steven k. blackhurst, osb no. 730320

RECEIVER’S RESPONSE TO LIMITED OBJECTION

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ATER WYNNE LLP 1331 NW LOVEJOY STREET, SUITE 900

PORTLAND, OR 97209-3280 (503) 226-1191

STEVEN K. BLACKHURST, OSB No. 730320 E-mail: [email protected]

ATER WYNNE LLP

1331 NW Lovejoy Street, Suite 900

Portland, OR 97209-3280

Telephone: (503) 226-1191

Facsimile: (503) 226-0079

Attorneys for Ronald F. Greenspan

in his Capacity as Receiver

UNITED STATES DISTRICT COURT

DISTRICT OF OREGON

PORTLAND DIVISION

SECURITIES AND EXCHANGE

COMMISSION,

Plaintiff,

v.

AEQUITAS MANAGEMENT, LLC;

AEQUITAS HOLDINGS, LLC; AEQUITAS

COMMERCIAL FINANCE, INC.;

AEQUITAS CAPITAL MANAGEMENT,

INC.; AEQUITAS INVESTMENT

MANAGEMENT, LLC; ROBERT J.

JESENIK; BRIAN A. OLIVER; and SCOTT

GILLIS,

Defendants.

Case No. 3:16-cv-00438-PK

RECEIVER’S RESPONSE TO

LIMITED OBJECTION FILED BY

COMVEST CAPITAL, III, L.P. AND

COMVEST FREEDOM

ADMINISTRATION

The Receiver submits this response to the Limited Objections filed by Comvest Capital,

III, L.P. and Comvest Freedom Administration, together with Comvest Capital (collectively

“Comvest”). This Court should reject Comvest’s Limited Objections.

Case 3:16-cv-00438-PK Document 114 Filed 03/25/16 Page 1 of 13

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Docket #0114 Date Filed: 3/25/2016


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I. COMVEST’S INTEREST IN THE TRUSTS AND THE TRUSTS’ ASSETS IS

STRICTLY AS A SECURED LENDER. COMVEST HAS NOT FORECLOSED

ITS SECURITY INTERESTS. IN THE ABSENCE OF FORECLOSURE, THE

RECEIVERSHIP ENTITY REMAINS THE LEGAL AND BENEFICIAL OWNER

OF THE ACC TRUSTS AND THE ACC TRUSTS’ ASSETS.

ACC Holdings 1, LLC and ACC Holdings 2, LLC (collectively, the “Subsidiary

Parents”) are the subsidiary parent companies of ACC Funding Trust 2014-1 and ACC Funding

Trust 2014-2, respectively (collectively, the “Trusts”). Each of these entities is a “Receivership

Entity” as set forth on Exhibit A of the Interim Order Appointing Receiver (Doc #30). Further,

corporate parents of these 100% owned entities are two of the five Entity Defendants (Aequitas

Commercial Finance and Aequitas Holdings, LLC) in the SEC complaint pending before this

Court. As contained in the SEC complaint, the Entity Defendants allegedly fraudulently raised

up to $331 Million from investors; Aequitas investors had more than $27 million of equity and

funds funneled into the Trusts for the purchase of consumer notes receivable – it is these

consumer note receivables (and the Trusts which own them) in which Comvest holds a security

interest.

Pursuant to various agreements entered between the parties, including a Credit

Agreement, Trust Agreement, and Collateral Agreement, the Trusts borrowed money from

Comvest. Pursuant to the terms of a Pledge Agreement, the Subsidiary Parents pledged their

interests in the Trusts (the “Trust Certificates”) as security for the Comvest loans to the Trusts.

Pursuant to the terms of a Collateral Agreement, the Trusts granted Comvest a security interest in

the Trusts’ assets.

