IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION

Transcription

1 IN THE UNITED STATES BANKRUPTCY COURT FOR THE WESTERN DISTRICT OF TEXAS SAN ANTONIO DIVISION IN RE PRIMERA ENERGY, LLC Case No cag Debtor Chapter 11 FREDERICK PATEK, et al. Plaintiffs VS. Adversary No cag BRIAN K. ALFARO, PRIMERA ENERGY, LLC, ALFARO OIL AND GAS, LLC, ALFARO ENERGY, LLC, KING MINERALS, LLC, & SILVER STAR RESOURCES, LLC Defendants. PLAINTIFFS POST-TRIAL BRIEF IN SUPPORT OF JUDGMENT INTRODUCTION Even Mr. Alfaro agrees that a salesman must only make promises he intends to keep. There is no dispute that Primera and Mr. Alfaro made written promises to Plaintiffs in the PPMs, and that every time Mr. Alfaro sent a PPM to a potential investor he was making these promises. Trial Transcript ( Tr. ) 4/17/2017 at 11:4-22. Moreover, Mr. Alfaro conceded that it was perfectly reasonable for the investors to rely on these written promises. Tr. 4/17/2017 at 10: These promises include that Primera will use the investors contributions to drill the wells and put them in production (Preliminary Injunction Hearing Transcript ( PI Tr. ) 9/1/2015 at 250:13-251:2), and that Primera will not pay Mr. Alfaro or his salesmen transaction-based compensation on the sale of units to investors. Based on these promises, Primera and Mr. Alfaro raised tens of millions of dollars; yet, more than $7 million of vendor invoices were left unpaid. Where did all that money go? In perhaps the most compelling testimony in the trial, Primera s interim CPA Edgar Perez

2 revealed that in 2013 and 2014, Primera collected $18.6 million, and 29% of that money ($5,337,658) when directly into Mr. Alfaro s pocket. Tr. 4/13/2017 at 230:13-232:23. It is no secret that Mr. Alfaro has lived a rather lavish lifestyle complete with multi-million dollar estates and exotic sports cars. And of all the things Mr. Alfaro disputes, he wholly admits that in 2014, with the exception of $137,000, every unnecessary toy he purchased was paid for with investor money. Tr. 4/17/2017 at 39: The most frightening thing is that Mr. Alfaro continues calling potential investors every day making the same promises, and has already convinced people to give him another $5 million through his next venture, Silver Star Resources. If the Court accepts Mr. Alfaro s argument that this lawsuit is simply sour grapes by disgruntled investors after oil prices tanked, Mr. Alfaro will likely keep making those calls. In the end, Plaintiffs respectfully submit that this is not just an investment gone south; rather, this is flat-out fraud. That is, as described below, the evidence overwhelmingly establishes that Mr. Alfaro made promises to Plaintiffs that he never intended to keep. FACTUAL AND LEGAL ANALYSIS A. Plaintiffs Fraud Claims In order to state a claim for common law fraud in Texas, Plaintiffs must prove: (1) Defendants made a material representation that was false; (2) Defendants knew that the representation was false or made it recklessly as a positive assertion without any knowledge of its truth; (3) Defendants intended to induce Plaintiffs to act upon the representation; and (4) Plaintiffs actually and justifiably relied upon the representation and thereby suffered injury. Texas Architectural Aggregate, Inc. v. ACM-Texas, LLC (In re ACM-Texas, Inc.), 430 B.R. 371, 410 2

3 (Bankr. W.D. Tex. 2010) (citing Ernst & Young, LLP v. Pacific Mut. Life Ins. Co., 51 S.W.3d 573, 577 (Tex. 2001)). As an initial matter, Mr. Alfaro claims that Plaintiffs cannot pursue a fraud cause of action against him because the fraud is based on contractual agreements between the parties. However, a party commits fraud when it enters into a contract that it does not intend to perform. See, e.g., Tony Gullo Motors I, L.P. v. Chapa, 212 S.W.3d 299, (Tex. 2006); Oliver v. Rogers, 976 S.W.2d 792, 805 (Tex. App. Houston [1st Dist.] 1998, no pet.) ( [W]hen one party enters into a contract with no intention of performing, that misrepresentation may give rise to a cause of action in fraud. ). A contractual promise made with no intention of performing may give rise to an action for fraudulent inducement. Tony Gullo, 212 S.W.3d at 304 (citing Formosa Plastics Corp. USA v. Presidio Eng rs and Contractors, Inc., 960 S.W.2d 41, 46 (Tex. 1998). The duty not to fraudulently procure a contract arises from the general obligations of law rather than the contract itself, and may be asserted in tort even if the only damages are economic. Id. (emphasis added). [T]he liability of the defendant on the contract does not absolve it from liability in tort damages too. Id. In Tony Gullo, the plaintiff alleged not only that the car dealer failed to deliver the promised car, but that the dealer never even intended to do so. Id. Here, Plaintiffs have demonstrated not only that Alfaro failed to comply with the PPMs, but that he never intended to do so. Therefore, Plaintiffs may seek fraud and fraudulent inducements claims against Alfaro, and they are not limited to breach of contract claims. Defendants made several false representations to induce Plaintiffs to invest. Defendants represented (1) that they would use investor funds for well drilling and completion as allocated in the PPMs, i.e. that investor funds would compensate vendors for the tasks delineated in such allocations; (2) that they would keep no more than 4% of investor funds as a management fee; and 3

4 (3) that they would not pay commissions to salesmen who procured investor funds. Because Defendants knew that all of these representations were false and intended that Plaintiffs act on the false representations, Defendants are liable for Plaintiffs justifiable reliance on the misrepresentations. 1. Use of Investor Funds for Well Drilling and Completion Defendants presented Plaintiffs with clearly defined allocations of investor funds in the PPMs. See, e.g., Defendants Exhibit 105 Screaming Eagle 2H Marketing Materials ( D. Ex. 105 ) at ALFARO Mr. Alfaro agrees that Defendants made promises in the PPMs regarding how they would use investor money; every time Mr. Alfaro sent out a PPM, he represented to a potential investor that her money would be applied according to the Application of Proceeds charts. Trial Transcript ( Tr. ) 4/17/2017 at 12:11-16, 14:8-11. Defendants asserted: Proceeds received from the offer and sale of all Units will be deposited into a segregated bank account in the name of the Program. All payments for Drilling and Testing Costs and Completion and Equipping Costs shall be paid from the segregated account. Id. (emphasis added). Indeed, Plaintiffs understood, and Mr. Alfaro and his salesmen assured Plaintiffs, that their money would go to the payment of vendors on time and as delineated in the PPMs. 1 Mr. Alfaro himself agrees that the communicated use of investor funds was to drill the well, to provide for the well, and to pay the vendors who worked on the well. Preliminary Injunction Hearing Transcript ( PI Tr. ) 9/1/2015 at 250:13-251:2. 1 See Tr. 4/10/2017 at 51:17-21 (Mr. Alfaro assured Mr. Peters); 4/10/2017 at 89:12-23 (Mr. Alfaro assured Mr. Collins); 4/10/2017 at 169:1-4 (Mr. Salmon s understanding); 4/10/2017 at 182:23-183:3 (Mr. Crawford s understanding); 4/10/2017 at 192:5-7 (Mr. Daniel Davalos understanding); 4/10/2017 at 199:10-12, 201:22-202:1 (Mr. David Davalos understanding); 4/10/2017 at 223:17-24 (Mr. J. Reiley s understanding); 4/11/17 at 14:8-11 (Mr. Rodriguez and Mr. Alfaro assured Mr. R. Reiley); 4/11/2017 at 96:14-17 (Mrs. Reiley s understanding); 4/12/2017 at 102:3-10 (Mr. Huber s understanding); 4/12/2017 at 174:11-18 (Mrs. Walls understanding); 4/12/2017 at 236:20-25 (Mr. Griffey s understanding); 4/12/2017 at 263:21-25 (Mrs. M. Gillette s understanding); and 4/13/2017 at 11:17-12:3 (Mr. Alfaro assured Mr. E. Gillette). 4

