ORDER DENYING PREVAILING PLAINTIFFS' MOTION FOR RECONSIDERATION OF ORDER ADOPTING IN PART AND DENYING IN PART AMENDED RECEIVER'S REPORT AND RECOMMENDATION (ECF NO. 450)

CRAIG A. GARGOTTA, Bankruptcy Judge.

Came on for consideration Prevailing Plaintiffs' Motion for Reconsideration of Order Adopting in Part and Denying in Part Amended Receiver's Report and Recommendation (ECF No. 450) (the "Motion for Reconsideration"). The Receiver filed the Receiver's Response to Prevailing Plaintiffs' Motion for Reconsideration (ECF No. 451). Prevailing Plaintiffs filed Prevailing Plaintiffs' Reply to Receiver's Response to Motion for Reconsideration of Order Adopting in Part and Denying in Part Amended Receiver's Report and Recommendation (ECF No. 452). Finally, on August 8, 2018, the Receiver filed, with leave of the Court, his Sur-Reply Regarding Prevailing Plaintiffs' Motion for Reconsideration (ECF No. 455). The Court took the matter under advisement without the necessity of a hearing.1

PROCEDURAL BACKGROUND

On June 2, 2015, Lamont A. Jefferson was appointed by the Honorable Judge Antonia Arteaga to serve as the receiver for Primera Energy, LLC ("Primera"), Alfaro Oil and Gas, LLC ("Alfaro Oil and Gas"), and Alfaro Energy, LLC ("Alfaro Energy"), in Cause No. 2015-CI-06691, Frederick Patek, et al. v. Brian K. Alfaro, Primera Energy, LLC, Alfaro Oil and Gas, LLC and Alfaro Energy, LLC, 288th Judicial District Court, Bexar County, Texas. On June 3, 2015, Primera filed for chapter 11 bankruptcy protection, Case No. 15-51396-cag, in the United States Bankruptcy Court for the Western District of Texas, San Antonio Division. The remainder of the state-court action was removed to this Court in this Adversary Proceeding, Case No. 15-05047-cag, on June 19, 2015 (ECF No. 54).

On December 29, 2017, the Court entered a Memorandum Opinion (ECF No. 369), and Final Judgment (ECF No. 370) in this Adversary Proceeding. In the Final Judgment, the Court ordered that certain Plaintiffs (the "Prevailing Plaintiffs") prevailed against all Defendants on their claims for common law fraud, fraud in the inducement, fraud in the real estate transaction, and negligent misrepresentation. The Court further ordered Prevailing Plaintiffs' request for actual damages for $7,989,526.75. The Court also granted Prevailing Plaintiffs' request for a constructive trust for Defendants' violation of Tex. Bus. & Comm. Code § 24.0052. Finally, the Court ordered that Defendants provide an accounting for the following property: (1) Salary and compensation transferred to the Living Trust beginning March 2016; (2) Bentley purchased within the last two years with a purchase price of $189,000.00; and (3) Cadillac purchased in May 2013 for $33,705.00.

On March 29, 2018, the Court amended the Final Judgment to limit liability for common law fraud, fraud in the inducement, fraud in the real estate transaction, and negligent misrepresentation to Defendant Brian Alfaro ("Alfaro") and Defendants (1) Primera Energy, LLC, (2) Alfaro Oil and Gas, LLC, and (3) Alfaro Energy, LLC (collectively referred to as "Alfaro Entities") (ECF No. 400). On April 11, 2018, Defendants filed an Amended Notice of Appeal (ECF No. 407).

FACTS

The facts as presented by the Receiver are not disputed. The assets under receivership are nearly all derived from the operations of two oil and gas projects involving fields in Louisiana: (1) the East Moss Lake/LNG project operated by Jordan Oil Company, Inc. ("Jordan Oil"), and (2) the North Cankton well project operated by Mack Energy Company ("Mack Energy") (the "Assets"). In each case, Alfaro, through Alfaro Oil & Gas, acquired a working interest and, in each case, solicited investors to subdivide the interest. The operating agreements for each prospect prohibit the assignment or subdivision of a participant's interest. Alfaro nevertheless engaged in a nationwide sales effort to sign up participants who funded the expenses necessary to participate in these ventures. It appears that Alfaro solicited funds that were far in excess of the amount needed to participate in each project.

With respect to the North Cankton prospect, Alfaro signed an operating agreement dated February 1, 2009 with Alpine Exploration whereby Alfaro purchased a 31.5% working interest and a 22.96% revenue interest. The accompanying Participation Agreement also includes an authorization for expenditure (AFE) for "drilling and completion" at a total cost of $760,300 thereby rendering Alfaro's participation cost to have been approximately $240,000. Rather than pay the participation cost himself, Alfaro formed an ostensible "joint venture" and solicited participants to contribute to the effort. Moreover, Alfaro also told investors he would charge $601,276 to acquire the prospect, and drill and complete the well—approximately $360,000 more than he committed to the lessor and operator that he would participate at.

