James McAluney Investor Group Awarded Priority Substantial Contribution Claim
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Transcript of James McAluney Investor Group Awarded Priority Substantial Contribution Claim
IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
SECURITIES AND EXCHANGE COMMISSION,
PLAINTIFF,
v.
§§§§§§§
PROVIDENT ROYALTIES, LLC, a Delaware Limited Liability Company, PROVIDENT ASSET MANAGEMENT, LLC, a Delaware Limited Liability Company, PROVIDENT ENERGY 1, LP, a Texas Limited Partnership, PROVIDENT RESOURCES 1, LP, a Texas Limited Partnership, PROVIDENT ENERGY 2, LP, a Texas Limited Partnership, PROVIDENT ENERGY 3, LP, a Texas Limited Partnership, SHALE ROYALTIES II, INC., a Delaware Corp., SHALE ROYALTIES 3, LLC, a Texas Limited Liability Company, SHALE ROYALTIES 4, INC., a Delaware Corp., SHALE ROYALTIES 5, INC., a Delaware Corp., SHALE ROYALTIES 6, INC., a Delaware Corp., SHALE ROYALTIES 7, INC., a Delaware Corp., SHALE ROYALTIES 8, INC., a Delaware Corp., SHALE ROYALTIES 9, INC., a Delaware Corp., SHALE ROYALTIES 10, INC., a Delaware Corp., SHALE ROYALTIES 12, INC., a Delaware Corp., SHALE ROYALTIES 14, INC., a Delaware Corp., SHALE ROYALTIES 15, INC., a Delaware Corp., SHALE ROYALTIES 16, INC., a Delaware Corp., SHALE ROYALTIES 17, INC., a Delaware Corp., SHALE ROYALTIES 18, INC., a Delaware Corp., SHALE ROYALTIES 19, INC., a Delaware Corp., SHALE ROYALTIES 20, INC., a Delaware Corp., PAUL R. MELBYE, BRENDAN W. COUGHLIN, HENRY D. HARRISON, and JOSEPH S. BLIMLINE, DEFENDANTS,
and
SHALE ROYALTIES 21, INC., a Delaware Corp., SHALE ROYALTIES 22, INC., a Delaware Corp., PROVIDENT OPERATING COMPANY, LLC, a Texas Limited Liability Company, SOMERSET LEASE HOLDINGS, INC., a Texas Corp., SOMERSET DEVELOPMENT, INC., a Texas Corp., CAROLE PETROLEUM, LLC, a Texas Limited Liability Company, DANIEL AND THE LION, LLC, a Texas Limited Liability Company, DEER VALLEY PRODUCTION COMPANY, a Texas Corp., J2 INVESTMENTS, LLC, a
§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§
Civil No.: 3-09CV1238-L Judge: Sam A. Lindsay RECEIVER’S MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 2
Texas Limited Liability Company, MARQUEE ENERGY, LLC, a Texas Limited Liability Company, ARKOMA MINERAL PROPERTIES, INC., a Texas Corp., NOVO ACQUISITIONS, LLC, a Texas Limited Liability Company, RED RIVER OPERATIONS, LLC, a Texas Limited Liability Company, RJW ENERGY, LLC, a Texas Limited Liability Company, SNAKE RIVER RESOURCES, INC., a Texas Corp., SUN VALLEY PRODUCTIONS COMPANY, a Texas Corp., TONNER PETROLEUM, LLC, an Oklahoma Limited Liability Company, TRULUCK ENTERPRISES, LLC, a Texas Limited Liability Company, WINTER PARK PRODUCTION COMPANY, LLC, a Texas Limited Liability Company, PETROLEUM RESOURCE GROUP, LLC, a Nevada Limited Liability Company, JORDAN RIVER RESOURCES, INC., a Nevada Corp., COLUMBIA RIVER RESOURCES, INC., a Texas Corp., DELAWARE RIVER RESOURCES, INC., a Texas Corp., REDSTONE ENERGY CORPORATION, a Nevada Corp., SUPERIOR PETROLEUM CORPORATION, a Nevada Corp., SOUTHWEST ENERGY RESOURCES, INC., a Nevada Corp., PEACH TREE PETROLEUM, INC., a Nevada Corp., APPLE TREE RESOURCES, INC., a Nevada Corp., MIDWEST DIVERSIFIED, LLC, a Nevada Limited Liability Company, HURON HYDROCARBONS, INC., a Nevada Corp., SHELF EXPLORATION AND PRODUCTION GP, LLC, a Texas Limited Liability Company, OK MINERALS, LLC, a Nevada Limited Liability Company, NEW STAR PROPERTIES, LLC, a Nevada Limited Liability Company, MESQUITE OIL AND GAS, LLC, a Nevada Limited Liability Company, GREAT LAKES ENERGY COMPANY, LLC, a Nevada Limited Liability Company, and LONGHORN ENERGY CORPORATION, a Nevada Corp.,
RELIEF DEFENDANTS.
§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§§
TO THE HONORABLE UNITED STATES DISTRICT COURT:
I. INTRODUCTION
1. This action concerns a series of intertwined securities offerings that have
resulted in large losses suffered by thousands of investors and left substantial debt and other
creditor claims. In order to effect a fair and reasonable resolution of these claims, the Receiver
proposes that the Court adopt the claims procedures set forth in the attached Exhibit "A" (the
"Claims Process") and authorize a means of effecting interim distributions on resolved matters.
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 3
2. The Claims Process is designed to formalize the procedures that the Receiver
desires to employ to reconcile competing claims to recovered funds and assets, resolve
potential conflicts for the distribution of recovered funds, and recover additional Recoverable
Assets and Receivership Assets. The Claims Process is necessary because of the large
number of involved beneficial interest holders, the potential conflict between certain investor
groups as set forth with more particularity below, and the challenges presented in reviewing
claims based upon the records of the Receivership Entities.
