Deutsche Bank v. US Energy Dev ( 2021 )

Case: 19-50646 Document: 00515730781 Page: 1 Date Filed: 02/03/2021
IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT
United States Court of Appeals
Fifth Circuit
FILED
No. 19-50646 February 3, 2021
Lyle W. Cayce
In the Matter of: FIRST RIVER ENERGY, L.L.C. Clerk
Debtor
DEUTSCHE BANK TRUST COMPANY AMERICAS, Agent;
FIRST RIVER ENERGY, L.L.C.,
Appellees - Cross-Appellants
v.
U.S. ENERGY DEVELOPMENT CORPORATION;
AGERON ENERGY, L.L.C.; PETROEDGE ENERGY IV, L.L.C.;
TEAL NATURAL RESOURCES, L.L.C.;
CRIMSON ENERGY PARTNERS IV, L.L.C.; VICEROY PETROLEUM, L.P.;
RLU OPERATING, L.L.C.; DEWBRE PETROLEUM CORPORATION;
JERRY C. DEWBRE; AMERICAN SHORELINE, INCORPORATED;
TEXPATA PIPELINE COMPANY; AURORA RESOURCES CORPORATION;
AWP OPERATING COMPANY; TEXRON OPERATING L.L.C.;
MAGNUM PRODUCING, L.P.; MAGNUM ENGINEERING COMPANY;
MAGNUM OPERATING, L.L.C.; ROCK RESOURCES INCORPORATED;
KILLAM OIL COMPANY, LIMITED; ENERGY RESERVES GROUP, L.L.C.,
Appellants Cross-Appellees
Appeal from the United States Bankruptcy Court
for the Western District of Texas
USDC No. 5:19-CV-301
Before JOLLY, JONES, and ENGELHARDT, Circuit Judges.
EDITH H. JONES, Circuit Judge:
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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. 28 U.S.C. § 158(d).
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. TEX. BUS. &
COM. CODE [hereinafter Texas UCC] § 9.343. As a result, producers must
beware “the amazing disappearing security interest” and continue to file
financing statements. 1 The Texas legislature should take note. As the court
also correctly disposed of a host of other issues, we AFFIRM the bankruptcy
court’s order.
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 court in January 2018. In the month before filing, FRE had
purchased crude oil and condensate from Texas and Oklahoma producers
(“Producers”), which it sold to downstream purchasers, but FRE did not pay
the Producers. The Producers assert liens created by statute in Texas and
Oklahoma on the production and proceeds. However, Deutsche Bank Trust
Company Americas, as Agent for various secured lenders (collectively “Bank”),
also asserts the Bank’s priority claim to the sale proceeds as a secured creditor
1 David F. Asmus, Top Ten Surprise Texas Oil and Gas Law Cases, Seventieth Ann.
Inst. on Oil and Gas Law 379-80 (2019).
2
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of the Debtor. The Debtor, an intervenor in this adversary proceeding, agrees
with the Bank.
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 for Producers’ deliveries that occurred in one
month would be made “on or before the 20th of the month following delivery.”
See In re Semcrude, L.P., 407 B.R. 112, 121 (Bankr. D. Del. 2009) (noting this
industry practice). The downstream purchasers paid Debtor according to the
terms of their respective agreements. As of the petition date, Debtor held
$27,613,066.81 in accounts receivable from the downstream purchasers. 4
RADCO Operations, LP (“RADCO”) and RHEACO, Ltd. (“RHEACO”)
(collectively referred to as “RADCO Intervenors”) also produced and sold Texas
2 “‘First purchaser’ means the first person that purchases oil or gas production from
an operator or interest owner after the production is severed, or an operator that receives
production proceeds from a third-party purchaser who acts in good faith under a division
order or other agreement authenticated by the operator under which the operator collects
proceeds of production on behalf of other interest owners.” Texas UCC § 9.343(r)(3).
