Securities and Exchange Commission v. Nadel et al

Filing 690

RESPONSE in opposition re #675 Unopposed MOTION for miscellaneous relief, specifically to (1) Approve Determination And Priority Of Claims, (2) Pool Receivership Assets And Liabilities, (3) Approve Plan Of Distribution, And (4) Establish Objection ProcedureUnopposed MOTION for miscellaneous relief, specifically to (1) Approve Determination And Priority Of Claims, (2) Pool Receivership Assets And Liabilities, (3) Approve Plan Of Distribution, And (4) Establish Objection ProcedureUnopposed MOTION for miscellaneous relief, specifically to (1) Approve Determination And Priority Of Claims, (2) Pool Receivership Assets And Liabilities, (3) Approve Plan Of Distribution, And (4) Establish Objection ProcedureUnopposed MOTION for miscellaneous relief, specifically to (1) Approve Determination And Priority Of Claims, (2) Pool Receivership Assets And Liabilities, (3) Approve Plan Of Distribution, And (4) Establish Objection Procedure Objection and Opposition to Receiver's Motion to Approve Determination and Priority of Claims and Supporting Memorandum of Law filed by TRSTE, Inc., Wells Fargo Bank, N.A., as successor by merger to Wachovia Bank, N.A.. (Attachments: #1 Exhibit Declaration of TRSTE, Inc. records custodian, #2 Exhibit Receiver's February 6, 2009 letter, #3 Exhibit Declaration of Mayda Nahhas, #4 Exhibit SDNY Preliminary Order of Forfeiture/Final Order of Forfeiture, #5 Exhibit SDNY Indictment, #6 Exhibit Declaration of W. Samuel Woodard, Esq.)(Barnett, Ana)

UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF FLORIDA
TAMPA DIVISION
CASE NO. 8:09-cv-0087-T-26TBM
SECURITIES AND EXCHANGE COMMISSION,
Plaintiff,
vs.
ARTHUR NADEL,
SCOOP CAPITAL, LLC,
SCOOP MANAGEMENT, INC.,
Defendants,
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.
__________________________________________/
OBJECTION AND OPPOSITION TO RECEIVER’S MOTION TO APPROVE
DETERMINATION AND PRIORITY OF CLAIMS, (D.E. 675) AND
SUPPORTING MEMORANDUM OF LAW
TRSTE, Inc. 1 (“TRSTE”), the Trustee holding legal title to North Carolina real
property known as Laurel Mountain Property2 (“Laurel Mountain”), and Wells Fargo
Bank, N.A. ("Wells Fargo"),3 as beneficiary of a Deed of Trust held by TRSTE, hereby

1

TRSTE, Inc. is a Virginia corporation registered to do business in North Carolina.
The real property at issue here is described by the Receiver as, “approximately 420 acres near Asheville,
North Carolina in Buncombe and McDowell counties, intended for development of home-sites. . .” [D.E.
685, p. 16], and more particularly described in the Deed of Trust appended to Exhibit A, Declaration of
TRSTE records custodian.
3
Wells Fargo is the successor by merger to Wachovia Bank, N.A. (“Wachovia”).
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file this Objection and Opposition to Receiver’s Unopposed Motion to (1) Approve
Determination and Priority of Claims, (2) Pool Receivership Assets and Liabilities, (3)
Approve Plan of Distribution, and (4) Establish Objection Procedure (DE 675)
(“Receiver’s Motion”),4 on the grounds that this Court and the Receiver lack jurisdiction
over the Laurel Mountain real property titled to TRSTE because:
•

The Receiver failed to follow the jurisdictional requirements of
28 U.S.C. § 754 (Receivers of property in different districts); and

•

Laurel Preserve, LLC and the Laurel Mountain property is already
under the jurisdiction of the United States District Court for the
Southern District of New York, and were forfeited to the United
States in a Preliminary and Final Order of Forfeiture signed
October 21, 2010.5

In addition to the above jurisdictional issues, the Receiver’s failure to provide
TRSTE, the Trustee holding title, with any notice that the property was part of the
Receivership, deprived TRSTE and Wells Fargo of an opportunity to file a timely claim
and be heard as required under the Fifth Amendment Due Process clause.
In support of this Objection and Opposition, TRSTE and Wells Fargo, as
beneficiary of the Deed of Trust, respectfully submit the following memorandum of law.

