Petition for Writ of Certiorari — Joseph D. Bradley, Petitioner v. Alco Oil & Gas Company, LLC, et al.

NO. 18-_____

In the

Supreme Court of the United States

JOSEPH D. BRADLEY,

Petitioner,

v.

ALCO OIL & GAS CO., LLC, and RAILROAD

COMMISSION OF THE STATE OF TEXAS,

Respondents.

On Petition for Writ of Certiorari to the

United States Court of Appeals for the Seventh Circuit

PETITION FOR WRIT OF CERTIORARI

SHAWN F. SULLIVAN

COUNSEL FOR PETITIONER

S. F. SULLIVAN, ATTORNEY AT LAW, LTD

1717 EAST WAYNE STREET

SOUTH BEND, IN 46615

(574) 233-7860

SullyatLaw@sbcglobal.net

APRIL 29, 2019

SUPREME COURT PRESS

♦

(888) 958-5705

♦

BOSTON, MASSACHUSETTS

i

QUESTIONS PRESENTED

1. Whether a State agency, with notice that certain

defrauded investor funds on account at a bank are

subject to 28 U.S.C. § 754’s exclusive in rem jurisdiction,

a Federal freeze order, and other orders, can divert

such funds unbeknownst to the Federal equity receiver

relying on the liquidation of those funds to close the

receivership estate.

2. Whether 28 U.S.C. § 959(b) and the principles

of Supreme Court’s Midlantic decision apply to a

liquidating Federal equity receiver, and, if they apply,

can they be stretched to require the receiver’s payment of the liabilities of a non-receivership operation

whose liabilities arose prior-to the receivership.

3. Whether 28 U.S.C. § 959(b) and Midlantic

should be used to catapult a State agency’s regulatory

expense “claim” to super-priority status, even though

the expenses were never claimed or vetted in court,

leaving the Receiver unable to pay the administrative

expenses such as attorney fees.

4. Whether 28 U.S.C. § 959(b) and Midlantic

supersede a District Court’s orders to protect the Federal equity receiver from such expenses as well as

the District Court’s sales orders that eliminate the

subject expenses with the transfer of estate properties.

5. Whether a Federal receiver is entitled to an

opportunity to refute a State agency’s defenses to

contempt and whether all of a Federal receiver’s causes

of actions against a State agency, properly filed and

contained in a “Summary Proceedings Application,”

can be dismissed without hearing or argument.

ii

6. Whether a Federal receiver pursuing defrauded

investor funds can claim the funds on deposit in support

of letters of credit instead of claiming the letters of

credit themselves.

iii

TABLE OF CONTENTS

Page

QUESTIONS PRESENTED ........................................ i

TABLE OF AUTHORITIES ..................................... vii

PETITION FOR WRIT OF CERTIORARI ................ 1

OPINIONS BELOW ................................................... 1

JURISDICTION.......................................................... 1

STATUTORY PROVISIONS INVOLVED ................. 2

INTRODUCTION AND STATEMENT OF THE

CASE ..................................................................... 3

A. Exclusive In Rem Jurisdiction, Notice to All

Parties, and Sequestering of the Funds........... 5

B. Pacifying the RCT in Order to Liquidate

the Leases—by Keeping Alco as “the Operator of Record”—and Protecting the Estate

from All Alco Liabilities, Past and Present..... 9

C. While Seeking Liquidation of the Funds on

Account at Bank of America, the Discovery

of RCT’s Clandestine Activities Related to

Those Funds ................................................... 12

D. Revelation of the RCT’s Immunity to All of

the Orders in the Case, the Dismissal of All

of the Receiver’s Claims Without a Hearing,

and the Implosion of the Receiver’s Budget

and Final Plan for Closing the Receivership . 14

iv

TABLE OF CONTENTS – Continued

Page

REASONS FOR GRANTING THIS PETITION ...... 15

I.

Federal Equity Receivers, Who Pay Their

Expenses From Estate Assets, Need Rules

Upon Which They Can Rely Such as the

Exclusive In Rem Jurisdiction of 28 U.S.C.

§ 754, the Procedures of a Freeze Order,

Protective Orders, and Final Sales Orders

That Absolve Liabilities ................................. 15

A. If 28 U.S.C. § 754 Provides Exclusive,

In Rem Jurisdiction, and a Freeze Order

Specifically Lists the Account Holder of

Where the Asset in Question Is Located,

and a State Agency Has Notice of the

Jurisdiction, the Freeze Order and the

Receiver’s Claim, the State Agency

Should Be Required to Air Its Alleged

Claim in Court .......................................... 15

B. If a Federal Receiver Cannot Rely on the

Appointing Court’s Orders That Explicitly Prevent the Receiver from Being

Saddled with Certain Expenses, and Yet,

a State Agency Can Inflict Those Certain

Expenses on the Estate, at the 11th Hour,

Administering a Federal Estate Will Be

Near Impossible and the Slippery Slope

with Such a Ruling Will Disable Federal

Equity Receiverships as a Remedy .......... 17

v

TABLE OF CONTENTS – Continued

Page

C. Liabilities That Are Expunged as Part of

Final Sale Orders Need to Be Honored

in Order to Attract Third Parties to

Those Sales and to Enable the Receiver

to Appropriate Expenses .......................... 18

II. In a Split from Circuits That Do Not Apply

28 U.S.C. § 959(b) to Liquidating Estates,

the 7th Circuit Erroneously Applied 28

U.S.C. § 959(b) and the Rationale of Midlantic to the Receiver’s Liquidation Efforts,

Demonstrating the Need for Supreme Court

Guidance ......................................................... 20

A. In the Absence of Federal Common Law

or a Governing Statutory Framework,

Federal Equity Receiverships Inheriting

Shams and Scams Need Their Own

Standard for Application of 28 U.S.C.

