Securities and Exchange Commission v. Nadel et al

Filing 1352

RESPONSE re 1349 Reply to Response to Motion for Payment of Fees and Costs filed by Burton W. Wiand. (Sharp, Susan)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION
SECURITIES AND EXCHANGE
COMMISSION
Plaintiff,
v.
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.
_______________________________________________/
RECEIVER’S RESPONSE TO WELLS FARGO’S REPLY
IN SUPPORT OF ITS MOTION FOR PAYMENT OF FEES AND COSTS
Burton W. Wiand, as Receiver (the “Receiver”) for the above-captioned case, hereby files
this response to Wells Fargo’s Reply in Support of its Motion for Payment of Fees and Costs [Doc.
1334] (Doc. No. 1349) (the “Reply”), filed by Wells Fargo Bank, N.A. (“Wells Fargo”) in reply
to the Receiver’s Objection to Wells Fargo’s Motion for Payment of Certain Fees and Costs as
Administrative Expenses (Doc. No. 1343). In this response (the “Response”), provided as a
supplement to the Receiver’s Objection to Wells Fargo’s Motion for Payment of Certain Fees and

Costs as Administrative Expenses (Doc. No. 1343) (the “Objection”), the Receiver states as
follows:
ARGUMENT IN RESPONSE
1.

Wells Fargo Misconstrues the Equitable Exceptions to the American Rule.
A. The Supreme Court’s Decision in Sprague v. Ticonic National Bank
Does Not Create a Broad Equity Receivership Exception to the
American Rule.

In its Reply, Wells Fargo seems to argue that the mere existence of a receivership case
provides a broad exception to the American Rule, misinterpreting the Supreme Court’s holding in
Sprague v. Ticonic Nat. Bank.1 Sprague does not create a far-reaching exception to the American
Rule for all aspects of equity receivership cases. The case is simply a variation of the Supreme
Court’s long-standing “common fund” exception to the American Rule.
The facts of Sprague are important.2 The petitioner had delivered funds in trust to a bank,
which later went into receivership. But the funds on deposit with the bank were secured by
earmarked bonds. In the receivership case, the petitioner sought to enforce a lien on the proceeds
of the bonds to recover the amount of her trust deposit. The district court granted the petitioner’s
request to recover on the bond proceeds, and after going up to the Supreme Court on a separate
issue, the case was remanded back to the district court. There, the petitioner sought attorney fees.
She argued that her litigation efforts had established entitlement to the specific bond proceeds for
the benefit of fourteen other similarly situated trusts, and therefore she should be entitled to receive
payment of her attorney fees from the bond proceeds, which were “more than sufficient to
discharge all trust obligations.” Id. at 164.

1
2

The district court denied the request for fees,

307 U.S. 161, 59 S. Ct. 777, 83 L. Ed. 1184 (1939).
See generally id. at 162–63.

2

determining that it only had authority to strictly follow the Supreme Court’s mandate. Most of the
opinion addresses that issue—whether the district court had the ability to award attorney fees
following remand.3
The Court found that it was within the “historic equity jurisdiction of the federal courts” to
award fees in that case, as it presented a “variant” of the common fund exception to the American
rule where the efforts of an individual “results in a fund for a group though he did not profess to
be their representative.” See id. at 166. The court found that although the petitioner did not create
a fund within the common sense, “by establishing her claim [the petitioner] necessarily established
the claims of fourteen other trusts pertaining to the same bonds.” Id.
Wells Fargo attempts to separate Sprague from the well-recognized “common fund”
exception to the American Rule and recast the case as a far-reaching exception for equity
receivership cases. (See Reply at 3 (“She was not a class representative and she did not create a
common fund”)). But examining the facts of the case, and the Supreme Court’s statements, show
that Sprague was indeed decided as a variation of the “common fund” exception. Getting to the
heart of the matter, the Court reasoned:
[W]hen such a fund is for all practical purposes created for the
benefit of others, the formalities of the litigation—the absence of an
avowed class suit or the creation of a fund, as it were, through stare
decisis rather than through a decree—hardly touch the power of
equity in doing justice as between a party and the beneficiaries of
his litigation.
Id. at 167 (emphasis added).
This is the critical point in Sprague that is missed by Wells Fargo: under the “common
fund” exception, when a litigant’s efforts benefit others and result in a fund made available to
satisfy the beneficiaries’ claims, a court can, in equity, award the litigant attorney fees from the

3

See id. at 167–70.

