Securities and Exchange Commission v. Nadel et al

Filing 1332

MOTION for miscellaneous relief, specifically for an Order Directing Receiver to Turnover Rents from Rite Aid Property by Wells Fargo Bank, N.A., as successor by merger to Wachovia Bank, N.A.. (Attachments: # 1 Exhibit 1 - Promissory Note, # 2 Exhibit 2 - Deed of Trust & Security Agreement, # 3 Exhibit 3 - Assignment of Rents & Leases, # 4 Exhibit 4 - Proposed Order)(Wirth, Steven)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION
SECURITIES AND EXCHANGE
COMMISSION
Plaintiff,
v.

ORAL ARGUMENT
REQUESTED

ARTHUR NADEL,
SCOOP CAPITAL, LLC,
SCOOP MANAGEMENT, INC.,
Defendants,

CASE NO.: 8:09-0087-T-26TBM

SCOOP REAL ESTATE, L.P.,
VALHALLA INVESTMENT PARTNERS, L.P.,
VALHALLA MANAGEMENT, INC.,
VICTORY IRA FUND, LTD.,
VICTORY FUND, LTD.,
VIKING IRA FUND, LLC.,
VIKING FUND, LLC., and
VIKING MANAGEMENT, LLC.
Relief Defendants.
_______________________________________________/
WELLS FARGO’S MOTION FOR ORDER DIRECTING RECEIVER TO
TURNOVER RENTS FROM RITE AID PROPERTY
Wells Fargo Bank, N.A. (“Wells Fargo” or “Bank”)1 moves this Court for an Order
compelling the Receiver to turnover rents from the Rite Aid Property, and states:

1

Wells Fargo is successor by merger to Wachovia Bank, N.A. (“Wachovia”).

42973297;19

SUMMARY OF THE ARGUMENT
Despite repeated trips to the Eleventh Circuit where the Bank prevailed, the Receiver
continues to improperly hold Wells Fargo’s property without articulating a valid basis for
doing so. The crux of the current dispute relates to $1,322,923.20 in rent (collectively, the
“Rents”) paid by a non-party for the use of the Bank’s collateral, a Rite Aid store located at
841 South Main Street, Graham, North Carolina (the “Rite Aid Property”). Pursuant to North
Carolina law, the original borrower transferred all rights, title and interest in the Rents to Wells
Fargo at the time the Loan Documents (including a separate absolute assignment of the Rents)
were recorded, almost four years before this receivership commenced.2 At the same time, the
borrower was granted a conditional, limited license to use the rents prior to default. While the
Receiver stands in the shoes of the original borrower who previously held a license to use these
monies, that license was automatically revoked upon default pursuant to the Loan Documents.
The Loan Documents establish that an Event of Default occurred before the creation of this
receivership estate, no later than when the relief defendants consented to the injunctive relief
and the filing of this case. As a result, the Receiver has no valid basis for withholding the
Rents from Wells Fargo. Nonetheless, despite clear direction from the Eleventh Circuit to the
contrary,3 the Receiver continues to dispute Wells Fargo’s property rights in the Rents, which

2

The Loan Documents (as defined below) were duly recorded in accordance with North
Carolina law on May 24, 2005.
3

As this Court may recall, Wells Fargo did not file proofs of claim for loans concerning the
La Bellasara and the Laurel Mountain Properties. Wells Fargo filed a motion seeking a
determination that the filing of a proof of claim was unnecessary to preserve its security
interests in the La Bellasara and Laurel Mountain Properties (the “Late Claim Motion”),
which this Court denied. (Dkts. 740, 1222). After an appeal, the Eleventh Circuit held that
Wells Fargo’s security interests remained intact as to the La Bellasara and Laurel Mountain

2
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vested long before this receivership proceeding commenced. Wells Fargo requests that this
Court enter an Order compelling the Receiver to return Wells Fargo’s property to the Bank.4
FACTUAL BACKGROUND
A.

THE RITE AID PROPERTY

The receivership entity Scoop Real Estate L.P. (“Scoop”), purchased the Rite Aid
Property in May 2005 by executing a promissory note with Wells Fargo (formerly Wachovia
Bank) in the amount of $2,655,000 (the “Note”). A copy of the Note is attached as Exhibit 1.
The Note is secured by a Deed of Trust and Security Agreement (the “Deed of Trust”). A
copy of the Deed of Trust is attached as Exhibit 2. The Note is also secured by an Assignment
of Rents and Leases (the “Assignment of Rents”). A copy of the Assignment of Rents is
attached as Exhibit 3. Scoop is defined as the “Grantor” in the Deed of Trust and as the
“Assignor” in the Assignment of Rents. As of June 21, 2017, the total indebtedness on the Rite
Aid Note was not less than $4,171,531.64 (the “Rite Aid Claim”)5. The Note, Deed of Trust,
and Assignment of Rents are referred to collectively as the “Loan Documents.”