§ 959(b) and the Midlantic Principle ....... 21

B. The Intersection of 28 U.S.C. § 959(b)

and Midlantic Have Been Expanded to

Require a Receiver to Pay the Liabilities of a Non-Receivership Entity, Even

Though the Liabilities Arose Prior-to the

Receivership, the Liabilities Were Extinguished by Previous Court Orders, and

the Receiver Was Protected by Court

Order Against Those Liabilities ............... 22

vi

TABLE OF CONTENTS – Continued

Page

III. Without an Opportunity to Be Heard, the

Receiver Had All of His Causes of Action

Against RCT (in the Application for Summary Proceedings) Dismissed by the 7th

Circuit, and Even the Contempt Claim Was

Dismissed Without a Hearing and an

Opportunity for the Receiver to Rebut the

RCT’s Defenses ............................................... 23

IV. The 7th Circuit Erroneously Focused on

the Letters of Credit Instead of the Funds

on Deposit at Bank of America (Which Is

What the Receiver Was Pursuing), Thus

Demonstrating the Need for Guidance in

This Area, Especially When a Federal

Equity Receiver and Freeze Orders Are

Involved .......................................................... 25

CONCLUSION.......................................................... 26

APPENDIX TABLE OF CONTENTS

Order of the Seventh Circuit

(November 20, 2018) .......................................... 1a

Final Judgment of the Seventh Circuit

(November 20, 2018) .......................................... 7a

Opinion and Order of the District Court of Indiana

(January 24, 2018).............................................. 9a

vii

TABLE OF AUTHORITIES

TABLE OF AUTHORITIES

CASES

Page

Bryan v. Bartlett,

435 F.2d 28 (8th Cir. 1970), .................................. 6

In re Wall Tube & Metal Products Co.,

831 F.2d 118 (6th Cir. 1987) ............................ 20

Int’l Finance Corp. v. Kaiser Group Int’l Inc.,

399 F.3d 558 (3d Cir. 2005) ............................... 25

Midlantic Nat’l Bank v. N.J. Dep’t of Envt’l

Prot., 474 U.S. 494 (1986)................... i, 3, 21, 22

Minn. Pollution Control Agency v. Gouveia,

345 B.R. 619 (Bankr. N.D. IN 2006) ................. 20

Redback Networks, Inc. v. Mayan Networks

Corp. 306 B.R. 295 (9th Cir. BAP 2004) ........... 25

S.E.C. v. First Choice Mngmnt Servs., Inc.,

(N.D. IN 2000) ..................................................... 1

CONSTITUTIONAL PROVISIONS

U.S. Const. Art. 1, § 8, cl. 4 ......................................... 3

viii

TABLE OF AUTHORITIES—Continued

Page

STATUTES

15 U.S.C § 77(a) ........................................................... 5

15 U.S.C. § 78aa........................................................... 5

28 U.S.C. § 754 ................................................... passim

28 U.S.C. § 959(b) .............................................. passim

28 U.S.C. § 1254(1) ..................................................... 1

28 U.S.C. § 1291 ........................................................ 14

28 U.S.C. § 1294 ........................................................ 14

28 U.S.C. § 1331 .......................................................... 5

28 U.S.C. § 1337 .......................................................... 5

JUDICIAL RULES

Fed. R. App. P. 32.1 .................................................... 1

1

PETITION FOR WRIT OF CERTIORARI

Joseph D. Bradley, the Receiver of the estate amassed in S.E.C. v. First Choice Mngmnt Servs., Inc., (N.D.

IN 2000), respectfully petitions the Court for a writ of

certiorari to review the judgment of the United States

Court of Appeals for the Seventh Circuit.

OPINIONS BELOW

The Seventh Circuit’s decision, a non-precedential

disposition per F.R.A.P. 32.1 (App.1a-6a), was issued

on November 20, 2018. The corresponding judgment

was issued the same day. (App.7a). On January 24,

2018, the United States District Court for the Northern

District of Indiana, issued its OPINION AND ORDER

(App.9a-19a, [Distr. Ct. Doc. No. 1115]), denying “the

receiver’s motion for summary proceedings and civil

contempt, disgorgement and other relief [Doc. No.

1097].”

JURISDICTION

The Seventh Circuit entered its judgment and

opinion on November 20, 2018. The Petition for Writ

of Certiorari was filed properly on the date listed

herein, and the Court has jurisdiction under 28 U.S.C.

§ 1254(1).

2

STATUTORY PROVISIONS INVOLVED

•

28 U.S.C. § 959(b)

(b) Except as provided in section 1166 of title 11, a

trustee, receiver or manager appointed in any

cause pending in any court of the United States,

including a debtor in possession, shall manage and

operate the property in this possession as such

trustee, receiver or manager according to the

requirements of the valid laws of the State in which

such property is situated, in the same manner that

the owner or possessor thereof would be bound to

do if in possession thereof.

•

28 U.S.C. § 754

A receiver appointed in any civil action or proceeding involving property, real, personal or mixed,

situated in different districts shall, upon giving

bond as required by the court, be vested with complete jurisdiction and control of all such property

with the right to take possession thereof.

He shall have capacity to sue in any district

without ancillary appointment, and may be sued

with respect thereto as provided in section 959 of

this title.