Comvest alleges that on or about February 2, 2016, it issued a Notice of Default to the

Trusts and the Subsidiary Parents. The purported notice sets forth a number of defaults and



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purportedly exercised a right to institute default rate of interest, 15% per annum, retroactive to

April 14, 2015, almost a year earlier than the declared default and a mere 15 days after making

the loan. The default notice states that Comvest is evaluating all of its available courses of action

relating to the alleged defaults, but provides no notice of any action taken by Comvest, other than

retroactive default interest.

The Receiver can neither confirm nor deny that the default notice was given or whether

the alleged defaults actually exist or existed. All of this being investigated pursuant to the

powers granted to the Receiver.

Without explanation, other than a general reference to “Loan Documents” (which is an

undefined term), Comvest would have this court believe it took action which transferred the

ownership and control of the Trusts, the Trusts’ assets and the Trust Certificates. Comvest

claims that it has re-registered the Trust Certificates from the Subsidiary Parents to Comvest

Admnistration; replaced the Trust administrator with Comvest Administration; and exercised

rights under deposit account control agreements.

Comvest alleges that, “[a]s a result of Comvest’s exercise of its enforcement remedies

under the Loan Documents, Comvest Administration owns the Trusts (including their assets) and

the Trust Certificates. Therefore, no Defendant to this action or any affiliate or subsidiary

thereof has any interest, legal or equitable, in the Trusts or the Trust Certificates.” See

Comvest’s Limited Objection to Stipulated Order Appointing Receiver, paragraph 12.

Contrary to Comvest’s unsupported allegations, the Receiver and the Receivership Estate

have not been divested of the ownership and control of the Trusts, the Trusts’ assets or the Trust

Certificates as a consequence of Comvest’s purported actions. Comvest is a secured creditor. It



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has a number of rights as a secured creditor against the Subsidiary Parents, the Trusts and the

Trusts’ assets – and, indeed it might have exercised a number of those rights. What Comvest has

not done is to foreclose on its collateral and, until it forecloses, Comvest cannot transfer

ownership and control of the Trusts, the Trusts’ assets or the Trust Certificates, or divest the

Receiver of the right to control and liquidate those assets. Moreover, even if Comvest had

divested the Subsidiary Parents or the Trusts of bare legal title, Comvest in its papers and

through subsequent actions, acknowledges that the Receivership Entity still owns the beneficial

economic interest in the Trusts and the Trusts’ assets. That interest alone is sufficient to permit

the appointment of a federal equitable receiver to protect and recover the over $27 million of

investor money in those entities.

ARGUMENTS:

A. UCC §9-602 provides that certain protections for the debtor set forth in

Article 9 cannot be waived or varied by agreement prior to default.

UCC §9-601(a) gives a secured party rights (after a default) to pursue remedies under:

(i) Article 6 of the UCC (which deals with bulk sales, and isn’t relevant here); (ii) Article 9 of the

UCC; and (iii) any additional processes agreed upon by the parties (except as set forth in UCC

§9-602).

An important backstop to the breadth of UCC §9-601 is UCC §9-602. UCC §9-602

contains a list of provisions of Article 9 that cannot be waived or modified by the agreement of

the parties prior to the occurrence of a default. If the parties agreed to provide Comvest the right

to re-certificate the Trust Certificates as an express remedy in the Pledge Agreement and/or the

Trust Agreement, as alleged by Comvest, UCC §9-602 would still operate to preserve certain

/ / /



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rights, responsibilities and processes with respect to the disposition of collateral, including but

not limited to the following provisions:

9-610(b) which provides that every aspect of a disposition of collateral must be

commercially reasonable. If commercially reasonable, a secured party may

dispose of the collateral by public or private proceedings, by one or more

contracts, as a whole or in parcels and at any time and place on any terms.

9-608(a) and 9-615(d) which provide that, with respect to proceeds of collection

or enforcement of collateral, a secured party must account to and pay the debtor

for any surplus, and the debtor is liable any deficiency.

9-611 which sets forth notification requirements for the disposition of collateral,

including the persons to be notified.

9-613 and 9-614 which set forth the required content and form of notification

before the disposition of collateral.