5 But Defendants never intended to uphold their promise to pay vendors and use investor funds as described in the PPMs. Defendants displayed their fraudulent intent by consistently paying exorbitant owner draws to Mr. Alfaro while remaining severely delinquent on vendor invoices. For example, Mr. Crawford invested in the Screaming Eagle 3H well on September 4, D. Ex. 14 at ALFARO On that date, Defendants promised, via the PPM, to use Mr. Crawford s funds as prescribed in the PPM and to pay vendors. Plaintiff Trial Exhibit 75 Screaming Eagle 3H Marketing Materials ( P. Ex. 75 ) at PLAINTIFF Defendants had no intention of upholding that promise; Defendants had, for months before then, maintained millions of dollars in unpaid vendor invoices on the Screaming Eagle 1H and 2H wells. See D. Ex. 115 Daily Cash Balance s. Defendants further confirmed their fraudulent intent by maintaining and failing to pay millions of dollars of vendor debt on the Screaming 3H well after Mr. Crawford s subscription. Id. And at the same time, Mr. Alfaro continued to take thousands of dollars in draws almost daily. P. Ex. 131 Summary of Alfaro Draws. The testimony elicited and the exhibits admitted at trial and at the preliminary injunction hearing offer further staggering support for Plaintiffs fraud cause of action. Mr. Alfaro agrees that the investors gave him millions and millions of dollars to pay for the costs associated with drilling the wells, and yet he didn t pay the vendors who drilled the wells. Tr. 4/17/2017 at 79: Ms. Blair testified that she received calls daily from vendors seeking payment of invoices, 2 yet Mr. Alfaro continued to take hundreds of thousands of dollars in draws in mere months. Tr. 4/13/2017 at 20:22-21:2; 77:4-21. At the preliminary injunction hearing, Mr. Seger testified to the 2 Defendants assertion that these invoices may be in dispute is belied by their filings with this Court at Docket No. 57, Summary of Schedules at Schedule F, which lists the vendor claims as undisputed. Indeed, Mr. Perez, Primera s certified public accountant at the time of the bankruptcy filing, testified: it s kind of black-and-white, [Primera] got goods and [Primera] got services, [Primera] incurred liability, [Primera] need[s] to pay it. Tr. 4/13/2017 at 186:8-10. Primera made no attempt to amend the schedule to mark any over the vendor claims as disputed. Tr. 4/13/2017 at 199:3-9. 5

6 three liens filed on his property, leased by Primera, for Primera s failure to pay water hauling vendors or reimburse Mr. Seger for his payment of those vendors. PI Tr. 9/1/2015 at 41:3-42:24, 47:16-48:14. In fact, Primera charged investors $4,500 for the lease of Mr. Seger s property but never paid Mr. Seger. PI Tr. 9/1/2015 at 229:20-236:14. Likewise, on the Screaming Eagle 4H well, Primera charged investors to bring additional electricity to the well, but never installed the electricity. PI Tr. 9/1/2015 at 220:19-221:21. Further, the cost of the casing and collar failure on the Screaming Eagle 3H was estimated at $1 million, but Alfaro charged the investors $2.3 million. PI Tr. 8/28/2015 at 169:3-25. Mr. Davis saw numerous unpaid vendor invoices with Primera, warned Defendants of the Screaming Eagle 3H shut-in that eventually occurred due to their failure to pay vendor invoices, and stopped working with Primera and Mr. Alfaro in any capacity due to their failure to pay vendor invoices. PI Tr. 118:1-119:1, 135:12-19; P. Ex. 27 at PLAINTIFF Such promises to pay vendor invoices and to use investor funds for well development induced Plaintiffs investments, i.e. Plaintiffs relinquishment of their hard-earned money, in reliance on those promises. 3 Mr. Alfaro knew that investors and potential investors would rely on the information in the PPM when deciding to invest. Tr. 4/17/2017 at 10:8-12. Such investment only bought Plaintiffs working interests in wells that would never reach their production potential or production, at all due to Defendants conversion of investor funds. Compellingly, Mr. Perez testified that he would not have taken over $200,000 in owner draws from a company 3 See Tr. 4/10/2017 at 95:41-21, 224:21-225:11, 4/11/2017 at 17:2-17, 20:17-21, 97:11-15, 157:5-14, 178:3-18, 179:5-11, 180:5-181:15, 4/12/2017 at 103:25-104:8, 175:17-24, 177:7-13, 237:1-5, 238:1-19, 264:1-4, 283:7-18, 4/13/2017 at 12:13-16, (Plaintiffs found it important to know where their money was going and relied on the PPM representations regarding the same); 4/10/2017 at 59:15-25, 62:3-8, 140:23-141:1, 230:9-17, 192:15-18, 4/11/2017 at 98:4-17, 126:25-127:15, (Plaintiffs would not have invested had they known vendors would not be paid) 6

7 that owed millions to vendors because it wouldn t be good for the company, stating specifically that he wouldn t be able to sleep at night if he d done that. Tr. 4/13/2017 at 221:3-222:5. 2. Management Fees Defendants second promise takes the form of the management fee allocation described in the PPMs. The PPMs allocated between 2.7 and 4% of investor funds to management fees. See D. Ex. 107 Screaming Eagle 4H Marketing Materials at ALFARO (management fee of 2.7%); D. Ex. 105 Screaming Eagle 2H Marketing Materials at ALFARO (management fee of 4%). Indeed, the PPMs also note that [t]his figure represents a fixed fee to be paid to the Company for its sponsorship, management and supervision of the Program and its efforts on behalf of Participants during Operations... Expenses related to the offer and sale of Units, including printing costs, accounting costs, and legal costs, will be borne by the Company. See, e.g., P. Ex. 75 Screaming Eagle 3H Marketing Materials at PLAINTIFF The PPMs do not state that Mr. Alfaro may claim investor funds for his own personal use. Tr. 4/11/2017 at 70:1-6, 98:8-13. Defendants had no intention of upholding this promise either. As an example, on March 28, 2014, the daily cash balance shows accounts receivable on the Screaming Eagle 3H and 4H wells Less: 25% Fees. D. Ex. 115 Daily Cash Balance s at ALFARO So, when Plaintiff David Davalos invested in the Screaming Eagle 4H well on April 15, 2014, Primera already knew it would be deducting 25% in fees instead of the 2.7% allocated in the Screaming Eagle 4H PPM. D. Ex. 16 at ALFARO ; D. Ex. 107 Screaming Eagle 4H Marketing Materials at ALFARO Indeed, the 25% fee deduction continued to appear on daily cash balance s until May 28, 2014 when it increased to 30%. D. Ex. 115 Daily Cash Balance s at ALFARO

8 Mr. Perkins observed management fees even in excess of this amount. Total investor contributions for the 3H Well were $10.5 million. PI Tr. 8/28/2015 at 78:9-16. $3.1 million of the $10.5 million in investor contributions for 3H were paid to Primera as management fees. PI Tr. 8/28/2015 at 78: On the 3H well, 30.1% of the investor contributions were management fees. 8/28/2015 at 79: Total investor contributions for the 4H well was $9,698,238. PI Tr. 8/28/2015 at 80:23-81:1. Primera was paid $6,304,608 in management fees of the $9.6 million for the 4H well, which is 65% management fees. PI Tr. 8/28/2015 at 81:4-11. Despite the fact that roughly 97% of funds should have gone to vendors, an excessive portion of investor funds went directly to Mr. Alfaro. For the two-year period ending December 31, 2014, Mr. Alfaro received $3,257,158 in owner draws. PI Tr. 8/28/2015 at 88:6-12. Between 90 and 100 percent of the revenue during 2014 and 2015 for Primera came from investor contributions, and Mr. Alfaro bought his Porsche in 2015, during a time when 100 percent of the revenue Primera received was from investor contributions. Tr. 4/17/2017 at 39:8-25. With the exception of $137,000, everything that Mr. Alfaro purchased in 2014 came from investor contributions. Tr. 4/17/2017; 41: Mr. Alfaro s salary in 2013 was $880,000. Tr. 4/17/2017; 69: Mr. Alfaro s salary in 2014 was $1.2 million. Tr. 4/17/2017 at 69: Including his salaries, Mr. Alfaro was personally compensated $5,337,658 between January 2013 and December 2014, which was 29% of the money raised from investors in 2013 and 2014, Tr. 4/13/2017 at 231:8-232:23, all while the wells owed millions to vendors. Many Plaintiff investments occurred during 2013 and 2014, making it clear that Defendants had no intention of complying with the management fee allocation promised in the PPMs during that time. 8