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fund. A later Supreme Court decision, interpreting Sprague, noted that the case “explained that
the beneficiaries of the plaintiff’s litigation could be made to contribute to the costs of the suit by
an order reimbursing the plaintiff out of the defendant’s assets from which the beneficiaries
eventually would recover.”4 Numerous other Supreme Court cases classify Sprague as a typical
“common fund” exception case.5
Absent in the present case is any discernable benefit conferred by Wells Fargo’s litigation
upon the creditors of the Receivership estate, or any “fund” made available to creditors as a result
of the legal services for which attorney fees are requested. Wells Fargo cannot point to any such
benefit in its Reply, only alluding to vague “interests of other hypothetical creditors who also might
have been harmed by the Receiver’s positions.” (Reply at 3). Neither Sprague nor any other case
cited by Wells Fargo supports awarding attorney fees for advancing undefined “hypothetical”
interests. In all “common fund” cases, tangible benefits were conferred to other parties from the
litigant’s efforts. No such benefits are present here. Sprague does not apply.
B. Wells Fargo’s Asserted “Wrongful Act”/”Negligence” Exception to the
American Rule has No Basis in Law.
Wells Fargo asserts that the Supreme Court’s Reading Co. v. Brown6 decision created “an
important exception to the American Rule.” (Reply at 4). This conclusion completely
mischaracterizes Reading. The case does not mention the American Rule, does not consider an
award of attorney fees, and certainly does not “[hold] that a creditor could recover attorneys’ fees
as a result of a receiver’s negligence” as claimed by Wells Fargo. (Reply at 4). For these reasons,

4

Hall v. Cole, 412 U.S. 1, 5 n.7, 93 S. Ct. 1943, 1946 n.7, 36 L. Ed. 2d 702 (1973).
See, e.g., Chambers v. NASCO, Inc., 501 U.S. 32, 45, 111 S. Ct. 2123, 2133, 115 L. Ed. 2d 27 (1991) (citing Sprague
as “common fund exception” case); Alyeska Pipeline Serv. Co. v. Wilderness Soc’y, 421 U.S. 240, 257–58, 95 S. Ct.
1612, 1621–22, 44 L. Ed. 2d 141 (1975) (citing Sprague in listing cases standing for the common fund exception to
the American Rule); Boeing Co. v. Van Gemert, 444 U.S. 472, 478, 100 S. Ct. 745, 749, 62 L. Ed. 2d 676 (1980)
(same).
6
391 U.S. 471, 88 S. Ct. 1759, 20 L. Ed. 2d 751 (1968).
5

4

the Receiver considered and quickly rebuffed Reading’s applicability to this case in his Objection.
(Objection at p. 8).
The Receiver does not wish to repeat the statements in his Objection, but it bears emphasis
that the key distinguishing factor in Reading is that the damages were, in actuality, damages for
negligence—a tort claim. That is, the claim at issue in Reading was a garden-variety negligence
claim by a neighboring property owner for fire damage caused by the receiver’s negligent
operation of estate assets.7 The Receiver cited several Circuit Court of Appeals cases that
distinguish the claims in Reading from claims for attorney fees similar to Wells Fargo’s. (See
Objection at p. 15).8 Wells Fargo mistakenly reads Reading to involve a claim for attorney fees.
It does not. The case has absolutely no bearing on the American Rule.
Wells Fargo also manufactures a “wrongful act” exception to the American Rule in arguing
that the Receiver’s “unreasonably litigiousness” supports its claim for attorney fees. (Reply at 4,
7–8). Yet Wells Fargo cites no case law supporting such an exception to the American Rule. As
the Receiver stated in his Objection, the Supreme Court has identified narrow exceptions to the
American Rule, which “fall into three categories”: (1) the common fund exception, discussed
supra, (2) assessment of fees as a sanction for “willful disobedience of a court order,” and (3)