Such receiver shall, within ten days after the

entry of his order of appointment, file copies of

the complaint and such order of appointment in the

district court for each district in which property

is located. The failure to file such copies in any

3

district shall divest the receiver of jurisdiction

and control over all such property in that district.

INTRODUCTION AND

STATEMENT OF THE CASE

Certiorari is warranted here not simply to provide

precedent and resolve State-verses-Federal issues,

conflicting Circuits, or the great injustice that was

inflicted on the Receiver by the lower courts. Rather,

the Supreme Court’s pronouncements and resolutions

regarding the relevant matters herein are needed to

fill a significant void that only the supervisory nature

of the Supreme Court can fill, and it is necessary in

order for Federal equity receiverships to be a viable

remedy.

With no Federal common law on the subject and

no governing statutory framework for Federal equity

receiverships, these equity constructs simply float

within and around the codified Federal law constituting

the “uniform Laws on the subject of Bankruptcies

throughout the United States.” (United States Constitution, Article 1, Section 8, Clause 4) But the treatment of Federal equity receivers is far from uniform,

and the disparity in relevant legal concepts is particularly pointed when a State agency, 28 U.S.C. § 959(b),

and the Supreme Court’s precedent in Midlantic Nat’l

Bank v. N.J. Dep’t of Envt’l Prot., 474 U.S. 494 (1986),

converge upon a receiver. This area of law is wildly

expansive, conflicting and unpredictable. This broken

system fails those who accept the appointment of

receivership and may, as in the instant case, leave the

4

receiver—the only party with no responsibility for

the mess the receiver is charged with cleaning-up—

“holding the bag.”

Certiorari is also warranted due to the glaring

error by the lower courts in distorting the convergence

of freeze orders with letter of credit law. The actual

asset that is being frozen by the Receiver—the funds

on deposit at the bank as opposed to the letters of

credit or proceeds therefrom—was already physically

segregated in an account at Bank of America, and, as

long as freeze orders and 28 U.S.C. § 754 do what

they say they do, there should not be an opportunity

for an error of law.

Worse yet, this material error created a blind

spot for the lower courts, enabling the State agency,

the Railroad Commission of Texas (“RCT”) to violate

the freeze orders, the orders dismissing the regulatory

liabilities, and the orders providing the protections

for the Receiver of any such regulatory liabilities.

Unfortunately, the Receiver took these District Court

orders to mean what they said in plain English, and

he relied on them to form his budget and strategy of

liquidation.

It was not until the last asset was to be liquidated,

to pay the attorneys and close the Receivership, that

the RCT had clandestinely (unbeknownst to the Receiver or the District Court) removed the funds on deposit

and was using them to pay the (excused) regulatory

liabilities of a non-party. And even though the Receiver

was protected from those liabilities, the lower courts

provided the RCT with de facto immunity from any of

the District Court’s orders.

5

This case is the perfect case for clarifying precedent

and guidance for Federal receivers because the relevant

facts are either undisputed or established by the

lower courts in this case. The precedential value of

the Supreme Court’s wisdom on these matters would

aid all lower courts as well as those persons accepting

Federal equity receivership appointments, and those

persons and entities dealing with Federal equity

receivers will benefit by the Supreme Court’s wisdom

on the matters raised herein.1

A.

Exclusive In Rem Jurisdiction, Notice to All

Parties, and Sequestering of the Funds.

This case arises out of a substantial Ponzi scheme

full of a number of sham entities that were used by

their puppeteers to create a financial mess that

scattered defrauded investor funds nationwide. The

SEC filed suit, pursuant to 28 U.S.C. § 1331 and 1337,

to shut it all down. Federal questions arose out of the

Securities Act of 1933 and the Securities Act of 1934,

15 U.S.C § 77(a) and 15 U.S.C. § 78aa, and specifically:

Federal jurisdiction in this case is based, not

on diversity of citizenship, but on a federal

equity receivership arising out of violation

of federal security regulation statutes. The

receiver was appointed in this case to prevent

further violations of the federal securities

laws and to preserve the assets for the benefit of the investor-creditors of the companies.

1 The facts that follow are taken from the Appellant’s Brief

pp.6-16 and Short Appendix (May 30, 2018 [7th Cir. Doc. 15]) in

addition to the Supplemental Appendix (May 30, 2018 [7th Cir.

Doc. No. 16]).

6

Bryan v. Bartlett, 435 F.2d 28, 32 (8th Cir. 1970), reh’g

en banc denied (1971) (federal law and not Arkansas

law to be used for issues related to receivership assets).

The architects of the Ponzi dispersed the funds

everywhere, and some of the funds were difficult to

track, but sometimes birds of a feather flock together.

The $250,000 in defrauded investor funds at issue in

this case landed in the hands of convicted felon,

Michael Wilson, d/b/a Alco Oil & Gas Co., LLC (“Alco”).

Although neither Michael Wilson nor Alco were ever

parties in this case, they were the Receiver’s focus

because Michael Wilson used his own “robotic tool”

and “evil zombie” company, Alco, to launder the funds

from his Ponzi-scheming acquaintances.

At the time, Alco was already a long time owner

and operator of a number of oil and gas leases in

Texas, under the authority of the RCT. Alco was already

the RCT’s approved “operator of record,” for the oil

and gas leases that later became assets of the estate,

and Alco already had “financial assurance” with the

RCT. The wells on the relevant leases were old—some

dating to the 1930s and already subject to fines and

penalties by the RCT.