9 3. Fraud Based on Transaction-Based Income Mr. Alfaro acknowledged that a salesman must only make promises he intends to keep. Tr. 4/17/2017 at 9: Mr. Alfaro testified that Primera made promises in the PPMs. Tr. 4/17/2017 at 11:1-3. Mr. Alfaro also conceded that it was perfectly reasonable for the investors to rely on the information in the PPM. Tr. 4/17/2017 at 10: Among the promises that Primera and Mr. Alfaro made in the PPM was that, the company will sell all units through its officers and its employees, who will not receive transaction-based compensation for the sale of units. Tr. 4/17/2017 at 11:4-18; D. Ex. 105 Se2H Marketing Materials, ALFARO 7525; D. Ex. 107 SE4H Marketing Materials, ALFARO 7710; P. Ex SE3H PPM, PLAINTIFF ; P. Ex. 77 SE6H, PLAINTIFF ). Indeed, Mr. Alfaro agrees that every time he sent out a PPM to a potential investor and signed a subscription agreement, he was making the promise that he will not pay himself or his employees transaction-based compensation for the sale of those units. Tr. 4/17/2017 at 11:13-12:1. Aside from the promise concerning no transaction-based compensation in the PPMs, Mr. Alfaro repeatedly assured investors (including Plaintiffs) that he would not take commissions off their investment. For example, Mr. Alfaro expressly told Plaintiff Vincent Gillette in a conference attended by Mr. Alfaro, Primera s engineer, lawyer, and accountant that no one would be taking commissions on the transaction. Tr. 4/11/17 at 179:12-23; Tr. 4/12/2017 at 29:14-30:18. Plaintiff Sharon Walls similarly understood based upon her review of the PPM and the meeting with Mr. Alfaro that Mr. Alfaro and his salesmen would not take commissions on her investment. Tr. 4/12/2017 at 175: Primera s agents made the same representation to Mr. David Davalos. Tr. 4/10/2017 at 202:2-7. Moreover, no one ever told the investors that Mr. Alfaro and Primera intended to deviate from the promises in the PPM by paying themselves transaction-based income. 9

10 PI Tr. 8/28/2015 at 118:3-5 (Mr. Hinajosa Testimony); Tr. 4/12/2017 at 237:13-238:3 (Mr. Griffey Testimony). Importantly, as Mr. Alfaro expected, Plaintiffs testified that they read the PPMs and relied on the promises stated therein, including the promise that Mr. Alfaro would not pay himself or others transaction-based income. Indeed, Plaintiffs testified that had they known that Mr. Alfaro did not intend on spending their investment as stated in the PPM or that Mr. Alfaro intended on paying transaction-based compensation, they would not have invested: Mr. Reiley read the PPM before sending in his money, and it was very important for Mr. Reiley to know where his investment money was going, and he relied the representations regarding where his money was going when deciding to invest. (Tr. 4/11/17 at 17:2-17; 40:6-9, 46:18-47:4; 97:21-24); If Mrs. Reiley had known ahead of time that Mr. Alfaro was going to take a ten percent cut off the top of her investment, she would not have invested. (Tr. 4/11/17 at 97:25-98:3; 122:10-15; 126:14-19); Mr. Janzen would not have invested if he had known that Mr. Alfaro could take Mr. Janzen s investment and use it however Mr. Alfaro wanted without using it on the costs to drill the well. (Tr. 4/11/17 at 157:15-24); Mr. Vincent Gillette relied on the PPMs representations regarding how the investment money would be spent when deciding to invest. (Tr. 4/11/17 at 178:3-18). If Mr. Vincent Gillette had known that his investment money was going to be spent in a way other than outlined in the PPM, Mr. Vincent Gillette would not have invested. (Tr. 4/11/17 at 179:5-11). Mr. Vincent Gillette would not have invested with Primera or Mr. Alfaro had he known that Mr. Alfaro was going to take money for himself from the investment before even beginning to pay the well expenses. (Tr. 4/11/17 at 180:5-181:15). When deciding to invest, Mr. Vincent Gillette relied on the fact that Primera and Mr. Alfaro would not deduct from distributions for expenses unenumerated in the PPM. (Tr. 4/11/17 at 230:6-13) Had Mr. Huber known his investment was going to pay anything other than the expenses on the wells in which he invested, he would not have invested. (4/12/2017; 103:25-104:4). Mr. Huber relied on the fact that his money would be used to drill, complete, and test the wells he invested in when deciding to invest. (Tr. 4/12/2017 at 104:5-8). Mrs. Walls would not have invested had she known that her money was not going to be used as explained in the PPM. (Tr. 4/12/2017 at 175:17-24, 177:7-13). Mrs. Walls would not have invested had she known that Mr. Alfaro and his salesmen were going to take a 10% commission on her investment. (Tr. 4/12/2017 at 175:25-176:7) 10

11 Mr. Griffey would not have invested had he known that the money he invested would be used for purposes other than the drilling of the Screaming Eagle 4H and 6H wells. (Tr. 4/12/2017 at 237:1-5). Mr. Griffey relied on the statements in the PPM regarding the use of his investment and the fact that salesmen would not take commissions when investing; he most likely would not have invested had he known that those statements would be violated. (Tr. 4/12/2017 at 238:1-19) Had Mrs. Margie Gillette known that her money was not going to be used to drill the wells as described in the PPM, she never would have invested. (Tr. 4/12/2017at 264:1-4). Had Mrs. Gillette known that Mr. Alfaro and his sales people were going to take transactionbased income, she would not have invested. (Tr. 4/12/2017 at 264:10-14) Mr. Tom Gillette would not have invested had he known that his money would spent elsewhere, on wells other than intended with his investment. (Tr. 4/12/2017 at 283:7-18). Had Mr. Tom Gillette known that Mr. Alfaro and his salesmen were going to take transaction-based compensation, it would have affected his decision to invest and he would not have invested. (Tr. 4/12/2017 at 297:12-16, 321:1-4) Mr. Edward Gillette would not have invested had he known that Mr. Alfaro and his salesmen were going to take commissions on his investment. (Tr. 4/13/2017 at 12:9-12). Mr. Edward Gillette would not have invested had he known that his investment would not be spend as the money is allocated in the PPM. (Tr. 4/13/2017 at 12:13-16). Whether Mr. Alfaro and his salesman were going to take commissions out of his investment would have affected Mr. Peters s decision to invest. (Tr. 4/10/2017 at 55:17-25). Had Mr. Peters known that Mr. Alfaro and his salesmen were going to take commissions, he would not have invested in the wells. (Tr. 4/10/2017 at 56:1-2; 61:25-62:2). If Mr. Peters had known that his investments would go to pay Mr. Alfaro s personal affairs as opposed to paying the vendors that drilled the wells, he absolutely would not have invested. (Tr. 4/10/2017 at 59:15-25). Mr. Collins always reads the documents before making a major investment such as in oil and gas wells. (Tr. 4/10/2017 at 105:17-21). Mr. Collins would have read the investment documents before he sent in his money. (Tr. 4/10/2017 at 105:22-24). Mr. Collins read the 4H and 6H documents before sending in his money. (Tr. 4/10/2017 at 105:22 106:17). Mr. Collins would not have invested if he had known that Mr. Alfaro or his salespeople were going to take commissions. (Tr. 4/10/2017 at 95:22 96:3) Mr. David Davalos probably would not have invested had he known that Mr. Alfaro and his salesmen would be taking 10 of his investment off the top. (Tr. 4/10/2017 at 203:22-25). If Mr. Alfaro had told Mr. Quackenbush that he was going to receive 10% commissions, he would not have invested. (Tr. 6/1/2015 at 56:15-25) 11

