Deutsche Bank v. US Energy DevDeutsche Bank v. US Energy Dev
Before JOLLY, JONES, and ENGELHARDT, Circuit Judges.
Appellants, comprising a number of Texas and Oklahoma oil and gas producers, challenge the bankruptcy court‘s grant, in part, and denial, in part, of Deutsche Bank‘s motion for partial summary judgment in this lien priority dispute. The allegedly competing security interests arose in proceeds from the sale of oil that the debtor, First River Energy, LLC purchased from Appellants before declaring bankruptcy. This court earlier granted an interlocutory appeal from the bankruptcy court‘s decision.
The bankruptcy court adroitly untangled a thorny conflicts of law issue, the result of which, unfortunately, undermines the efficacy of a non-standard UCC provision intended to protect Texas oil and gas producers.
BACKGROUND
First River Energy, LLC (“Debtor” or “FRE“) filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the Delaware bankruptcy
The mechanics of fossil fuel production frame the parties’ debate. After oil and gas is extracted upstream by producers, the production is sold to “first purchasers”2 at or near the wellhead. The first purchasers, also called midstream service providers, typically transport the production and market it to downstream purchasers like refineries or commodities traders.
Debtor FRE is a midstream service provider organized under Delaware law but headquartered in San Antonio, Texas. Pre-petition, the Debtor, as the first purchaser,3 bought oil under contracts with numerous upstream Producers located in Texas and Oklahoma and resold it to downstream purchasers. According to their agreements and standard oil and gas industry practice, the Debtor‘s payments
RADCO Operations, LP (“RADCO“) and RHEACO, Ltd. (“RHEACO“) (collectively referred to as “RADCO Intervenors“) also produced and sold Texas oil to First River pre-petition pursuant to a non-standard Crude Oil Purchase Agreement. They intervened in this adversary proceeding to collect payments for oil sold through December 2017, for which payment would have been due by the twenty-third of the following month (January). As explained below, the RADCO Intervenors are partially aligned with the Producers here.5
The Producers’ sales to the Debtor are governed by identical agreements, each of which incorporated certain terms and conditions known as the Conoco Phillips General Provisions.6 Among those terms is a warranty of title:
Warranty: The Seller warrants good title to all crude oil delivered hereunder and warrants that such crude oil shall be free from all royalties, liens, encumbrances and all applicable foreign, state and local taxes.
The RADCO Intervenors’ Purchase Agreements contain similar language.7 The following discussion assumes RADCO‘s arguments are the same as those of the Producers except where specifically noted.
Following a sweep of its deposit accounts by the Bank, the Debtor discontinued business at the end of December 2017. It had taken delivery from the Producers for that month but the purchase invoices were outstanding and unpaid. The Debtor sought Chapter 11 relief a few weeks later. The Producers filed proofs of claim in bankruptcy asserting that they have statutorily created first-priority, perfected purchase money security interests in the proceeds of the oil and condensate pursuant either to
As further protection for the Bank credit agreement, the Debtor, JPMorgan Chase, and the Bank entered into a Blocked Account Control Agreement in which the Bank was granted a security interest in all of Debtor‘s funds on deposit in accounts at JPMorgan Chase. The agreement indicates that its terms “shall be governed by and construed in accordance with the law of the State of New York” because “the State of New York is the jurisdiction of [JPMorgan Chase] as [d]epositary for purposes of Section 9-304(b) of the Uniform Commercial Code.”
First River, a Delaware entity, initially filed its chapter 11 petition in Delaware, but the bankruptcy court transferred the case to the Western District of Texas.
In March 2019, the bankruptcy court entered its Order Granting, in Part, and Denying, in Part, Agent‘s Motion for Summary Judgment and Alternative Motion for Partial Summary Judgment (the “Order“) in the adversary proceeding. Critically, the bankruptcy court first decided that because Delaware does not have a UCC nonstandard provision comparable to
Responding to the Producers’ request for interlocutory appeal of its decisions, the bankruptcy court certified the Producers’ appeal for direct review by this court pursuant to
A bankruptcy court‘s findings of fact are reviewed for clear error, and conclusions of law are reviewed de novo. In re Renaissance Hosp. Grand Prairie Inc., 713 F.3d 285, 294 (5th Cir. 2013). This court reviews “grants and denials of summary judgment de novo. Summary judgment is appropriate when ‘there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.‘” In re Crocker, 941 F.3d 206, 210 (5th Cir. 2019), as revised (Oct. 22, 2019) (internal citations omitted). An order dismissing claims or defenses is also reviewed de novo. Whitaker v. Collins, 862 F.3d 490, 497 (5th Cir. 2017).
