Question: I am a receiver in a fraud case where there are a lot of investors, trade creditors and secured creditors. Pursuant to my request, the court established a claims procedure and set a deadline for all creditors to file claims with me. A creditor with a lien on one of the estate’s assets did not file a claim, despite my sending it a claim form and notice of the claim filing deadline. Is the creditor entitled to participate in the distribution of estate assets? Does the answer change if it files a late claim? Does the creditor lose its security interest because it did not timely file a claim?
Answer: While a recent case, SEC vs. Nadel, 2016 WL 398026 (M.D. Fld. 2016), came to the conclusion, siding with the receiver, that a secured creditor’s failure to file a claim by the court established claims bar date not only bars the secured creditor from receiving a distribution from the receivership estate, but also results in the extinguishment of its security interest, that decision seems wrong based on prior precedent. Indeed, the secured creditor in that case, Wells Fargo, has appealed the district court’s decision. In the case, the court, at the receiver’s request, had established a claims procedure and, as part of the claims procedure, a claims bar date that required all creditors to file claims by the claims bar date and specifically stated that “any person or entity that fails to submit” a proof of claim “shall be forever barred and precluded from asserting any claim.” The court held that this meant that secured creditors must file proofs of claim before the claims bar date. Wells Fargo argued not only did it have an excuse for not timely filing a claim, but even if its claim was denied that should have no effect on its security interest in the estate’s assets. The district court disagreed. While it conceded that, generally, a secured creditor’s in rem rights to collateral are distinct from its right to receive a cash distribution from receivership assets through a claims process, the court specifically ordered all creditors to file claims and, therefore, Wells Fargo was required to follow the claims procedure. Its failure to do so, given the court’s order, resulted in it not being allowed to participate in the claims distribution process, but also the extinguishment of its lien on estate assets.
In rendering its decision, the court appears to have ignored clear precedent that receiverships do not affect existing liens on receivership assets. SEC v. Vescor Capital Corp., 599 F.3d 1189, 1195 (10th Cir. 2010) (“[A]ppointment of a receiver does not determine any rights nor destroy any liens.”); SEC vs. Madison Real Estate Group, LLC, 647 F.Supp.2d 1271, 1276 (D. Utah 2009) (“[T]he Interveners are secured creditors. ‘It...