3 FRE took possession of the oil “[a]s product passes through SELLER’s exit flange
from lease tankage into BUYER’s designated carrier trucks.”
4 The bankruptcy court found that by June 2018, Debtor had collected all outstanding
accounts receivable from the downstream purchasers.
3
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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.
5 The RADCO Intervenors did not appeal the bankruptcy court’s summary judgment
ruling. However, the Bank’s cross-appeal and the Debtor’s intervention in this appeal
dispute certain of the bankruptcy court’s conclusions about the RADCO Intervenors.
Although RADCO does not appear as a party to this appeal, the disposition of Producers’
rights will also determine the RADCO Intervenors’ rights as a matter of law.
6 The Debtor’s standard form Producer Contract contains the following language:
Special Provisions: Conoco Phillips General Provisions dated 1993 and
subsequent amendment dated 2009 are made a part of this contract by
reference hereto. However, the terms herein shall control if there is any
conflict between these terms and those in the General Provisions.
7 The RADCO Purchase Agreement provides:
Warranty of Title and Authority to Sell. Seller [RADCO] hereby warrants and
guarantees that the title to the portion of the crude oil sold and delivered
hereunder which is owned by Seller is free and clear of all liens and
encumbrances and warrants that as to the remaining portion of the crude oil
sold and delivered hereunder Seller has the right and authority to sell and
deliver said crude oil for the benefit of the true owners thereof.
4
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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 Texas UCC § 9.343 or Okla. Stat.
Ann. tit. 52, [hereinafter Oklahoma Lien Act] § 549. 8
The Bank’s competing security interests stem from a credit agreement
executed under Delaware law in July 2015 between FRE as borrower and the
Bank. The Debtor simultaneously entered into a guarantee agreement and a
security agreement with the Bank that granted a continuing security interest
in substantially all of Debtor’s assets, including its accounts and proceeds
thereof. The security interest was perfected by filing UCC-1 financing
statements with the Delaware Department of State in July 2015, and the
filings have been updated to maintain continuous perfection. Debtor’s
indebtedness to the Bank and the validity and perfection of the Bank’s security
interests are not disputed.
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
8 The Bank contends that the Producers never submitted adequate summary
judgment proof of their secured claims. Timely filed proofs of claim, however, constitute
prima facie evidence of creditors’ claims. FED. R. BANKR. P. 3001(f). Claims are “deemed
allowed,” 11 U.S.C. § 502(a), unless properly objected to under the Bankruptcy Code. See,
e.g., 11 U.S.C. § 502(b). No objections were filed here. See In re Heritage Highgate, Inc.,
679 F.3d 132, 140 (3d Cir. 2012) (giving prima facie effect to the validity and amount of a
properly filed secured claim).
5
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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. 28 U.S.C. § 1412. The Bank initiated an adversary
proceeding seeking a declaration of the first priority of its security interests in
the accounts and cash proceeds from FRE’s sale of the oil notwithstanding the
Producers’ claimed security interests. The Producers answered,
counterclaimed, and asserted affirmative defenses; the Debtor intervened
seeking a resolution of the conflict; and ultimately all sides briefed the Bank’s
summary judgment motion.
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 Texas
UCC § 9.343, a choice of law determination was required. The court’s analysis
led it to conclude that either Delaware or Texas, would “choose” the Delaware
UCC to assess the validity, perfection and priority of the parties’ liens.
Notwithstanding Texas UCC § 9.343, the court held that the Bank’s valid,
perfected security interests in the Debtor’s accounts and proceeds takes
priority over unperfected or later-filed 9 secured claims of the Texas Producers.
The court also concluded, however, that the Bank’s interests are subordinate
to the statutory real property liens asserted by the Oklahoma Producers. The
9 Some Texas Producers filed financing statements in Delaware in early January 2018.
6
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court affirmed the Bank’s valid, perfected, first-priority security interest in
Debtor’s deposit accounts at JPMorgan Chase.