DISCUSSION
The parties dispute bankruptcy court rulings that: (1) the Producers did not waive their claimed security interests through one of the Conoco Phillips General Provisions in the Producer Agreements; (2) the Delaware UCC is the body of law that governs the parties’ priority dispute; (3) the Texas Producers’ purchase money security interests under
I.
Initially, the Bank argues that the Producers expressly waived any security interests in the proceeds of their production in the Conoco Phillips General Provisions incorporated in the FRE sales agreements. The relevant provision, quoted fully above, states that “Seller warrants good title to all crude oil delivered . . . and that such crude oil shall be free from all . . . liens [and] encumbrances.” As the bankruptcy court noted, the warranty‘s interpretation depends on contract law, not the court‘s perception of underlying policies.10 Unambiguously, this provision is a “warranty,” not a “waiver,” and in fact a separate provision in the Agreements concerns waivers.11 Texas law, applicable by the parties’ designation, requires holistic construction of contractual provisions and “giv[ing] effect to all of the provisions of the contract so that none will be rendered meaningless.” Coker v. Coker, 650 S.W.2d 391, 393 (Tex. 1983). Whether considered against the background of
Because the warranties did not waive Producers’ claims to proceeds in the hands of FRE, the Bank‘s reliance is misplaced on cases where producers attempted to collect from purchasers downstream of the first purchasers. In the Third Circuit‘s decision In re Semcrude, upstream producers sought to enforce their Texas and Oklahoma lien rights against purchasers downstream of the first purchaser. In re Semcrude, 864 F.3d 280 (3d Cir. 2017).14 See also J. Aron & Co., v. SemCrude, L.P., (In re SemCrude, L.P.), 504 B.R. 39, 60 (Bankr. D. Del. 2013) (bankruptcy decision resulting in above Third Circuit appeal; court states in dicta that the Conoco Phillips provisions constituted an “express warrant[y] that the product was not subject to any security interests“); New Dominion, LLC v. J. Aron & Co. (In re SemCrude, L.P.), 2018 WL 481862 at *4 (Bankr. D. Del. Jan. 17, 2018) (same). Here, in contrast, the Bank, a lender to FRE, competes with the Producers for proceeds in the hands of FRE as “first purchaser.” In no case has a court held that the Conoco Phillips warranty provision prevents producers from asserting a lien against proceeds held by the first purchaser.
The Producers did not waive the right to assert their liens.
II.
The pivotal merits issues involve special laws enacted in Texas and Oklahoma whose purpose was to facilitate and ensure payment to the states’ oil and gas producers for sales of their production. See
A.
1. The Texas Producers rely on
Overall, the provisions of Section 9.343 so deviate from Texas‘s (and Delaware‘s) uniform Article 9 requirements for perfection, the effect of perfection, the length of perfection, and priority among security interests that they form a comprehensive scheme significantly benefitting statutory “interest owners.”
Critical to the Producers’ interpretation of this non-uniform provision is Section 9.343(p), which provides that “[t]he rights of any person claiming 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.”
2. The Oklahoma Lien Act creates a state statutory lien not connected with the UCC. “To secure the obligations of a first purchaser to pay the sales price, each interest owner is hereby granted an oil and gas lien to the extent of the interest owner‘s interest in oil and gas rights.”
b. By way of illustration and not limitation, oil and gas rights include, but are not limited to:
(1) oil or gas in place prior to severance,
(2) oil or gas production, or the right to receive a portion of the proceeds, upon severance,
(3) any interest or estate in, by, through or under an oil and gas lease, (4) rights acquired under a pooling order insofar as such rights relate to: ownership of oil and gas, the right to proceeds, or the right to enter into an agreement to sell,
(5) a legal or equitable right to receive consideration of whatsoever nature under an agreement to sell, or
(6) a mortgage lien or security interest in any of the foregoing;
An oil and gas lien “exists in and attaches immediately to all oil and gas on the effective date of this act; continues uninterrupted and without lapse in all oil and gas upon severance; and continues uninterrupted and without lapse in and to all proceeds” until the interest owner has received the sales price.
Critically, “the interest owner‘s oil and gas lien created by the Lien Act is not a UCC Article 9 security interest but rather arises as part of a real estate interest of the interest owner in the materials.”
3. Delaware follows the uniform UCC requirements, whereby perfection of a security interest in inventory, accounts, and proceeds is achieved by filing a financing statement. See
Further, as provided in the Uniform UCC, Delaware treats the priority of a security interest in deposit accounts as governed by the local law of the bank‘s jurisdiction, and state law allows the debtor and the bank holding the deposits by contract to specify the bank‘s jurisdiction for these purposes.
