Securities and Exchange Commission v. Nadel et al

Filing 719

MOTION to compel (Receiver to Abandon The Property Located at 841 South Main Street, Graham, North Carolina) by Wells Fargo Bank, N.A., Wells Fargo Bank, N.A.. (Attachments: #1 Exhibit Composite Exh. A)(Shaheen, Louis)

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.
_______________________________________________/
MOTION OF WELLS FARGO BANK, N.A. (I) FOR RELIEF FROM
INJUNCTION OR, IN THE ALTERNATIVE, (II) TO COMPEL THE
RECEIVER TO ABANDON THE PROPERTY LOCATED AT
841 SOUTH MAIN STREET, GRAHAM, NORTH CAROLINA
Wells Fargo Bank, N.A. ("Wells Fargo"),1 a valid secured creditor and party in
interest herein, hereby files this motion (the "Motion") seeking (i) relief from this Court's
injunction so that it may foreclose on the property located at 841 South Main Street,

1

Wells Fargo is successor by merger to Wachovia Bank, N.A.

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Graham, North Carolina (the "Rite Aid Property"), or, in the alternative, (ii) to compel
the Receiver to abandon the Rite Aid Property. In support of this Motion, Wells Fargo
states as follows:
A.

The Receivership Case
1.

On January 21, 2009, the Securities and Exchange Commission (the

"Commission") initiated this action to prevent the defendants from further defrauding
investors of hedge funds operated by them. That same day, the Court entered an order
appointing Burton W. Wiand as Receiver for Defendants Scoop Capital, LLC ("Scoop
Capital") and Scoop Management, Inc. ("Scoop Management") and Relief Defendants
Scoop Real Estate, L.P. ("Scoop RE"); Valhalla Investment Partners, L.P.; Valhalla
Management, Inc.; Victory Fund, Ltd.; Victory IRA Fund, Ltd.; Victory IRA Fund, LLC;
Viking Fund, LLC; and Viking Management, LLC (the "Order Appointing the
Receiver").

(See generally Order Appointing Receiver (Doc. No. 8)).

The Court

subsequently granted several motions to expand the scope of the Receivership Entities to
include other entities owned or controlled by Arthur Nadel ("Nadel"). (See generally
Doc. Nos. 17, 44, 68, 81, 153, 172, 454).
2.

The Receiver has taken possession of the Rite Aid Property pursuant to the

Order Appointing the Receiver.
3.

The Order Appointing the Receiver enjoins all parties with notice of the

Order "from in any way disturbing the assets or proceeds of the receivership or from
prosecuting any actions or proceedings which involve the Receiver or which affect the

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property of the Defendants or Relief Defendants . . ." Order Appointing the Receiver,
¶15.
B.

The Rite Aid Property
4.

The Rite Aid Property consists of approximately 1.18 acres of land and a

13,824 square foot building. The Rite Aid Property was purchased in May 2005 by
Scoop RE in an arms'-length transaction for $5,310,000.

The Rite Aid Property is

currently being leased to a Rite-Aid Pharmacy for $33,073.08 per month pursuant to a
triple net lease which expires in 2024 (subject to potential extensions).

The total

estimated rent collected by the Receiver to date exceeds $1.19 Million.
C.

The Loan Documents and Continued Breaches Thereof
5.

On May 23, 2005, Wells Fargo and Scoop RE entered into a standard loan

transaction (described below) pursuant to which Wells Fargo served as lender in
connection with the Scoop RE's purchase of the Rite Aid Property. As of January 10,
2012, Scoop RE was indebted to Wells Fargo in the total approximate amount of
$3,147,427.00, all pursuant to that certain Promissory Note dated as of May 23, 2005 (as
amended, restated, supplemented, or otherwise modified from time to time, the “Note”),
between Wells Fargo and the Scoop RE.
6.

In order to secure the indebtedness under the Note, Scoop RE executed

and delivered to Wells Fargo a Deed of Trust and Security Agreement (as amended,
restated, supplemented, or otherwise modified from time to time, the "Deed of Trust")2

2

The legal description of the Property is included in the Deed of Trust, which legal description is
incorporated in this Motion by this reference.