7

See id. at 473 (“On January 1, 1963, the building was totally destroyed by a fire which spread to adjoining premises
and destroyed real and personal property of petitioner Reading Company and others. On April 3, 1963, petitioner filed
a claim for $559,730.83 in the arrangement, based on the asserted negligence of the receiver.”). “In Reading, the
claimant was an owner of a neighboring business whose property was damaged by a fire negligently caused by the
bankruptcy receiver in the course of operating the debtor's estate during a bankruptcy reorganization.” In re Jack/Wade
Drilling, Inc., 258 F.3d 385, 389 (5th Cir. 2001) (discussing Reading).
8
See In re Jack/Wade Drilling, Inc., 258 F.3d 385, 387–92 (5th Cir. 2001) (discussing Reading); In re Hemingway
Transp., Inc., 954 F.2d 1, 5–7 (1st Cir. 1992) (same); In re Kadjevich, 220 F.3d 1016, 1019–21 (9th Cir. 2000)
(distinguishing Reading claims from claims arising from pre-petition conduct, and finding that because the claims at
issue “were not caused by any wrongful action of the trustee, they cannot be considered administrative expenses under
the “fairness” principle of Reading Co.”); In re Abercrombie, 139 F.3d 755, 758 (9th Cir. 1998) (discussing Reading).

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assessment of fees when a party has “acted in bad faith, vexatiously, wantonly, or for oppressive
reasons.”9
None of these categories fit Wells Fargo’s allegations. To the extent Wells Fargo is arguing
the third exception—that the Receiver acted in “bad faith, vexatiously, wantonly, or for oppressive
reasons”—Wells Fargo wholly fails to meet the extraordinary showing required to support an
award of attorney fees. This exception “transcends a court’s equitable power concerning relations
between the parties and reaches a court’s inherent power to police itself” and is appropriate when
a court finds “that fraud has been practiced upon it, or that the very temple of justice has been
defiled.”10 The facts in this case certainly do not support such a drastic finding, and no such
extraordinary showing has been made by Wells Fargo.
2.

Wells Fargo Ignores Analogous Circuit Court of Appeals Bankruptcy
Decisions Holding that Attorney Fees Incurred pursuant to Pre-Petition
Contracts Are Not Entitled to Administrative Expense Priority.

Even if the claimed attorney fees fall within the language of the loan documents’ fee
provisions, a point the Receiver disputes,11 the requested fees would not be entitled to
administrative expense priority. To be sure, the contract exception to the American Rule is well
recognized.

But Wells Fargo’s Reply completely ignores the Receiver’s argument that in

analogous bankruptcy proceedings, attorney fee claims based on pre-petition contracts are not
entitled to administrative expense priority. (See Objection at 14–16). As this Court well knows,
bankruptcy decisions are often looked to as guidance by federal courts in equity receivership
actions.

9

Chambers v. NASCO, Inc., 501 U.S. 32, 45, 111 S. Ct. 2123, 2133, 115 L. Ed. 2d 27 (1991) (citations omitted).
Id. (citing and quoting Universal Oil Products Co. v. Root Refining Co., 328 U.S. 575, 580, 66 S.Ct. 1176, 1179,
90 L.Ed. 1447 (1946)).
11
Objection to Motion for Turnover (Doc. No. 1342 at pp. 12–14).
10