12 Contrary to the promise made by Primera and Mr. Alfaro, the evidence confirms that Mr. Alfaro paid himself and others transaction-based compensation on the sale of units to investors. First, former Primera salesmen Cody Reyes testified that before he accepted the position, Mr. Alfaro explained that he would get a $3,000 draw per month, and then there was commissions for any sale that we did, which we didn t call them commissions, they called a bonus. And that consisted of a ten percent. So, if you sold one unit of the Eagle shale, whatever it was called at the time, it was a hundred thousand dollars, you d get a ten grand commission. PI Tr. 9/1/2015 at 181:17 182:3. The 10% commission described by Mr. Reyes is corroborated by both documentary evidence and witness testimony. For example, on May 13, 2015, Primera accounting employee Megan Blair sent Mr. Alfaro an regarding amounts paid and owed to Brian Alfaro, which included a spreadsheet showing 10% bonuses based on investor contributions. P. Ex. 37-1, PLAINTIFF , When questioned about this alleged bonus, Ms. Blair explained that Mr. Alfaro paid his salesmen commissions based on what they sold. Tr. 4/13/2017 at 61:25-62:16). When asked about her use of the word commission, Ms. Blair conceded that s the only way I can refer to it. Tr. 4/13/2017 at 62:3-11). In addition, Plaintiff Exhibit 41N (Plaintiff ) is a spreadsheet calculating Primera salesman Justin Rodriguez s compensation based on 10% of the sales he generated for Primera. Plaintiff Exhibit 132 provides a summary of hundreds of examples where Mr. Alfaro received 10% or nearly 10% of investor contributions that he generated for Primera. PI Tr. 8/28/2015 at 83:9-15; 154:15-23; 154:24-155:3; 158: For example, on 12/27/2013, Mr. Apel paid $197,220, and on that same day, Alfaro took a draw of $19,722. PI Tr. 9/1/2015 at 137: Similarly, on another occasion, an investor paid $202,332 and Mr. Alfaro took a draw of $20,200. (PI Tr. 9/15/2015 at 152:1-22). Based on this evidence, even Mr. Alfaro s own expert, 12

13 Michael Turner, testified that there was evidence of transaction-based compensation. PI Tr. 9/15/2015 at 152:1-22; 174:10-177:8). In summary, the evidence is undisputed that Primera and Mr. Alfaro promised that Mr. Alfaro and other salesmen would not receive transaction-based compensation based on investor contributions, and that it was reasonable for the Plaintiffs to rely on this promise. The evidence also demonstrates that Mr. Alfaro never intended to keep this promise, and as a result, defrauded Plaintiffs. 4. Fraudulent Inducement A fraudulent inducement claim is essentially a special type of fraud claim. See In re Merit Bank, N.A., 52 S.W.3d 749, 758 (Tex. 2001) (listing elements which are identical to a normal fraud claim). The distinction in a fraudulent inducement claim is the requirement of existence of a contract or binding agreement of the parties. Haase v. Glazner, 62 S.W.3d 795, 798 (Tex. 2001). Here, the contract or binding agreement at issue is the subscription agreement or PPM. See D. Ex Plaintiffs Execution Documents. Because Plaintiffs fraud claim is supported by the evidence, Plaintiffs prevail on their claim for fraudulent inducement as well. 5. Alfaro Can Be Held Individually Liable for Fraud Because He Personally Participated in the Fraudulent Activity. Alfaro is individually liable for the fraudulent acts of his company. A corporate officer who knowingly participates in tortious or fraudulent acts may be held individually liable to third persons even though he performed the act as an agent of the corporation. Walker v. Anderson, 232 S.W.3d 899, 918 (Tex. App. Dallas 2007, no pet.); Glattly v. CMS Viron Corp., 177 S.W.3d 438, 448 (Tex. App. Houston [1st Dist.] 2005, no pet.). The issue of a defendant s liability in his individual capacity is distinct from that of his liability under an alter ego theory. A corporation s agent is personally liable for his own fraudulent or tortious acts, even when acting within the course 13

14 and scope of his employment. Sanchez v. Mulvaney, 274 S.W.3d 708, 712 (Tex. App. San Antonio 2008) (citations omitted). In an action seeking to hold an agent individually liable for his tortious or fraudulent acts, plaintiffs need not pierce the corporate veil. Id.; see also Kingston v. Helm, 82 S.W.3d 755, 759 (Tex. App. Corpus Christi 2002). In Nwokedi v. Unlimited Restoration Specialists, Inc., 428 S.W.3d 191, 201 (Tex. App. Houston [1st Dist.] 2014), the court concluded that a corporate officer could be individually liable for fraud because he knowingly participated in the company s fraudulent activity. The officer participated in contract negotiations, informed his employees which contractual terms to modify, and gave personal assurances to the plaintiffs that they would receive their money under the contract. Id. at The court concluded that the evidence against the officer was sufficient to hold him personally liable for fraud. Similarly, in Curocom Energy LLC v. Eem, 2016 Tex. App. LEXIS 8419 (Tex. App. Houston [1st Dist.] Aug. 4, 2016), the court held there was sufficient evidence to hold an individual liable for fraud when he had important information regarding the valuation of a purchase but did not disclose it. Because there is ample evidence of Alfaro actively and knowingly participating in his companies fraud against Plaintiffs, Alfaro is individually liable for that fraud. B. Plaintiffs Texas Uniform Fraudulent Transfer Act Claims The Texas Uniform Fraudulent Transfer Act ( TUFTA ), Tex. Bus. & Comm. Code et seq., is intended to prevent debtors from prejudicing creditors by improperly moving assets beyond their reach. Janvey v. Golf Channel, Inc., 487 S.W.3d 560, 566 (Tex. 2016) (citing KCM Fin. LLC v. Bradshaw, 457 S.W.3d 70, 89 (Tex. 2015) ( [TUFTA] is designed to protect creditors from being defrauded or left without recourse due to the actions of unscrupulous debtors. )). The Texas Supreme recently stated that [u]nder TUFTA, a 14

15 transfer made with actual or constructive intent to defraud any creditor may be avoided to the extent necessary to satisfy the creditor s claims: (a) A transfer made or obligation incurred by a debtor is fraudulent as to a creditor... if the debtor made the transfer or incurred the obligation: (1) with actual intent to hinder, delay, or defraud any creditor of the debtor; or (2) without receiving a reasonably equivalent value in exchange for the transfer or obligation, and the debtor: (A) was engaged or was about to engage in a business transaction for which the remaining assets of the debtor were unreasonably small in relation to the business or transaction; or (B) intended to incur, or believed or reasonably should have believed that the debtor would incur, debts beyond the debtor s ability to pay as they became due. Golf Channel, 487 S.W.3d at 566 (quoting Tex. Bus. & Comm. Code (a)); accord id (a) (transfer is fraudulent as to present creditor if debtor is insolvent or made insolvent by a transfer and debtor did not receive reasonably equivalent value); see also id (creditor remedies for fraudulent transfer)). TUFTA section (b) sets out a non-exclusive list of badges of fraud to be considered in determining whether a transfer was made with actual intent to defraud. Walker, 232 S.W.3d at 914; G.M. Houser, 204 S.W.3d at 842. They include: (1) the transfer or obligation was to an insider; (2) the debtor retained possession or control of the property transferred after the transfer; (3) the transfer or obligation was concealed; (4) before the transfer was made or obligation was incurred, the debtor had been sued or threatened with suit; (5) the transfer was of substantially all the debtor's assets; (6) the debtor absconded; 15

16 (7) the debtor removed or concealed assets; (8) the value of the consideration received by the debtor was reasonably equivalent to the value of the asset transferred or the amount of the obligation incurred; (9) the debtor was insolvent or became insolvent shortly after the transfer was made or the obligation was incurred; (10) the transfer occurred shortly before or shortly after a substantial debt was incurred; and (11) the debtor transferred the essential assets of the business to a lienor who transferred the assets to an insider of the debtor. Id. Mr. Alfaro has argued that Plaintiffs may not pursue a TUFTA claim in this case because the debt is future or contingent in other words, according to Mr. Alfaro, a plaintiff cannot sue for fraudulent transfer of assets unless a judgment has already been rendered against him. Tr. 4/18/17 at 113:6-8. This argument runs counter to the very text of the statute, which defines debt as liability on a claim and claim as a right to payment or property, whether or not the right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured. Tex. Bus. & Com. Code (3), (5) (emphasis added). Plaintiffs need not obtain a judgment or prove a fixed right before bringing and proving a claim under TUFTA, and Mr. Alfaro s argument to the contrary has no basis in law. Plaintiffs have satisfied their burden of prevailing on their TUFTA claims. The evidence establishes that Mr. Alfaro has transferred funds rightfully belonging to Plaintiffs to his own accounts, to his companies, and to the Kristi and Brian Alfaro Trust (the Trust ) to obfuscate their existence and place them out of reach, with an intent to delay payment of those funds indefinitely. 16