3. Formal adoption of the Claims Process permits the Receiver to obtain the
essential cooperation of all involved parties, including those with apparent disparate and
conflicting interests. Although the Claims Process is principally designed to provide direction to
the Receiver, it also allows the Receiver to accurately provide explanation and direction to
involved parties as to the wishes of the Court relative to disposition of the assets of the
Receivership. The Receiver intends to make his best efforts to adhere to the procedures set
forth in the Claims Process, which he will post publicly. However, these procedures
contemplate a continuing investigation, and so, in the event that assumptions used to formulate
the Claims Process are materially inaccurate, the Receiver may seek to modify the Claims
Process after notice to this Court and the affected parties.
II. FACTS
A. Provident Receivership Entities
4. On June 22, 2009, Provident Royalties, LLC and each of its subsidiary affiliates
(collectively, the “Provident Debtors”) filed a voluntary petition for relief under Chapter 11 of the
Bankruptcy Code with the Bankruptcy Court for the Northern District of Texas (the "Bankruptcy
Court"), thereby initiating their bankruptcy cases which are being jointly administered under
Case No. 09-33886 (collectively, the “Provident Bankruptcy Cases”).
5. On July 1, 2009, the Securities and Exchange Commission (the “SEC”) filed its
Complaint (the “SEC Complaint”) with this Court against the Provident Debtors and a broker-
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 4
dealer alleging securities fraud (the "Provident Receivership Defendants"), as well as three
principals of the Provident Receivership Defendants, seeking, among other things, the
appointment of a receiver over the property and the estates of certain of these defendants.
6. On July 2, 2009, the District Court granted the Commission's request for entry of
an Order Granting Temporary Restraining Order, Appointing Receiver, Freezing Assets, Staying
Litigation, Prohibiting the Destruction of Documents and Accelerating Discovery (the "Order
Appointing Receiver"), which, among other things, appointed the Receiver to serve as receiver
for the Receivership Assets as defined therein. The Order Appointing Receiver also froze
Recoverable Assets as defined therein, which included the personal assets of Defendants
Russell Melbye, Brendan W. Coughlin and Henry D. Harrison (the "Provident Individual
Defendants") and all proceeds of the alleged scheme.
7. The Provident Individual Defendants have since each consented to entry of the
Preliminary Injunction and Appointment of Receiver.
8. As more fully discussed in the Receiver's First Quarterly Report, the broker-
dealer – Provident Asset Management, LLC – remained in the Receivership, its operations were
wound up, and its assets reduced to cash and claims.
9. The rest of the Provident Receivership Defendants remain in bankruptcy. On
July 17, 2009, this Court and the Bankruptcy Court each entered a Stipulation Approving
Protocol for the Receiver to Serve as Chapter 11 Trustee in the Provident Bankruptcy Cases
(the “Protocol”). The Protocol was agreed to, accepted and approved in all respects by the
Receiver, the Provident Creditors Committee,1 the SEC, and the Provident Investors Committee
(defined below) in the Provident Bankruptcy Cases (at such time being an ad hoc committee).
The Protocol resulted in the Receiver’s formal appointment as the chapter 11 trustee in the
1 On July 8, 2009, a committee formation meeting was conducted by the Office of the United States Trustee and, pursuant to that meeting, on July 14, 2009, the United States Trustee filed its Notice of formation of the Official Committee of Unsecured Creditors (the “Provident Creditors Committee”) in the Provident Bankruptcy Cases.
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 5
Provident Bankruptcy Cases pursuant to section 1106 of the Bankruptcy Code, while
simultaneously allowing the Receiver to continue to act as the receiver of the non-debtor
Receivership Defendants. On July 20, 2009, the U.S. Trustee’s Office appointed the Chapter
11 Trustee to serve as the Chapter 11 trustee in the Provident Bankruptcy Cases, which
appointment was confirmed by the Bankruptcy Court’s Order entered on the same day. Since
that time, the Receiver has acted as the chapter 11 trustee of the Provident Debtors’ bankruptcy
estates.
10. On July 30, 2009, the Office of the United States Trustee appointed the Official
Investors Committee (the “Provident Investors Committee”). The Provident Investors
Committee and the Provident Creditors Committee (collectively the “Provident Committees”)
have since been actively involved in the Provident Bankruptcy Cases.
B. Blimline Receivership Entities
11. The Provident offerings were based in substantial part upon the proposition that
funds would be raised and then invested in oil and gas properties identified by Defendant
Blimline. Ultimately, the Receivership was expanded as a result to include thirty-one additional
entities (the "Blimline Entities"). The Blimline Entities have been involved in not just the
Provident offerings, but also one large, one medium, and a series of small offerings, all of which
were premised upon the essential proposition that the invested funds to be used in line with the
strategies proposed by Defendant Blimline and/or paid over to him to use as he thought best.
Over $150 million was transferred to Blimline Entities as a result. These funds were
commingled and used in such a way that there are now many overlapping creditor and investor
claims to the assets of the Blimline Entities.
McAluney State Court Action
12. The first effective efforts to freeze assets of the Blimline Entities were undertaken
by certain investors in one of the groups of offerings that ran parallel to the Provident offerings.
These were investors in one or more of the following entities: Shale Synergy I, LLC, Shale
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 6
Synergy II, LLC, Black Rock Royalties, LLC, Black Rock Acquisition, LLC and Ranch Rock
Properties, LLC (the “Shale Synergy Entities”).
13. October 19, 2009, several investors in the Shale Synergy offerings (the
“McAluney Investor Group”) brought suit against three Blimline Entities (J2 Investments, LLC
(“J2”), Red River Operators, LLC (“Red River”), Carole Petroleum, LLC (“Carole Petroleum”));
and against Defendant Blimline (“Blimline”); and against two other individual and several related
entities including the Shale Synergy Entities. The case was styled James P. McAluney, et al. v.
Joseph Stanley Blimline, et al., Case No. 09-14189 (the “State Court Action”), in the 44th
Judicial District Court of Dallas County, Texas (the “State Court”).