So when Michael Wilson received the $250,000

from the fraudsters, he put it up as security to replace

Alco’s existing “financial assurance” with RCT that

supported his status an “operator of record” for the

RCT. He deposited those funds in a CD with Bank of

America who in turn issued a letter of credit to RCT

to serve as Alco’s operating bond.

Thanks to the FBI and SEC, the Receiver was on

the trail of these shenanigans and filed the requisite

28 U.S.C. § 754 documents in the District Courts of

7

Texas in order to secure exclusive in rem jurisdiction

over the funds on deposit at Bank of America.

Accordingly, immediately after the defrauded investor

funds were deposited, they were “frozen in place,” at

“Bank of America” per the FREEZE AND TURNOVER

ORDER [Distr. Ct. Doc. No. 178], and this was made

known to all of relevant parties.

The RCT was notified from the get-go and remained so throughout the duration of the case:

Since the beginning of this case, the Railroad

Commission has known of the court’s oversight of the leases, the receiver’s claim to

the bond, and the governance of the freeze

and turnover order concerning any resolution to issues concerning the leases and bond.

(2018 OPINION AND ORDER, at App.15a-16a).

Bank of America, of course, was also served with

the same FREEZE AND TURNOVER ORDER ([Distr. Ct.

Doc. No. 178] p. 6), and given that funds were sitting in

CD, the Receiver rated this estate asset as one of his

safest and so left it “frozen in place,” per the terms of

the FREEZE AND TURNOVER ORDER, and opted to leave

it in place until the final liquidation. The Receiver

anticipated that the final liquidation would happen

in short order not over a decade later.

But first the convicted felon with a long fraud rap

sheet had to be removed from the estate’s assets.

When the Receiver sought to remove Michael Wilson

and Alco from the assets, the Receiver surprisingly

encountered resistance from the RCT. Indeed, the RCT

would not allow us to remove Alco as the operator of

record, and for the most part would not give us stand-

8

ing. The specifics on this can be found in the Affidavits

of Attorney J. Michael Katz [Dist. Ct. Doc. No. 1112-1]

and Attorney T. DeBlasio [Dist. Ct. Doc. No. 1112-2].

(Suppl. Appx. [7th Cir. Doc. No. 16] pp. 65-68 and pp.

84-85)

Short of suing the RCT for its obstructive stance,

which would have made all future transfers of leases

more cumbersome because of the need for RCT’s

consent to operator transfers, the Receiver’s only option

was to remove Michael Wilson from the scene. The

freeze had already stripped Alco of most of its assets,

such as the $250,000 in funds on deposit at Bank of

America, and the Receiver fought in Federal and state

courts for a couple years until he was ousted. Eventually Michael Wilson went to jail, ousted from Alco,

leaving Alco as a shell, but as the “operator of record.”

That ends phase one of the funds on deposit at

Bank of America. The prolonged and tortured duration

between the readying of this prized asset to its attempted liquidation may have corrupted memories and

permitted for incorrect inferences to be used against

the Receiver, but no where and no way did the Receiver

ever lose his position that it was the cash on deposit

at Bank of America that was his frozen asset to be

liquidated, not the letters of credit or some other

claim. The cash itself. And once Michael Wilson was

segregated from it and Alco, the path to the asset’s

liquidation was unhindered . . . so it seemed.

9

B.

Pacifying the RCT in Order to Liquidate the

Leases—by Keeping Alco as “the Operator of

Record”—and Protecting the Estate from All

Alco Liabilities, Past and Present.

The District Court, back when it was closer to

the relevant facts and law, perfectly described this

second phase related to the funds on deposit at Bank

of America:

Once Mr. Wilson was out of the picture, BET

and ALCO came to an agreement and this

court’s order of September 5, 2006 [Doc. No.

487] determined that ALCO had assigned

ownership to BET on July 25, 2002. The

receiver designated ALCO to be the operator

of the leases. The September 5, 2006 order

lifted the freeze order as to ALCO so ALCO

could operate the leases without violating the

freeze order. The receiver’s next task was to

liquidate BET’s assets (sell the leases) and

give restitution to defrauded First Choice

investors. But the receiver couldn’t do this

because certain other parties were known to

claim interests in the property . . .

(January 20, 2010 OPINION AND ORDER, [Dist. Ct. Doc.

No. 680]; Short Appx. [7th Cir. Doc. No. 15] p. 12).

The reference to that September 5, 2006 OPINION

AND ORDER ([Dist. Ct. Doc. No. 487] p. 8. ¶ 4) is key

because that order set forth Soam Oil and Gas

Investments, the purchaser of Alco, as the “operator

of record,” but also explicitly recognized that such

operatorship by Soam/Alco was “subject to its own

direction, costs and discretion.” A previous order also

made clear exactly who was responsible for what. The

10

June 26, 2006 ORDER ([Dist. Ct. Doc. No. 471]; Short

Appx. [7th Cir. Doc. No. 15] pp. 44-45) explained the

scenario as follows:

1.

The 9-17-03 freeze order shall continue to

apply to the assets claimed by Branson Energy

Texas, Inc., and Alco.

****

3.

The 9-17-03 freeze order is lifted in favor of

Alco, the receiver, and their designees, inso-far as is necessary to maintain the value

of the subject oil and gas assets, including

repairs, operations, and improvements. All

costs to repair, operate or improve the oil and

gas assets shall be the responsibility of Alco

at Alco’s discretion.

It is clear from the ORDER’s language below that no

assets were moving, the Receiver was not going to be

involved, and the Receiver was not committing any

obligations of the estate.