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and Assignment of Rents and Leases ("Assignment of Rents"), each dated May 24,
2005.3 Among other things, pursuant to the Loan Documents, Scoop RE granted Wells
Fargo security interests in and liens upon the Rite Aid Property, including but not limited
to all rents, issues, revenues and profits generated by the operation of the Rite Aid
Pharmacy (the "Cash Collateral").
7.

Pursuant to the Loan Documents, Wells Fargo is a first priority, senior

secured creditor of Scoop RE. Wells Fargo has valid, perfected, and not otherwise
avoidable first-priority security interests in the Rite Aid Property and Cash Collateral
(collectively, the "Collateral").
8.

Notwithstanding the fact that the Receiver has had possession of the Rite

Aid Property since January 2009 and has collected rents from Rite Aid in an amount
likely in excess of $1.19 Million (which is Wells Fargo's Cash Collateral), the Receiver
has failed to turnover those proceeds to Wells Fargo. While the Receiver did pay interest
on this loan through October 2009, he has not made any payment to Wells Fargo since
that date. As a result, the receivership estate is in continuing default under the Loan
Documents and Wells Fargo's Collateral has been severely impaired as a result.
D.

The Receiver's Motion to Sell the Property
9.

On January 6, 2012, the Receiver filed a Verified Motion to Approve Sale

of Real Property Located in Graham, Alamance County, North Carolina (the "Sale
Motion") (Doc. No. 706). Pursuant to the Sale Motion, the Receiver seeks to sell the Rite
Aid Property at a price significantly below market value ($2.4 Million) and well below
3

The Note, Deed of Trust and Assignment of Rents are collectively referred to herein as the "Loan
Documents", copies of which are annexed hereto as Composite Exhibit A.

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the total amount of Wells Fargo's secured claim, which currently aggregates
approximately $3,147,427.00.
10.

Contemporaneously with the filing of this Motion, Wells Fargo has filed a

comprehensive objection to the Receiver's Sale Motion (the "Objection"),4 asserting that
motion should be denied for the following reasons: (1) the Receiver's contemplated
private sale does not comply with the mandated procedural safeguards set forth in 28
U.S.C. § 2001(b), which require the Court to appoint three disinterested persons to
appraise the property prior to any such sale; (2) the Receiver attempts to sell the Rite Aid
Property at a price significantly below market value ($2.4 Million) and well below the
total amount of Wells Fargo's secured claim; and (3) the Receiver seeks to effectuate an
impermissible taking of Wells Fargo's state law property rights in contravention of the
due process clause of the Fifth Amendment.
MEMORANDUM OF LAW
A.

Wells Fargo Is Entitled to Relief From the Court's Injunction in Order to
Foreclose on Its Collateral.
__
11.

A court has the power to grant and continue “stays to prevent interference

with the receivership estate.” Commodity Futures Trading Com. v. Chilcott Portfolio
Mgmt., 713 F.2d 1477, 1483 (10th Cir. 1983). To preclude other individuals from
proceeding with their case in another forum, however, one must “make a strong showing”
that a receivership is “necessary and that the disadvantageous effect on others would be
clearly outweighed.” Id. at 484. Indeed, “[a] receivership is only a means to reach some
legitimate end sought through the exercise of the power of a court of equity. It is not an
4

The Objection is incorporated in its entirely in this Motion by this reference.

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end in itself.” Kelleam v. Maryland Cas. Co., 312 U.S. 377, 381 (1941) (quoting Gordon
v. Washington, 295 U.S. 30, 37, 55 (1935)). Consequently, a receivership must be
monitored to ensure it is still serving the function for which it was created. See id. (citing
Michigan v. Michigan Trust Co., 286 U.S. 334, 345 (1932)).
12.

In the case of Securities & Exchange Commission v. Wencke, 742 F.2d

1230, 1231 (9th Cir. 1984), the court set forth three factors that are relevant here in
determining whether the stay should be lifted for the Rite Aid Property. First, the Court
should determine whether the stay preserves the status quo or whether the creditor “will
suffer substantial injury if not permitted to proceed.” Second, the Court should look at
the timing of the motion to lift stay to ensure the Receiver has had sufficient time to
organize and understand the assets under his control. Id. Finally, the Court should
determine whether the creditor's claims have merit. Id.
(i)

The Receiver Has Failed to Maintain the Status Quo and Wells Fargo
Has Suffered Substantial Injury as a Result.