14. The State Court entered a Temporary Restraining Order which, in effect, froze
the assets of the defendants in the State Court Action. This was later confirmed as a
Temporary Injunction.
15. On November 13, 2009, J2, Red River and Carole Petroleum (collectively, the
“J2 Debtors”) each filed a voluntary petition under Chapter 11 of the Bankruptcy Code with the
Bankruptcy Court, thereby initiating their bankruptcy cases which are being jointly administered
under Case No. 09-37744 (collectively, the “J2 Bankruptcy Cases”). The State Court Action
was removed to the J2 Bankruptcy Court, and was assigned an adversary cause number.
Expansion of Receivership
16. These actions accelerated the investigation of the Commission into the affairs of
the Blimline Entities. On December 3, 2009, the SEC amended its Complaint to include an
additional individual Defendant, Blimline, and obtained an expansion of the Receivership to the
Blimline Entities. Also on December 3, this Court entered an order expanding the Receivership
as requested (the term "Order Appointing Receiver" includes that order as well).
17. On or about December 9, 2009, Defendant Blimline consented to the expansion
of the Receivership to include the Blimline Entities, and the Court's asset freeze with regard to
his personal assets.
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 7
Resulting Procedural Issues
18. Under the expanded Order Appointing Receiver, the J2 Bankruptcy Cases were
stayed, as was the removed State Court Action. The question then became how to address the
interrelated claims.
19. It was first determined that the J2 Bankruptcy Cases were superfluous. On
December 21, 2009, the United States Trustee accordingly moved that the J2 Bankruptcy
Cases be dismissed. This was supported by the SEC and later the Receiver. No objections
were filed, and the Bankruptcy Court, with the permission of this Court, recommended
dismissal, and this Court adopted that recommendation by order dated January 28, 2009.
20. At the same time, efforts were undertaken to address the State Court Action. In
dismissing the J2 Bankruptcy, the Court withdrew the reference of the State Court Action, but
did not lift the stay nor has it acted on the pending motion for remand. The Court has raised the
question of the appropriate handling of this matter, however, and the Receiver has indicated
that he would recommend a course of action.
Impact of Proposed Claims Process
21. The proposed Claims Process would effect a partial resolution of the State Court
Action, since, as more fully explained below, the Receiver proposes to address the claims of the
McAluney Investor Group and all Shale Synergy Investors against the Blimline Entities as a part
of this Claims Process. The Receiver believes that this is appropriate and inevitable because
the Shale Synergy offerings were principally premised on assets accumulated by Blimline
through the Blimline Entities, and most of the invested funds flowed through the Shale Synergy
Entities and into Blimline Entities in return for notes that are in default. Equitably, the Shale
Synergy Investors have direct claims in the Receivership based upon this flow of funds.
22. The proposed Claims Process also allows the Receiver flexibility to address
remaining unresolved issues. The Receiver seeks herein authority to attempt to effect a
cooperative liquidation and claims process with the Shale Synergy Entities. The Receiver
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 8
favors the inclusion of those entities and/or their assets within the Receivership, and seeks
flexible authority as a part of this Motion to effect the proposed Claims Process including those
entities should they agree to be included or to cooperate in a liquidation and claims process with
those entities should they not so agree. The result would be to allow for a single consolidated
liquidation and administration rather than parallel undertakings. Alternatively, and if necessary,
the Receiver may ask the Court to order such relief by separate motion. The Receiver also
seeks authority to include assets of Blimline in this process. The Commission seeks such relief
as a part of the main action, but Blimline may agree to include frozen assets as a part of the
assets of the Blimline Entities, and the Claims Process includes provisions to address such a
situation.
23. Depending upon the results of ongoing discussions, these actions may pave the
way for a settlement or substantial narrowing of the issues in the State Court Action. If that is
not promptly forthcoming, the Receiver will make a proposal to the Court by separate motion.
Other Securities Offerings – Jordan River Offering
24. The proposed Claims Process also addresses the other large securities offering
in which Blimline Entities were involved. The central figures in this offering were Eric Merkle,
Jay Merkle, and Blimline. The structure of the offerings were similar, in that money was raised
from investors based upon Blimline's purported ability to turn a profit in the oil and gas business.
Much of the money was sent to Blimline for his disposition, and appears to have flowed through
many of the Blimline Entities. Approximately $48 million was raised, and over $36 million was
purportedly used to purchase oil and gas assets.
25. The Merkle ventures ended up in bankruptcy too. See In re Jordan River
Resources, Inc., et al., Case Nos. DL07-1747 (W.D.Mich. 2007) (the "Jordan River
Bankruptcy"). As in the case of the Provident Entities, the claims of the creditors and investors
were addressed in the course of the bankruptcy proceedings.
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 9
26. The Blimline Entities most directly involved were Jordan River Resources, Inc.,
Columbia River Resources, Inc., Delaware River Resources, Inc., Redstone Energy
Corporation, Superior Petroleum Corporation, Southwest Energy Resources, Inc., Peach Tree
Petroleum, Inc., Apple Tree Resources, Inc., Midwest Diversified, LLC, Huron Hydrocarbons,
Inc., Shelf Exploration And Production GP, LLC, Ok Minerals, LLC, New Star Properties, LLC,
Mesquite Oil And Gas, LLC, Great Lakes Energy Company, LLC, Longhorn Energy Corporation,
Petroleum Resource Group, LLC. As necessary, this subset of the Blimline Entities is referred
to as the "Jordan River Entities".
27. The Jordan River Bankruptcy was ongoing during the course of the Provident
offerings. New money from the Provident investors was used to buy substantially all of the
assets out of the Jordan River Bankruptcy and to obtain releases for Blimline. Approximately
$22 million was paid to the Trustee in the Jordan River Bankruptcy, but the full sale price agreed
to by Provident principals and Blimline was not paid before the Provident Entities ran out of
money. A plan was confirmed in the Jordan River Bankruptcy on December 19, 2008, and so
the money was committed to the payment of Jordan River creditors and investors.