These orders are expressly clear concerning the

limited nature of the lifting of the freeze. No funds

are to be committed by the Receiver—most notably the

funds on deposit at Bank of America2—and all costs

are are Alco’s/Soam’s. There was never a question

about who was taking on this liability—Soam was—

and no Receivership assets were to be dedicated to

2 There would have been a great deal of discussion and soughtafter court approval if the Receiver had the non-sensical idea of

re-uniting the funds on account at Bank of America with Alco.

It would have received much discussion in the court because a

Receiver does not easily part with $250,000 just to pacify the

RCT. Undoubtedly, another route would have been chosen.

11

this effort. (Short Appx. [7th Cir. Doc. No. 15] p. 44;

Suppl. Appx. [7th Cir. Doc. No. 16])

And the Receiver’s protection from any Alco

liabilities went one step further—the District Court,

in approving the sale of the leases operated by Alco

extinguished all past and present liability associated

with Alco’s operations. (See, e.g., 4/16/10 SALE ORDER

[Dist. Ct. Doc. No. 686] p. 7, ¶ E; 9/22/10 SALE ORDER

[Dist. Ct. Doc. No. 703] p. 6, ¶ G; 11/1/13 SALE ORDER

[Dist. Ct. Doc. No. 861]). This was not boiler-plate or

accidental. It is clear that the court was erasing all

Alco liabilities associated with operation of the oil

and gas operations, especially regulatory liabilities

(which were the only known liabilities to exist). The

exculpatory language used by the court recognizes

the deplorable condition that the leases were in and

that their prior management, at the hands of Michael

Wilson, was not good.

What’s more, the RCT was involved in these sales

and knew of the transactions that were occurring

because they are part of the transaction. The RCT

has to sign-off on the transfer of operatorship, and

they eventually did which has been made public in

the filings in the District Court. The RCT was right

every step of the way and never did object to any of

the transfers, the SALE ORDERS or otherwise make a

claim to the Receiver’s right to the funds on deposit

at Bank of America.

Furthermore, with Alco being a third party, a

non-party, forced upon the Receiver by the RCT, and

with the Receiver staying in liquidation mode, never

seeking to actually operate, never seeking any revenue,

and there were no benefits to the estate—simply the

12

passage of time. Moreover, those regulatory liabilities

were extinguished in final sale orders, and, accordingly

no party including Alco can be liable for them.

In sum, as for this phase surrounding the $250,000

on deposit at Bank of America, appeasing the RCT was

successful by leaving Alco in there as the operator.

There was no indication of any movement of the funds

on deposit at Bank of America, and, why would there

be if the orders at the time made clear that the Receiver

was not going to incur any operational costs. The

Receiver was expressly protected from any regulatory

liabilities.

C.

While Seeking Liquidation of the Funds on Account

at Bank of America, the Discovery of RCT’s

Clandestine Activities Related to Those Funds.

This third phase in the life of the funds on deposit

at Bank of America involves the attempts to liquidate

the funds. The $250,000 on deposit was to serve as

the last asset to liquidate—because of its liquidity—

and whenever there was light at the end of the tunnel,

the Receiver referenced the funds in his liquidation

status reports.

The Receiver never lost sight of the funds on

account at Bank of America, and he publicly referenced

his eagerness to get to them. He referred to them in

2010 as “[t]he Receivership’s interest in a Surety

Bond held by Bank of America.” (3/02/10 [Dist. Ct. Doc.

No. 684] p. 1; see also 10/21/10 Receiver’s Eighteenth

Liquidation Report [Dist. Doc. No. 704] p. 4) With a

little light at the end of the tunnel in 2011, the Receiver

referred to liquidation of the funds as follows: “The

Bank of America deposit of $250,000 . . . will either be

13

resolved through settlement or summary proceedings.”

(8/4/11 Receiver’s Twentieth Consolidated Liquidation

Report [Dist. Ct. Doc. No. 774] p. 2)

With the lease litigation and sales concerning

the Texas oil and gas leases completed, it was time

for the Receiver to finally liquidate the funds. It was

with these efforts that the Receiver learned of the

RCT’s clandestine activities. It is important to note

that the RCT never filed a claim or insinuated that it

was making a claim to the funds on account at Bank

of America. The Receiver had no idea what he was going

to discover regarding the status of the funds on account

at Bank of America. None of the details are known by

the Receiver, but the funds made it over to the RCT,

and the Receiver demanded their return. There were

demand letters and discussions, but no progress.

Hence, desperate to close the Receivership and be

in position to pay his attorneys, on August 31, 2016,

the Receiver submitted his “Verified Final Budget and

Revised Plan for Closure of the Receivership” [Dist.

Ct. Doc. No. 1093]. The District Court approved that

budget [Dist. Ct. Doc. No. 1094] and authorized the

receiver to make immediate demand of the RCT for

turnover of the $250,000. The failure of the RCT to

turn the funds over led to the July 26, 2017 “Verified

Application for Summary Proceedings and Civil Contempt, Disgorgement, and Other Relief Against the

Railroad Commission of Texas,” which contained several

different causes of action, including turnover (although

only contempt gets heard and resolved).

14

D.

Revelation of the RCT’s Immunity to All of the

Orders in the Case, the Dismissal of All of the

Receiver’s Claims Without a Hearing, and the

Implosion of the Receiver’s Budget and Final Plan

for Closing the Receivership.

