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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 RECEIVERS MOTION TO APPROVE PROCEDURES FOR CLAIMS AND INTERIM DISTRIBUTIONS

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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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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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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 Receivers formal appointment as the chapter 11 trustee in the

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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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. Trustees 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 Courts 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 The Provident Investors

Investors Committee (the Provident Investors Committee).

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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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 This was later confirmed as a

the assets of the defendants in the State Court Action. 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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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 The Receiver seeks herein authority to attempt to effect a The Receiver

remaining unresolved issues.

cooperative liquidation and claims process with the Shale Synergy Entities.

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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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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 The $22 million in sale payments

acknowledged from Jordan River creditors or investors.

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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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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defendant for whom the receiver was appointed. (Anderson 3d ed. 1959).

III CLARK ON RECEIVERS 667, at 1198

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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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 Receivers 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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reserve upon providing notice of such adjustment in the Receivers 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 For example, the assets that

a single constructive trust or parallel constructive trusts.

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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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 Commissions 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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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 The assets of the Blimline Entities are more specifically identified in the Essentially, they consist of some ranch real estate

available funds.

Receiver's Second Quarterly Report.

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. proposes the following: (a) Three separate restitution pools will be created within the Receivership, Specifically, the Receiver

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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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 nonreceivership 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,
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.
2

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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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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 pools 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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(f)

The Receiver proposes that interim distributions from the restitution pools The procedures for

fifteen days after each Quarterly Report based upon available funds.

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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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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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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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.

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. This is shown, for example, in the Declaration of Dennis L. Roossien, Jr., which is contained in pages 115 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. Roossien Declaration at 27 (App. 6) and Ex. A to Declaration (App. 7-15). Roossien Declaration at 27 (App. 6) and Ex. A to Declaration (App. 7-15).

5 6

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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 In both cases, the

stated by Judge Solis under remarkably comparable circumstances.

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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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 The Receiver believes that the expenses were

Documentation Room as defined above.

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 invoices are available in the Receiver's Claim The Receiver believes that the expenses were

The expense portion is $153.88.

Documentation Room as defined above.

reasonable and necessary, and recommends the approval of the expense portion of the claim.

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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

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