Properties even though Wells Fargo did not file proofs of claim, determining that the
receivership court does not have the authority to extinguish a creditor's state law property rights
(e.g., security interests) that vested prior to the commencement of the receivership. See SEC v.
Wells Fargo Bank, N.A., 848 F.3d 1339 (11th Cir. 2017).
4

By separate motion, the Bank will also be requesting payment of its fees and costs incurred
in enforcing its loan documents as administrative expenses prior to any further distributions
being made to holders of lower priority claims, including investors.
5

Total debt amount is calculated as follows: Principal ($2,655,000.00); Contract Rate Interest
($503,488.81); Default Rate Interest ($619,057.50); Appraisal Fee ($6,840.00); Legal
Fees/Costs Trenam ($20,047.29); Legal Fees/Costs KL Gates ($15,144.90); Legal Fees/Costs
Akerman (not less than $351,953.14) with fees and costs continuing to accrue.

3
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B.

THE LOAN DOCUMENTS ASSIGNED AND TRANSFERRED TITLE OF THE RENTS
TO WELLS FARGO

The Security Agreement and Assignment of Rents are governed by the laws of North
Carolina, a title theory state. See Ex. 2, § 6.9; Ex. 3, ¶ 16. Under the Deed of Trust, TRSTE,
Inc., held the entire fee simple title to the Rite Aid Property for the benefit of the Bank. See
Ex. 2, p. 1. Under the Deed of Trust, Scoop “collaterally” assigned the Rents to the Bank,
retaining a license to use the Rents prior to any default. See Ex. 2, § 2.1. Separately, under the
Assignment of Rents, all of Scoop’s “right, title and interest in and to” the “rents, income,
issues, profits, revenues, rights and benefits arising hereafter from the [Rite Aid Property]”
were irrevocably and absolutely conveyed, transferred and assigned to the Bank, to secure the
Rite Aid Loan, and then licensed to Scoop so long as no Event of Default occurred. See Ex. 3,
¶ 2.6 To be clear, while the Assignment of Rents did provide for a limited license to use rents
pre-default, the default automatically terminated that license. See Ex. 3, ¶ 7 (“From and after
the occurrence of an Event of Default (whether or not Assignee shall have exercised Assignee’s
option to declare the Note immediately due and payable), such license shall be automatically
revoked without any action required by Assignee.”) (Emphasis added).
C.

THE DEFAULTS UNDER THE LOAN DOCUMENTS

The Loan Documents define several Events of Default. First, any Event of Default
under the Deed of Trust or Note also constituted an Event of Default under the Assignment of
Rents:

6

The language of the Assignment of Rents broadly confirms the irrevocable, absolute and
unconditional transfer of the Rents to the Bank.

4
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Events of Default. The term “Events of Default” as used herein shall
mean the occurrence of any one of the following: … (b) If a default
shall occur under the Note, the Deed of Trust or any Loan Documents
and shall not be cured within any applicable curative period as stated
therein).
See Ex. 3, ¶ 6(b).
Scoop’s voluntary consent to an Order of Preliminary Injunction and Other Relief (Dkt.
3, consent signed January 20, 2009) and the subsequent initiation of this case by the SEC
against Scoop on January 21, 2009 seeking to freeze its assets, appoint a receiver to control it,
and to disgorge any profits from it, each constituted an Event of Default under the Deed of
Trust, and thus, the Assignment of Rents. In the relevant part, the Deed of Trust provides:
5.1. Events of Default. Any one or more of the following shall
constitute a “Default” under this Deed of Trust and the Note hereby
secured: … (f) “the consent of Grantor or any guarantor to the
appointment of a receiver, ….” (h) … the initiation of an action or
proceeding for the dissolution, termination or liquidation of Grantor or
any guarantor.”
See Ex. 3, § 5.1(f) and (h).
In addition to 5.1(f) and (h), several other Events of Default under the Loan Documents
occurred, both prior to and subsequent to the filing of this case.7 The Rents at issue were paid
after the Receiver was appointed. Thus, any defaults prior to the defaults under 5.1(f) and (h)
do not affect the analysis necessary for this motion. Because the Events of Default under

7

See, e.g., Ex. 2, § 1.21 (transfer without lender consent); § 5.1(a) (failure to pay note when
due); § 5.1(e) (the assertion of other liens/encumbrances on the property); § 5.1(g) (the filing
of a petition for bankruptcy or reorganization under the bankruptcy code or similar law, such
as this receivership proceeding); and § 5.1(j) (lender’s determination of a material adverse
change in financial condition of Grantor). In addition, the Note matured by its terms, was
accelerated and became due on May 23, 2009.

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section 5.1(h) and (f) are undeniable and sufficient for the relief sought in this motion, this
motion does not address the others in detail.
D.