This fourth phase surrounding the funds on

account at Bank of America concerns the litigation that

leads this case to the Supreme Court. First of all, after

the Receiver filed the Verified Application for Summary Proceedings and Civil Contempt Contempt,

Disgorgement, and Other Relief Against the Railroad

Commission of Texas [Dist. Ct. Doc. No. 1097], only the

contempt claim received any analysis. Obviously contempt was the claim to lead with, but not at the expense of all other claims.

Even as to the contempt claim, the Receiver was

not afforded an opportunity to refute the defenses of

the RCT. The Receiver does not believe they are meritorious and strenuously objected to the District Court

and 7th Circuit that the facts being alleged by RCT

needed to be vetted. While giving the cause of action

for turnover scant mention, the District Court simply

dismissed the application against the Receiver in its

entirety, without a hearing, accepting all of the RCT’s

“evidence” without any opportunity to challenge it, and

giving the Receiver no avenue to pursue other causes

of action against the RCT. (Appx. at p. 16a)

The Receiver appealed this final decision to the 7th

Circuit Court of Appeals pursuant to 28 U.S.C. § 1291

and 28 U.S.C. § 1294. The Court of Appeals affirmed

the District Court.

15

REASONS FOR GRANTING THIS PETITION

The Court should take this case to examine the

issues set forth below in order to resolve the problems

that beset court-appointed receivers in Federal equity

matters, wherein there is no statutory guidance or

framework.

I.

Federal Equity Receivers, Who Pay Their

Expenses From Estate Assets, Need Rules Upon

Which They Can Rely Such as the Exclusive In

Rem Jurisdiction of 28 U.S.C. § 754, the

Procedures of a Freeze Order, Protective Orders,

and Final Sales Orders That Absolve Liabilities.

As set forth above in the Statement of the Case, the

RCT never filed a claim in Receivership estate, never

filed notice of any kind that it was taking an asset

continually claimed by the Receiver, and never provedup any costs or the relation of those costs to the

Receiver.

A. If 28 U.S.C. § 754 Provides Exclusive, In Rem

Jurisdiction, and a Freeze Order Specifically

Lists the Account Holder of Where the Asset in

Question Is Located, and a State Agency Has

Notice of the Jurisdiction, the Freeze Order and

the Receiver’s Claim, the State Agency Should

Be Required to Air Its Alleged Claim in Court.

Unless 28 U.S.C. § 754 is to be rendered useless

and fail to serve the purpose Congress intended for it,

and unless all rulings in Federal equity receiverships

are subject to be trumped at the whim of a State agency,

16

a claim must be filed against an asset claimed by a

Federal Receiver, pursuant to a freeze order with

procedures for making such claims. This must be the

case regardless of a mistaken understanding of the

situation or alternative interpretations of the facts at

hand. A Federal receivership cannot function unless

this is a mandatory rule.

With the current dearth of rules in Federal equity

receiverships, rules that always have been and will

need to be fashioned by the Federal courts, a scenario

similar to the instant case will be encouraged. A

State agency conceal its motive and its plan, waiting

for the proper time, or out waiting the receiver forever,

while receiver plans his liquidation budget.

The RCT knew for 15 years what was going-on in

the case in terms of the Receiver’s plans for the leases

and the bond. Unfortunately, it took that long to clean

up the mess they helped construct with the fraudsters.

But, by not having to file a claim, and thereafter not

having to justify or otherwise prove-up any of its alleged

expenses somehow attributable to the Receivership,

the RCT watched the Receiver freeze this asset (the

funds at Bank of America), protect against the very

liabilities on which RCT’s expenses are based, absolve

those liabilities through the sale of leases, and then

rip the rug right out from under the Receiver’s feet

when the Receiver tries to liquidate the funds to close

the estate.

17

B. If a Federal Receiver Cannot Rely on the

Appointing Court’s Orders That Explicitly

Prevent the Receiver from Being Saddled with

Certain Expenses, and Yet, a State Agency Can

Inflict Those Certain Expenses on the Estate,

at the 11th Hour, Administering a Federal

Estate Will Be Near Impossible and the

Slippery Slope with Such a Ruling Will Disable

Federal Equity Receiverships as a Remedy.

As explained above in the Statement of the Case,

and in more detail in the proceedings before the 7th

Circuit Court of Appeals, once Michael Wilson, the

convicted felon, was ousted from Alco, and a new party

bought Alco’s business, the Receiver was willing to

appease the RCT by recognizing Alco as the operator

(since the RCT was unwilling to depose Alco as the

operator). But, in so appeasing, the District Court provided protections to the Receiver so that none of the

regulatory expenses nor liabilities that might arise

from Alco’s new operations would fall on the Receiver.

These protections are without ambiguity. For instance, the September 5, 2006 OPINON AND ORDER

([Dist. Ct. Doc. No. 487] p. 8. ¶ 4) is key because the

order sets forth Soam Oil and Gas Investments, as the

purchaser of Alco and the “operator of record,” but

also explicitly recognizes that such operatorship by

Soam/Alco was “subject to its own direction, costs and

discretion.” A previous order was even more succinct

regarding where expenses and liabilities would fall:

1.

The 9-17-03 freeze order shall continue to

apply to the assets claimed by Branson

Energy Texas, Inc., and Alco.

****

18

3.

The 9-17-03 freeze order is lifted in favor of

Alco, the receiver, and their designees, inso-far as is necessary to maintain the value

of the subject oil and gas assets, including

repairs, operations, and improvements. All

costs to repair, operate or improve the oil and

gas assets shall be the responsibility of Alco

at Alco’s discretion.

