Patek v. Alfaro (In re Primera Energy, LLC)

579 B.R. 75

IN RE: PRIMERA ENERGY, LLC, Debtor.

Frederick Patek; Geraldine Patek; Jasper Compise; William Crawford; Micahel Covington; Rick Griffey; Ed McPherson; Dieter Jansen; Quackenbush Petroleum LLC; James Reiley; Betty Reiley; Rick Reiley; Vincent J. Gillette; Marjorie A. Gillette; Thomas J. Gillette; Edward A. Gillette; Sharon Walls ; Buddy Walls; DC Oil Company, Inc.; Buford Salmon; Lillian Salmon; Joseph Hart ; Brian Huber; David Davalos; Daniel Davalos ; Frederick Johnston ; Milan Knezovich 11; Fountaingates Investment Group; James Peters; and Broc Yakel, Plaintiffs,

v.Brian K. Alfaro; King Minerals, LLC ; Silver Star Resources, LLC ; 430 Assets, LLC, A Montana LLC; Kristi Michelle Alfaro; Brian and Kristi Alfaro, as Trustees of the Brian and Kristi Alfaro Living Trust; and Ana and Avery's Candy Island, LLC, Defendants.

CASE NO. 15–51396–CAG

ADVERSARY NO. 15–05047–CAG

United States Bankruptcy Court, W.D. Texas, San Antonio Division.

Signed December 29, 2017

Brandon Barchus, Ashely M. Hymel, Faulk Barchus PLLC, Houston, TX, Lawrence Morales, II, Natalie F. Wilson, San Antonio, TX, for Plaintiffs.

J. Mitchell Little, Patrick J. Schurr, Scheef & Stone, LLP, Frisco, TX, for Defendants.

MEMORANDUM OPINION

CRAIG A. GARGOTTA, UNITED STATES BANKRUPTCY JUDGE

This Memorandum Opinion resolves the above-referenced adversary proceeding in which the Court conducted a six day trial on April 10–13 & 17–18, 2017, before taking the matter under advisement. The Court has reviewed the entire record before it; including all admitted exhibits and the weight of testimony and credibility of all witnesses. Additionally, the Court has carefully considered all evidentiary objections raised and sustained in making its findings of fact.