6

In his Objection, the Receiver discusses Circuit Court of Appeals cases supporting the
proposition that attorney fees awarded post-petition based on a pre-petition contract are not entitled
to administrative expense priority. (Objection at 14–16). One case in particular, In re Jack/Wade
Drilling, Inc.,12 illustrates the doctrine’s applicability to the this case.
In Jack/Wade, the debtor was party to a pre-petition drilling contract with TMC. The
debtor filed bankruptcy, and the chapter 7 trustee sued TMC under for breach of the pre-petition
contract. TMC counter-sued and, following a trial, both parties’ breach claims were denied. The
pre-petition drilling contract contained a prevailing party attorney fee provision; TMC ultimately
was deemed the prevailing party. The district court awarded TMC approximately $500,000 in
attorney fees and costs, but the bankruptcy court denied TMC’s request for administrative expense
priority for the award.
On appeal to the Fifth Circuit, the creditor argued that the fees qualified as an
administrative expense as an “actual and necessary cost” of the bankruptcy estate.13

The

bankruptcy code does not define “actual and necessary cost,” but the courts have generally found
that to qualify, “a claim against the estate must have arisen post-petition and as a result of actions
taken by the trustee that benefitted the estate.”14 The creditor, like Wells Fargo here, argued that
the Supreme Court’s Reading Company v. Brown15 decision supported its administrative expense
request. The Fifth Circuit soundly rejected that argument, distinguishing the claim for attorney

12

258 F.3d 385 (5th Cir. 2001).
See id. at 387.
14
Id. at 387; see In re Hemingway Transp., Inc., 954 F.2d 1, 5 (1st Cir. 1992); see In re EZ Pay Servs., Inc., 380 B.R.
861, 864 (Bankr. M.D. Fla. 2007) (finding that to qualify as an administrative expense claim, “it is generally held that
the claim must have arisen postpetition and resulted from actions taken by the trustee that created a benefit to the
estate”).
15
391 U.S. 471, 477, 88 S.Ct. 1759, 20 L.Ed.2d 751 (1968).
13

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fees from tort claims in Reading which arose from the receiver’s negligent operation of estate
assets.16
The court also rejected the creditor’s argument that the fees should receive priority
treatment simply because they arose post-petition. The court’s findings on this point are directly
applicable to Wells Fargo’s claimed entitlement to its fees based on its pre-receivership contract:
The only difference between TMC and the existing creditors of
Jack/Wade is that TMC’s debt was incurred after Jack/Wade filed
for bankruptcy. If Jack/Wade had sued TMC and lost one day before
filing for bankruptcy, TMC would be an unsecured creditor with no
claim to any priority of payment for its award of attorney fees. See
In the Matter of Al Copeland Enterprises, 991 F.2d 233, 240 (5th
Cir.
1993)
(granting
administrative
expense
priority
under Reading and 503(b)(1)(A) to only the portion of the debt
which accrued post-petition). The Court does not find that this
fortuity of timing, standing alone, creates a principled basis on
which to make an exception to the rule of equal distribution among
creditors.17
Any claim by Wells Fargo for attorney fees incurred post-receivership based on its prereceivership contracts with the Defendants or Relief Defendants should not receive administrative
expense priority. If the Court borrows bankruptcy courts’ definitions of “administrative expense”
claims, the “prepetition genesis” of a claim for attorney fees based on a pre-petition contract
“ultimately distinguishes it from the postpetition losses” of the type afforded administrative
expense priority.18 When the “source of the estate’s obligation [is] a prepetition fee provision,”

16

See Jack/Wade, 258 F.3d at 387–92; see also id. at 390 n.4 (“The only reason that TMC is able to claim its attorney
fees as damages is because of the contractual provision. We cannot equate the injustice that would have resulted to
the fire damage victim in Reading had it been denied full recovery of its damages with that resulting to TMC in being
denied full recovery of its contractual attorney fees and costs.”).
17
Jack/Wade, 258 F.3d at 390.
18
In re Hemingway Transp., Inc., 954 F.2d 1, 7 (1st Cir. 1992) (finding “We are aware of no authority that
the Reading–Charlesbank exception encompasses a right to payment originating in a prepetition contract with the
debtor.”).