B.
The bankruptcy court acknowledged that the differences between Texas and Oklahoma and Delaware law concerning the Producers’ priority rights raised a serious potential conflict of law issue. The Bankruptcy Code, however, provides no method for resolving conflicts of law, and “[t]his circuit has not determined whether the [federal] independent judgment test or the forum state‘s choice-of-law rules should be applied in bankruptcy.” In re Mirant Corp., 675 F.3d 530, 536 (5th Cir. 2012) (citing Woods-Tucker Leasing Corp. of Ga. v. Hutcheson-Ingram Dev. Co., 642 F.2d 744, 748 (5th Cir. 1981)).19 We need not decide between the Texas forum‘s law or federal law where both bodies of law reach the same result. Woods-Tucker, 642 F.2d at 748.20
Texas courts, as it happens, apply the Restatement (Second) of Conflicts of Law (1972). Fishback Nursery, Inc. v. PNC Bank, N.A., 920 F.3d 932, 939-40 (5th Cir. 2019); Reddy Ice Corp. v. Travelers Lloyds Ins. Co., 145 S.W.3d 337, 340 (Tex. App. 2004). The federal independent judgment test, relied on by the Producers, also uses the Restatement (Second) of Conflicts of Law. The Bank and the Producers differ in the order in which provisions of the Second Restatement are to be considered.
This court‘s decision in Fishback Nursery has resolved that dispute in favor of the Bank. Fishback Nursery, like this case, settled competing lien priorities in a bankruptcy concerning “farm products” by applying the “most significant relationship” standard from Section 6 of the Second Restatement.21 Fishback Nursery, 920 F.3d at 939-40. The court found Section 6 “quite simple to apply where, as here, ‘Texas . . . has a statute which specifically controls the choice of law issue.‘” Id. at 938-39 (quoting Sommers Drug Stores Co. Emp. Profit Sharing Tr. v. Corrigan, 883 F.2d 345, 353 (5th Cir. 1989)). That simple-to-apply statute was
We are bound by Fishback Nursery‘s interpretation of Texas and federal choice of law principles in this case, in which the simple-to-apply state conflict of laws statute is
local law of the jurisdiction where “a debtor is located.”22
The Producers counter the application of substantive Delaware law in several ways. First, they contend that proper application of the federal independent judgment test would adhere to Section 251(1) of the Second Restatement, which addresses the “validity and effect of [a] security interest in chattel[s].” Restatement (Second) of Conflict of Laws § 251(1). According to that section‘s commentary, the “most significant relationship” standard would give “greater weight” to the location of the “chattels” at the time the security interest attached in order to secure predictability and certainty. Id. at § 251(1) cmt. e. But those concerns are prefaced by two significant features of the Section. First, the Introductory Note before the Restatement Section on encumbrances notes that it generally defers to UCC choice of law provisions.23 Restatement (Second) of Conflict of Laws ch 9, topic 3, title B (1971). Second, the commentary accompanying Section 251 incorporates both Section 6 principles and the UCC. Restatement (Second) of Conflict of Laws § 251. Even apart from the conclusions of Fishback Nursery, we find little basis for elevating Section 251 above the relevant Texas UCC choice of law.
But what is the relevant Texas UCC choice of law? The Producers turn to Section 9.343(p), contending that their rights as secured creditors are not governed by the law of FRE‘s formal organization, Delaware, because by its terms, Section 9.343 “necessarily displaces” the general Texas UCC choice of law rules.
Section 9.343 was deliberately enacted within the Texas UCC.25 Texas UCC Article
are thus included, not singled out, in this introductory provision describing the scope of coverage or exemption from Article 9 as a whole.
When it comes to choice of law, Section 9.301 articulates the general Article 9 rules, except as otherwise provided in Sections 9.302-307.
Given the overall specificity with which Texas Article 9, following in most instances the UCC, includes, excludes, or articulates special choice of law rules for many other types of transactions, the absence of special treatment for Section 9.343 interests is just that—absence. In fact, two provisions of the Texas UCC specifically accommodate security interests created by Section 9.343.26 The Texas legislature plainly understood the significance of specificity in regard to other types of security transactions and Section 9.343 interests. Conversely, in light of these other provisions, it is difficult to conclude that Section 9.343 “necessarily,” though impliedly, “displaces” the general choice of law rules.27
Further, because deciding the choice of law that governs a dispute is a prelude to deciding the dispute, the Producers essentially put the cart before the horse by relying on the source of their substantive interests, Section 9.343, to gauge the choice of law. We do not deny the force of the term “necessarily displaces” in Section 9.343(p), but the scope of Section 9.343 is declared in its title: “Oil and Gas Interests: Security Interest Perfected without Filing; Statutory Lien.” The terms of perfection, continuation, and priority of such interests are covered, which suggests that any “necessary displacement” relates to other provisions of Article 9 concerned with perfection, continuation and priority, not to generic choice of law provisions.