THE EVENTS OF DEFAULT AND THIS RECEIVERSHIP PROCEEDING

The SEC initiated this action against Arthur Nadel and his entities, including Scoop,
and sought a preliminary injunction on January 21, 2009. (Dkts. 1-2). The SEC also moved to
appoint the Receiver on the same date. (Dkt. 6). The entity defendants, including Scoop Capital
LLC and the Rite Aid Loan Borrower, Scoop Real Estate, L.P. (defined as “Scoop” above),
consented to the preliminary injunction and other relief the day before, on January 20, 2009,
which contemplated the appointment of a Receiver, and which was filed simultaneously with
the SEC’s motion to appoint the Receiver. (Dkt. 3, at ¶¶ 3-5, and 10). The Court immediately
entered the Order of Preliminary Injunction and Other Relief against the entity defendants and
the Order Appointing Receiver. (Dkts. 7-8).8 As a result of the Order Appointing Receiver, the
Receiver took possession of a commercial building located on the Rite Aid Property. No later
than March 17, 2009, Wells Fargo had notified the Receiver that Scoop was in default on the
Note. (Dkt. 713-6). Wells Fargo timely filed a proof of claim in this case with respect to the
Rite Aid Property loan, which claim has been designated No. 502 by the Receiver. As set forth
in its proof of claim, Wells Fargo claimed property rights and a security interest in the Rite Aid
Property and the Rents based upon the Loan Documents.
Months later, on April 21, 2010, this Court entered an order establishing a claims
administration process by which potential claimants could file their claims against the
8

Within two weeks, by February 2, 2009, Arthur Nadel consented to a preliminary injunction
and other relief. (Dkt. 24-2). The Court entered its Order of Preliminary Injunction and Other
Relief the next day. (Dkt. 29).

6
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Receivership Estate. The claims bar date for claims against the Receivership Entities was
September 2, 2010. The order also barred any claims asserted after that date. (Dkt. 391). On
December 7, 2011, the Receiver filed a proposed plan for claims determination and priority of
claims (including an objection to the Rite Aid Claim), which the Court granted in part. (Dkts.
675 and 776). The Court reserved ruling on (1) Wells Fargo’s Objection to the procedures and
the Receiver’s objection to the Rite Aid Claim; (2) the Bank’s Motion to Abandon the Rite Aid
Property; and (3) the Bank’s Late Claim Motion. Thus, the Receiver’s objection to the Rite
Aid Claim remains pending. Notably, the only basis alleged by the Receiver in his objection
to the Rite Aid Claim was the Bank’s alleged complicity in the Ponzi scheme and all of those
claims, including fraudulent conveyance claims, seeking to disallow Wells Fargo’s security
interests in the Rite Aid collateral, were denied on summary judgment by District Judge
Whittemore, and affirmed on appeal by the Eleventh Circuit (the “Litigation”). See Wiand v.
Wells Fargo Bank, N.A., 86 F. Supp. 3d 1316 (M.D. Fla. 2015) (granting summary judgment
for Wells Fargo, on all counts), aff’d Wiand v. Wells Fargo Bank, N.A., No. 15-10968, 677 F.
App. 573 (11th Cir. Jan. 26, 2017).
On January 6, 2012, the Receiver filed a motion to approve the sale of the Rite Aid
Property (Dkts. 706 and 823) free and clear of all liens. Although Wells Fargo objected to the
sale of the Rite Aid Property based upon the Loan Documents,9 the Court entered its Order
authorizing the sale of the Property over Wells Fargo’s objection (Dkt. 840) (the “Court’s Sale

9

The Bank also moved to compel the Receiver to abandon the Rite Aid Property or,
alternatively, for relief from the Court’s injunction so that it could foreclose (Dkt. 719). In the
motion to abandon, Wells Fargo noted that the Rent collected to date (1.19.2012) was estimated
to exceed $1.19 Million because it was accruing at $33,073.08 per month. See Dkt. 719 at 3.

7
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Order”).10 The Court found: “After careful consideration, the Court concludes that the
Receiver’s motion should be granted and his proposed order be entered as the Court’s order.”
(Court’s Sale Order, at 2). In overruling Wells Fargo’s objection to the sale, this Court
specifically noted that “Wells Fargo’s specific claim with respect to the Rite-Aid property can
and will be determined later.” Id. at 2. In a footnote on this point, the Court stated: “The Court
is ever mindful that the state lawsuit filed by the Receiver against Wells Fargo for participation
in the Ponzi scheme is on-going.” Id. at 2 n.4.11 On that same day, May 8, 2012, the Court
entered the proposed Order submitted by the Receiver, approving the sale of the Rite Aid
Property to Trinet West, LLC (the “Purchaser”) free and clear of all claims, liens, and
encumbrances (the “Receiver’s Sale Order”) (Dkt. 842). In relevant part, the Receiver’s Sale
Order provided—
Any and all existing claims, liens, and encumbrances relating to
the property located in Alamance County, North Carolina (the
“Property”), including any held by Wells Fargo Bank, N.A. as
successor to Wachovia Bank, N.A., arising from a loan provided
to Scoop Real Estate, L.P., shall be transferred to the proceeds
of the sale ordered herein, and the Property shall become free
and clear of any and all such existing claims, liens, and
encumbrances.
Dkt. 842, at 1.
This Court intentionally entered two sale orders: (1) the Court’s Sale Order for the
benefit of the Wells Fargo and the Receiver, to address the Receiver’s sale motion and the