4

In accordance with this Court’s September 24, 2009 Order [D.E.207], which stated it was intended “to
prevent any subsequent motions to intervene which would require the SEC, the Receiver, and the Court to
expend valuable time and resources,” TRSTE and Wells Fargo have refrained from seeking intervention as
the vehicle for protecting their interest in the Laurel Mountain real property. However, to the extent the
Court now deems a motion to intervene helpful or necessary, TRSTE and Wells Fargo request the
opportunity to submit such motion. See SEC v. Flight Transportation Corp., 699 F. 2d 943 (8th Cir. 1983).
5
This Order was entered into the record on December 2, 2010 as [D.E.78], Southern District New York.

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MEMORANDUM OF LAW
The Receiver’s Motion [D.E. 675] in effect seeks leave to exercise dominion and
control of property over which, by operation of law, he has been divested of jurisdiction
and in contravention of the Fifth Amendment Due Process rights of the title holder and
beneficial owner. Such action should not be permitted.
I. Factual Background
On January 21, 2009, a sealed criminal complaint was filed in the United States
District Court for the Southern District of New York charging Arthur Nadel (“Nadel”)
with securities and wire fraud. That same day, the Securities and Exchange Commission
initiated this case, filing a complaint, seeking a preliminary injunction freezing the assets
of Nadel, and requesting the appointment of a Receiver over property identified in the
pleadings. In a letter dated February 6, 2009, the Receiver purported to give Wachovia
notice that there was receivership property in which it had an interest. See Exhibit B.
The letter is directed to “Wachovia Commercial Loan Services” at a post office box
address in Atlanta, Georgia. Neither the letter nor its accompanying documents identify
Laurel Preserve, LLC as a receivership entity.6 The letter specifically requests, “that you
provide us with a description of your relationship and the extent of any outstanding
obligations between you and any of the Receivership Entities.” It was not until after the
purported notice letter was sent that the Receiver sought to add Laurel Preserve, LLC as a
Receivership Entity [D.E. 36]. Laurel Preserve, LLC became a Receivership Entity on
February 11, 2009 [D.E. 44], but the Receiver never supplemented his earlier letter to

6

Laurel Preserve, LLC is a North Carolina entity that was controlled by Arthur Nadel. The 420 acres of
real property located in Buncombe and McDowell counties, North Carolina referred to herein as Laurel
Mountain was titled to Laurel Preserve, LLC until May 2, 2008 when legal title was conveyed to TRSTE to
hold in trust under a Deed of Trust to secure a $1.9 million loan Wachovia made to Laurel Preserve, LLC.

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Wachovia with the new Order identifying Laurel Preserve, LLC. Moreover, although the
Motion seeking to add Laurel Preserve, LLC. as a Receivership Entity identifies the
Laurel Mountain real property as an asset it does not mention that a search of the public
records shows that title to the real property was held by TRSTE, in trust for Wachovia as
security for a loan made May 2, 2008. The Receiver never provided TRSTE notice by
any means at any time. See Exhibit A, Declaration of TRSTE records custodian.
More importantly, once the Court included the Laurel Mountain property in the
receivership, the Receiver did not within 10 days, or anytime thereafter, file copies of the
order of appointment in the Western District of North Carolina as explicitly required by
28 U.S.C. §754. See Exhibit C, Declaration of Mayda Nahhas.
Nadel was arrested January 27, 2009 on a warrant issued by the Southern District
of New York. On April 28, 2009, a Grand Jury sitting in the Southern District of New
York returned an Indictment charging Nadel with multiple counts of securities, wire and
mail fraud, and sought the forfeiture of, among other things, the Laurel Mountain
property. On January 24, 2010, Nadel changed his plea to guilty and on October 21,
2010, he was sentenced in accordance with Fed. R. Crim. P. 32 and 32.2. As part of his
sentence7 the United States District Court for the Southern District of New York forfeited
Laurel Preserve, LLC and the Laurel Mountain property to the United States, subject to
the provisions of 21 U.S.C. § 853(n), among other pertinent forfeiture provisions. See
[D.E. 78, SDNY], Exhibit D, Preliminary Order of Forfeiture / Final Order of Forfeiture
as to Defendant’s Interest in Specific Property.

7

Forfeiture is part of the sentence. See Libretti v. United States, 516 U.S. 29, 49 (1995).

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II. Legal Argument
A. The Failure to File Copies of the Order Appointing Receiver and
Complaint With the District Court in the Western District of North
Carolina has Divested the Receiver of Jurisdiction and Control Over the
Laurel Mountain Real Property.
The Receiver’s reach is constrained by the provisions of 28 U.S.C. § 754 which
give a receiver great reach but only on condition that:
Such receiver shall, within ten days after the entry of his order of
appointment, file copies of the complaint and such order of appointment in
the district court for each district in which property is located. The failure
to file such copies in any district shall divest the receiver of jurisdiction
and control over all such property in that district.
28 U.S.C. § 754 (emphasis added).
The provision is not discretionary, it is mandatory.