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attorney fees incurred post-petition pursuant to that provision are not entitled to administrative
expense priority.19
The analysis above directly translates to federal equity receiverships, as both bankruptcy
and receivership proceedings share a common primary purpose: “to promote the efficient and
orderly administration of estates for the benefit of creditors.”20 Pre-receivership contracts with
prevailing party attorney fee provisions entered into between relief defendants (who are likely
perpetuating fraud) and third parties should not be permitted to chill a receiver’s ability to bring
good-faith lawsuits against such third parties. Under Wells Fargo’s argument, any equity receiver
who sues a party to pre-receivership contract that includes an attorney fee provision would subject
the receivership estate to massive potential administrative liability. This result would cut against
the receiver’s very purpose, to marshal assets for the benefit of defrauded investors and creditors.
The Court should look to persuasive appellate court bankruptcy case law and find that, to the extent
Wells Fargo’s loan documents entitle it to any attorney fees incurred in this receivership case, such
attorney fees are not entitled to administrative expense priority.
3.

Wells Fargo’s Failure to File Proof of Claim Precludes Recovery of Attorney
Fees Despite Receiver’s Alleged Actual Notice.

As a final point, any supposed actual knowledge the Receiver may have had regarding
Wells Fargo’s intent to claim prospective attorney fees does not absolve it from filing a proof of
claim. The Eleventh Circuit was clear in its holding in Bendall v. Lancer Mgmt. Grp., LLC21—a
party’s contingent claim for attorney fees must be asserted through a proof of claim to receive
recovery from assets of the receivership estate.22 Contrary to Wells Fargo’s statement in the Reply

19

In re Abercrombie, 139 F.3d 755, 759 (9th Cir. 1998).
Bendall v. Lancer Mgmt. Grp., LLC, 523 F. App’x 554, 557 (11th Cir. 2013).
21
523 F. App’x 554, 557 (11th Cir. 2013).
22
See id. at 558–59.
20

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(Reply at 9), the Eleventh Circuit’s ruling in the Claims Litigation did not absolve Wells Fargo
from filing a proof of claim to recover from receivership assets. The court simply held that the
failure to file a proof of claim did not act to deprive Wells Fargo of its “secured state-law property
right that existed prior to the receivership.”23 In fact, the Eleventh Circuit expressly stated that a
secured creditor must file a proof of claim before it become entitled “to access of the general pool
of receivership assets for any unsecured portion of its debt.”24
This is precisely what Wells Fargo seeks—it seeks payment of its attorney fees from the
general pool of receivership assets. What’s more, Wells Fargo asks the Court to elevate its claim
above defrauded investors and creditors (who timely filed proofs of claim). As stated in the
Objection, Wells Fargo failed to file the required proofs of claim for attorney fees.25 Further, as
discussed above and further in the Objection, even if it had filed a proof of claim for attorney fees,
such a claim still is not entitled to administrative expense priority.
CONCLUSION
For all of the reasons stated in the Objection, as supplemented by this Response, the Court
should deny Wells Fargo’s request for an administrative claim
/s/ Susan Heath Sharp
Susan Heath Sharp (FBN 716421)
Matthew B. Hale (FBN 110600)
Stichter Riedel Blain & Postler, P.A.
110 E. Madison St., Ste. 200
Tampa, FL 33602
Telephone: [phone]
Facsimile:
813-229-1811
Email: [e-mail]
[e-mail]
23

Sec. & Exch. Comm’n v. Wells Fargo Bank, N.A., 848 F.3d 1339, 1345 (11th Cir. 2017).
Id. “As the district court correctly noted, there is a distinction between a secured creditor's in rem rights to the
collateral and its right to receive a distribution for the general pool of receivership assets.” Id. at n.5.
25
Even if the proof of claim filed by Wells Fargo as to the Rite-Aid Property were deemed sufficient as to future
attorney fees, Wells Fargo’s fee request fails to separate out which fees expressly related to services in connection
with the Rite-Aid Property.
24

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CERTIFICATE OF SERVICE
I hereby certify that on January 26, 2018, I electronically filed the foregoing with the Clerk
of the Court by using the CM/ECF system.
/s/ Susan Heath Sharp
Susan Heath Sharp

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