Each of the investors he solicited funds from (the "North Cankton Investors") signed a subscription agreement identifying the number of "interests" being purchased with their investment. In many instances, the amount of the "interest" being acquired is either blank, or modified with interlineations. According to the Receiver, the records that he was provided are incomplete; however, the records reflect that Alfaro collected from investors at least $817,232— approximately $577,000 more than it cost Alfaro to participate in the North Cankton prospect.

As to the East Moss Lake/LNG prospect, Alfaro signed three separate operating agreements. On February 26, 2009, Alfaro acquired a 10% interest in East Moss Lake LNG for a cost of $32,500. On the same day, Alfaro also purchased a 10% interest in the East Moss Lake Attic for a cost of $34,500. On May 4, 2010, Alfaro purchased a 22% interest in the East Airport Prospect for a cost of $187,000. The total cost for Alfaro to participate in the East Moss Lake/LNG prospect should have been a total of $254,000. Using the same tactics used to fund the North Cankton prospect, Alfaro collected at least $1,264,179 from investors (the "East Moss Lake/LNG Investors")—over $1 million more than it cost him to participate. Moreover, Alfaro signed a "turnkey contract" with his own company that obligated the joint venture to pay $1,179,256 for his services to "acquire . . . drill and complete" the well.

Both prospects resulted in producing wells and both operators, Jordan Oil and Mack Energy, issued revenue checks to Alfaro. Alfaro then distributed sums of the revenue checks to the investors who acquired "units" (the "North Cankton and East Moss Lake/LNG Investors"); however, it is unclear to the Receiver on what basis Alfaro calculated each investor's proportionate share of revenue proceeds.

On February 20, 2013, Jordan Oil sued Alfaro Oil & Gas and Alfaro in a concursus proceeding filed in the Parish of Calcasieu, Louisiana, styled Case No. 2013-08899F, Jordan Oil Company, Inc. v. Alfaro Oil and Gas, LLC, in the 14th Judicial District Court. Jordan alleged that Alfaro breached the operating agreement by fractioning off his participation interests to outside investors. The suit further alleges that because of Alfaro's previous prosecution by the Financial Industries Regulatory Authority ("FINRA"), there were substantial questions about whether Alfaro raised investor funds properly, and whether he was paying his investors the amounts that Alfaro owed them. At the time of filing, Jordan Oil represented that it was withholding the sum of $14,467.70, which represented the amounts that Jordan Oil otherwise owed to Alfaro based on the operating agreements. Jordan Oil requested leave to deposit that sum in the registry of the court. The concursus proceeding also resulted in an order, entered without objection, requiring all proceeds from well operations that would otherwise be owed to Alfaro be instead deposited into the court's registry.

According to Alfaro's accounting expert, Mike Turner ("Turner"), Alfaro continued to pay the East Moss Lake/LNG Investors their proportionate share of production, even after Jordan Oil suspended payments to Alfaro. In the Receiver's opinion, these payments were made using funds obtained by Alfaro from new investors, including the Plaintiffs in this Adversary Proceeding (the "Named Plaintiffs"). The Receiver notes, however, that the precise source of any funds used by Alfaro to pay these investors is most likely impossible to know.

Turner concluded that process resulted in the East Moss Lake/LNG Investors receiving $577,655.91 in funds from some source other than East Moss Lake/LNG well production. This conclusion, however, assumes that Jordan Oil suspended payments to Alfaro beginning January 2012.2 The suit by Jordan Oil was brought in February 2013, and at that time, Jordan represented to be holding $14,467.70. Thus, according to the Receiver, if Jordan's "suspense" date is February 2013, then funds potentially traceable to "new" investors totals $242,803.05.

Shortly after the Receiver's appointment, the concursus proceeding was settled. The Receiver asked this Court for authorization to receive all funds associated with the settlement. (ECF No. 135). After payments of expenses associated with the settlement, the net amount deposited into the receivership account was $613,819.23. An order of dismissal of the concursus proceeding was entered by the Louisiana Court on November 5, 2015. (ECF No. 135).

THE COURT'S ORDER

On March 26, 2018, the Receiver filed his Amended Receiver's Report and Recommendations (ECF No. 396). On June 4, 2018, the Court held a hearing on the Amended Receiver's Report and Recommendations and on July 2, 2018, the Court issued an oral ruling on the matter and contemporaneously filed an Order Adopting in Part and Denying in Part Amended Receiver's Report and Recommendation (ECF No. 446) (the "Order") which ordered distribution of the liquid receivership in the following order and manner:

ECF No. 446. The Court, having considered each Parties' papers and each argument, whether or not addressed herein, finds that the Motion for Reconsideration should be denied.