9-615(f) which provides a mechanism for calculating deficiency or surplus when

a disposition is made to the secured party or related party (e.g. in a credit bid

scenario).

9-620 which provides that a secured party may accept collateral in full or partial

satisfaction of an obligation only if the debtor consents in writing following

default.

9-621 which lists the parties to whom the secured party must send notification of

its intent to accept collateral in full or partial satisfaction of an obligation.

9-622 which sets forth the effect of acceptance of collateral in full or partial

satisfaction of the obligation it secures. Such effect includes the discharge of the

obligation to the extent consented to by the debtor, transferring to the secured

party all of the debtor’s rights in the collateral, discharging the security interest,

and terminating any other subordinate interest.

Official Comment 2 to UCC §9-602 explains why Article 9 contains these express

limitations:

… in the context of rights and duties after default, our legal system

traditionally has looked with suspicion on agreements that limit the

debtor’s rights and free the secured party of its duties. As stated in

former Section 9-501, Comment 4, “no mortgage clause has ever

been allowed to clog the equity of redemption.” The context of



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default offers great opportunity for overreaching. The suspicious

attitudes of the courts have been grounded in common sense. This

section . . . codifies this long-standing and deeply rooted attitude.

The specified rights of the debtor and duties of the secured party

may not be waived or varied except as stated. Provisions that are

not specified in this section are subject to the general rules in

[Section 1-302].

B. Comvest may not acquire the Subsidiary Parents’ or the Trusts’ interests in

the collateral without complying with non-waivable requirements for

conducting either (a) a commercially reasonable foreclosure sale or (b) strict

foreclosure.

Included among these UCC sections that can’t be “contracted around” are provisions

relating to the commercially reasonable sale process, which are designed to maximize the value

of the collateral and to provide for the return of any surplus to the debtor after the proceeds of the

sale are used to satisfy the debtor’s obligations to the secured party.1

Comvest does not contend that it conducted a foreclosure sale of its collateral. Instead,

Comvest relies upon provisions of the Pledge Agreement and the Trust Agreement that allegedly

permit Comvest to re-register the certificates in the name of Comvest Administration upon the

occurrence of and during the pendency of a default. See Comvest’s Limited Objection To

Stipulated Order Appointing Receiver, at paragraphs 4, 5, and 12.

The Receiver disagrees with Comvest’s interpretation of the Pledge Agreement and the

Trust Agreements. The Receiver reads the relevant provisions merely as providing a mechanism

to transfer the Trust Certificates to the new owner thereof after a commercially reasonable

disposition of the Trust Certificates. The Receiver does not read the provisions (nor could they

1 Under Article 9, the debtor is entitled to any surplus proceeds resulting from a disposition of the

collateral. UCC §9-615(d)(1); see also Bill Fits Auto Sales, Inc. v. Daniels, 922 S.W.2d 718, 720-21 (Ark. 1996) (affirming the trial court’s judgment awarding surplus proceeds to debtor). This duty to account for surplus proceeds is among the duties that cannot be waived or varied by agreement of the parties. UCC §9-602(5)



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be enforced under the law) as authorizing Comvest to seize ownership of collateral without a

foreclosure sale, debtor’s consent to strict foreclosure or judicial intervention in violation of the

non-waivable requirements of Article 9 of the Uniform Commercial Code.

Comvest contends that, by re-registering the Trust Certificates in the name of Comvest

Administration and by replacing the administrator of the Trusts with Comvest Administration,

Comvest Administration has acquired all legal and equitable title to the Trusts, the Trusts’ assets

and the Trust Certificates.

At the outset, it should be noted that this contention makes no sense whatever when

applied to the Trust assets. Comvest does not explain why re-registration of the Trust

Certificates or by the replacement of the Trust administrator would affect the Trusts’ ownership

of the Trust assets.