10

Notably, in the Court's Sale Order, the Court specifically rendered the Bank's motion to
abandon moot and reserved ruling on the Rite Aid Claim.
11

With the issues in the Litigation resolved in favor of Wells Fargo by the Eleventh Circuit,
there is no longer any basis for the Receiver to contend that the Rite Aid Claim is subject to
setoff or dispute.

8
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Bank’s objection, and to reserve ruling on the amount and priority of the Rite Aid Claim; and
(2) the Receiver’s Sale Order to deliver free and clear title of the real estate to the Purchaser.
To be clear, the purpose and intent of the Receiver’s Sale Order was only to deliver clear title
to the Purchaser, and does not (and cannot) transfer Wells Fargo’s property rights in the Rents
to the Receiver, nor can it impair the Bank’s security interests in the Rite Aid Sale Proceeds or
the Rents. Indeed, one day before the Sale Orders were entered, this Court granted – over the
Bank’s objection – the Receiver’s motion to make a first interim distribution, stating, “After
this first interim distribution [the Receiver] will have more than sufficient assets to satisfy
Wells Fargo’s [Rite Aid] claim in the amount it has valued that claim in the event the Court
rules in favor of Wells Fargo… Wells Fargo’s monetary fears are totally unfounded.” Dkts.
831, 838.
After certain closing costs, the proceeds from the sale of the Rite Aid Property were
approximately $2,229,463.15 (the “Rite Aid Sale Proceeds”). The Receiver incurred expenses
in connection with the Rite Aid Property of approximately $9,200 for an appraisal of the Rite
Aid Property and $300 for certain processing fees. The parties previously agreed to split the
costs of the appraisals and Wells Fargo also agreed to reimburse the Receiver $300 for the
processing fees. Almost five years after the sale of the Rite Aid Property, upon motion and
Court Order dated June 21, 2017 approving settlement (Dkt. 1296), Wells Fargo received a
$2,224,563.15 distribution on the Rite Aid Claim leaving a deficiency of approximately
$1,955,876.52 as of October 11, 2017.12 Several factors contributed to the almost five-year gap

12

Total debt amount is calculated as follows: Principal ($430,436.85); Contract Rate Interest
($508,194.17) (per diem $40.47302); Default Rate Interest ($623,260.17) (per diem
$35.86974); Appraisal Fee ($6,840.00); Legal Fees/Costs Trenam ($20,047.29); Legal

9
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between the sale and the distribution of the Rite Aid Sale Proceeds, including two Eleventh
Circuit decisions not rendered until earlier this year.
In the first appeal, the Eleventh Circuit affirmed Judge Whittemore’s grant of summary
judgment in the Bank’s favor on all counts in the Litigation, and confirmed the district court’s
conclusions that the undisputed facts demonstrated Wells Fargo conducted itself in good faith;
that it was “unaware of the Ponzi scheme until it became public;” and “other than the
Receiver’s speculation and innuendo, [Wells Fargo’s] evidence of good faith [was]
undisputed.” Wiand v. Wells Fargo Bank, N.A., Case No. 15-10968, 677 F. App’x 573 (11th
Cir. Jan. 26, 2017) (citing Case No. 8:12-cv-557, Dkts. 325 at 19, 21). Notably, in the
Litigation, the Receiver sought to avoid Wells Fargo’s liens against the Rite-Aid Property and
lost, and the Receiver did not appeal that issue to the Eleventh Circuit. Thus, with these issues
finally resolved, the Rite Aid Claim is no longer subject to setoff or dispute.
In the second appeal, the Eleventh Circuit reversed this Court’s February 2016 order
extinguishing Wells Fargo’s other secured claims because the Bank did not file proofs of claim
with respect to those properties. See SEC v. Wells Fargo Bank, N.A., 848 F.3d 1339 (11th Cir.
2017). This second decision is critically important to this motion because it made one issue
clear: a receivership court does not have the authority to extinguish a secured creditor’s state
law property rights or security interests that were vested prior to the Receivership Proceeding.
See id. at 1344 (holding “a federal district court… does not have the authority to extinguish a

Fees/Costs KL Gates ($15,144.90); Legal Fees/Costs Akerman (not less than $351,953.14),
with fees and costs continuing to accrue.

10
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creditor’s pre-existing state law security interest”). After the second decision, there is
absolutely no basis to disallow the Bank’s claim to the Rents.
E.