Challenging this reading of the statutory provisions, one experienced commentator advocates that “the physical placement of the Section 9.343 in Article 9 as opposed to the Property Code ought not be outcome determinative” of choice of law. See Rhett G. Campbell, A Survey of Texas Oil and Gas Bankruptcy Issues, 5 Tex. Oil, Gas &
Prompted by an inquiry from this court, the Producers argue that they may take advantage of one of the special Texas UCC choice of law provisions (mirroring the UCC) applicable to “as-extracted collateral.” For such collateral, which includes oil and gas production and accounts arising from their sales, “[t]he local law of the jurisdiction in which the wellhead or minehead is located governs Article 9 security interests.
Focusing on the lack of a statutory definition of a debtor‘s “interest” in the minerals, the Producers admit that FRE did not obtain legal title until oil and condensate passed from their storage tanks into the FRE‘s trucks or pipeline. However, they assert that FRE‘s exclusive right to purchase production created an equitable interest or title in “as-extracted collateral,” on which the Producers held a security interest. This argument would fundamentally recharacterize the parties’ relationship and transform the sellers into a lender. This claim is insupportable. The Debtor‘s bankruptcy schedules do not list its ownership of mineral interests as property, and the Debtor‘s CEO testified that FRE purchased oil at the wellhead that generated accounts receivable to the Producers. Finally, the Producers’ contracts with Debtor stipulate that delivery of the product and transfer of title from the Producer to Debtor occurred when the product is loaded on Debtor‘s carrier trucks.29 See also SemCrude, 864 F.3d at 292 (“SemGroup had no interest in the oil while it was in the ground. Only after the Producers extracted and sold it did SemGroup become involved“). The Producers had no enforceable security
interest based on the as-extracted collateral provision.
The Producers next attempt to rely on a Texas choice of law provision in the Conoco Phillips General Provisions incorporated in the Producers’ Sales Agreements with FRE. But the instant dispute is a lien priority contest with a third-party creditor, the Bank, not a suit between parties to the Sales Agreements. As this court explained in Fishback Nursery, enforcing the choice-of-law
C.
Concurring with the bankruptcy court that substantive Delaware UCC law governs these priority disputes, we must analyze the comparative rights of the Bank against the Texas and Oklahoma Producers. As explained previously, Delaware UCC law requires filing financing statements with its state authorities to perfect security interests in goods, inventory and proceeds and determines priority according to the first-to-file rule. The Bank‘s financing statements have been perfected and continuously updated since 2015.
Further, under the Delaware UCC, the Bank‘s possession of the Debtor‘s deposit accounts secures its interest in those blocked accounts.
1. The Texas Producers are out of luck under Delaware UCC law, which does not recognize the priority of their unfiled, unperfected security interests in proceeds under
The Producers assert that Official Comment 7 to the
The Producers also contend that the Bank‘s loan documents with FRE waive or subordinate the Bank‘s assertion of security interests in proceeds from FRE‘s sales of the Producers’ oil and condensate. Specifically, the Bank‘s credit agreement with FRE provides that “100% of the First Purchaser Lien Amount[s]” is
The bankruptcy court held that the permitted liens under § 8.3 of the credit agreement did not result in a waiver of priority by the Bank. The parties’ security agreement stipulated that permitted liens could not “be deemed to constitute an agreement to subordinate any of the Liens of the Collateral Agent under the transaction Documents to any Liens permitted under Section 8.3 of the Credit Agreement.” Under Texas law, waiver is “the intentional relinquishment of a known right or intentional conduct that is inconsistent with asserting that right.” Teal Trading and Dev. LP v. Champee Springs Ranches Prop. Owners Ass‘n, 534 S.W.3d 558, 584 (Tex. App. 2017), aff‘d, 593 S.W.3d 324 (Tex. 2020). Moreover, “Delaware courts have consistently held that the existence of an express non-waiver provision precludes a contracting party from arguing that the other party‘s conduct waived a contractual right.” AgroFresh Inc. v. MirTech, Inc., 257 F.Supp.3d 643, 660 (D. Del. 2017) (collecting cases).