28. The Receiver's view is that the Provident Entities substantially overpaid for the
assets. However, given the advanced stage of the Jordan River Bankruptcy proceedings and
the relative equities of the situation, the Receiver proposes that the sale be treated as final. The
Jordan River plan appears to have been implemented, and the last filing in that case was more
than six months ago.
29. By the same token, though, the Receiver proposes that no claims be solicited or
acknowledged from Jordan River creditors or investors. The $22 million in sale payments
substantially funded the entire Jordan River Bankruptcy. Moreover, even though the sale price
was actually even higher than $22 million, the Jordan River Bankruptcy Trustee never filed a
claim in the Provident Bankruptcy.
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 10
30. Accordingly, the Receiver proposes that he act as the residual custodian of the
subject oil and gas assets regardless of whether they are presently titled of record as assets of
older Blimline Entities, Jordan River Entities, and Provident Entities or otherwise. Additionally,
with regard to the sale proceeds of assets that the Receiver may sell herein but that may have
been involved in the Jordan River offerings or that may have been pledged to Jordan River
creditors or investors at any point, the Receiver proposes that those proceeds be distributed to
Provident, Blimline and/or Shale Synergy investors consistent with the procedures proposed in
this Motion.
Other Blimline Entity Offerings
31. Finally, there were a series of smaller offerings that were similarly structured. As
a result, there are further claims by various investors. These offerings have not resulted in
separate freeze orders or insolvency proceedings. The Receiver therefore proposes to address
the resulting claims as a part of this Claims Process.
III. AUTHORITIES
32. A distribution of receivership assets is entrusted to the Court's sound discretion.
SEC v. Forex Asset Mgt., 242 F.3d 325, 331 (5th Cir. 2001).
33. A receiver has the power to adjust and compromise a matter in dispute when a
claim is submitted, subject, however, to the Court's review of such a determination. II CLARK ON
RECEIVERS § 655, at 1147 (Anderson 3d ed. 1959), citing Samuels v. E.F. Drew & Co., 7 F.2d
764 (S.D.N.Y. 1924) (op. by Learned Hand, J.).
34. Where an equity receiver is presented with competing claims to property, the
order of priority of payment is (1) administrative expenses; (2) return of third-party property held
in trust or otherwise by the defendant; (3) payment of priority government claims; (4) payment of
secured parties from secured assets; (5) payment to creditors securing the appointment of the
receiver as equity may require; (6) pro rata payment to general creditors; (7) surplus to the
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 11
defendant for whom the receiver was appointed. III CLARK ON RECEIVERS § 667, at 1198
(Anderson 3d ed. 1959).
IV. PROPOSED CLAIMS PROCESS
35. The Receiver has developed the proposed Claims Process (attached as Exhibit
"A") bearing in mind the above principles and applying them to the complex facts of this case.
The following outlines the Receiver's analysis and the equitable basis for the adoption of the
proposed Claims Process.
A. Receivership Administrative Claims
36. The Court has already provided procedures for administrative expenses. The
Receiver proposes no change to those procedures.
B. Receivership Operating Expenses
37. The Court has separately granted the Receiver authority to pay any ordinary
course expense of any Receivership Entity. Nothing is these procedures alters or limits that
authority.
C. Receivership Secured Claims
38. Secured claims to assets of the Provident Debtors and the Jordan River Entities
have been addressed in the course of their respective bankruptcy proceedings and are
therefore not addressed in this Claims Process. The Receiver does not seek any alteration of
the disposition of assets that has been or may be approved in those proceedings.
39. In the Receivership, the Receiver proposes to first resolve claims of secured
creditors on a case-by-case basis and consistent with well-established principles of equity
receiverships. To the extent that the claims of secured creditors cannot be resolved by
agreement, they will be presented to this Court for resolution. Generally speaking, the Receiver
expects to acknowledge the rights of secured creditors to priority with regard to their security;
provided, however, that the security interest is valid, perfected and the secured party exchanged
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 12
reasonably equivalent value to obtain the security interest. The Receiver presently has
authority to compromise such claims, and therefore does not seek further authority to do so.
C. Receivership Unsecured Claims
40. Likewise, the claims of unsecured creditors of the Provident Debtors and the
Jordan River Entities are being addressed in their respective bankruptcy proceedings.
Accordingly, the Receiver does not seek any alteration of the disposition of assets that has been
or may be approved in those proceedings.
41. In the Receivership, the Receiver expects to acknowledge valid unsecured
claims and to address the payment of those claims on an entity-by-entity basis. The Receiver
presently believes that the unsecured claims against non-Provident Debtors in Receivership are
comparatively nominal relative to the investor claims. The Receiver, therefore, proposes that a
reserve be established equal to thirty percent (30%) of the net proceeds from the liquidation of
the assets of any receivership entity or other entity subsequently placed into the Receivership
and that this reserve be used to pay approved unsecured claims. In the event there are funds
remaining in this reserve after all approved unsecured claims are paid in full, the surplus will be
used to pay investor claims through the procedures set forth below. With regard to entities that
have known assets, the Receiver proposes that a notice be sent to all creditors shown on the
books and records in the Receiver’s possession advising that such creditors must file a Claim
using the form attached hereto as Exhibit "B" by not later than ninety days from the date of
mailing of the notice (the “Bar Date”), and that the failure to timely file a proof of claim will bar
that creditor from receiving any distribution from the Receiver on account of its unsecured claim.
In his next Quarterly Report following the expiration of sixty days after the Bar Date, the
Receiver will advise the Court as to the extent of the unsecured claims for each entity, and will
propose to the Court which claims should be allowed or disallowed. After which, the Receiver
will begin to make distributions to holders of allowed unsecured claims, pro-rata, from the
reserve. If it appears the reserve is insufficient, the Receiver may increase the size of the
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 13
reserve upon providing notice of such adjustment in the Receiver’s Quarterly Reports filed with
the Court.