THE RECEIVER HAS BEEN PLACED ON NOTICE AND THE RENTS HAVE BEEN
PRESERVED

The Receiver has repeatedly been placed on notice – and has acknowledged – that
monies must be reserved to return the Rents to Wells Fargo. See, e.g., Dkt. 713-6 (showing
that Receiver was notified of default on Note by March 17, 2009); Dkt. 689 at 3 n.3 (“The
Wells Fargo Claim is secured by, among other things, the Rite Aid Property and rents generated
from the operation of a Rite-Aid Pharmacy on the property. Wells Fargo timely filed a proof
of claim in this case with respect to the Rite Aid Property, which claim has been designated
No. 502 by the Receiver.”). That claim clearly asserted a claim for Rents. In the first interim
distribution motion, the Receiver stated the receivership’s $9 million in cash “would be more
than sufficient to cover any potential obligation the Receivership may have based on Wells
Fargo’s claim and asserted interest (in the Rite Aid property).” Dkt. 825 at 12. In response to
that motion, on May 2, 2012, the Bank filed a limited objection, asking the Court to require
the Receiver to reserve an additional $1.2 Million for payment of Wells Fargo’s Claim – which
is, importantly, the amount of the rent collected during the relevant period – and reserving its
right to seek “full recovery on its secured claims.” See Dkt. 831. Replying to the Bank’s
objection, the Receiver stated that he and the Bank, and the Court, all agreed that the Bank’s
claims secured by the Rite Aid Property would be considered and resolved by the Court at a
later date. See Dkt. 836. On May 7, 2012 – one day before the Sale Orders were entered –
the Court entered an Order granting the first distribution motion and stating, “After this first
interim distribution [the Receiver] will have more than sufficient assets to satisfy Wells Fargo’s

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claim in the amount it has valued that claim in the event the Court rules in favor of Wells
Fargo… Wells Fargo’s monetary fears are totally unfounded.” See Dkt. 838.
Wells Fargo has continued to raise the Rents issue with this Court and the Receiver
cannot claim he is unaware of the issue or that the Rent monies have not been preserved. On
December 20, 2016, four-and-a-half years after the sale of the Rite Aid Property, the Receiver
filed a motion for authority to make a sixth interim distribution. See Dkt. 1253. In that motion,
the Receiver asked for permission to increase “certain reserves for Wells Fargo’s claim and
asserted interests.” See id. On December 21, 2016, the Bank filed a response in opposition
addressing the rents collected, separate from the sale proceeds, because it was not clear whether
the Receiver would maintain sufficient funds to pay the Bank’s entire claim. See Dkt. 1254.
The Bank objected to the extent that the motion sought to “extinguish Wells Fargo’s secured
lien on approximately $1 million in rent collected by the Receiver” and asked that the Court
require the Receiver to maintain sufficient cash in his accounts to satisfy the Rite Aid Claim,
a claim for fees, and the Cost Award in full. See id. In his reply, the Receiver asserted for the
very first time that Wells Fargo's property rights in the Rents were somehow extinguished, yet
he still voluntarily increased the amount of reserves. See Dkt. 1258. On January 10, 2017, the
Court granted the Receiver’s motion after finding that “the interests of Wells Fargo are
adequately protected” because the Receiver had almost $10 million13 in cash in the receivership
accounts. See Dkt. 1259.

13

As of December 5, 2016, the total funds in all Receivership accounts were $9,962,964.22.
See Dkt. 1253.

12
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The Receiver is holding $1,322,923.20 in Rents generated from the Bank’s collateral,
the Rite Aid Property in North Carolina. Pursuant to the Bank’s valid and enforceable
Assignment of Rents, described below, the Rents are the property of Wells Fargo and should
be turned over to the Bank in further partial satisfaction of its secured claim. Yet, the Receiver
unreasonably refuses to turn over the Rents. In an attempt to resolve this dispute, the Receiver
and Wells Fargo participated in mediation in September 2017. Because the efforts at mediation
were not successful, Wells Fargo requests that this Court resolve this issue.
MEMORANDUM OF LAW
A.

THE LAWS OF NORTH CAROLINA GOVERN THIS ISSUE

An assignment of rents, like any interest in property, is governed by the law of the situs
of the real property. See Butner v. United States, 440 U.S. 48, 55, 99 S.Ct. 914, 918 (“Property
interests are created and defined by state law.”). North Carolina is a “title theory” state,14
meaning that the lender receives legal title to the property for security purposes. See In re
Grandfather Mountain L.P., No. 2:96CV85, 1997 WL 34740256, at *3 (M.D.N.C. Jan. 29,
1997) (citing Neil Realty Co. v. Med. Care, Inc., 110 N.C. App. 776, 778, 431 S.E.2d 225, 226
(1993) (“North Carolina is considered a title theory state with respect to mortgages, where a
mortgagee does not receive a mere lien on mortgaged real property, but receives legal title to

14

“In ‘title theory’ states, the mortgagee holds title to the land from the outset of the loan until
the debt has been satisfied. In ‘lien theory’ states, the borrower holds title to the land and the
mortgagee has a lien on the property. Finally, in ‘intermediate theory’ states, the borrower
maintains title to the property; however, once the loan goes into default, the mortgagee
immediately receive title and the right to possess the property.” In re Millette, 186 F.3d 638,
644 n.10 (5th Cir. 1999) (concluding, for property in Mississippi, an intermediate theory state,
that party’s interest was perfected when party recorded deed of trust containing the assignment
of rents clause).

