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Moore v. Payson Petroleum Grayson, LLC

United States District Court, N.D. Texas, Dallas Division

May 11, 2018

TIM MOORE, et al., Plaintiffs,



         By Special Order No. 3-251, this pro se case has been automatically referred for full case management. Before the Court for recommendation is Plaintiffs' Motion for Default Judgment, filed September 7, 2017 (doc. 54). Based upon the relevant filings and applicable law, the motion should be DENIED.

         I. BACKGROUND

         On February 22, 2017, Tim Moore, David Vednor, Roland Lentz, James Rosemeyer, Virginia Humphrey, William Martin, and Jeff Wilshire (Plaintiffs) filed this class action suit alleging violations of the Texas Securities Act against thirteen defendants, including Payson Petroleum Grayson, LLC (Payson Grayson), Matthew Carl Griffin (Griffin), PTX Securities, LLC (PTX), Dan Nichter (Nichter), EDI Financial, Inc. (EDI), Financial West Group (Financial West), MidAmerica Financial Services, Inc. (MidAmerica), Shaun Darnell Young (Young), S&M, Ltd. (S&M), Terry Dewayne Harvey (Harvey), Plano Capital Group, LLC (Plano Capital), Martin William Prinz (Prinz), and Gene Charles Valentine (Valentine) (Defendants) in Texas state court. (See doc. 1-3 at 23-57, 174-210.)[1]On May 31, 2017, Financial West and Valentine removed this action to federal court, asserting original jurisdiction under the Class Action Fairness Act provisions of 28 U.S.C. § 1332(d)(2). (doc. 1.)

         At issue is a two-phase offering to invest in two Texas limited partnerships to fund the drilling, completion, and operation of two vertical wells and one horizontal well (3 Well Program) owned by Payson Petroleum, Inc.[2] (Payson), in Grayson County, Texas. (doc. 1-3 at 175-76.) The first phase offered 1, 000 units at a cost of $27, 000.00 per unit for the Payson Petroleum 3 Well, L.P. (3 Well), commencing on October 23, 2013, through December 31, 2013. (Id. at 175, 200.) Because only 277.65 units were sold, a second offering phase for the remaining 722.35 units of Payson Petroleum 3 Well 2014, L.P. (3 Well 2014), commenced on January 12, 2014, through June 30, 2014. (Id.) The two offerings in the 3 Well Program raised $23 million in total. (Id. at 200.) A private placement memorandum (PPM) was issued for each offering. (Id. at 175.)

         Plaintiffs allege that the offering documents included statements on how:

(1) Payson agreed to purchase 200 units in the 3 Well Program for $5.4 million; (2) in no event will Payson not purchase at least 100 units in the 3 Well Program; (3) Payson's $5.4 million capital infusion would fund 20% of the cost of the 3 Well Program; and (4) the “estimated” cost to drill and complete the wells by Payson was approximately $24 million.

(Id. at 176-77.) “Defendants” and “Broker-Dealer Defendants, ” identified as PTX, EDI, Financial West, and MidAmerica, allegedly “disseminated” these offering documents to Plaintiffs and other investors, and they “reiterated to Plaintiffs the same, in meetings and communications, at investor events, dinners, and sales presentations, and by other marketing and promoting mechanisms, in order to solicit Plaintiffs' purchases of units in the 3 Well Program.” (Id. at 178.) They further solicited Plaintiffs' purchases of units in the 3 Well Program by e-mails, mailings, webinar slides, and unsolicited telephone calls to Plaintiffs. (Id. at 194.) Defendants collectively made “an estimated $4, 260, 276.00 in sales commissions from selling units to Plaintiffs and Class Members.” (Id. at 202.)

         It was later discovered that Payson lacked the means to purchase 20% of the units and contributed nothing to the well costs. (Id. at 196.) The 3 Well Program was then abandoned, and none of Plaintiffs received back any portion of the difference between the $23 million that was raised in the offerings and the actual cost of the wells. (Id. at 178.) These funds were allegedly “appropriated by Payson . . . to the detriment of Plaintiffs and the limited partnerships.” (Id.) On November 23, 2016, the Securities and Exchange Commission (SEC) announced that it had filed a civil action against Griffin and his brother, the owners of Payson, for violations of federal securities law by fraudulently offering interests in the 3 Well Program. (Id. at 195); see SEC v. Griffin et al., No. 4:16-CV-00902 (E.D. Tex. Nov 23, 2016). It alleges that “the Griffins were the source of the PPMs' representations” about Payson's co-investment. (doc. 1-3 at 196.) Griffin agreed to accept the civil penalty and did “not take any action or make or permit to be made any public statement denying, directly or indirectly, any allegation in the Complaint or creating the impression that the Complaint is without factual basis.” (Id. at 198.)

         Plaintiffs subsequently filed this suit, which they identify as a class action “on behalf of [themselves] and all persons and entities, other than Defendants, who purchased or otherwise acquired units in the 3 Well Program by means of two sets of fraudulent offering documents.” (Id. at 205.) They allege that the statements made in the two PPM and offering documents are fraudulent and misleading because:

(1) Payson never purchased a single unit and thereby contributed no money to the 3 Well Program; (2) consequently, Payson paid nothing towards its 20% share of the cost of the 3 Well Program; (3) Payson lacked the financial means to make the $5.4 million payment; (4) the true cost of drilling and completing the wells was $16-$18 million; (5) the “estimated” $24 million cost to drill and complete the wells was Payson's undisclosed fixed fee for drilling the wells, regardless of the actual drilling cost; and (6) Payson pocketed the difference between the $23 million raised in the two integrated offerings and the actual drilling cost-$16-$18 million.

(Id. at 177.) Plaintiffs further allege that they were never informed that “Payson had a secret ‘turn-key' agreement with the limited partnerships whereby Payson would retain as its putative drilling fee, $24 million net of actual well costs of the projected $27 million raised in the offering.” (Id. at 178.) They contend that these misrepresentations and omissions were made so that Payson could “fleece investors by unlawfully pocketing the difference between the false $24 million estimate and the wells actual cost.” (doc. 30 at 8.)

         Plaintiffs claim in Count I that “All Defendants” are liable under Article 581-33A(2) of the Texas Securities Act for “offering, soliciting, and/or selling units the 3 Well Program to Plaintiffs and Class Members by means of untrue statement of material facts and/or omissions to state material facts necessary in order to make the statements made, in the light of the circumstances under which they are made, not misleading.” (doc. 1-3 at 206-07.) They allege in Count II that the “Control Person Defendants, ” identified as Griffin, Harvey, Plano Capital, Prinz, Valentine, S&M, and Young, are jointly and severally liable under Article 581-33F(1) of the Texas Securities Act as the “senior officers, directors, significant shareholders, or have indirect control over” the Broker-Dealer Defendants. (Id.) Plaintiffs seek monetary relief in an amount over $1, 000, 000.00, exemplary damages, and attorney fees. (Id. at 208.)

         On September 7, 2017, Plaintiffs filed a motion for default judgment against MidAmerica, S&M, and Young, in which they seek rescission of the units that MidAmerica sold in the 3 Well Program for total award of $1, 308, 103.00 plus pre- and post-judgment interest, as well as attorneys' fees of $72, 225.00 and costs of $2, 852.53. (doc. 55 at 11-16.) MidAmerica is identified as one of the Broker-Dealer Defendants that specifically sold 49.73 units in the 3 Well Program, but it has now “ceased doing business.” (doc. 1-3 at 182.) Young and S&M are each identified as “control persons” for MidAmerica, where Young ...

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