Although the credit agreement acknowledges First Purchaser Liens, and it even limits the Debtor‘s borrowing base in accord with such liens, the security agreement expressly does not subordinate the Bank‘s security interest. Including First Purchaser Liens in the “permitted liens” under the agreement means that Debtor did not default under the credit agreement by allowing such liens. This arrangement is a practical necessity for a midstream service provider. The Bank waived no priority rights to the proceeds.
Having carefully reviewed all of the Producers’ arguments, we must affirm the bankruptcy court‘s conclusion that the Bank‘s interests in the disputed collateral prime any interests held by the Texas Producers.
2. The Oklahoma Producers contended successfully in the bankruptcy court that they are entitled to a first-priority statutory lien in the proceeds from Debtor‘s sale of the oil produced in Oklahoma. Although Delaware law contains no statutory lien provision similar to the Oklahoma Lien Act, the Delaware UCC does not preempt statutory liens created by other states.
Passed in 2010, the Oklahoma Lien Act was meant to cure the defects found in the state‘s Lien Act of 1988 by the Delaware bankruptcy court in In re SemCrude. In re SemCrude, 407 B.R. 112 (Bankr. D. Del. 2009);
Commenting on the new statute, an Oklahoma appellate court explained that “the purpose of the statute was to give Oklahoma producers and royalty owners a first-priority lien to secure payment for their interest in oil and gas sold to a first purchaser.” Gaskins v. Texon, LP, 321 P.3d 985, 990 (Okla. Civ. App. 2013). The court further stated:
[the Oklahoma Lien Act] strengthens the rights of Oklahoma interests owners in three (3) ways: (1) Oklahoma oil and
gas interests are now governed by real property law, which designates the applicable law by the state in which the wellhead is located; (2) Oklahoma interest owners can now obtain a lien that will remain attached until a first purchaser has paid in full the purchase price of produced oil; and (3) the Lien Act explicitly and unbendingly grants superior priority to Oklahoma interest owners above all other lienholders and U.C.C. Article 9 secured creditors.
Id. at 991 (citing Sahar Jooshani, There‘s A New Act in Town: How the Oklahoma Oil and Gas Owners’ Lien Act of 2010 Strengthens the Position of Oklahoma Interest Owners, 65 Okla. L. Rev. 133 (2012)).
The Bank does not challenge that the Oklahoma Lien Act creates a first-priority statutory lien outside the UCC, but contends instead that the Oklahoma Producers offered no summary judgment evidence demonstrating the extent of their interests. Evidence proffered by the Bank, however, through Debtor‘s CEO Kryak, acknowledged the Oklahoma Producers’ claims and estimated the value of those liens at “less than $1 million.” Proof to the penny was not required at this summary stage of the proceedings.
We perceive no reason to disturb the bankruptcy court‘s assessment of priority between the Oklahoma Producers and the Bank, nor its further conclusion that the Producers will be required to prove up the extent and amount of their secured claims.
III.
The Producers asserted affirmative defenses described as estoppel, unclean hands, and waiver.32 The bankruptcy court correctly dismissed these theories, all of which depend on incorrect assertions about the Bank‘s credit agreement and securitization documents. As we have discussed, the Bank‘s documentation of its loans to FRE did not waive or subordinate its security interests to those claimed by the Producers, nor is the Bank “estopped” to base its claim on documentation that merely identified the Producers’ potential liens. The Producers admit that their “unclean hands” defense is plausible
only if the Bank wrongly swept the Debtor‘s accounts in early January 2018 in derogation of their security interests. This defense is meritless in light of the preceding conclusions.
IV.
Finally, the Bank contends that the bankruptcy court erred by holding that it would allow the Oklahoma producers to submit an application for attorney‘s fees for prevailing on their declaratory judgment counterclaim. The Bank contends under the Declaratory Judgment Act, attorney‘s fees are recoverable “only where they are recoverable under non-declaratory judgment circumstances.” See Mercantile Nat‘l Bank at Dallas v. Bradford Trust Co., 850 F.2d 215, 216 (5th Cir. 1988). That is correct. And here, the Oklahoma Lien Act specifically authorizes recovery of attorney‘s fees by the prevailing party in a proceeding to enforce oil and gas liens. See
CONCLUSION
For the foregoing reasons, we AFFIRM the bankruptcy court‘s order granting, in part, and denying, in part, the Bank‘s motion for partial summary judgment, granting relief to the Oklahoma Producers, and dismissing the Producers’ affirmative defenses.