D. Investor Claims
42. The handling of investor claims is the most challenging. There are a number of
potential controversies between possible classes of investors who have claims to the same
assets based upon the interrelationships and similarities between the Provident offerings, the
Shale Synergy offerings, the Jordan River offerings, and other related Blimline Entity offerings in
which the receivership entities were involved.
43. First, the offerings have a number of characteristics that support the imposition of
a single constructive trust or parallel constructive trusts. For example, the assets that
purportedly supported the offerings were assembled by or under the direction of Joseph
Blimline. In some instances, the very same assets were involved. The proposed business was
very similar, and the offering materials evolved from common roots. Funds were regularly
transferred between the various offerings, and funds from later investors were paid to earlier
investors. This allows for at least two potential means of dividing assets among the affected
investors: a single, pro-rata distribution; or separate distributions from discrete pools of assets.
At present, it is difficult to evaluate which form of distribution would be more or less
advantageous to the involved investor groups. There are a number of factors that would be
considered in selecting between these means of distribution, such that controversy could
certainly ensue between various investors who believe that one or the other methodology may
favor them.
44. Second, there were procedural issues that the proposal of these procedures has
resolved in part and will, hopefully, resolve entirely eventually. The result of the procedural
history recited above is that there were and, in part, remain several procedural avenues
available in which to resolve claims with competing priorities, and in which to formulate a
reorganization or distribution plan. This could have been done several ways, such as, for
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 14
example, through this receivership as proposed, through the Provident Bankruptcy Cases,
through the J2 Bankruptcy Cases, or by the original principals through a release of the freeze
orders and dismissals of the cases with cooperation of the Receiver. Again, various parties may
view the various venues as being more or less advantageous, and these procedures seek to
avoid any such controversies.
45. Third, there are questions of relative contributions made and assets preserved or
impaired as a result of the various legal actions. The Provident Bankruptcy Cases addressed
assets of the involved entities, and the course of those cases has been such that net assets for
the investors in the Provident offerings will likely become available. The Commission’s action
has resulted in further assets being preserved with regard to the involved individuals. The State
Court Action appears to have frozen some assets and slowed the dissipation of assets in the
entities that were then placed in bankruptcy, and later receivership in the expanded SEC action.
Each of these efforts involved prosecution costs, and each resulted in some amount of asset
preservation.
46. Fourth, there are differing capacities with regard to effecting a liquidation, claims
process, and distribution. As for the Provident Debtors, the secured and unsecured claims
against those entities will be addressed in the Provident Bankruptcy Cases, and it appears that
there will be a net distribution to investors. Although the Provident Debtors’ assets have been
well-handled by financial and industry consultants, competitive asset sales, and an appropriate
insolvency administration, the case is nearing the adoption of a plan of its own, and the claims
of creditors and investors have been established. One option, however, is for the remaining
Provident staff, which has been employed by the operating Provident Debtors under the
supervision of the bankruptcy trustee and his professionals, to assist with the remaining
liquidation of certain oil and gas assets remaining in receivership entities. This staff has
competent operational and industry expertise, and accounting transparency. This staff also has
specific expertise with regard to the subject assets, records, and factual situation. It is likely
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 15
that, as a part of the Provident Debtors’ Plan, a liquidating trust will be established to facilitate
the further liquidation of assets and resolution of claims. The liquidation trust will employ such
professionals as necessary to fulfill its mandate. However, as the Provident Investors will
continue to have substantial claims to investor assets, a means of allowing for this staff to
participate at the Receiver's discretion has some advantages. As for the Shale Synergy
Entities, these appear to have very limited oil and gas interests and limited real estate holdings,
and no significant cash reserves. The value of these assets is uncertain, moreover, as they are
currently estimated only by the involved principals. A number of the assets were transferred
from these entities prior to the freeze order and encumbered. Even so, these entities may be in
a position to liquidate their assets and provide a nominal return to their respective investors,
particularly since the primary assets are receivables from the Blimline Entities. The present
management does not appear to be in a position to reasonably undertake such a liquidation with
current staff, but would instead need to retain brokers and some limited staff to undertake such
a course of action on a contingent basis. This would create a redundant administration.
Additionally, there remain disputes between the Shale Synergy Investors as to the
trustworthiness of current management that would further complicate an independent effort, and
so some form of Court-approved process would be beneficial under the circumstances. To the
extent that cooperation could be fostered, this would be beneficial.
47. Fifth, the value of some of the Blimline Entity Assets may be enhanced by using
available funds. The assets of the Blimline Entities are more specifically identified in the
Receiver's Second Quarterly Report. Essentially, they consist of some ranch real estate
holdings and some oil and gas holdings. Prior to commencement of the J2 Bankruptcy Cases,
these entities were under the direction of Blimline and were in the process of encumbering their
assets and dissipating them in a manner that did not benefit creditors or investors overall. This
resulted in a number of secured claims that are presently unresolved. In addition, there are
unsecured claims against various Blimline Entities, which are believed to be nominal, although
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those obligations are not well documented. It appears that a liquidation of the real estate assets
will provide some amount of cash that could be distributed to investors, but there may be
opportunities to exploit, improve and/or liquidate certain oil and gas assets that might add to the
amount ultimately repaid to investors. The value of these assets has been estimated by
Blimline, and a preliminary review of the assets has been made by certain accounting and
industry professionals. At present, there is a difference of view between Blimline and the
professionals retained by the Receiver as to the value and potential of the assets. The staff of
the operating entity, J2, has been reduced and the remaining staff may be in a position to
oversee the liquidation and/or operation of these assets, as supplemented by accounting and
industry professionals to provide appropriate controls.
48. Bearing in mind all of these considerations, the Receiver proposes an approach
that creates three restitution pools, each of which would receive an equitable portion of any
distribution made herein to investors, and which allows for an orderly liquidation and, as
appropriate, operations to maximize the value of the assets. Specifically, the Receiver
proposes the following:
(a) Three separate restitution pools will be created within the Receivership,
one for Provident investors, one for Shale Synergy investors, and one for investors in the
smaller Blimline Entity offerings.
