Source: http://www.thesecuredlender-digital.com/thesecuredlender/october_2017?pg=42
Timestamp: 2019-01-18 19:35:23
Document Index: 206283328

Matched Legal Cases: ['§ 9', '§\n84', '§ 9', '§ 84', '§ 9', '§ 9', '§ 9']

40;REGISTRATION;IS;OPEN;FOR;CFA’S;ANNUAL;CONVENTION;IN;CHICAGO!;WWW.CFA.COM n;this;issue,;CFA’s;Co-General Counsel;discuss;a;recent;Third Circuit;ruling;that;analyzes certain;nonuniform;UCC provisions;dealing;with;security interests;in;oil;and;gas. JONATHAN;HELFAT AND;RICHARD;KOHN CFA;CO-GENERAL;COUNSEL
In re SemCrude L.P., 864 F.3d 280 (2017)
(Third Circuit holds that producers of oil did not possess an automatically perfected security interest in oil sold to third parties.)
A recent decision of the U.S. Court of Appeals for the Third Circuit provides an interesting lesson in the workings of the automatic perfection provisions of the Uniform Commercial Code favoring oil and gas producers in certain states.
Thousands of oil producers sold oil to two of SemGroup L.P.’s affiliates, SemCrude L.P. and Eaglwing, L.P. (collectively, the “SemCrude Companies”), which in turn resold the oil to various purchasers, including BP Oil Supply Company and J.
Aron & Company (the “Ultimate Purchasers”), which bought oil from the SemCrude Companies on open account in 2007 and
2008. The SemCrude Companies also sold
call options to the Ultimate Purchasers,
giving them the right to purchase oil at
a specific date and price in the future. In
their contracts with the SemCrude Compa-
nies, the Ultimate Purchasers retained the
right to set-off, against any amounts owing
to the SemCrude Companies for purchases
of oil, any amounts owing to the Ultimate
Purchasers in respect of their call options.
The price of oil rose throughout 2007 and 2008, and the SemCrude Companies sold more options to cover the losses.
Eventually, the SemCrude Companies were unable to cover the margin requirements on the options. J. Aron & Company requested assurance of performance from the SemCrude Companies; however, the SemCrude Companies failed to provide the assurance, and J. Aron & Company called a default and set-off $345 million owing in respect of option trades against $435 million in oil purchases. SemGroup filed for chapter 11, triggering a default, and set-off, under BP Oil Supply Company’s agreement with the SemCrude Companies.
After the chapter 11 was filed, numerous oil producers sued the Ultimate Purchasers in federal and state courts, and the cases were transferred to the bankruptcy court. After extensive proceedings, the bankruptcy court recommended summary judgment in favor of the Ultimate Purchasers, the District Court adopted that recommendation and granted summary judgment, and the producers appealed to the U.S. Court of Appeals for the Third Circuit. The Third Circuit affirmed the grant of summary judgement in favor of the Ultimate Purchasers.
The producers located in Texas and Kansas argued, among other things, that they had an automatically perfected security interest in the oil sold to the Ultimate Purchasers. Both the Texas UCC and the Kansas UCC provide for a security interest “in favor of interest owners, as secured parties, to secure the obligations of the first purchaser of oil and gas production, as debtor, to pay the purchase price,” and further provide that such security interest is automatically perfected without the need to file a UCC- 1 financing statement.
(Tex. Bus. & Com. Code § 9.343; Kan. Stat. §
84-9-399). These producers took the position that their security interest continued in the hands of the Ultimate Purchasers.
However, the Court found that this provi-
sion was overridden by other provisions
of the UCC. First, the Court noted that the
same section of the Texas and Kansas UCC
also provided that “[t]he rights of any
person claiming under a security interest
or lien created by this section are governed
by the other provisions of this chapter
except to the extent that this section
necessarily displaces those provisions.”
(Tex. Bus. & Com. Code § 9.343(p); Kan. Stat.
§ 84-9-339a(o)). The Court then looked to
the basic conflict-of-laws provision of both
UCCs (UCC 9-301), under which perfection,
the effect of perfection or nonperfection
and the priority of a security interest
are governed by the law of the debtor’s
state of organization, which in this case
was either Delaware or Oklahoma. The
UCC in neither of those states granted an
automatically perfected security interest
in favor of oil and gas producers.
The Court noted that the only possible exception to the basic conflict-of-laws rule of § 9-301 would be § 9-301( 4), which provides that the perfection, the effect of perfection or non-perfection and priority of a security interest in “as-extracted collateral” is governed by the jurisdiction in which the wellhead or minehead is located. However, the Court observed that this possible exception only applies where the debtor has a preexisting interest in the oil before it is extracted at the wellhead – a circumstance that did not exist in this case, since the SemCrude Companies only acquired an interest in the oil after it had been extracted.
The Court also found that nothing in the sections of the Texas or Kansas UCC “ necessarily displaces” the basic conflict-of-laws rule embodied in § 9-301.
Finally, the Court made the point that permitting the producers to have a security interest in the hands of the Ultimate Purchasers would create tremendous “ burdens and uncertainty” in the marketplace, given that the SemCrude Companies resold oil from thousands of producers located in eight states. TSL