17 For example, Mr. Alfaro and his wife created the Trust to protect their personal assets against frivolous lawsuits. PI Tr. 8/28/2015 at 59:1-3; Tr. 4/17/2017 at 196: After creating this trust, Mr. Alfaro has repeatedly used it as a method of making it more difficult for disgruntled investors like Plaintiffs to recover his personal assets. For example, Mr. Alfaro transferred his beach home on Mustang Island which is worth approximately $926,000 to the Trust. PI Tr. 8/28/2015 at 35:14-36:12. Mrs. Alfaro explained that the beach house is where we spend our summers, and I want my children to have it with their children. PI Tr. 8/28/2015 at 59: Moreover, beginning in March 2016 (after Plaintiffs filed this lawsuit), Mr. Alfaro started paying his salary and compensation into the Trust. Tr. 4/17/2017 at 198:21-24; 199:23-200:2. Previously, Mr. Alfaro had paid his salary and owner draws into a private bank account. PI Tr. 9/1/2015 at 115:14-17; Tr. 4/17/2017 at 198:25-199:4. However, without any explanation other than that the Trust bank account was one of his oldest accounts, Mr. Alfaro has transferred at least $732,200 into the Trust since Plaintiffs filed this lawsuit against him individually. Tr. 4/17/2017 at 200:3-25; P. Ex Although Mr. Alfaro denies that this maneuver was intended to make it more difficult for Plaintiffs to recover his personal assets, he provided no evidence adequately explaining why after being sued by Plaintiffs he changed his practice of paying his compensation into a personal bank account. In addition to transferring more than $700,000 in compensation into the Trust without explanation, the evidence also establishes that after Plaintiffs filed this lawsuit against Mr. Alfaro, he has withdrawn hundreds of thousands of dollars from financial institutions without adequate explanation of how and where those funds were expended. P. Ex For example, on December 15, 2015, Mr. Alfaro withdrew $100,000 from his Silver Star account. P. Ex. 134; Tr. 4/17/2017 at 203:3-206:3. Mr. Alfaro explained that he believed he used those funds to buy acreage, but was 17

18 far from certain: But so far as withdrawing it and putting it in my pocket, no. I don t think that happened. Tr. 4/17/2017 at 204:5-13. Similarly, on December 23, 2015, Mr. Alfaro withdrew $266,000 from his Wells Fargo account. P. Ex. 134; Tr. 4/17/2017 at 206:8-10. Mr. Alfaro attempted to explain that he had to withdraw these funds so they could be deposited into an unidentified person s account at the same bank to buy land. Tr. 4/17/2017 at 206:14-207:25. However, Mr. Alfaro explained that a wire transfer could not have been used to complete this transaction at Wells Fargo because BBVA (another bank he uses) does not like wires. Tr. 4/17/2017 at 208:1-16. In the end, Mr. Alfaro conceded that because there are no records documenting this unusual transaction, the Court will just have to take his word that he in fact used the money as he says he did. Tr. 4/17/2017 at 208: Finally, in addition to transferring his compensation to the Trust and withdrawing hundreds of thousands of dollars without adequate explanation, Mr. Alfaro has also used out-of-state legal entities to make it more difficult for investors to recover his personal assets. For example, the evidence establishes that Mr. Alfaro is the sole owner of Defendant 430 Assets, LLC, which was formed in Montana. PI Tr. 9/2/2015 at 21:9-23:12. Mr. Alfaro testified that 430 Assets, LLC owns his $400,000 Lamborghini. PI Tr. 9/2/2015 at 22:5-12. As described above, the evidence demonstrates that Mr. Alfaro transferred substantial assets into the Trust and 430 Assets, LLC, and withdrew substantial sums of cash with the intent to hinder and delay Plaintiffs from recovering his personal assets in this lawsuit. These funds were transferred to the Trust and 430 Assets without receiving reasonably equivalent value with the intent that if Plaintiffs prevail in this action, Mr. Alfaro will be left with insufficient assets to cover the judgment. Based on this evidence, Plaintiffs have satisfied their burden under their TUFTA claims, and are entitled to recover assets to satisfy the judgment from the Trust, 430 Assets, LLC, 18

19 and any assets Mr. Alfaro purchased with the cash he withdrew on December 14, 2015 and December 23, C. Plaintiffs Fraud in a Real Estate Transaction Claims Texas Business and Commerce Code 27.01(a) provides the elements for statutory fraud in a real estate transaction and stock transaction. It states: a. Fraud in a transaction involving real estate or stock in a corporation or joint stock company consists of a i. false representation of a past or existing material fact, when the false representation is 1. made to a person for the purpose of inducing that person to enter into a contract; and 2. relied on by that person in entering into that contract; or ii. false promise to do an act, when the false promise is 1. material; 2. made with the intention of not fulfilling it; 3. made to a person for the purpose of inducing that person to enter into a contract; and 4. relied on by that person in entering into that contract. Tex. Bus. & Comm. Code 27.01(a). For fraud in a transaction to be actionable under 27.01, the contract must actually effect the conveyance of real estate between the parties and cannot merely be tangentially related or a means of facilitating a conveyance of real estate. Fidelity Nat. Title Ins. Co. v. Doubletree Partners, L.P., 866 F. Supp. 2d 604, 632 (E.D. Tex. 2011) (quoting Windsor Village, Ltd. v. Stewart Title Ins. Co., 2011 WL 61848, at *5 (Tex. App. Houston [14th Dist.] March 17, 2011, no pet.)). Under Texas law, a conveyance of a working interest in oil and gas is a real property interest that subject the agreement conveying the interest to the statute of frauds. Exxon Corp. v. Breezevale, Ltd., 82 S.W.3d 429, 436 (Tex. App. Dallas 2002, pet. denied) (citations omitted). Because Plaintiffs purchased working interests, i.e. real estate, with their investments, they qualify for the protection of the fraud in real estate statute. See, e.g., P. Ex. 77--SE6H Marketing 19

20 Materials at PLAINTIFF ( Primera Energy LLC (the Company ) is offering up to 100 units of 1% Working Interest (the Units ) in the Screaming Eagle 6H Prospect, located in Gonzales County, Texas. ) As outlined in the fraud section, supra, Defendants perpetrated a fraud and deprived Plaintiffs of their money in a real estate transaction. Plaintiffs thus prevail on their claim of fraud in a real estate transaction. D. Plaintiffs Deceptive Trade Practice Act Claims The DTPA provides that the definition of a consumer is: an individual, partnership, corporation, this state, or a subdivision or agency of this state who seeks or acquires by purchase or lease, any goods or services, except that the term does not include a business consumer that has assets of $25 million or more, or that is owned or controlled by a corporation or entity with assets of $25 million or more. Tex. Bus. & Comm. Code 17.45(4). Goods is defined by the DTPA as tangible chattels or real property purchased or leased for use. Tex. Bus. & Comm. Code 17.45(1). Services is defined under the DTPA as work, labor, or service purchased or leased for use, including services furnished in connection with the sale or repair of goods. Tex. Bus. & Comm. Code 17.45(2). Plaintiffs are consumers under the DTPA. Many Plaintiffs testified that their investments were personal. Tr. 4/10/2017 at 52:24 53:2, 137:23 138:1, 181:1-4, 197:18-20, 219:23 220:1; Tr. 4/11/17 at 11:1-7, 90:18-25, 158:4-24, 248:2-5; Tr. 4/12/2017 at 105:11-13, 176:8-12, 218:7-10; Tr. 4/13/2017 at 15:2-3). However, this testimony was not necessary under the law. It is Defendants burden to plead and prove the applicability of $25,000,000 exception to business consumer status as an affirmative defense. Eckman v. Centennial Sav. Bank, 784 S.W.2d 672, (Tex. 1990). Requiring the defendant to plead and prove the $25,000,000 exception as an affirmative defense is consistent with the statutory mandate to provide efficient and economical procedures to protect consumers. Adopting this procedure best serves the interests of judicial efficiency and economy. Id. at 675. Defendants failed to do so and the record is absent 20