CONTENTS

Procedural Background...88

Jurisdiction, Authority and Venue...89

Relief Requested...90

Parties' Contentions...90

I. Plaintiffs' Contentions...90

II. Defendants' Contentions...92

Evidence Presented...94

I. Preliminary Injunction Hearing and Exhibits...94

II. Trial and Exhibits...94

III. Witnesses and Credibility...94

A. Plaintiffs...94

1. James Peters...94

2. Richard David Collins...94

3. James "Buford" Salmon...95

4. William L. Crawford...95

5. Daniel Davalos...95

6. David Davalos...95

7. James Reiley...95

8. Rick Reiley...95

9. Betty Reiley...95

10. Dieter Jansen...95

11. Vincent J. Gillette...96

12. Brian Huber...96

13. Sharon Walls...96

14. Rick Griffey...96

15. Marjorie A. Gillette...96

16. Thomas J. Gillette...96

17. Edward A. Gillette...96

B. Non–Plaintiff Investors...97

1. Louis Hinojosa...97

2. Alma Guerra–Gillette...97

3. Orlando Guerra...97

C. Defendants...97

4. Brian Alfaro...97

5. Kristi Alfaro...97

D. Employees...97

1. Michael Covington...97

2. Cody Reyes...98

3. Megan Blair...98

4. Sonia Jimenez...98

5. Timothy Hundley...98

6. Edgar Perez–Mendez...98

7. Justin Rodriguez...98

E. Vendors...98

1. Alphonse Seger...98

2. Cliff Davis...99

F. Experts...99

1. Michael Perkins...99

2. Michael Turner...99

IV. Factual Findings...99

A. Corporation and Trust Formation...99

B. Well Drilling and Distributions...100

1. Montague Legacy...100

2. Screaming Eagle ...100

3. Blackhawk Buda ...100

C. State Court Activities...100

1. Tejas Tubular Suit...100

2. Acute Safety Suit ...100

3. Key Energy Suit...100

4. Unit Texas Drilling Suit...100

5. Energy Fishing Suit...100

6. Platinum Energy Suit ...100

7. Qwik Pipe Suit...100

8. American Oilfield and Tejas Transport Suit...101

9. Brennan Short Suit...101

D. Plaintiffs...101

1. Questions Asked to Plaintiffs...101

2. The Governing Writing...102

3. James Peters ...102

4. Richard David Collins...103

5. James "Buford" Salmon...104

6. William L. Crawford...105

7. David Davalos...106

8. Daniel Davalos...106

9. Rick Reiley...107

10. James Reiley...108

11. Betty Reiley...109

12. Dieter Jansen...110

13. Vincent J. Gillette...111

14. Brian Huber...113

15. Sharon Walls...115

16. Rick Griffey...116

17. Marjorie A. Gillette...117

18. Thomas J. Gillette...118

19. Edward A. Gillette...119

20. Michael Covington...119

21. Megan Blair...122

E. Defendants...123

1. Brian Alfaro—Preliminary Injunction Hearing Testimony...123

a. Testimony Regarding Primera's Investment Process...124

b. Testimony Specific to the Screaming Eagle 4H Well...125

c. Testimony Regarding the FINRA Investigation and Contract Statements ...126

d. Testimony Regarding the Investment Process...126

e. Testimony Regarding the Gillette Group...128

f. Testimony Regarding Commissions, Management Fee, and Vendor Payments...129

2. Brian Alfaro—Trial Testimony...130

a. Testimony Regarding the Subscription Agreement and PPM...130

b. Testimony Regarding Bankruptcy Filing and TRO...130

c. Issues with Investments and Wells ...131

d. Testimony Regarding Alfaro's Personal Financials...131

e. Testimony Regarding Silver Star Resources...132

3. Kristi Alfaro...132

F. Primera Employees and Michael Turner ...133

1. Justin Rodriguez...133

2. Michael Perkins...133

3. Edgar Perez–Mendez...134

4. Tim Hundley...136

5. Sonia Jimenez...136

6. Cody Reyes...136

7. Michael Turner...137

V. Miscellaneous Evidence Presented ...137

Analysis of Plaintiffs' claims...138

I. Common Law Fraud and Fraud in the Inducement ...138

A. Breach of Contract or Fraudulent Inducement?...138

1. May Plaintiffs' Recover Under Fraudulent Inducement? ...139

2. Does the Statute of Fraud Preclude Plaintiffs' Claims Based on Oral Representations? ...141

B. Plaintiffs' Fraud Claims...143

1. Material False Representations ...144

a. Use of investor funds for well drilling and completion as allocated in the Contracts ...145

b. Management Fees...145

c. Commission-based Payments...145

2. Knowledge of Falsity or Reckless Assertion...146

a. Use of Investor Funds for Well Drilling and Completion...146

b. Management Fees...148

c. Commission–Based Payment...148

3. Intent to Induce Reliance ...150

4. Actual and Justifiable Reliance Causing Injury...150

a. Did the Contracts Contain "Red Flags" That Should Have Put Plaintiffs on Notice to Make Further Inquiries?...159

C. Fraud-in-the-inducement...160

II. Fraud in a Real Estate Transaction ...161

III. Negligent Misrepresentation...162

IV. Deceptive Trade Practices Act...164

A. The Working Interest ...165

B. Operator Services...166

V. Violation of Texas Securities Laws ...168

VI. Conversion ...169

A. Personal Property Comprising the Screaming Eagle 1H Well ...169

B. Rights to a Proportionate Right of the Production of Oil, Gas, and Other Minerals from the Screaming Eagle 1H well...170