(b) The three investor restitution pools will be funded as follows:
(i) The Provident restitution pool will be funded by net recoveries
from the three initial individual defendants (Paul D. Melbye, Brendan W. Coughlin and
Henry D. Harrison), any assets of PAM, and any assets recovered from PAM brokers,
any third-party brokers who solicited the subject investments, and potentially other third
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 17
parties.2 The Provident investors will also be entitled to receive distributions from the
Plan approved in the Provident Bankruptcy Cases according to the terms of the Plan.
The Provident restitution pool will also receive a percentage of the net proceeds of the
Blimline Entities' liquidation as described below.
(ii) The Shale Synergy restitution pool will be funded by net
recoveries from the Blimline Entities’ liquidation as described below. Additionally, the
Shale Synergy investors will receive the net proceeds of any assets recovered from
the Shale Synergy Entities and any persons who solicited the subject investments.
(iii) The Other Investors restitution pool will be funded by net
recoveries from the Blimline Entities’ liquidation as described below. Additionally, the
Other Investors will receive the net proceeds of any assets recovered from any non-
receivership entity in which that person invested and any persons who solicited their
investments.
(c) The Receiver will state the amount contained in each pool in his Quarterly
Reports, and there are provisions in the Claims Process to determine when funds are available
for interim distribution.
(d) Investor losses will be paid from these pools according to the net cash
loss of each investor as determined in the following manner, subject to Court review.
(i) The loss amounts for Provident investors will be paid according to
their net cash losses as established in the Provident Bankruptcy Cases, or, if not in
those cases, by the Receiver with reference to the work done in those cases.
(ii) The loss amounts for Shale Synergy investors will be determined
by a claims process in which the loss amounts will be established according to the net
cash losses as reflected on the books and records of the Shale Synergy Entities,
2 In the case of brokers who solicited investors in multiple pools, the recovery shall be allocated according to the net cash losses of the investors involved. Claims against other third parties would likewise be allocated according to the relative impact upon the particular offering.
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provided that the principals thereof reasonably cooperate with the Receiver, and then a
proposed loss amount will be sent to each investor, a response will be obtained from the
investor, and any discrepancy will be resolved in consultation with the investor with
resort to bank records, if necessary. Alternatively, claims will be solicited using the
Claim Form attached as Exhibit "B" hereto.
(iii) The loss amounts for Other Investors will be determined by a
claims solicitation made to persons who appear to have made investments in Blimline
Entities that have not already been otherwise addressed using the form attached as
Exhibit "B" hereto. Claims submitted by such investors will be reviewed and adjusted,
as necessary, to reflect the actual cash loss of the investor.
(e) The Blimline Entities’ liquidation will be conducted by the Receiver. The
Receiver will pursue liquidation of the Blimline Entities’ assets, whether held personally or by an
entity in which he may hold an interest. The Receiver will also pursue recoveries, as
appropriate, from third-parties who received the invested proceeds from or through Blimline or
from such other entities and/or parties as the Receiver may have rights to pursue by virtue of
the Order Appointing Receiver or any amendment, supplementation or modification thereof.
The Receiver will endeavor to resolve secured and unsecured creditor claims, liquidate real
estate and any other non-energy property, maximize the value of any oil and gas assets, and
create a net pool consisting of at least seventy percent (70%) of the net liquidated value. As
assets are sold, seventy percent (70%) of the proceeds will be placed in a separate account
("Blimline Entities Liquidation Account"), and the remaining thirty percent (30%) will be used at
the Receiver's discretion to pay administrative and/or unsecured claims as approved by the
Court and to pay operating expenses as incurred ("Blimline Entities Operating Funds"). In the
event that operations are profitable, then any such profit would remain available for use as
operating funds. Likewise, in the event that operations increase the value of assets prior to
sale, then the appreciated value will be treated as available operating funds. As noted above,
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 19
this division may be adjusted as necessary to reflect increased unsecured claims, and
conversely, any residual amount after the conclusion of operations will be included in the
Blimline Entities Liquidation Account. The Blimline Entities Liquidation Account will be divided
to proportionately fund the three restitution pools identified above. The proportions will be
determined according to the net cash provided by the respective investor groups to Blimline
and/or the Blimline Entities. The proportions to be allocated to the respective claim pools will be
such that the Shale Synergy pool and the other Blimline investor pool will be treated each as
having a claim to the Blimline Entities’ Liquidation Account that is equal to the collective claims
of their respective groups, and the Provident pool’s claim shall equal the net cash funding that
flowed from Provident Debtors to or for the benefit of Blimline and the Blimline Entities. The
Receiver will propose respective net cash loss amounts as soon as practical. As it is
anticipated that the claims for other Blimline investors will take some time to establish, a ten
percent (10%) reserve amount will be initially assigned until the contemplated claims process
can be completed. Provided that adequate cooperation is received, claim determination notice
letters will be sent to J2 and Shale Synergy investors as soon as the Claims Process is
approved. Alternatively, such investors will be sent Claim Forms. Filed claims will be reviewed
and any discrepancies resolved as may be provided in the claims procedures. The aggregate
net cash loss figure for the Provident pool will be proposed no later than fifteen days after the
approval of this Claims Process, and access to the records supporting the proposal shall be
afforded at that time to any interested party. At least a thirty day period shall be allowed before
the Receiver seeks confirmation of such amount. If any objections are received, they shall be
resolved by resort to either a magistrate, or special master agreed upon by a objecting parties
and the Receiver within thirty days of the receipt of any objections, or by Judge Lindsay. The
Receiver expects that any allocation percentage will be determined with resort to company
records and/or bank records, and that any dispute will be resolved by written submission under
the standard timetable of the Federal Rules of Civil Procedure.
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 20
(f) The Receiver proposes that interim distributions from the restitution pools
fifteen days after each Quarterly Report based upon available funds. The procedures for
determining whether sufficient funds exist to effect interim distributions are set forth more fully in
the proposed Claims Process. Distributions to the larger class of Provident Investors may be
accrued for a longer period so as to make a distribution cost-effective. Distributions shall be
made in accordance with the classifications proposed in the accompanying Claims Process.