(June 26, 2006 ORDER [Dist. Ct. Doc. No. 471]; Short

Appx. [7th Cir. Doc. No. 15] pp. 44-45)

The meaning of the District Court’s terms here

are without genuine question. The question is what

happened to that clear meaning when the RCT revealed

at the 11th hour that it had acquired the funds on

deposit at Bank of America. Something turned the State

agency into a clandestine super-creditor with the

highest priority status, which makes it near impossible

to operate as a Federal equity receiver.

C. Liabilities That Are Expunged as Part of Final

Sale Orders Need to Be Honored in Order to

Attract Third Parties to Those Sales and to

Enable the Receiver to Appropriate Expenses.

It is common for the courts to extinguish liabilities

associated with property interests in order to move

them out of the estate and to provide them with a

“fresh start.” Such use of equity in the case at hand,

when the Receiver has inherited an estate previously

managed by fraudsters. The release of such liabilities

is rendered even more appropriate here, as to the

RCT, because the RCT was the party that approved of

Michael Wilson, d/b/a Alco, as the operator that ran

the leases into the ground and switched his final

19

assurance literally months before the Receiver was

knocking at the RCT’s door.3

The Receiver was relying on the fact that the

erasure of Alco’s liabilities was authentic and valid.

Surely Alco was relying on such a fact. The buyers

were relying on such a fact. What does that do to the

buyers and Alco when the claim of the RCT is that

those liabilities are still being collected upon and the

RCT is not done. Obviously for the Receiver, it creates

substantial problems because the Receiver cannot now

pay for the expenses incurred the last couple years of

the administration of the estate. Instead those administrative expenses are trumped by the expenses of a

non-party, incurred (whether latent or manifest) prior

to the existence of the Receivership, despite the fact

that those expenses were expressly eliminated nine

years ago.

Moreover, all relevant parties believed such expenses and liabilities to be extinct because there has

never been an attempt to collect them in the District

Court and there was never a mention that such expenses existed until 2017 when the Receiver demanded

turnover of the funds.

It bears hearkening back to the District Court’s

finding that the RCT always knew what was going on,

and yet, stayed conveniently silent amidst all these

orders being issued in favor of the Receiver’s reliance

on liquidating the funds on account at Bank of America:

3 The point here is that the RCT could have required new financial

assurance from Michael Wilson, when the Receiver showed up

claiming the bond funds and the leases.

20

Since the beginning of this case, the Railroad

Commission has known of the court’s oversight of the leases, the receiver’s claim to

the bond, and the governance of the freeze and

turnover order concerning any resolution to

issues concerning the leases and bond.

(2018 OPINION AND ORDER, at App.15a-16a).

And thus, this Court should grant the writ for

certiorari to address these issues and formulate rules

of law that will provide the proper guidance and not

allow for great injustices to fall upon the courtappointed receivers who are administering the Federal

estate.

II.

In a Split from Circuits That Do Not Apply 28

U.S.C. § 959(b) to Liquidating Estates, the 7th

Circuit Erroneously Applied 28 U.S.C. § 959(b)

and the Rationale of Midlantic to the Receiver’s

Liquidation Efforts, Demonstrating the Need for

Supreme Court Guidance.

Although noting that In re Wall Tube & Metal

Products Co., 831 F.2d 118 (6th Cir. 1987) finds liquidation verses operation inconsequential, the Northern District of Indiana court correctly maintained that

“t]he overwhelming authority established by federal

courts is that § 959(b) does not apply to the trustee in

a Chapter 7 case unless the trustee continues to operate

the debtor’s business.” Minn. Pollution Control Agency

v. Gouveia, 345 B.R. 619, 637 (Bankr. N.D. IN 2006)

(string citing a host of bankruptcy decisions). That

the Northern District of Indiana is in the 7th Circuit

is intriguing because the 7th Circuit appears to have

21

a rule of thumb that if a receiver is in existence, the

receiver is operating.

When the words of the Supreme Court and Congress no longer have meaning, and can be ignored, the

Supreme Court needs to reset the standard, especially

in the context of Federal equity receivers where there

is no general common law or statutory framework.

A. In the Absence of Federal Common Law or

a Governing Statutory Framework, Federal

Equity Receiverships Inheriting Shams and

Scams Need Their Own Standard for Application of 28 U.S.C. § 959(b) and the Midlantic

Principle.

Obviously, most of the 28 U.S.C. § 959(b) and

Midlantic caselaw arises out of the Bankruptcy Code.

Yet every bankruptcy filing under the Code, even involuntary bankruptcies, involve voluntary participants.

They may have made some wrong turns and they may

have even made some illegal turns, but in virtually all

cases they are not a sham for the purposes of operating

a scam. The same can be said of most receiverships.

That said, the Federal equity receiver inheriting

a Ponzi scheme has no intention of operating, in the

normal sense of the word, and is going to be charged,

by the appointing court, to liquidate as soon as possible.

The sole goal for a Federal equity receiver, as was the

case here, is to collect all the defrauded investor funds

that are collectible and return them to investors. And

so, if that is the sole goal, the Federal equity receiver

needs to know what limits exist that he or she must

work around when budgeting and strategizing.

22

The case can be made, despite some variation

amongst the Circuits, that a liquidating trustee or a

receiver is outside the mandate of 28 U.S.C. § 959(b)

and Midlantic principals. And there is an even stronger

case that Federal equity receivers, particularly when

cleaning up shams and scams, should fall outside the

parameters of 959 and Midlantic. The Supreme Court

needs to put parameters on the intersection of 959

and Midlantic so that Federal equity receivers, such

as the case here, are not treated in the same manner

as bankruptcy trustees and receivers inheriting normal

(and legal) business situations.