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the land for security purposes.”)). In other words, in North Carolina, the mortgage lender
receives legal title to the land, including the rents, but the mortgagor remains in possession of
that property. Id. “In 1991, the North Carolina legislature codified the rule that an assignment
of rents is ‘valid and enforceable” and perfected from the date of recording.” Id. (citing N.C.
Gen. Stat, § 47-20(c)). With this codification, the lenders interest in post-petition rents was
perfected and secured by pre-petition recording. Id. Both before and after the statute, parties
were always “free to contract with respect to rents.” Id. at *8.
B.

WELLS FARGO HAS AN ABSOLUTE ASSIGNMENT OF THE RENTS

In this case, Wells Fargo has an absolute assignment of the rents under North Carolina
Law by contract. See Ex. 3, ¶ 2 (“Assignor hereby grants, conveys, transfers and assigns to
Assignee all of its right, title and interest in and to (i) the rents, income, … rights and benefits
arising now and hereafter from the Property (collectively the “Rents and Profits”), together
with …") (emphasis in original).15 Although the Rents were absolutely assigned to Wells
Fargo, Scoop maintained a limited, revocable license to use the Rents so long as no Event of
Default occurred. Id. at ¶ 7. But, upon the occurrence of an Event of Default, that license was
automatically revoked. See Ex. 3, ¶ 7 (“From and after the occurrence of an Event of Default
(whether or not Assignee shall have exercised Assignee’s option to declare the Note
immediately due and payable), such license shall be automatically revoked without any
action required by Assignee.”) (Emphasis added); N.C. Gen. Stat, § 47-20(c) (stating that
assignment of rents is valid, enforceable, and perfected from time of recording). As explained

15

Separately, the Deed of Trust also contains an assignment of rents section, which provided Wells Fargo with
title to the Rents. See Ex. 2, § 2.1 (“Grantor hereby collaterally assigns and transfers to Lender all the leases,
subleases, franchises, rents, issues and profits of the Property …”).

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below, while the Receiver stands in the shoes of the borrower, inheriting all rights and
obligations, the borrower’s license was automatically revoked before the Receiver was
appointed. Id.
C.

SCOOP’S LICENSE
JANUARY 20, 2009.

TO

USE

THE

RENTS WAS REVOKED NO LATER THAN

On January 20, 2009, Scoop executed a Consent to the Order of Preliminary Injunction
and Other Relief. (Dkt. 3 at 3-9). This consent constituted a default under the Loan Documents.
See Ex. 3, § 5.1(f) (“the consent of Grantor or any guarantor to the appointment of a receiver,
….”). Then, on January 21, 2009, the SEC filed its Complaint for Injunctive and Other Relief
in this action (Dkt. 1), and its emergency motion for a temporary restraining order (Dkt. 2).
Also on January 21, 2009, this Court entered the Order of Preliminary Injunction (Dkt. 7) and
the Order Appointing Receiver (Dkt. 8). These events also constituted an Event of Default
under the Loan Documents. See Ex. 3, § 5.1(h) (… the initiation of an action or proceeding for
the dissolution, termination or liquidation of Grantor or any guarantor.”). Wells Fargo notified
the Receiver of the default immediately after the case was filed. See Dkt. 713-6.
Under the plain terms of the Assignment of Rents, Scoop’s license to use the rents
automatically terminated no later than these Events of Default. See Ex. 3, ¶ 7 (“From and after
the occurrence of an Event of Default (whether or not Assignee shall have exercised Assignee’s
option to declare the Note immediately due and payable), such license shall be automatically
revoked without any action required by Assignee.”) (Emphasis added). Thus, by the time
the Receiver was appointed in this case, Scoop’s license to use the rents had already been
automatically revoked by the terms of the parties’ agreements. Id. In other words, by the time
the Receiver was appointed, the Rents were solely the property of Wells Fargo. Id. This is