(g) If the Shale Synergy Entities consent to be included as parties in
Receivership, then they will be treated the same as any entities presently included therein.
(h) The Receiver will not take a commission on any sales, as would a
bankruptcy trustee, but shall instead be paid hourly compensation.
E. Claim Notice, Submission, Review and Approval
49. The Claims Process contains provisions that set forth the proposed process for
providing notice to potential claimants, receiving and processing claims, and allowing or denying
claims. Essentially, the Receiver will gather information and documentation with regard to the
claim as set forth on the proposed Claim Form (Exhibit "B"). The Receiver will place the key
operative documents in a file that will be available, along with any other non-privileged materials
relied upon by the Receiver, in a claim file room that will be open to any interested party and will
be made available upon request to the Receiver's counsel during regular business hours and
subject to the need for reasonable document control to be maintained with regard to the records
("the Receiver's Claim File Room"). The Receiver will allow for reasonably copying to take
place as necessary, and will provide electronic copies upon request of select materials as
resources allow. When seeking approval or disapproval, the Receiver will identify the claim in
general terms and by claim number, so that interested parties may evaluate the Receiver's
proposed determination. A process is outlined for objection, and for review of any objection by
the Court.
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 21
F. Priority Claims
50. The Claims Process allows for the possibility that the Court may approve priority
claims, which are unique claims that are to be addressed as the Court may direct. The Claims
Process contemplates that such claims will be presented to the Court on a case-by-case basis.
There are two such categories of claims of which the Receiver is presently aware. The
Receiver accordingly presents such claims to the Court as a part of this Motion in order for the
Court to specifically address these two unique groups of claims.
McAluney Investor Group – Priority Substantial Contribution Claims
51. As explained above, the McAluney Investor Group brought the State Court Action
and obtained a temporary restraining order. The result of these efforts was that the dissipation
of assets that was then ongoing at a rapid pace was halted, and a substantial benefit was
conferred upon all investors. In such a case, the parties conferring such a benefit are entitled to
compensation. In view of these principles, the Receiver evaluated the claim and agreed to
recommend to the Court a proposal.
Applicable Law
52. The applicable law is set forth in a memorandum opinion and order that was
entered by Judge Solis under comparable circumstances in another securities fraud
enforcement receivership. See SEC v. IPIC International Inc., No. 3:03cv2781 (N.D. Tex.),
Order dated July 5, 2005, Dkt 303 therein. In that case, an investor was persuaded by the
perpetrators of the securities fraud to transfer funds to an account in Hong Kong just before the
enforcement action was brought and the receiver therein was appointed. Upon learning of the
receivership, the investor immediately contacted the Hong Kong bank and demanded the return
of his portion of the money in the account. The investor was not successful in recovering his
investment ($270,000) but he was successful in alarming the Hong Kong authorities, who froze
the entire balance of the account ($1.470,000). The investor was not entirely altruistic in his
motives, since he did not advise the receiver of the existence of the account and continued
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 22
instead to attempt to persuade various authorities to send his money back to him. But, the
effect of his efforts was that when the receiver independently located the account and began
working through proper channels to effect a proper return of the funds for the benefit of all
investors, the money was still frozen. More likely than not, had the investor not acted as he did,
the money would have been moved to a further account and beyond the reach of the receiver.
Judge Solis made two findings. First, he found that all of the money had to be distributed to
defrauded investors, pro-rata, and so he denied the investor's claim to the $270,000. Second,
he found that the investor had substantially contributed to the recovery of approximately $1.5
million, and therefore awarded a 5% commission -- $73,500. Judge Solis also noted that the
investor would have a pro-rata claim for the actual cash loss of the investor, which entitled the
investor in that case for a further 14% to 16% of the $270,000. In the memorandum opinion,
Judge Solis explains in detail the principles of equity and the law with regard to substantial
contribution. The leading case with regard to substantial contribution upon which Judge Solis
relied is Godfrey v. Powell, 159 F.2d 330, 331 (5th Cir. 1947), and he specifically quoted the
following statement from that case: "Where it appears that there is no one in the field to protect
the class as a whole, and an individual . . . acts and benefits the whole group, a court may
properly, and should, award compensation and expense allowances for such services out of the
[Receivership Estate]." In that case, Judge Solis awarded a finder's fee as compensation, and
there were virtually no expenses to be considered.
Facts
53. The facts of this case are shown by the Commission's pleadings and evidence
associated with the expansion of the receivership (Dkts. 79-82, filed December 3, 2009), which
demonstrated the activities of the Blimline Entities and the dissipation of assets and which the
Court found to merit the expansion of the receivership to include the Blimline Entities (see Dkt.
83, Order Granting Temporary Restraining Order, Appointing Receiver, Freezing Assets,
Staying Litigation, Prohibiting the Destruction of Documents and Accelerating Discovery), the
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 23
Clerk's file3 with regard to the State Court Action (now before this Court as an ancillary
proceeding), and the Receiver's Second Quarterly Report (Dkt 103), all of which the Receiver
would ask that the Court take judicial notice for the purposes of this Motion.
54. It is patently clear from this evidence that throughout 2009 the assets of the
Blimline Entities were shrinking rapidly. Tens of millions in investor funds became a handful of
ranches, limited oil and gas assets, and little else.4 Further, the ranches were being sold and/or
encumbered right up until September, 2009.5 On October 19, 2009, the McAluney Investor
Group filed the State Court Action (see Adversary Dkt. No. 3 & Attachments 1&2). A TRO was
entered that day (see Adversary Dkt. No. 3 & Attachment 1). Successive freeze orders were
thereafter entered and ultimately a three-day hearing was conducted that resulted in Temporary
Injunctions freezing the assets of Blimline, several Blimline Entities, and the Shale Synergy
Entities (id.). This led to the defensive filing of the J2 Bankruptcy on November 11, 2009, and
accelerated the pace of the Commission in seeking blanket relief to preserve the assets of the
Blimline Entities on December 3, 2009. The property records show that the ranches were not
further encumbered after September, 2009.6 Plainly, the ranches that remain must be credited
largely to the efforts of the McAluney Investor Group.