B. The Intersection of 28 U.S.C. § 959(b) and

Midlantic Have Been Expanded to Require a

Receiver to Pay the Liabilities of a Non-Receivership Entity, Even Though the Liabilities

Arose Prior-to the Receivership, the Liabilities

Were Extinguished by Previous Court Orders,

and the Receiver Was Protected by Court Order

Against Those Liabilities.

Without limits on the intersection of 28 U.S.C.

§ 959(b) and Midlantic principals, unjust results like

the instant case will arise, and Federal equity receivers

will have a difficult time fulfilling budgeting and

planning.

This case presents a challenging set of facts that

should have made the application of 28 U.S.C. § 959(b)

and Midlantic principals improbable. But, when the

7th Circuit applies 959(b) to a receiver charged only

to liquidate, with only liquidation reports and public

expressions referring to liquidation, merely because

the receiver recognizes the pre-existing operator that

23

the RCT will not allow to be removed, there are few

situations, if any, where 959(b) would not apply.

The 7th Circuit goes so far as to say that Alco as

the operator preserved the estate. Say what? Alco’s

existence cost the estate hundreds of thousands in

losses and expenses, and that was before the loss of

the funds on account at Bank of America. The presence

of Alco, that the RCT would not allow us to removed,

spawned a great deal of litigation and led to much

delay. The Receiver would have liquidated the leases

and the funds on account at Bank of America as early

as 2003-04, at the time the Receiver first gave notice

to the RCT. But RCT would not allow the Receiver to

separate Alco from the scene, and it took several

years to do so, and over five more years dealing with

the related litigation, and then another two years

getting the RCT to sign off on the transfer of operatorship for the new buyers.

Again, facts such as these markedly make the point

that Supreme Court intervention and guidance in this

area is a necessity.

III. Without an Opportunity to Be Heard, the Receiver

Had All of His Causes of Action Against RCT (in

the Application for Summary Proceedings) Dismissed by the 7th Circuit, and Even the Contempt

Claim Was Dismissed Without a Hearing and an

Opportunity for the Receiver to Rebut the RCT’s

Defenses.

When the District Court denied the Receiver’s

motion for contempt, the court apparently denied all

claims against RCT: “the court DENIES the Receiver’s

motion for summary proceeding and civil contempt,

24

disgorgement and other relief [Doc. No. 1097].” (App.

19a) The 7th Circuit followed suit in affirming the

District Court. The 7th Circuit’s analysis focused primarily on the contempt claim and affirmed on that basis.

This is problematic for two reasons. First, as is

apparent on the face of the Application for Summary

Proceedings for Civil Contempt, Disgorgement, and

Other Relief” contains a host of other claims, as all of

the Receiver’s summary proceeding complaints have.

It did lead with contempt, and for obvious reasons

that was to resolved first. But the Receiver never had

an opportunity to be heard on the rest of its claims

against RCT, and the consequences are significant

for the Receiver.

Second, the 7th Circuit’s blind focus on just contempt also changed the standard of review from de

novo to abuse of discretion. To eliminate all of the

Receiver’s claims against the RCT, both legal and

equitable, the Receiver should have had the chance

to be heard on them. A de novo standard of review

would have required the 7th Circuit to delve into the

facts.

But the 7th Circuit did not even permit the

Receiver to have a hearing or otherwise rebut the

defenses of the RCT. All of the RCT’s defenses to the

contempt motion were newly alleged despite the fact

that they were years old. The Receiver doubts the

factual integrity and merit of any of them and stressed

this in briefing to the 7th Circuit. The RCT made off

with $250,000 of defrauded investor funds without

undergoing any scrutiny as to the validity of its claim.

25

IV. The 7th Circuit Erroneously Focused on the

Letters of Credit Instead of the Funds on

Deposit at Bank of America (Which Is What the

Receiver Was Pursuing), Thus Demonstrating the

Need for Guidance in This Area, Especially When

a Federal Equity Receiver and Freeze Orders

Are Involved.

The 7th Circuit’s statement proves the Receiver’s

case, and with this argument, we have gone full circle.

The 7th Circuit said: “When the [FREEZE] order was

issued, the bond was in the hands of Bank of America,

and the Railroad Commission had an independent letter

of credit from the bank.” Precisely. The Receiver

froze the bonds funds—cash on deposit—in the hands

of Bank of America, and Bank of America is specifically

listed in the FREEZE ORDER (9-17-03 [Dist. Doc. No.

178] p. 6) along with Alco, and Michael Wilson.

If a freeze order in this context does its job, the

fraudulent intent of the depositing of funds evaporates

and the Receiver’s intent for the funds controls. This

should especially be true in a situation where all the

relevant parties have notice. Caselaw supports that

the funds that support the letter of credit are estate

assets: “where the claim centers around the collateral

is a red herring.’” Int’l Finance Corp. v. Kaiser Group

Int’l Inc., 399 F.3d 558, 566 (quoting from Redback

Networks, Inc. v. Mayan Networks Corp. 306 B.R. 295,

299 (9th Cir. BAP 2004)).

26

CONCLUSION

The petition should be granted.

Respectfully submitted,

SHAWN F. SULLIVAN

COUNSEL FOR PETITIONER

S. F. SULLIVAN, ATTORNEY AT LAW, LTD

1717 EAST WAYNE STREET

SOUTH BEND, IN 46615

(574) 233-7860

SullyatLaw@sbcglobal.net

APRIL 29, 2019