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consistent with how such assignments are treated under North Carolina law. See In re
Grandfather Mountain L.P., 1997 WL 34740256, at *6 (recognizing that under North Carolina
law this type of assignment “entitles the lender access to rents upon the condition of default…
[it] secures the debt and obviates the need for appointment of a receiver or possession after
foreclosure on the deed of trust.”) (citing In re Tripplet, 84 B.R. 84, 89 (Bankr. W.D. Tex.
1988)). It is also consistent with how such assignments are treated under the laws of other “title
theory” states. See, e.g., In re Town Center Flats, LLC, 855 F.3d 721, 727 (6th Cir. 2017) (“In
summary, Michigan law treats a complete assignment of rents as a change of ownership and
the assignor of those rents does not retain residual property rights in the assigned rents.”); First
Fidelity Bank, N.A. v. Eleven Hundred Metroplex Associates, 190 B.R. 510 (S.D.N.Y. 1995)
(Sotomayor, J.) (holding that bankruptcy estate had no interest in rents after default based upon
language of assignment); In re Jason Realty, L.P., 59 F.3d 423 (3d Cir. 1995) (concluding that
assignment agreement that provided the debtor a license to use the rents pre-default was an
absolute assignment, and the rents were not part of the bankruptcy estate).
We are not moved by the fact that the assignment was part of a
financing transaction and served as additional security for repayment
of the note. An assignment clause within a mortgage may be
independent of the mortgage security. … Moreover, we are impressed
that the instant assignment was contained in an agreement separate
from the mortgage. First Fidelity proceeded here as an assignee of rents
under rights conferred on a special instrument bearing the title
“Assignment of Lease or Leases,” App. at 78, and not in its capacity as
a mortgagee enforcing rights contained in the instrument bearing the
title “mortgage.” App. at 55.
In re Jason Realty, L.P., 59 F.3d at 428. Here, like in Jason Realty and Eleven Hundred
Metroplex, Wells Fargo seeks turnover of the Rents under an Assignment of Rents that was
separate and independent of the Deed of Trust (i.e., separate from the mortgage). And similarly,

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here, the “assignment, though conditional, became absolute upon default.” Eleven Hundred
Metroplex, 190 B.R. at 512 (internal quotation omitted). Here, like in Jason Realty and Eleven
Hundred Metroplex, even though the Assignment of Rents afforded Scoop a conditional
license to use the rents and was executed to secure a loan, the default automatically revoked
the license, leaving only the absolute assignment. Id.16 Thus, Wells Fargo had title to and
exclusive rights to the Rents prior to the commencement of this receivership under the
Assignment of Rents. Accordingly, the Rents are not property of the Receivership Estate and
must be turned over to Wells Fargo.
D.

AT A MINIMUM, WELLS FARGO HAS A SECURITY INTEREST IN THE RENTS.

As explained above, Wells Fargo has absolute title to the Rents pursuant to North
Carolina law, a title theory jurisdiction. The sale of the Rite Aid Property and the Receivers’
possession of the Rents do not change the analysis, even if Wells Fargo was deemed to only
have a lien on (rather than title to) the Rents. As noted above, this Court intentionally entered
two orders in connection with the sale of the Rite Aid Property: (1) the Court’s Sale Order for
the benefit of the Wells Fargo and the Receiver, to address the Receiver’s sale motion and

16

The assignment considered by Judge (now Justice) Sotomayor was similar to the one in
this case:
1. So long as there shall exist no “Event of Default,” as such term is defined
in the Notes, the Mortgage or any other loan document, there is reserved to
the Assignor a license to collect as they become due, but not prior to accrual,
all rents, income, issues and profits from the Premises and to retain, use and
enjoy the same. Upon the occurrence of an Event of Default under the
Notes, the Mortgage or any other loan document, such license granted to
the Assignor shall be immediately revoked without further demand or notice
from the Assignee....
First Fid. Bank, N.A. v. Eleven Hundred Metroplex Assocs., 190 B.R. 510, 512 (S.D.N.Y.
1995).

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Bank’s objection, and to reserve ruling on the amount and priority of the Rite Aid Claim; and
(2) the Receiver’s Sale Order to deliver free and clear title of the real estate to the Purchaser.
Indisputably, the purpose and intent of the Receiver’s Sale Order was only to deliver clear title
to the Purchaser, and does not (and cannot) transfer Wells Fargo’s vested property rights in the
Rents to the Receiver, nor can it impair the Bank’s security interests in the Rents. Indeed, the
Eleventh Circuit has provided this Court with clear guidance when it held that the Court could
not extinguish the Bank’s security interests in property that vested prior to the commencement
of the receivership, notwithstanding Wells Fargo’s failure to file proofs of claim. See SEC v.
Wells Fargo Bank, N.A., 848 F.3d at 1345. Here, the Bank’s property rights and security
interests in the Rents vested almost four years before this receivership commenced, therefore,
this Court cannot extinguish the Bank’s rights in the Rents in this case either.
In fact, throughout this receivership proceeding the Bank closely monitored the
Receiver's disbursements to his law firm and third parties to ensure that the Rite Aid Claim
was preserved in its entirety and that the funds in the Receiver's bank account never fell below
the total amount of the Rents in his possession. See Dkts. 831, 1253 (objecting to interim
distributions and reserve amounts). Notably, in his August 31, 2017 motion to approve a
seventh interim distribution, the Receiver indicated that he was reserving $1,322,923.20 – the
entire amount of the Rents – for the purposes of finally resolving the issues described in this
motion.17 See Dkt. 1308 at 6. Thus, any contention by the Receiver that the Bank’s security