13.

It indisputable that federal receivers such as Mr. Wiand are required to

manage real estate according to the law of the state where the property is located. See 28
U.S.C. § 959(b) (noting receiver must manage and operate the property "in the same
manner that the owner or possessor thereof would be bound to do" under applicable state
law). Against this backdrop, the district court in SEC v. Madison Real Estate Group,
specifically held that in order for a receiver to retain property in the estate, the
receiver must preserve the status quo with the lender -- which includes bringing current
the regular, monthly principal and interest payments, as well as property taxes. See 647
F. Supp. 2d at 1284-85 (citing SEC v. Wencke, 742 F.2d at 1231). Thus, at minimum,

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Wells Fargo is entitled to monthly interest payments on the Rite-Aid Property loan during
the pendency of this case. Here, the Receiver has been collecting substantial rent from
Rite Aid (which is also Wells Fargo's Collateral) over the last three years and has failed
to service the loan with Wells Fargo. The monthly rent on the property is $33,073.08 and
the total estimated rent collected by the Receiver exceeds $1.19 Million. While the
Receiver did pay interest on this loan through October 2009, he has not made any
payment to Wells Fargo since that date.5 As a result, Wells Fargo's Collateral has been
severely impaired during the pendency of this case. The Receiver now seeks to further
abrogate Wells Fargo's state law property rights by selling the Rite Aid Property for
significantly less than Wells Fargo's valid secured claim, based upon unsupported
allegations devoid of any factual support.
14.

This lack of adequate protection represents sufficient cause to lift the

injunction to allow Wells Fargo to exercise its state law rights and remedies. See SEC v.
Madison Real Estate Group, 647 F. Supp. 2d at 1284-85; Orix Credit Alliance, Inc. v.
Delta Resources, Inc. (In re Delta Resources, Inc.), 54 F.3d 722, 729 (11th Cir. 1995) (".
. . a creditor may obtain relief from the stay (1) for cause, including the lack of adequate
protection of the creditor's interest in the collateral.") (citation omitted); Old West Annuity
& Life Ins. Co. v. Apollo Group, 2006 U.S. Dist. LEXIS 68644, at *16 (M.D. Fla. 2006)
(noting that the stay can be terminated, annulled or modified because of a lack of

5

In accordance with this Court’s September 24, 2009 Order (Doc. No. 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,” Wells Fargo has refrained from seeking intervention as the vehicle
for protecting its interests in the Rite Aid Property. To the extent the Court now deems a motion to
intervene helpful or necessary, Wells Fargo requests the opportunity to submit such motion. See SEC v.
Flight Transportation Corp., 699 F.2d 943 (8th Cir. 1983).

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adequate protection); In re Murray Industries, Inc., 121 B.R. 635, 637 (Bankr. M.D. Fla.
1990) (lifting the stay for a secured creditor to initiate a state law action against a debtor
where the creditor's interest was not adequately protected). Based on the foregoing,
Wells Fargo satisfies the first Wenke factor for lifting the injunction herein.
(ii)

The Receiver Has Had Sufficient Time to Understand the Assets Under
His Control.

15.

The Receiver was appointed in January 2009, including as Receiver for

Scoop RE, and he immediately took possession of the Rite Aid Property. The Receiver
cannot credibly assert that he has not had sufficient time to understand the assets under
his control. In fact, the Receiver concedes he has marketed the Rite Aid Property for sale
since August 2009 and that he has had several offers on the property, with the highest
offer of $4,177,000 being received in August 2010 (See Sale Motion at p. 5). Incredibly,
the Receiver now seeks to sell the Rite Aid Property at a price significantly below market
value ($2.4 Million) and well below the total amount of the Wells Fargo's secured claim.
At the Receiver's proposed sale price, he concedes that there is no equity in the property.
Accordingly, the injunction should be lifted and the property abandoned to Wells Fargo.
See, e.g., SEC v. Madison Real Estate Group, 647 F. Supp. 2d at 1284-85 (lifting stay to
allow secured creditors to foreclose on various properties because there was no equity in
the properties). Accordingly, this Wenke factor also favors lifting the injunction against
the Rite Aid Property.
(iii)

Wells Fargo's Secured Claim Has Merit.