Moreover, Comvest’s contention that Comvest (through its affiliate, Comvest

Administration) acquired ownership of the Trusts, the Trust assets and the Trust Certificates

without a foreclosure sale is tantamount to the claim that Comvest has accepted the collateral in

strict foreclosure.

Article 9 of the Uniform Commercial Code includes strict foreclosure among the

enforcement remedies available to a secured party upon the default of a secured obligation.

Strict foreclosure – referred to as an “acceptance of the collateral” in Article 9 – provides a post-

default mechanism for the secured party to acquire the debtor’s interest in the collateral without a

foreclosure sale or judicial intervention. UCC §9-620, Comment 1.

The procedures for strict foreclosure and the protection inherent in those procedures are

set out in UCC §§ 9–620, 9-621 and 9-622. The rights granted to the debtor or and the duties



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imposed upon the enforcing secured party in these sections are non-waivable. UCC §§ 9-

602(10) and 9-624(b). In addition, Article 9 does not eliminate any non-UCC requirements that

an enforcing secured party may have to satisfy to become the owner of the collateral it accepts.

UCC §9-620, Comment 9.

Under Article 9, an acceptance of collateral by the enforcing secured party in full or

partial satisfaction of the secured obligation requires:

(1) the secured party’s consent to the acceptance in an authenticated (i.e., signed) record

(UCC § 9-620(b)(1)); and

(2) the debtor’s post-default consent to the acceptance (UCC § 9-620(a)(1)); and

(3) good faith on the part of the enforcing secured party (UCC §9-620, Comment 11).

Under element (2) above, “the remedy [of strict foreclosure] is only available if the

debtor consents to strict foreclosure after it has defaulted. Thus, for example, the debtor cannot

consent to strict foreclosure in anticipation of a future default at the time it enters into the

transaction that creates the debt and security interest.” In re CBGB Holdings, LLC, 439 B.R.

551, 555 (Bankr. S.D.N.Y. 2010).

The form of the debtor’s consent depends on whether the strict

foreclosure is partial or full. In the case of partial strict foreclosure,

the debtor must expressly consent “to the terms of the acceptance

in a record authenticated after default.” UCC § 9-620(c)(1). In

contrast, the debtor may consent to full strict foreclosure – the

complete satisfaction of its debt – either expressly or by

implication. As with partial strict foreclosure, it can expressly

consent “to the terms of the acceptance in a record authenticated

after default.” UCC § 9-620(c)(2). Alternatively, after default, the

secured party can send a “proposal”2 to the debtor “that is

2 "'Proposal' means a record authenticated by a secured party which includes the terms on which the

secured party is willing to accept collateral in full or partial satisfaction of the obligation it secures pursuant to Sections 9-620, 9-621, and 9-622." UCC § 9-102(a)(66).



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unconditional or subject only to a condition that collateral not in

the possession of the secured party be preserved or maintained,”

UCC § 9-620(c)(2)(A), and “proposes to accept collateral in full

satisfaction of the obligation it secures.” UCC § 9-620(c)(2)(B).

The debtor then has twenty days to object to the proposal. UCC §

9-620(c)(2)(C). If it does not object, it is deemed to have accepted

the proposal. 4 WHITE & SUMMERS § 324-10, at 394 (“[T]he

debtor’s silence for 20 days seals the deal.”) The requirements of §

9-620(c) may not be waived. UCC § 9-602(j); 4 WHITE &

SUMMERS § 34-10, at 396 (“Section 9-602(j) explicitly prohibits

waiver of the ‘rules’ stated in 9-620 . . . .”).3

In re CBGB Holdings, LLC, supra, 439 B.R. at 555-56.

Comvest has not obtained an agreement signed by the Subsidiary Parents or the Trusts

consenting to strict foreclosure after default. Nor has Comvest sent a proposal to anyone

proposing to accept any collateral in full satisfaction of the secured obligations. Thus an essential

element of strict foreclosure (i.e., debtor’s post-default consent) has not been satisfied, and any

purported or apparent acceptance of collateral by Comvest or its affiliate is ineffective. UCC §9-

620(b).