21 of any evidence indicating any of the Plaintiffs were business consumer(s) with assets of $25 million or more, or that is owned or controlled by a corporation or entity with assets of $25 million or more. Tex. Bus. & Comm. Code 17.45(4). Moreover, Plaintiffs purchased goods with the purchase of working interests in the wells. A working interest is considered in Texas to be real property. Texas courts have consistently treated all of the various types of royalty and non-operating interests -- including the lessor s royalty in an oil and gas lease, non-participating royalties (royalty carved out of the mineral owner s estate), overriding royalties and production payments -- as the same kind of legal interest, and as constituting interests in real property. Sheffield v. Hogg, 124 Tex. 290, 77 S.W.2d 1021 (1934); see also USE OF NET PROFITS INTERESTS IN FINANCING OIL AND GAS TRANSACTIONS, 34th Annual Ernest E. Smith Oil, Gas & Mineral Law Institute, Michael Pearson at p. 3. Under Texas law, oil and gas can be owned in place - that is, while they still rest within the geological strata underlying the land in question and prior to their production and consequent reduction to physical possession. Texas Co. v. Daugherty, 107 Tex. 226, 176 S.W. 717, 719 (1915). Any interest in the mineral estate, or payment issuing therefrom, is land. Cockburn v. Mercantile Petroleum, Inc. 296 S.W.2d 316 (Tex. App. Dallas 1956). [T]he lessor owning... the right to a portion of the proceeds or profits derived from the lessee s... sale of the minerals... have and own... [an] interest in land. Sheffield, 124 Tex Under the Tax Code, an estate or interest in oil, gas, or other minerals is taxable as real property. See Tex. Tax Code Ann. 1.04(2) (Vernon Supp. 2001) (defining real property to include both a mineral in place or an estate or interest... in property ); see also Electra Indep. Sch. Dist. v. Waggoner Estate, 168 S.W.2d 645, 650 (Tex. 1943) (treating a working interest in mineral as an interest in real property 21

22 taxable as real property); Sheffield, 77 S.W.2d at 1030 (holding mineral royalty interest taxable as real estate). Additionally, Plaintiffs purchased services under the DTPA through the provision of management and operating fees. D. Ex. 105 SE2H Marketing Materials, ALFARO 7614; D. Ex. 107 SE4H Marketing Materials, ALFARO ; P. Ex. 75 SE3H Marketing Materials, PLAINTIFF ; P. Ex. 77 SE6H Marketing Materials, PLAINTIFF Defendants have previously pointed the Court to cases which reference situations where operating interest holders merely incur debt for the others as a matter of law and thereby are not consumers under the DTPA. See C&C Partners v. Sun Exploration & Production Co., 783 S.W.2d 707, 713 (Tex. App. Dallas 1989, no writ). However, this case is inapposite of the typical oil and gas company non-operator/oil and gas company operator relationship in which a customary joint operating agreement is entered. It is clear from the PPMs that Alfaro Entities would be providing services on behalf of Investors pursuant to the stated Management Fee in each PPM. The PPMs state that the Management Fee represents a fixed fee to be paid to the Company for its sponsorship, management and supervision of the Program and its efforts on behalf of Participant during Operations, and thereafter if the Well is a Commercial Well. Expenses related to the offer and sale of Units, including printing costs, accounting costs, and legal costs will be borne by the Company. D. Ex.107 SE4H Marketing Materials, ALFARO An Alfaro Entity was not simply reimbursed for costs incurred on behalf of the operating and non-operating interest owners, but rather took Investors moneys up front before costs to drill and complete a well were incurred, and additionally charged a stated fee for supervision during operations and thereafter. See C&C Partners, 783 S.W.2d at Primera was not simply a 22

23 front man for the Investors. Id. There can be no question that Investors qualify as consumers under the DTPA. Section of the Texas Business & Commerce Code provides liability against actors who engage in the following violations, inter alia: (1) Passing off goods or services as those of another; (2) Causing confusion or misunderstanding as to the source, sponsorship, approval, or certification of goods or services; (3) Causing confusion or misunderstanding as to affiliation, connection, or association with, or certification by, another; (5) Representing that services have sponsorship, approval, characteristics, ingredients, uses, benefits, or quantities which they do not have or that a person has a sponsorship, approval, status, affiliation, or connection which he does not; (7) Representing that goods or services are of a particular standard, quality, or grade, if they are not; (8) Disparaging the goods, services, or business of another by false or misleading representation of facts; (9) Advertising goods or services with intent not to sell them as advertised; (12) Representing that an agreement confers or involves rights, remedies, or obligations which it does not have or involve, or which are prohibited by law; and (24) Failing to disclose information concerning goods or services which was known at the time of the transaction if such failure to disclose such information was intended to induce the consumer into a transaction into which the consumer would not have entered had the information been disclosed. Defendants Brian Alfaro, Alfaro Oil & Gas and Alfaro Energy have violated several of the items listed above by, without limitation, causing confusion and misrepresentation as to the purchases Plaintiffs actually made (e.g., buying into one well with their funds going to another well); representing that Alfaro and the Alfaro Entities were licensed and capable of selling the property interests Plaintiffs purchased; representing that the wells would pay back investor funds within a year or less; advertising producing wells when they actually intended to take investor funds for personal use and decline to pay vendors, thus driving the wells into disrepair; and failing 23

24 to disclose the fraud Alfaro was perpetrating. Defendants Brian Alfaro, Alfaro Oil & Gas and Alfaro Energy knew this information at the time of each transaction with each Plaintiff, the failure to disclose was intended to induce Plaintiff consumers into the transaction, who would not have entered into the transaction had such information been disclosed, causing Plaintiffs damages. A full discussion of the facts satisfying the foregoing five elements is contained in the fraud section above. Furthermore, Defendants Brian Alfaro, Alfaro Oil & Gas and Alfaro Energy committed unconscionable acts under of the Texas Business and Commerce Code. An unconscionable Act is an act or practice which, to a consumer s detriment, takes advantage of the lack of knowledge, ability, experience, or capacity of the consumer to a grossly unfair degree. Id. at 17.45(5). The testimony establishes that several Plaintiffs had never invested in oil and gas investments or working interests before investing with Defendants. Tr. 4/10/2017 at 81:19-22, 206:21-207:4; Tr. 4/11/17 at 129:24-130:2; Tr. 4/12/17 at 9:1-3, 140:4-8). Moreover, the evidence as discussed fully in the fraud section above demonstrates that Defendants Brian Alfaro, Alfaro Oil & Gas and Alfaro Energy took advantage of Plaintiffs lack of knowledge of Defendants nefarious actions and practices to a grossly unfair degree. E. Plaintiffs Negligent Misrepresentation Claims The elements of a cause of action for negligent misrepresentation are identical to that of fraud with the exception that a plaintiff need only show that the defendant did not exercise reasonable care or competence in obtaining or communicating information that was false and supplied for the guidance of others, rather than meeting a heightened requirement of knowledge or recklessness regarding the falsity. See, e.g., Federal Land Bank Ass n v. Sloane, 825 S.W.2d 24

25 439 (Tex. 1991) (listing elements of claim). For the reasons addressed in the fraud section, above, Plaintiffs claims for negligent misrepresentation also have merit. F. Plaintiffs Conversion Claims Conversion is the unauthorized and unlawful assumption and exercise of dominion and control over the personal property of another which is to the exclusion of, or inconsistent with the owner s rights. Cass v. Stephens, 156 S.W.3d 38, (Tex. App. El Paso 2004, writ denied) (citing Waisath v. Lack s Stores, Inc., 474 S.W.2d 444, 446 (Tex. 1971); Whitaker v. Bank of El Paso, 850 S.W.2d 757, 760 (Tex. App. El Paso 1994, no writ)). The elements of conversion are: (1) plaintiff had legal possession of, or was entitled to, possession of the property; (2) defendant assumed and exercised dominion and control over the property in an unlawful or unauthorized manner to the exclusion of, and inconsistent with, plaintiff s rights; and (3) defendant refused plaintiff s demand for return of the property. Texas Dept. of Transp. v. Crockett, 257 S.W.3d 412, 416 (Tex. App. Corpus Christi 2008, pet. denied). Demand and refusal is not necessary when the possessor s acts manifest a clear repudiation of the plaintiff s rights. Cass, 156 S.W.3d at 61. First, Plaintiffs had legal possession, or were entitled to legal possession, of their own investments in the working interests. In 2013 and 2014, Primera received revenue from selling working interests to investors and from distributions out of any well in which they retained an interest, but the overwhelming majority of Primera s revenue, about 90%, came from investor contributions. Tr. 4/13/2017 at 205:8-206:8, 208:9-20. In 2015, 100% of Primera s revenue was from investor contributions. Tr. 4/13/2017 at 209: Thus, any draws Mr. Alfaro took came exclusively from investor contributions, to which Plaintiffs had legal right of possession. Tr. 4/13/2017 at 209:

26 Second, Mr. Alfaro exercised control over Plaintiffs investments in an unlawful or unauthorized manner to the exclusion of, and inconsistent with, Plaintiffs rights. See generally Plaintiff Exhibit 102B. Mr. Alfaro sold the 1H well in December 2014 for approximately $92,000. PI Tr. 9/2/2015 at 5:24 6:10; PI Tr. 9/1/2015 at 176:5-8. Mr. Alfaro retained $60,000 of the proceeds himself. PI Tr. 8/28/2015 at 173:18 175:14; PI Tr. 9/2/2015at 9:22 10:16. However, the investors in the 1H well were not informed of the sale of the well and Mr. Alfaro never distributed any of the monies from the sale of the 1H well to the investors. PI Tr. 8/28/2015 at 172:15-25; PI Tr. 9/2/2015 at For example, Mr. Huber understood that he would be entitled to a share of the proceeds from the sale of the 1H wellbore because he had a working interest in the well; instead, he received nothing. Tr. 4/12/2017at 157:8-14. Moreover, Mr. Huber was not told that Mr. Alfaro sold the Screaming Eagle 1H well and kept the money for himself. Tr. 4/12/2017 at 106:15-107:2. Similarly, Mr. Alfaro did not tell Mr. Hernandez that he was selling the 1H well, and Alfaro did not pay Mr. Hernandez any money from the proceeds of the sale. (Tr. 6/1/2015 at 181:24 182:1. Third, although a plaintiff must generally show that he made a demand for return of the property and the defendant refused, here Plaintiffs need not prove this element because the demand would have been useless and Mr. Alfaro s acts amount to a clear repudiation of Plaintiffs rights. Emil v. Bures, 806 S.W.2d 935, 938 (Tex. App. Corpus Christi 1991, no pet.); see also Loomis v. Sharp, 519 S.W.2d 955, 958 (Tex. Civ. App. Texarkana 1975, writ dism d); Neyland v. Brammer, 73 S.W.2d 884, 887 (Tex. Civ. App. Galveston 1933, writ dism d). Further, a demand and refusal are not required after the conversion has become complete. McVea v. Verkins, 587 S.W.2d 526, 531 (Tex. Civ. App. Corpus Christi 1979, no pet.). Where, as here, the circumstances and the acts of the possessor authorize a finding... of a clear repudiation of the 26

27 owner s rights, the repudiation is tantamount to a refusal after demand and no such formal demand and refusal is necessary. Loomis, 519 S.W.2d at 958. Plaintiffs here purchased working interests in the Screaming Eagle 1H well, which Alfaro sold without consulting them and without compensating them from the sale, as discussed above. Therefore, a formal demand would have been useless because Alfaro had already acted in clear repudiation of Plaintiffs rights in their working interests by selling the well. See Loomis, 519 S.W.2d at 958. The conversion ha[d] become complete by the time Plaintiffs learned of it. See McVea, 587 S.W.2d 531. Requiring a formal demand after Alfaro had already sold it would be pointless, and the law does not require Plaintiffs to make such a useless demand. Alfaro deprived Plaintiffs who invested in the Screaming Eagle 1H well of their working interest, i.e. real estate, when he sold it from under them without their permission or even notice. Thus, Alfaro is liable for conversion of Plaintiffs property, where applicable. G. Plaintiffs Money Had and Received Claims Money had and received is a category of general assumpsit to restore money where equity and good conscience require refund. MGA Ins. Co. v. Charles R. Chestnutt, P.C., 358 S.W.3d 808, 813 (Tex. App. Dallas 2012, no pet.). A cause of action for money had and received is not premised on wrongdoing, but looks only to the justice of the case and inquires whether the defendant has received money which rightfully belongs to another. Id. (quoting Amoco Prod. Co. v. Smith, 946 S.W.2d 162, 164 (Tex. App. El Paso 1997, no writ)). Here, first, Mr. Alfaro held and received money. In 2013 and 2014, Primera received revenue from selling working interests to investors and from distributions out of any well in which they retained an interest, but the overwhelming majority of Primera s revenue, about 90%, came from investor contributions. Tr. 4/13/2017 at 205:8-206:8, 208:9-20. In 2015, 100% of Primera s 27

28 revenue was from investor contributions. Tr. 4/13/2017 at 209: Therefore, Mr. Alfaro s draws came exclusively from investor contributions. Tr. 4/13/2017 at 209: Moreover, Mr. Alfaro retained that money even after selling the 1H well. Mr. Alfaro sold the 1H well in December 2014 for approximately $92,000. PI Tr. 9/2/2015 at 5:24 6:10; PI Tr. 9/1/2015 at 176:5-8. Mr. Alfaro retained $60,000 of the proceeds himself. PI Tr. 8/28/2015 at 173:18 175:14; PI Tr. 9/2/2015 at 9:22 10:16. However, the investors in the 1H well were not informed of the sale of the well and Mr. Alfaro never distributed any of the monies from the sale of the 1H well to the investors. PI Tr. 8/28/2015 at 172:15-25; PI Tr. 9/2/2015 at 8-11). Second, that money in equity and good conscience belonged to Plaintiffs, for all the reasons discussed related to Plaintiffs fraud causes of action, above, and incorporated fully herein. Since Defendants fraudulently induced Plaintiffs investments, such funds should be rightfully returned. H. Plaintiffs Unjust Enrichment Claims To recover under unjust enrichment, Plaintiffs must show that Defendants obtained a benefit from [Plaintiffs] by fraud, duress, or the taking of an undue advantage. Heldenfels Bros. Inc. v. City of Corpus Christi, 832 S.W.2d 39, 43 (Tex. 1992). In other words, [u]njust enrichment is enrichment that lacks an adequate legal basis: it results from a transfer that the law treats as ineffective to work a conclusive alteration in ownership rights. Tex. Architectural Aggregate, Inc. v. ACM-Tex., LLC (In re ACM-Tex., Inc.), 430 B.R. 371, 412 (Bankr. W.D. Tex. 2010) (quoting Restatement (Third) of Restitution and Unjust Enrichment 1, cmt. b (Discussion Draft 2000)). The doctrine is based on the principle that someone that receives benefits which would be unjust for him to retain, ought to make restitution even though no contract exists. Texas 28

29 Architectural, 430 B.R. at 412 (citing Mowbray v. Avery, 76 S.W.3d 663, 679 (Tex. App. Corpus Christi 2002, pet. denied)). The evidence obtained at the temporary injunction hearing and at trial establishes that Plaintiffs have satisfied their burden of recovering on their unjust enrichment claim. First, the evidence overwhelming establishes that Mr. Alfaro received substantial benefits from Plaintiffs. Edgar Perez (who served as Primera s Certified Public Accountant at the time it filed for bankruptcy) confirmed that during 2013 and 2014, Mr. Alfaro received $5,337,658 in total compensation from Primera, which represents 29% of the total amounts Primera collected from investors during that time period. See P. EX. 36 at PLAINTIFF ); Tr. 4/13/2017 at 209:20-210:10. Notably, Mr. Perez testified that when Mr. Alfaro took draws from Primera (which amounted to more than $3.2 million in 2013 and 2014 alone), the funds came exclusively from investor contributions. Tr. 4/13/2017 at 209:11-24; P. EX. 36. Because Mr. Alfaro s only job during the relevant time period was with Primera, Alfaro Oil and Gas, and Alfaro Energy (Tr. 4/17/2017 at 35:1-6), nearly all of the lavish purchases Mr. Alfaro made during the relevant time period were funded by investor contributions. Tr. 4/17/2017 at 35:1-41:23; see also Tr. 4/13/2017 at 205:8-206:8; 208:9-20; 209:11-19; 209:20-24). Indeed, Mr. Alfaro conceded that with the exception of $137,000, everything he purchased in 2014 came from investor contributions. Tr. 4/17/2017 at 41: These purchases include: a. A $2.5 million home in Shavano Park, with a monthly payment of $23,000 (PI Tr. 8/28/2015 at 33:18-24, 40:7-14, 55:2-3; Tr. 4/17/2017 at 28:25-29:5, 31:22-24); b. A $1.2 million home in Anaqua Springs in Boerne, Texas, with a monthly payment of $6,300 (PI Tr. 8/28/2015 at 33:25-34:5; Tr. 4/17/2017 at 30:13-25; 32:2-5); c. Two additional lots in Anaqua Springs worth approximately $500,000 and $100,000, respectively (PI Tr. 8/28/2015 at 34:8-17); 29