PREVAILING PLAINTIFFS' CONTENTIONS

In their Motion to Reconsider, Prevailing Plaintiffs ask the Court to revise the Order and distribute the liquid receivership as follows:

ECF No. 450. Prevailing Plaintiffs urge the Court to reconsider the Order because "a fundamental error was committed in the Court's analysis which led to an incorrect result in the distribution of the funds held in Receivership." Specifically, Plaintiffs challenge the Court's interpretation of a Texas case, Waters-Pierce Oil Co. v. U.S. & Mexican Trust Co., 99 S.W. 212, 215 (Tex. Civ. App.-Texarkana 1906, writ ref'd), which the Court cited in support of distributing the liquid receivership. Next, Prevailing Plaintiffs argue that the Court wrongfully applied rules of equity when determining the distribution of the liquid receivership and such application was inconsistent, and therefore in violation of chapter 64 of the Texas Civil and Practice Remedies Code. Third, Prevailing Plaintiffs assert that, according to at least one Texas case, the Court abused its discretion by giving priority to claims not identified Texas Civil and Practice Remedies Code § 64.051(a). Finally, Prevailing Plaintiffs argue that equity dictates that the Court award claims to all Named Plaintiffs from non-earnings.

ANALYSIS

Prevailing Plaintiffs challenge the Court's interpretation of a Texas case, Waters-Pierce Oil Co. v. U.S. & Mexican Trust Co., 99 S.W. 212, 215 (Tex. Civ. App.-Texarkana 1906, writ ref'd), contending that the Court's interpretation of the case is too broad. The Court cited to Waters-Pierce as authority for the Court to deviate from priority scheme enumerated under Texas Civil Practice and Remedies Code § 64.051(a) with respect to claims not specifically identified under section 64.051(a). Section 64.051 dictates the disbursement of earnings of property held in receivership under chapter 64:

Tex. Civ. Prac. & Rem. Code Ann. § 64.051 (West 2018). Using the Court's interpretation of Waters-Pierce, the Court can prioritize the payment of claims according to rules of equity where claims to receivership assets exist, but are not specifically identified under section 64.051(a). Plaintiffs contend that the application Waters-Pierce is much more narrow and limited to circumstances where the competing claims fall within the same class and such class of claims are identified in section 64.051(a).

Waters-Pierce involves two claimant-appellants contending that the lower court erred in subordinating their claims to others in the same class of claims. Waters-Pierce Oil Co., 99 S.W. at 212. Specifically, the appellants argued that because the manner of disbursing earnings was dictated by statute, and the statute "embrac[ed] such claims as those of these [claimants]," the lower court violated the statute. The Waters-Pierce court disagreed. The court begins its analysis by discussing only the appellants' claims, identifying them as claims "based on judgments obtained in suits brought after the appointment of the receiver" and therefore not provided for in the statute:

Id. at 215 (emphasis added). Immediately following this discussion, Waters-Pierce then articulates the rule which this Court relied on and Plaintiffs contend has a limited application:

Id. (emphasis added). Thus, according to the Waters-Pierce court, because the appellants' claims did not fall under any type of class designated in the statute, the priority scheme dictated by a former version of 64.051(a) did not apply to these claims. Stated differently, because these claims were not provided for in the statute, the court's treatment of the claims was governed by the court's discretion and rules of equity. The Waters-Pierce court then goes on to apply the rule approving the lower court's subordination of appellants' claim to others placed in the same class. Id.

As previously noted, Prevailing Plaintiffs suggest that the Court's application of this rule is too broad; rather the rule articulated by the Waters-Pierce court should only be applied to the facts before the Waters-Pierce court. The Court disagrees. The plain language of the rule refers only to "these claims," which are previously identified the appellants' claims which "[did] not come within any class enumerated in said statute." Id. The Waters-Pierce court articulates this rule in the context of a type of claim not identified in the statute. The plain language of the rule does not contemplate competing claims within the same class of which is not identified in the statute.

Next, Prevailing Plaintiffs argue that the Court wrongfully applied rules of equity when determining the distribution of the liquid receivership and such application was inconsistent, and therefore in violation of chapter 64 of the Texas Civil and Practice Remedies Code. Section 64.004 states "the rules of equity govern all matters relating to the appointment, powers, duties, and liabilities of a receiver and to the powers of a court regarding a receiver" unless inconsistent with chapter 64 or other general law. The Court's authority to deviate from section 64.051(a) with respect to claims not identified therein and treat such claims according to rules of equity is consistent with § 64.004. Section 64.051(a) dictates what priority specific types of claims are to be paid using earnings of property held in receivership. Section 64.051(a) does not mandate that earnings of property held in receivership only be used to pay these types of claims. Moreover, as the Court previously discussed, Texas case law permits the court to apply rules of equity when determining priority of claims not identified in section 64.051(a). Accordingly, the Court does not agree that subordinating Prevailing Plaintiffs' claims to that of the Named Plaintiffs or North Cankton and East Moss Lake/LNG investors is a violation of chapter 64 of the Texas Civil Practice and Remedies Code.