If the provisions of the Pledge Agreement or the Trust Agreement were interpreted as

apparently alleged by Comvest, to permit Comvest to re-register the Trust Certificates in the

name of Comvest Administration without conducting a foreclosure sale, such a provision would

violate the non-waivable statutory requirements under UCC § 9-620 or its predecessor,

UCC §9-505(2). In re CBGB Holdings, LLC, supra, 439 B.R. at 556-57, citing Forbes v. Four

Queens Enters., Inc., 210 B.R. 905, 910 (D.R.I. 1997) (“The original contract signed by Forbes

3 UCC § 9-621 also requires the secured party to provide notice of the proposed strict foreclosure to any

third parties who assert an interest in the collateral. In the case of partial strict foreclosure, the secured party must also provide notice to any secondary obligor. The secured party may not strictly foreclose if it receives a timely objection from one of the noticed parties or any other party holding a subordinate interest in the collateral. UCC § 9-620(a)(2). However, the failure to notify these parties does not invalidate the foreclosure. 4 WHITE & SUMMERS § 34-10, at 394.



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[which authorized the secured creditor to retain the collateral] was not signed after default, and

does not satisfy the written notice requirement of N.Y.U.C.C. § 9-505(2).”), aff’g in part and

rev’g in part, 191 B.R. 510 (Bankr. D.R.I. 1996); In re Cadiz Props., Inc., 278 B.R. 744, 749

(Bankr. N.D. Tex. 2002) (“The record does not contain evidence that [the debtor] agreed to the

terms of the stock transfer ‘after default.’ Nor does the record contain evidence that [the secured

party] sent a proposal to [the debtor] ‘after default’ thereby triggering the twenty day objection

time.”); Chen v. Profit Sharing Plan of Dr. Donald H. Bohne, DDS, P.A., 216 Ga. App. 878, 456

S.E.2d 237, 240 (Ga. Ct. App. 1995) (“[T]he condition in the ‘ADDENDUM’ providing for full

and complete assignment and transfer of the collateral upon default by Chen amounted to

nothing more than an unenforceable attempt at predefault waiver of the debtor’s rights under

Article 9 of Georgia’s Uniform Commercial Code.”); Emmons v. Lemaster, Inc., 27 Kan. App.

2d 940, 10 P.3d 33, 36 (Kan. Ct. App. 2000) (“LeMaster has produced no other evidence

indicating that he gave notice of strict foreclosure to Emmons or that she renounced after default

her right to receive notice.”).

In re Schwalb, 347 N.R. 726 (Bankr. D. Nev. 2006), involved the unsuccessful attempt of

a pawnbroker to take two cars in strict foreclosure under UCC §9-620. The pawn broker left the

cars in possession of the debtor but took possession of the certificates of title. The pawnbroker

claimed to be the “owner” of the cars by re-registering the certificates of title in its name. The

court found that the pawn slip sufficed as a security agreement and that the pawnbroker had

perfected a security interest in the cars by eventually getting himself listed as the lien holder on

the certificates of title. However, the court held that the pawnbroker was a secured creditor but

not an owner. It noted that the anti-waiver provisions of UCC §9-602 rendered the debtor’s



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waiver of various provisions of Article 9 ineffective. The court also held that the pawnbroker

was not proceeding in a commercially reasonable manner when he attempted to get the title to

the cars as the sole owner without having gone through an appropriate strict foreclosure.

Comvest cannot reasonably claim outright ownership of the Trusts, the Trusts’ assets or

the Trust Certificates at this point. Comvest has not provided any evidence that it has taken steps

to have the Trust Certificates re-registered. In the event that Comvest has affected the re-

registration without a commercially reasonable sale or a proper strict foreclosure, such re-

registration was improper. Lastly, even if the validity of the re-registration is confirmed,

Comvest’s rights with respect to the Trust Certificates do not give Comvest the ability to

circumvent the foreclosure and commercially reasonable sale provisions of the UCC and claim

outright ownership of the Trusts, the Trusts’ assets or the Trust Certificates without complying

with the non-waivable provisions of the UCC.