16.

Finally, the third factor supports Wells Fargo's position. Under the third

prong of the Wencke test, the party requesting a lift of stay is not required to show that it

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is likely to prevail on the merits. Rather, the inquiry is whether “the [moving] party has
colorable claims to assert which justify lifting the receivership stay.” United States v.
Acorn Tech. Fund, L.P., 429 F.3d 438, 443 (3d Cir. 2005) (emphasis in original) (citing
Wencke, 742 F.2d at 1232). Pursuant to the Loan Documents, Wells Fargo is a first
priority, senior secured creditor of Scoop RE. Wells Fargo has valid, perfected, and not
otherwise avoidable first-priority security interests in the Rite Aid Property and Cash
Collateral. Significantly, the Receiver does not allege – because he cannot – that Wells
Fargo's security interests in the Rite Aid Property and Cash Collateral are not valid under
North Carolina law. “It is well-established that a ‘receiver appointed by a federal court
takes property subject to all liens priorities or privileges existing or accruing under the
laws of the State.’” In re Real Property Located at Jupiter Drive, Salt Lake City, Utah,
2007 U.S. Dist. LEXIS 65276, at *10 (D. Utah June 7, 2007) (quoting Marshall v. New
York, 254 U.S. 380, 385 (1920)). Consequently, Wells Fargo's priority interest remains
intact despite the receivership. See id. at *12; see generally Objection. Because “one
debt is secured and another is not there is manifestly an inequality of rights between the
secured and unsecured creditors.” Id. at *10–11 (quoting Ticonic Nat'l Bank v. Sprague,
303 U.S. 406, 412 (1938)). Thus, while this Court may have broad powers to carry out
the purpose of the receivership, it should not put the interests of the investors and the
receivership over the interests of secured creditors. See SEC v. Madison Real Estate
Group, 647 F. Supp. 2d at 1278-84.
17.

On December 7, 2011, the Receiver filed a claims determination (Doc.

No. 675), seeking to disallow Wells Fargo's security interests in the Rite Aid Property,

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primarily based on purported "shadow accounts" Arthur Nadel allegedly maintained at
Wells Fargo. Importantly, Wells Fargo's objection to the Receiver's claims determination
motion (Doc. No. 689) and objection to the Sale Motion (filed contemporaneously
herewith) set forth the many reasons why the Receiver's claims have no merit and why
Wells Fargo's secured claim is valid under North Carolina state law. Those reasons
include, but are not limited to: (1) the Receiver lacks standing to pursue the "shadow
account" claims; (2) the Receiver's "shadow account" claims are barred by the in pari
delicto doctrine; (3) the Receiver cannot subordinate a creditor's valid secured claim
based merely on the presence of red flags or the indicia of fraud, particularly in
connection with wholly unrelated transactions; (4) the Receiver's contemplated private
sale of the Rite Aid Property does not comply with the mandated procedural safeguards
set forth in 28 U.S.C. § 2001(b), which require the Court to appoint three disinterested
persons to appraise the property prior to any such sale; (5) the Receiver cannot sell the
Rite Aid Property at a price significantly below market value ($2.4 Million) and well
below the total amount of Wells Fargo's secured claim; and (6) the Receiver's Sale
Motion seeks to effectuate an impermissible taking of Wells Fargo's state law property
rights in contravention of the due process clause of the Fifth Amendment.
18.

