Security Is Secure, Even When It’s in Receivership

In 2009, the SEC filed an action against Arthur Nadel and others following the collapse of a Ponzi scheme. The district court appointed a receiver to administer the defendants’ property and business affairs “and take whatever actions are necessary for the protection of the investors.”  The district court also established a bar date for creditors’ and investors’ proofs of claim.

Wells Fargo had security interests in three of the properties placed in receivership but filed a timely proof of claim only as to one of them. More than a year later, Wells Fargo filed a motion seeking a determination that it need not file proofs of claims, or in the alternative, leave to file them belatedly.  The receiver, in turn, moved for a determination that Wells Fargo’s failure to file proofs of claims had extinguished its security interests, and for permission to release the proceeds of the sale of one of the properties at issue.

The district court granted the receiver’s motion, finding that Wells Fargo had the burden to protect its security interest by following the proof of claim requirements established by the court, and had failed to do that. Wells Fargo appealed.

The Eleventh Circuit reversed, SEC v. Wells Fargo Bank, N.A., No. 16-10942 (11th Cir. Feb. 22, 2017).  District Judge R. David Proctor, visiting from the Northern District of Alabama and writing for a panel also including Judge Jordan and Judge Jill Pryor, first rejected the receiver’s argument that the appeal was untimely.  The receiver argued that Wells Fargo’s rights were extinguished, and the clock started to run, when the bar date for proofs of claim came and went, back in 2010; the Eleventh Circuit disagreed, because the 2010 order establishing the claims procedure was not a final, appealable judgment.

On the merits, the court cited the “axiomatic” principle that “interests in property are determined by state law,” and looked to bankruptcy law as “both analogous and instructive” on the interplay between that principle and a court-ordered proof of claim requirement. “In the bankruptcy context, a secured creditor’s lien remains intact through the bankruptcy, regardless of whether the creditor files a proof of claim.”  Similarly, the court held, “a federal district court cannot order a secured creditor to either file a proof of claim and submit its claim for determination by the receivership court, or lose its secured state-law property right that existed prior to the receivership.”  If a creditor with an interest in property in receivership is undersecured, its deficiency claim may be subject to the court’s proof of claim requirements.  But a secured creditor retains its interest in collateral whether or not the creditor files a proof of claim in the receivership proceeding.

Posted by Valerie Sanders.

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