Third, Prevailing Plaintiffs assert that, according to at least one Texas case, RSS Rail Signal Systems Corp. v. Carter Stafford Arnett Hamada & Mockler, PLLC, 458 S.W.3d 72 (Tex. App.-El Paso 2014, no pet.), the Court abused its discretion by giving priority to claims not identified Texas Civil and Practice Remedies Code § 64.051(a). The Court disagrees. RSS Rail Signal Systems involved a receiver appointed under Texas Civil Practice and Remedies Code § 31.002.3 RSS Rail Signal Sys., 458 S.W.3d at 76. The Court does not agree that chapter 64 provisions apply to receivers appointed under other chapters of the Texas Civil Practice Remedies Code.4 See Flooring Sys., Inc. v. Chow, Bankr. No. 08-40182, Adv. Proc. No. 10-4030, 2012 WL 1898951 at *2 (E.D. Tex. May 24, 2012), aff'd, 765 F.3d 518 (5th Cir. 2014) (rejecting defendant's arguments grounded in cases involving receivers appointed under chapter 64 of the Texas Civil and Practice Remedies Code because the receiver at issue was appointed under chapter 31); cf. Schultz v. Cadle Co., 825 S.W.2d 151, 154-55 (Tex. App.-Dallas 1992, writ denied)5 (rejecting arguments that chapter 64 requirements for appointing a receiver apply to receivers appointed under chapter 31). Moreover, chapter 31 contains no reference to chapter 64 for purposes of disbursing earnings of property held in receivership. Cf. id. at 155. ("Indeed, if the Texas Legislature had intended for the appointment of receivers in turnover proceedings to meet the requirements of the receivership statutes, it would have provided for or at least referred to these requirements in the turnover statute."). Thus, the Court does not agree that RSS Rail Signal Systems provides a proper basis for asserting that this Court abused its discretion by giving priority to claims not identified under section 64.051(a).

Finally, Prevailing Plaintiffs argue that equity dictates that the Court award claims to all Named Plaintiffs from non-earnings because (1) there is "no clear rule of law that dictates whether or not there is a time frame of when monies recovered by the Receiver are considered `earnings' within the statute"; and (2) but for the receivership, this money would not be present for the Court to distribute. With respect to the issue of whether section 64.051(a) imposes a timeframe of when monies recovered by the Receiver are considered earnings, the Court previously addressed this in its Oral Ruling on July 2, 2018:

Second, as to Prevailing Plaintiffs' contention that "but for the receivership, this money would not be present for the Court to distribute[,]" it is not clear to the Court why Prevailing Plaintiffs are advocating that "equity mandates that all of the Named Plaintiffs be awarded at the very least $242,000 out of the proceeds the Court has deemed `non-earnings' of the receivership" other than to allow for Prevailing Plaintiffs to recover some portion of their judgment without harm to the Named Plaintiffs. The Court's Oral Ruling and Order, recognizing the Named Plaintiffs' equitable right to the liquid receivership, disburses earnings to the Named Plaintiffs prior to payment to any other class other than the costs of the Receiver and the $100,000 reserve:

(Oral Ruling Audio, July 2, 2018, 2:30:55-33:31).

The Court further notes that Prevailing Plaintiffs propose that North Cankton and East Moss Lake/LNG Investors be paid pro-rata using a fixed amount of approximately $400,000 while Prevailing Plaintiffs collect on their judgement from earnings currently in the receivership account plus any proceeds resulting from the sale of the non-liquid assets. The Court stands behind its reasoning with respect to why North Cankton and East Moss Lake/LNG Investor claims should be satisfied in full before payment on Prevailing Plaintiffs' claim should be paid:

(Oral Ruling Audio, July 2, 2018, 2:40:46-41:51).

CONCLUSION

For these reasons stated above, the Prevailing Plaintiffs' Motion for Reconsideration of Order Adopting in Part and Denying in Part Amended Receiver's Report and Recommendation (ECF No. 450) is denied.

IT IS THEREFORE ORDERED that Prevailing Plaintiffs' Motion for Reconsideration of Order Adopting in Part and Denying in Part Amended Receiver's Report and Recommendation (ECF No. 450) is DENIED.

IT IS SO ORDERED.

IT IS HEREBY ADJUDGED and DECREED that the below described is SO ORDERED.