Apart from these reasons, all the Receiver has done is threaten to assert a

separate cause of action in another proceeding. That claim has nothing to do with Wells
Fargo's security interest, established in 2005, under North Carolina law. The Receiver
can litigate the threatened claim if he wishes but that should not affect Wells Fargo's
ability to enforce its state law property rights. See Sender v. The Bronze Group, Ltd. (In

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re Hedged Investments Assocs., Inc.), 380 F.3d 1292, 1298-1303 (10th Cir. 2004)
(refusing to abrogate lender's secured claims despite (i) making loan a thinly capitalized
corporate debtor that was being operated as a Ponzi scheme, (ii) lender's lack of due
diligence in making loan, and (iii) similarities existing between lender's return on the loan
and returns promised to investors in Ponzi scheme); see also Henry v. Lehman
Commercial Paper, Inc. (In re First Alliance Mortg. Co.), 471 F.3d 977, 1007 (9th Cir.
2006) (refusing to subordinate secured lender's claim, thus allowing Lehman's $77
Million secured claim despite Lehman’s alleged involvement in aiding and abetting the
debtor’s fraudulent lending practices). Based on the foregoing, Wells Fargo's secured
claim is colorable, and thus this Wenke factor also favors lifting the injunction against the
Rite Aid Property.
B.

The Trustee Should Abandon the Rite Aid Property.
19.

On request of a party in interest, the Court may order the Receiver to

abandon any property of the estate that is burdensome to the estate or that is of
inconsequential value and benefit to the estate. See SEC v. Madison Real Estate Group,
647 F. Supp. 2d at 1278-84 ("If the value of the property is less than the loan amount . . .
the disadvantages of keeping the property in the Receivership outweigh the
advantages."); see also 11 U.S.C. § 554(b) (directing abandonment in bankruptcy cases
when property is burdensome to the estate or is of inconsequential value and benefit to
the estate). Wells Fargo seeks to compel the Receiver to abandon the receivership
estate's interest in the Rite Aid Property. Where the estate has no equity in an asset, so
that investors or unsecured creditors are unlikely to benefit from a sale of the property, it

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is generally recognized that abandonment is the appropriate method of dealing with the
asset, not liquidation. See SEC v. Madison Real Estate Group, 647 F. Supp. 2d at 127884; In re: Feinstein Family P'ship, 247 B.R. 502, 507-09 (Bankr. M.D. Fla. 2000). By
the Receiver's own admission in his Sale Motion, the Rite Aid Property, which he seeks
to sell for $2.4 Million, has no value to the estate because Wells Fargo's secured claim
currently exceeds $3.1 Million. Thus, any potential value that the estate may gain from
the sale of the Rite Aid Property is negated by Wells Fargo's valid secured claim and
state law property interests.
20.

If the sale of an asset will not generate funds for investors or unsecured

creditors, abandonment is the proper course. See In re Kent, 411 B.R. 743, 751 (Bankr.
M.D. Fla. 2009) (quoting In re Rambo, 297 B.R. 418, 433 (Bankr. E.D. Pa. 2003)).
Accordingly, Wells Fargo requests this Court order abandonment of the receivership
estate's interest in the Rite Aid Property.
CONCLUSION
WHEREFORE, Wells Fargo respectfully requests that this Court enter an order (i)
lifting the Court's injunction as it relates to the Rite Aid Property; (ii) directing the
Receiver to commence payment of the receivership estate's obligations under the Loan
Documents, plus attorney's fees and costs and to continue payment on a monthly basis
until the Rite Aid Property is abandoned by the Receiver; (iii) compel the Receiver to
abandon any interest in the Rite Aid Property; and (iv) for such other and further relief as
the Court deems just and proper.

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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, and each indicated that they objected to
and would oppose the relief requested in this Motion.
Dated this 19th day of January, 2012 in Tampa, Florida.
Respectfully submitted,
AKERMAN SENTERFITT
/s/L. Joseph Shaheen______________
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
401 East Jackson Street, Suite 1700
Tampa, Florida 33602
Telephone: [phone]
Facsimile: [phone]
Counsel for Wells Fargo, N.A.

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CERTIFICATE OF SERVICE
I hereby certify that on January 19, 2012, I electronically filed the foregoing with
the Clerk of the Court by using the CM/ECF system. I further certify that I mailed the
foregoing document and the notice of electronic filing by first-class mail to the following:
Arthur G. Nadel
FCI BUTNER LOW
Federal Correctional Institution
P.O. Box 999
Butner, NC 27509
Gianluca Morello, Esq.
Wiand Guerra King, P.L.
3000 Bayport Drive
Suite 600
Tampa, FL 33607
Counsel for Receiver, Burton W. Wiand

/s/L. Joseph Shaheen______________
Attorney

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