C. Rights to Investments in the Working interests ...170

VII. Texas Uniform Fraudulent Transfer Act Claims ...171

A. Plaintiffs' Texas Uniform Fraudulent Transfer Act Claims ...171

B. Plaintiff's TUFTA Remedies...179

1. Constructive Trust...180

2. Equitable Lien...182

VIII. Unjust Enrichment ...183

IX. Money Had and Received...184

X. Civil Conspiracy ...184

Remedies...185

A. Damages...186

B. Constructive Trust...187

Conclusion...187

PROCEDURAL BACKGROUND

Plaintiffs commenced this action by filing their lawsuit styled Frederick Patek, Geraldine Patek, Jim Gregory, Cal Curtner, Lisa Simpson, Jasper Campise, Karen Smith, William Crawford, Mike Covington, Marc Keese, Mike McPherson, Ed McPherson, Wesley Crow, Dieter Jansen, Quackenbush Petroleum, James Reiley, Betty Reiley, Rick Reiley, Greg Shilts and Jana Shilts and on behalf of All Other Similarly Situated Investors of Defendants' "Screaming Eagle," "Montague Legacy" and "Buda Well" Investments vs. Brian K. Alfaro, Primera Energy, LLC, Alfaro Oil and Gas, LLC and Alfaro Energy, LLC , in the 288th District Court for Bexar County on April 24, 2015 (the "State Court Action").

In the State Court Action, Plaintiffs sought and obtained a temporary restraining order ("TRO") against Brian Alfaro ("Alfaro"), Primera Energy, LLC ("Primera"), Alfaro Oil and Gas, LLC ("Alfaro O & G") and Alfaro Energy, LLC ("Alfaro Energy") on April 28, 2015. The TRO expired on May 12, 2015, and on May 19, 2015, Plaintiffs filed a motion to extend the TRO. On May 22, 2015, the TRO was extended to June 1, 2015. On June 2, 2015, the state court judge entered a temporary injunction against Defendants Alfaro, Primera, Alfaro O & G and Alfaro Energy.¹

On June 3, 2015, Primera filed for relief under Title 11 of the U.S. Code commencing Bankruptcy Case No. 15–51396 (the "Bankruptcy Case"). On June 19, 2015, Alfaro, Primera, Alfaro O & G, Alfaro Energy, King Minerals, LLC ("King") and Silver Star Resources, LLC ("Silver Star") removed the State Court Action to this Court, commencing this Adversary Proceeding No. 15–05047 (the "Adversary"). Also on June 19, 2015, Plaintiffs filed their Second Amended Petition in the State Court Action adding King and Silver Star as Defendants.

On July 13, 2015, Jason Searcy was appointed chapter 11 trustee for the estate of Primera in the Bankruptcy Case. On August 11, 2015, Plaintiffs filed their Application for Temporary Restraining Order and Temporary and Permanent Injunctions (Adv. ECF No. 22) (the "Application") in this Adversary, seeking relief against Alfaro, Primera, Alfaro O & G, Alfaro Energy, King and Silver Star. On August 14, 2015, Plaintiffs filed their Third Amended Complaint (ECF No. 29) in this Adversary adding the following Defendants in their Third Amended Complaint: 430 Assets, LLC ("430 Assets"); Kristi Michelle Alfaro ("Kristi Alfaro"); Brian Alfaro and Kristi Alfaro, as trustees for the Brian and Kristi Alfaro Living Trust ("Living Trust"); and Ana and Averys Candy Island, LLC ("Candy Island").

The Court held a hearing on the Application over the following five days: August 28, 2015; September 1, 2015; September 2, 2015; September 4, 2015; and September 15, 2015. The Court issued its Order Denying Plaintiffs' Application for Preliminary Injunction (ECF No. 98) on October 28, 2015. In its Order, the Court specifically noted that the Order only referenced those Defendants who were named in the Application to the Court and excluded those Defendants who had been added in later amended Complaints. Thus, the Order referred only to Defendants Alfaro, Primera, Alfaro O & G and Alfaro Energy.

On March 21, 2016, Plaintiffs filed their...