The Laurel Mountain

property, by the Receiver’s own description is located in Buncombe and McDowell
counties, North Carolina.8 Searches of the records for the Western District of North
Carolina, which encompasses Buncombe and McDowell counties, show no record of any
filing by the Receiver. See Exhibit C, Nahhas Declaration. This failure to follow the
jurisdictional requirements of the law has removed this property from the receivership
and deprived this Court of jurisdiction over it.

See e.g., Securities and Exchange

Commission v. Bilzerian, 378 F.3d 1100, 1103-1104 (D.C. Cir. 2004); Securities and
Exchange Commission v. Kirkland, No. 6:06-cv-183-Orl-28KRS, 2006 WL 3388463, at
*2 (M.D. Fla. Nov. 21, 2006) (finding that the Court did not have jurisdiction over the
nonparty’s interest in property located in Georgia, because the receiver failed to file
copies of the complaint and order of appointment in the foreign county pursuant to 28
U.S.C. § 754).
8

See Exhibit A, Declaration of TRSTE custodian of records.

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Even if the Court were to now re-appoint the Receiver so he could comply with
the law, it would be futile because, as described below, another United States District
Court has assumed jurisdiction over the property.

Accordingly, the Receiver, and

implicitly this Court, are divested of jurisdiction and control of Laurel Preserve, LLC and
Laurel Mountain.
B. The Receivership Entity Laurel Preserve, LLC and Laurel Mountain
Property are Already Under the Jurisdiction of the United States District
Court for the Southern District of New York, and Forfeited to the United
States in an Order of Forfeiture Signed October 21, 2010.
At the time of his arrest on December 27, 2009, Nadel came under the jurisdiction
of the United Stated District Court for the Southern District of New York. On April 28,
2009, a Grand Jury sitting in the Southern District of New York returned an Indictment
charging Nadel with multiple counts of fraud and seeking the forfeiture of specifically
identified property that included, “[a]ll right, title, and interest in the entities known and
described as Laurel Mountain Preserve, LLC, Laurel Preserve, LLC, . . . including but
not limited to 420 acres in Buncombe County and McDowell County, North Carolina,”
put the Securities and Exchange Commission and Receiver on notice that it was the intent
of the United States in the Southern District of New York to seek the forfeiture of the
Receivership Entity Laurel Preserve, LLC and the Laurel Mountain property pursuant to
18 U.S.C. § 981(a)(1)(C) and 28 U.S.C. § 2461. See [D.E. 18, SDNY], Exhibit E,
Indictment. Nonetheless, the Receiver did not take any action to ensure he in fact
obtained and maintained jurisdiction. See supra. In the meantime, on February 24, 2010,
Nadel entered a guilty plea and agreed to forfeit to the United States a sum of money and
property including:

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(g) All right, title, and interest in the entities known and described as
Laurel Mountain Preserve, LLC, Laurel Preserve, LLC, and Laurel
Mountain Preserve Homeowners Association, Inc., including, but not
limited to, 420 acres in Buncombe County and McDowell County, North
Carolina;
See [D.E. 78, SDNY], Exhibit D, Preliminary Order of Forfeiture/Final Order of
Forfeiture as to Defendant’s Interest in Specific Property.
On October 21, 2010, the District Court in New York entered the Order forfeiting
“All of the defendant’s right, title and interest in the Specific Properties9 . . .” and
authorized the United States Marshals Service to “seize the Specific Properties and hold
the Specific Properties in its secure, custody and control.” Without a doubt, both the
Receivership Entity Laurel Preserve, LLC and Laurel Mountain, are now in the custody
and control of the United States Marshals Service and cannot therefore be a part of the
receivership.
C. The Failure to Give Notice and an Opportunity to be Heard Before
Appropriating Real Property is a Violation of Fifth Amendment Due
Process.
Assuming this Court had jurisdiction over Laurel Mountain, which as explained
above, it does not, the Receiver’s failure to afford TRSTE or Wells Fargo notice of his
intention to appropriate Laurel Mountain before he exercised dominion over the property,
constitutes a taking in violation of the Fifth Amendment Due Process Clause. While
district courts have broad powers and wide discretion to determine relief in an equity
receivership such as this one, it is not unfettered. Indeed, a district court’s use of
summary proceedings must still, of course, comply with due process. See Securities and
Exchange Commission v. Pension Fund of America L.C., No. 09-10241, 2010 WL
9

“Specific Properties” is defined in the October 21, 2010 Order as including Laurel Preserve, LLC and the
Laurel Mountain real property.

