Court to focus on the Receiver's “results obtained.”[25] Because the Receiver did not quickly and without controversy release the rents from the Rite Aid property, despite the unresolved litigation regarding whether Wells Fargo was liable, Wells Fargo demands the Receiver must pay for its injury.

         Wells Fargo relies on several cases applying bankruptcy law as authority for awarding its fees and costs as administrative expenses of the receivership, save one - SEC v. HWK Trading LLC, 2009 WL 2499146 (M.D. Fla. Aug. 14, 2009), which did not apply or construe bankruptcy law.[26] When minimal authority and guidance exists in the receivership setting, bankruptcy law provides guidance. Wells Fargo, 848 F.3d at 1344. The Bankruptcy Code permits recovery of administrative expenses “including . . . the actual, necessary costs and expenses of preserving the estate.” 11 U.S.C. § 503(b)(1)(A).[27]“The use of the words ‘actual and necessary' indicate that the estate must accrue a real benefit from the transaction for which the claim is being filed. The mere potential of benefit to the estate does not satisfy this requirement.” Broadcast Corp. of Ga. v. Broadfoot, 54 B.R. 606, 611 (Bankr. N.D.Ga. 1985) (citation omitted), aff'd in part, rev'd in part, In re Subscription Television of Greater Atlanta, 789 F.2d 1530, 1532 (11thCir. 1986) (noting that the district court “correctly applie[d] the law . . . [and] thoroughly analyzed the pertinent portions of sections 365 and 503 of the Bankruptcy Code”).[28] Section 503(b)(1)(A) should be narrowly construed in determining whether a benefit occurred to maximize the value of the estate. Varsity Carpet Servs., Inc. v. Richardson, 19 F.3d 1371, 1377 (11th Cir. 1994); In re Moody & Sons, Inc., 473 ...

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