Wells Fargo’s Secured Interests Stay Through Receivership

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By Diane Davis

A federal district court can’t extinguish creditor Wells Fargo Bank, N.A.'s pre-existing state law security interest in property following the collapse of a Ponzi scheme, the U.S. Court of Appeals for the Eleventh Circuit held Feb. 22 ( Sec. & Exch. Comm’n v. Wells Fargo Bank, N.A. , 11th Cir., No. 16-10942, 2/22/17 ). In a receivership case, Judge R. David Proctor of the U.S. District Court for the Northern District of Alabama, sitting by designation, looked to bankruptcy law to resolve an issue of first impression.

Both receivership and bankruptcy proceedings seek to promote the efficient and orderly administration of estates for the benefit of creditors, the court said.

Security interests in property are determined by state law, and a receiver “takes property subject to all liens, priorities, or privileges existing or accruing under the laws of the state,” the court said.

In the bankruptcy context, a secured creditor’s lien remains intact through the bankruptcy process, regardless of whether the creditor files a proof of claim, the court said. A proof of claim is a document filed with the court stating the amount owed by a debtor to a creditor. This reasoning is also consistent with treatises addressing the issue in the receivership context, the court said.

In this case, the district court, which appointed a receiver to administer the affairs, funds, and property of parties following the collapse of a Ponzi scheme, established a claims administration process and ordered that creditors submit all of their claims—secured and unsecured—before a certain date.

Wells Fargo, who was not a party in the case brought by the U.S. Securities and Exchange Commission but held secured interests in three properties that the receiver took possession of, didn’t submit a proof of claim for two of the properties.

The district court found that Wells Fargo’s security interests weren’t preserved due to its failure to submit proofs of claim.

The Eleventh Circuit reversed and remanded the case in favor of Wells Fargo. The district court didn’t have authority to extinguish Wells Fargo’s interests, the appeals court said.

Judges Adalberto José Jordán and Jill A. Pryor joined the opinion. Robert K. Levenson, Scott Andrew Masel, Andre J. Zamoran represented plaintiff U.S. Securities and Exchange Commission; James Hoyer Newcomer & Smiljanich, PA, represented interested party Sean P. Keefe; Akerman, LLP, represented Wells Fargo Bank.

To contact the reporter on this story: Diane Davis in Washington at DDavis@bna.com

To contact the editor responsible for this story: Jay Horowitz at JHorowitz@bna.com

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