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1794388, at *4 (11th Cir. May 6, 2010); Securities and Exchange Commission v. Elliott,
953 F.2d 1560, 1566 (11th Cir. 1992), rev’d in part on other grounds, 998 F.2d 922 (11th
Cir. 1993).
While a district court has the power to include the property of a nonparty in an
SEC receivership order, it can only do so if the nonparty receives actual notice and an
opportunity to be heard. Securities and Exchange Commission v. Whitworth Energy
Resources Ltd., 2000 WL 1770652, at *4 (9th Cir. Dec. 1, 2000) (finding that investors’
due process rights weighed heavily in favor of affording them a right to be heard prior to
the sale of their property). Here, neither TRSTE nor Wells Fargo received notice of the
Receiver’s intention to include Laurel Mountain in the receivership. While arguably a
“notice” letter was sent to Wachovia Commercial Loan Services on February 6, 2009,
this letter did not, and could not, put TRSTE or Wells Fargo (then operating as
Wachovia) on notice of the Receiver’s intentions with respect to Laurel Mountain.
In determining if summary proceedings comply with due process, the Court “must
look at the actual substance, not the name or form, of the procedure to see if the
claimants’ interests were adequately safeguarded.” Elliott, 953 F. 2d. at 1567. The
February 6, 2009 letter included receivership documents that identified various properties
included in the receivership, but not Laurel Preserve, LLC, nor Laurel Mountain. See
Exhibit B. Neither were mentioned because as of February 6, 2009, neither Laurel
Preserve, LLC nor Laurel Mountain were within the scope of the receivership order. In
fact, it was not until February 11, 2009, five days after the February 6th letter was sent to
Wachovia Commercial Loan Services, that this Court expanded the receivership to
include, among other things, Laurel Preserve, LLC and Laurel Mountain. See D.E. 44.

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At no time after February 11, 2009 did TRSTE receive any Order, Claim Notice, judicial
pleading, or correspondence of any kind regarding Laurel Preserve, LLC or Laurel
Mountain from the Receiver identifying a claim against Laurel Preserve, LLC, or Laurel
Mountain. See Exhibit A, Declaration of TRSTE custodian of records; see also Exhibit
F, Declaration of W. Samuel Woodard. Generally, a district court’s use of summary
proceedings complies with due process if the parties are permitted to “present evidence
when the facts are in dispute and to make arguments regarding those facts.” Elliott, 953
F. 2d at 1567. By not providing notice that the Laurel Mountain real property was added
to the receivership, TRSTE and Wells Fargo were deprived of the opportunity to present
a claim and submit evidence of the facts or to make arguments before the Court, and
accordingly were deprived of Due Process.
III. Conclusion
For the foregoing reasons, this Court should deny Receiver’s Motion with respect
to Receivership Entity Laurel Preserve, LLC and its assets, including Laurel Mountain.
Respectfully submitted,
STEARNS WEAVER MILLER WEISSLER
ALHADEFF & SITTERSON, P.A.
By: /s/ Ana T. Barnett
Ana T. Barnett
[e-mail]
Alice R. Huneycutt
Florida Bar No.: 0293105
[e-mail]
Julie Fishman Berkowitz
Florida Bar No.: 17293
[e-mail]
150 West Flagler Street – Suite 2200
Miami, FL 33130
Telephone No.: [phone]
Facsimile No.: [phone]
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CERTIFICATE OF SERVICE
I HEREBY CERTIFY that on this 21st day of December, 2011, I electronically
filed the foregoing document with the Clerk of Court using CM/ECF. I also certify that
the foregoing document is being served this day on all counsel of record or pro se parties
identified on the attached Service List in the manner specified, either via transmission of
Notices of Electronic Filing generated by CM/ECF or in some other authorized manner
for those counsel or parties who are not authorized to receive Notices of Electronic
Filing.

/s/ Ana T. Barnett

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SERVICE LIST
Securities and Exchange Commission v. Arthur Nadel, et al.
CASE NO. 8:09-cv-0087-T-26TBM

Gianluca Morello, Esq.
Wiand Guerra King, P.L.
3000 Bayport Drive
Suite 600
Tampa, FL 33607
Counsel for Receiver, Burton W. Wiand

Arthur G. Nadel
Via U.S. Mail
Register No. 50690-018
FCI Butner Low
Federal Correctional Institution
P. O. Box 999
Butner, NC 27509

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