17

The Receiver has repeatedly been put on notice - and has acknowledged - that monies must
be reserved to return the Rents to Wells Fargo. See, e.g., Dkt. 689 at 3 n.3. The Receiver is
estopped from now taking any inconsistent position. See Muldrow v. Credit Bureau Collection
Servs., Inc., No. 09-61792-CIV, 2010 WL 5393373, at *1 (S.D. Fla. Dec. 22, 2010) (judicial
estoppel “precludes a party from asserting a position in a legal proceeding inconsistent with a

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interests/property rights in the Rents were impaired when the Rents were commingled in his
general trust account has absolutely no merit.
Article 9 of the Uniform Commercial Code and courts in the Second, Fourth and
Eleventh Circuits have signified their approval of the “lowest intermediate balance” rule, an
equitable tracing method that analyzes commingled accounts on the premise that rent proceeds
are the last monies to be removed from a commingled account. Here, the lowest intermediate
balance in the Receiver’s trust account never fell below $1,322,923.20 – which is the amount
of the Rents, according to the Receiver. Therefore the Bank did not lose its property rights and
security interest in the Rents by those funds being deposited in the Receiver's trust account.
See § 679.3151, Fla. Stat., comment 3; N.C.G.S.A. § 25-9-315, comment 3; Sony Corp. of
America v. Bank One, West Virginia, Huntington NA, 85 F.3d 131, 138 (4th Cir. 1996)
(enforcing creditor’s security interest in proceeds based on the court’s application of the
“lowest intermediate balance” rule, which, according to the Court, “preserves the proceeds to
the greatest extent possible as the account is depleted.”); In re Rothstein, Rosenfeldt, Adler,
PA, 717 F.3d 1205 (11th Cir. 2013) (citing United States v. Banco Cafetero Panama, 797 F.2d
1154, 1159 (2d Cir. 1986)). Indeed, the Receiver himself recently argued for application of the
“lowest intermediate balance” rule in a related bankruptcy case and won. See Wiand v. Lee (In

position taken by that party in the same or a prior litigation”) (citation omitted); Terrell v.
Rathman, No. 1:11-cv-00197-WMA-HGD, 2012 WL 4953128, at *11 (N.D. Ala. Sept. 13,
2012) (magistrate finding petitioner “should be judicially estopped” from taking inconsistent
position in “same proceeding”), rep. and rec. adopted, 2012 WL 4953124 (N.D. Ala. Oct. 11,
2012); see also Harrington v. Wells, No. 2:13-cv-103, 2016 WL 111439, at *7 n.5 (S.D. Ga.
Jan. 11, 2016) (rejecting argument that was “inconsistent” with party's prior argument in same
case).

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re Lee), Case No. 8:15-bk-01038-KRM, Adv. Pro. No. 8:15-ap-464- KRM, Doc. 29, *11-12
(Bankr. M.D. Fla. Jun. 22, 2017) (granting Receiver’s motion for summary judgment, holding
that the “‘lowest intermediate balance rule’ is an acceptable method for treating trust proceeds
that have been commingled with other funds”).
WHEREFORE, Wells Fargo respectfully requests that the Court enter an order in the
form attached as Exhibit 4 (i) granting this Motion; (ii) directing the Receiver to disburse
$1,322,923.20 in Rents to Wells Fargo, within three days of the Court’s Order; and (iii)
granting such other and further relief as this Court deems just and proper.
LOCAL RULE 3.01(g) CERTIFICATION
Counsel for Well Fargo has conferred with counsel for the Receiver and counsel for
the Securities and Exchange Commission. The Receiver has indicated that he objected to and
would oppose the relief requested in this Motion. The SEC has indicated that it has no position
regarding the relief requested in the Motion.
LOCAL RULE 3.1(j) REQUEST FOR ORAL ARGUMENT
Pursuant to Local Rule 3.1(j), Wells Fargo requests oral argument on this Motion and
estimates the time required for both sides to make their presentation to be one hour.
Respectfully submitted,
/s/ Steven R. Wirth
AKERMAN LLP
L. Joseph Shaheen, Jr.
Florida Bar No.: 212385
Email: [e-mail]
Steven R. Wirth
Florida Bar No.: 170380
Email: [e-mail]
Jason L. Margolin
Florida Bar No. 69881

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401 East Jackson Street, Suite 1700
Tampa, Florida 33602
Telephone: [phone]
Facsimile: [phone]
Counsel for Wells Fargo, N.A

CERTIFICATE OF SERVICE
I hereby certify that on December 1, 2017, I electronically filed the foregoing with the
Clerk of the Court by using the CM/ECF system.
Steven R. Wirth
Attorney

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