30 d. A condominium in downtown San Antonio with a monthly payment of $1,800 (PI Tr. 8/28/2015 at 35:3-5; 46:14-21; Tr. 4/17/2017 at 31:8-10; 34:8-18); e. A $926,000 beach house on Mustang Island, Texas (PI Tr. 8/28/2015 at 35:14-36:12; Tr. 4/17/2017 at 31:1-7); 4 f. A Lamborghini, purchased for approximately $400,000, with a monthly payment of approximately $6,000 (PI Tr. 8/28/2015 at 30:21 31:2; 41:8-24; 53:14-16; Tr. 4/17/2017 at 32:10-13); g. A G-Class Mercedes, purchased for approximately $130,000, with a monthly payment of $2,300 (PI Tr. 8/28/2015 at 27:21 28:2; 41:13-17; 52:25 53:2; Tr. 4/17/2017 at 32: ); h. A Porsche, purchased for approximately $130,000, with a monthly payment of $2,854 (PI Tr. 8/28/2015 at 31:3-7; Tr. 4/17/2017 at 33:6-11); i. A leased Cadillac Escalade with a monthly payment of approximately $1,600 (PI Tr. 8/28/2015 at 31:8-23; 54:2-6; Tr. 4/17/2017 at 32:24-33:1); j. A Bentley, purchased for approximately $189,000 (PI Tr. 8/28/2015 at 31:24 32:4; 54:7-11); k. A Ford GT, purchased for approximately $160,000 (PI Tr. 8/28/201at 32:5-11); l. A 1999 Dodge Viper (PI Tr. 8/28/2015 at 32:12-13); and m. Two Ducati Motorcycles (PI Tr. 8/28/2015 at 32:17-20). Second, as described in detail above in the fraud section, the evidence also establishes that the benefits received by Mr. Alfaro from Plaintiffs were obtained through fraud or taking undue advantage. For these reasons, Plaintiffs have met their burden of showing entitlement to recovery under their unjust enrichment claim, and are entitled to receive as damages the amounts each invested with Mr. Alfaro and Primera. 4 The Mustang Island Beach House is owned by the Kristi and Brian Alfaro Trust, which Ms. Alfaro testified was created to protected its assets against frivolous lawsuits. (8/28/2015 Transcript, 59:1-3). 30

31 I. Plaintiffs Texas Securities Laws Claims Defendants violated the Texas Securities Act in three ways by engaging in fraudulent practices in the sale of securities. The use of fraud and fraudulent practices in connection with the offer for sale and sale of securities is prohibited by Sections 4.F, 25-1, and 32.A of the Securities Act. In Section 4.F of the Securities Act, fraud is defined as follows: The term fraud or fraudulent practice shall include any misrepresentations, in any manner, of a relevant fact; any promise or representation or prediction as to the future not made honestly and in good faith, or an intentional failure to disclose a material fact;... provided, that nothing herein shall limit or diminish the full meaning of the terms fraud, fraudulent, and fraudulent practice as applied or accepted in courts of law or equity. Defendants, in the issuance, sale, promotion, negotiations, advertisement, or distribution of securities in the State of Texas, have engaged in fraud and fraudulent practices by misrepresenting material facts and intentional failing to disclose material facts as outlined above. Since Plaintiffs prevail on their fraud claims, Defendants are likewise liable for violations of the Texas Securities Act. DAMAGES A. The Court Should Not Consider Offset When Considering Plaintiffs Damages. 1. Alfaro Has Not Proven the Affirmative Defense of Offset. It is Alfaro s burden to prove offset, and he has not met that burden. Texas courts consistently hold that offset is an affirmative defense, and the burden of proving offset falls on Alfaro. The right of offset is an affirmative defense and the burden of pleading offset and proving the supporting facts are on the party making the assertion. Harris v. Mack, No. SA-11-CV FB (HJB), 2012 U.S. Dist. LEXIS , at *16-17 (W.D. Tex. 2012) (citing Brown v. Am. Transfer and Storage Co., 601 S.W.2d 931, 936 (Tex. 1980)); see also Alexander v. Kent, 480 S.W.3d 676, 701 (Tex. App. Fort Worth 2015); Smith v. Davis, 462 S.W.3d 604, 614 (Tex. 31

32 App. Tyler 2015, pet. denied) (op. on reh g); Tenet Health Sys. Hosps. Dallas, Inc. v. N. Tex. Hosp. Physicians Grp., P.A., 438 S.W.3d 190, 204 (Tex. App. Dallas 2014, no pet.); Triton 88 v. Star Elec. L.L.C., 411 S.W.3d 42, 60 (Tex. App. Houston [1st Dist.] 2013, no pet.). Because Alfaro has not introduced evidence of offset, let alone met his burden of proving offset by a preponderance of the evidence, he is not entitled to the benefit of the affirmative defense. 2. Any Tax Benefits Investors Received Do Not Reduce Damages. Even if the Court finds that Alfaro has met his burden of proving offset, any tax benefits the investors received do not reduce their out of pocket damages. In Randall v. Loftsgaarden, 478 U.S. 647 (1986), a securities fraud case, the Supreme Court held that the recovery a defrauded tax shelter investor receives may not be reduced by any tax benefits the investor received from the investment. Id. at In so holding, the Court rejected the defendant s claim that plaintiffs will receive undeserved windfalls absent an offset for tax benefits. Id. The Fifth Circuit has applied the Randall rationale in a Texas DTPA case. In Nottingham, the defendant sold investors a tax shelter and investment program that included the rights to produce and exploit children s educational video programs. Nottingham v. Gen. Am. Commc'ns Corp., 811 F.2d 873, 878 (5th Cir. 1987). Investors were meant to receive revenues from the distribution of the video programs, as well as tax deductions and credits available to them as socalled producers of the shows. The defendant argued that the plaintiff s DTPA damages should be reduced by the amount of tax benefits they received, but the Fifth Circuit disagreed. If tax benefits cannot reduce the damages under the strict out-of-pocket measure applied in the securities laws, we are persuaded that Texas courts would not use tax benefits to reduce recovery under the Texas DTPA, which permits plaintiffs to recover the greatest amount of actual damages. Id. (citing 32

33 Randall, 478 U.S. at ; Woo v. Great Southwestern Acceptance Corp., 565 S.W.2d 290, 298 (Tex. Civ. App. Waco 1978, writ ref d n.r.e.). Here, too, the Court should refuse to consider any tax benefits Plaintiffs received as an offset to reduce their recovery. B. Plaintiffs Are Entitled to Damages and Attorney s Fees and Costs. Defendants actions wrongfully deprived Plaintiffs of the moneys that they invested in the wells fraudulently advertised and sold by Defendants. Plaintiffs are entitled to a return of all funds paid to Defendants. Since Plaintiffs prevail on their claims for money damages, they are also entitled to attorneys fees and other costs under Section of the Texas Business & Commerce Code. Further, since Defendants acted knowingly and intentionally in defrauding Plaintiffs, Plaintiffs are entitled to treble damages under Section 17.50(b)(1) of the Texas Business & Commerce Code. Plaintiffs are also entitled to exemplary damages as both prongs, objective and subjective, have been met. See Tex. Civ. Prac. & Rem. Code (11) and ( exemplary damages may be awarded only if the claimant proves by clear and convincing evidence that the harm with respect to which the claimant seeks recovery of exemplary damages results from: (1) fraud; (2) malice; or (3) gross negligence. ); State v. Shumake, 199 S.W.3d 279, 287 (Tex. 2006) (citing Transp. Ins. Co. v. Moriel, 879 S.W.2d 10, 21 (Tex. 1994)). Plaintiffs are entitled to out of pocket damages in the amount of $14,650,833.40, as detailed below: 5 5 Attached to this Brief as well is Exhibit A, which is an evidentiary chart referring the Court to exhibits establishing the amounts invested by each Plaintiff. 33

34 Plaintiffs are additionally entitled to $29,301, in treble damages to bring the award to $43,952, Further, Plaintiffs are entitled to attorneys fees as costs, which Plaintiffs respectfully request they be permitted to submit by sworn declaration for the Court s consideration. 34