3 The Clerk of the Northern District has possession of the file of the State Court Action because the case
was, as noted above, first removed to the Bankruptcy Court as a part of the J2 Bankruptcy, where it was assigned Adversary No. 09-03409, and then the reference was withdrawn, such that this Court is presently presiding over the case. The matter has not been consolidated with the main case herein, but rather is merely stayed pursuant to the Order Appointing Receiver (Dkt. 14, at ¶32 and Dkt. 83 at ¶32) because several Relief Defendants are parties to the case. Even so, since the Clerk has the file, the Court may reasonably take judicial notice of its contents.
4 This is shown, for example, in the Declaration of Dennis L. Roossien, Jr., which is contained in pages 1-
15 of the Appendix filed on December 3, 2009 in support of the Commission's Motion for Ex Party Temporary Restraining Order and Order to Show Cause.
5 Roossien Declaration at ¶27 (App. 6) and Ex. A to Declaration (App. 7-15). 6 Roossien Declaration at ¶27 (App. 6) and Ex. A to Declaration (App. 7-15).
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 24
55. The Receiver's investigation to date indicates that in the six months prior to the
filing of the State Court Action, approximately $4.7 million was raised from selling or
encumbering ranches. None of that cash remains.
56. The Receiver currently estimates that several million dollars in ranches remain,
although the value of these ranches is still being determined.
57. The McAluney Investor Group incurred hundreds of thousands of dollars in
pursuing the State Court Action and opposing efforts to continue to dissipate assets with the
permission of the Bankruptcy Court.
Proposed Claim Treatment
58. In considering the situation, the Receiver has attempted to apply the law as
stated by Judge Solis under remarkably comparable circumstances. In both cases, the
investors pursued recovery of their own funds and ended up, intentionally or not, preserving
substantial value for other investors. The only difference between the cases is that the
McAluney Investor Group incurred much larger costs in so doing.
59. Based upon the foregoing, the Receiver proposes that the Court pay
compensation to the McAluney Investor Group of a small fraction of its fees and expenses at
this time, and allow the McAluney Investor Group to present claims in the course of the Claims
Process seeking to be treated as priority claims with a unique treatment that reflects the
inherent uncertainty associated with determining the current value of the preserved estates of
the Blimline Entities and the Shale Synergy Entities. Specifically, the Receiver proposes
$85,000 in compensation upon approval of this Motion to partially reimburse the costs incurred
by the McAluney Investor Group, and that the Court allow that application be made by the
members of the McAluney Investor Group for priority treatment with regard to the balance of the
fees and expenses actually incurred, provided, however, that such claims would be paid only up
to the amounts approved by the Court, and such claims would be paid only from one-third of the
funds distributed to Shale Synergy Investors out of the first $4 million funded into the Blimline
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 25
restitution account and twenty percent of the funds placed in the Blimline restitution account
over $4 million, and/or one-third of any recovery from the assets of the Shale Synergy Entities.
This proposal is intended to balance the equities concerned based upon the facts and law as
set forth above.
J2 Expense Claims
60. Prior to the dismissal of the J2 Bankruptcy Cases, the Receiver discussed the
appropriate forum for the resolution of the claims of the J2 Debtors' Counsel in the J2
Bankruptcy Cases, which would arguably have been administrative claims that could have been
addressed by Judge Hale. The J2 Debtors' Counsel agreed to compromise the claims, and to
present the compromised claims to this Court for consideration and review. The Receiver
agreed to seek the payment of expenses as a part of this Motion, and to present the fees
portion as a part of the Claims Process.
61. These claims have been numbered, J2-P0001 and J2-P0002, and
documentation thereof has been placed in files bearing those claim numbers.
62. Claim J2-P0001 is a claim asserted by the Curtis Law Firm. The expense portion
of the claim is $5,240.09. The majority of the expenses in question were for filing fees for the
bankruptcy cases ($3,367.00). The invoices are available in the Receiver's Claim
Documentation Room as defined above. The Receiver believes that the expenses were
reasonable and necessary, and recommends the approval of the expense portion of the claim.
The Receiver recommends that the fee portion of the claim be treated as a priority unsecured
claim of the former J2 Debtors, and handled pursuant to the proposed Claims Process.
63. Claim J2-P0002 is a claim asserted by Mastrogiovanni Schorsch & Mersky, P.C.
The expense portion is $153.88. The invoices are available in the Receiver's Claim
Documentation Room as defined above. The Receiver believes that the expenses were
reasonable and necessary, and recommends the approval of the expense portion of the claim.
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MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS – PAGE 26
The Receiver recommends that the fee portion of the claim be treated as a priority unsecured
claim of the former J2 Debtors, and handled pursuant to the proposed Claims Process.
V. CONCLUSION
64. The Receiver believes that the foregoing claims procedure and distribution plan
represents a fair and equitable allocation of claims, and submits that it is in the best interest of
all parties involved to resolve potential controversies in the fashion recommended herein. The
Receiver therefore prays that the Court enter an order substantially as submitted herewith.
Respectfully submitted,
Munsch Hardt Kopf & Harr, P.C. 3800 Lincoln Plaza 500 N. Akard Street Dallas, Texas 75201-6659 Telephone: (214) 740-5180 Facsimile: (214) 855-7584
/s/ James M. McGee_____ James M. McGee Bar No. 13613220
COUNSEL FOR RECEIVER
CERTIFICATE OF SERVICE
This is to certify that the undersigned caused a true and correct copy of the foregoing to be served on the following parties by electronic service for all parties requesting same on this 12th day of February, 2010.
/s/ James M. McGee____ James M. McGee
MHDocs 2455240_1 4856.8
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