II. COMVEST’S POSITION IS NOT IMPROVED BY ITS JOINDER IN WELLS

FARGO’S LIMITED OBJECTION

Comvest’s joinder in the Limited Objection filed by Wells Fargo is to no avail. First, the

financial agreements under which the Wells Fargo and Comvest loaned funds to the

Receivership Entities are different and each creditor’s financial terms need to be evaluated

separately.

Second, in its Limited Objection, Comvest admits that it has not foreclosed the Trust

Certificates under Article 9 and that the Receiver is entitled to the proceeds from a foreclosure

sale if they exceed the amounts owed. (Comvest Limited Objection at p.7). This admission of

the Receiver’s continuing interest in the assets is sufficient by itself to allow the Trusts to be

included in the Receivership Entity. The Aequitas investors, including investors in the Entity



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Defendants, have over $27 million of equity and funds invested in these entities, which assets the

SEC and Receiver are seeking to preserve.

Third, Comvest fails to recognize the broad scope of the federal court’s equitable powers

in an SEC enforcement action. As then Circuit Judge Kennedy said in SEC v. Wencke, 622 F2d

1363, 1371 (9th

Cir. 1980) “The Supreme Court has repeatedly emphasized the broad equitable

powers of the federal courts to shape equitable remedies to the necessities of particular cases,

especially where a federal agency seeks enforcement in the public interest.” Judge Kennedy

articulated the basis for this authority: “The federal courts have inherent equitable authority to

issue a variety of “ancillary relief” measures in actions brought by the SEC to enforce the federal

securities laws. … The power of a district court to impose a receivership or grant other forms of

ancillary relief does not in the first instance depend on a statutory grant of power from the

securities laws. Rather, the authority derives from the inherent power of a court of equity to

fashion effective relief.” Id. at 1369.

Creditors cannot defeat the inherent power of a federal court to fashion appropriate

equitable remedies by creating unique private financial agreements under state law, even if their

terms purport to deprive borrowers of any rights or interests in their assets. As the SEC points

out in its opposition to Comvest’s Limited Objection, if a provision in an organizational

document were all that was required to circumvent the equitable powers of a federal court, then

creditors could routinely include such provisions in their documents thus undermining the utility

of federal receiverships. SEC Response to Limited Objections at 11-12.

The Court’s broad equitable authority is especially important at the beginning of a

receivership. The Receiver needs time to investigate and understand complex financial



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transactions involving substantial assets of potential significance to the investors whose interests

the Receiver is to protect. Again, as Judge Kennedy said in Wencke, “The time at which the

motion for relief from the stay is made also bears on the exercise of the district court’s discretion.

Where the motion for relief from the stay is made soon after the receiver has assumed control

over the estate, the receiver’s need to organize and understand the entities under his control may

weigh more heavily than the merits of the party’s claim.” Id. at 1373-74. We already know that

the books and records of the Receivership Entity show investor capital of over $27 million in the

subject entities – the details of which need to be investigated by the Receiver. Here Comvest, by

filing its Limited Objection, seeks to deprive the Receiver of an opportunity to investigate fully

Comvest’s transactions with the Receivership Entities. The Receiver should be provided with

the time he needs to do this investigation. (See Declaration of Receiver Ronald F. Greenspan).

III. CONCLUSION

This Court should reject Comvest’s Limited Objection.

DATED this 25th

day of March, 2016.

ATER WYNNE LLP

By: s/Steven K. Blackhurst

Steven K. Blackhurst, OSB No. 730320

Email: [email protected]

Telephone: (503) 226-1191

Facsimile: (503) 226-0079

Attorneys for Ronald F. Greenspan

in his Capacity as Receiver