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 28 U.S.C. § 158(d)(2). We authorized the
appeal and the Bank’s cross-appeal.
STANDARD OF REVIEW
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 Texas UCC § 9.343 are subordinate
to those of the Bank, while the Oklahoma Producers’ statutory liens prime the
Bank; and (4) the Producers’ counterclaims and affirmative defenses were
correctly dismissed. We address these issues in order.
I.
Initially, the Bank argues that the Producers expressly waived any
security interests in the proceeds of their production in the Conoco Phillips
7
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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 Texas UCC
§ 9.343, 12 or by itself, this warranty covered the production alone, not the
purchase price owed by the “first purchaser,” which is the “proceeds” of sale.
Accordingly, the bankruptcy court did not err in holding that the warranty of
title did not waive the Producers’ rights to assert a lien under either Texas
UCC § 9.343 or the Oklahoma Lien Act. 13
10 Cf. In re Semcrude L.P., 864 F.3d 280, 300 (3d Cir. 2017) (making an offhand
comment that “[t]he industry thus uses the Conoco [Phillips] warranty that this oil is sold
free and clear of any liens because it is a hard-to-trace, liquid asset that flows throughout the
country”).
11The “Waiver” section states: “no waiver by either party regarding the performance
of the other party under any of the provisions of this Agreement shall be construed as a
waiver of any subsequent performance under the same or any other provisions.”
12 Section 9.343(c) attaches the security interest to the production and proceeds from
it, but while the security interest in the production is cut off by the first purchaser’s sale to a
buyer in the ordinary course, a security interest in proceeds remains intact “whether or not”
such sale is to a buyer in the ordinary course. §§ 9.343(c),(e). The sales agreements with this
Debtor were governed by Texas law. The Oklahoma Lien Act is comparable. Oklahoma Lien
Act §549.6.
13 The bankruptcy court found such reasoning equally applicable to the RADCO sales.
8
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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 Texas UCC § 9.343;
Oklahoma Lien Act § 549. But the Producers’ path to success runs into a
14 In the course of rejecting the producers’ claims on various grounds, the court simply
noted, without opining on, the fact that “Producers now argue that the [Conoco warranty
language] applied only to third-party liens, not the ones created between a Producer and the
purchaser.” Id. at 295. Moreover, the court acknowledged testimony from the downstream
entities that they were familiar with state lien laws and knew that the midstream/first
purchaser’s banks had carved out of their lending base assets encumbered by such “state
liens.” Id.
9
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formidable choice of law hurdle in that Delaware, the state of Debtor’s formal
organization, does not recognize certain nonstandard UCC security interests.
To review the bankruptcy court’s determinations, it is necessary to describe
the scope of the respective statutes, then to consider the choice of law, and
finally to apply the substantive choice to the priority disputes here.
A.
1. The Texas Producers rely on Texas UCC § 9.343, a nonuniform
Uniform Commercial Code provision first enacted in 1983, which grants a first
priority purchase money security interest in oil and gas produced in Texas as
well as proceeds in the hands of any “first purchaser.” 15 A “first purchaser,” is
in pertinent part, “the first person that purchases oil or gas production from
an operator or interest owner after the production is severed.” Texas UCC
§ 9.343(r)(3).
The statute’s purpose is to “provide[] a security interest in favor of
interest owners, as secured parties, to secure the obligations of the first
purchaser of . . . production, as debtor, to pay the purchase price.” Texas UCC
§ 9.343(b). It effectuates a “security interest” that is “perfected automatically
without the filing of a financing statement.” Id. Automatic perfection occurs
“if the interest of the secured party is evidenced by a deed, mineral deed,
reservation in either, oil or gas lease, assignment or any other such record
recorded in the real property records of a county clerk, that record is effective
as a filed financing statement for the purposes of this chapter.” Id. The
security interest extends to the oil and gas production and the identifiable
15 The Producers are included among the statutory “interest owners,” defined as a
“person owning an entire or fractional interest of any kind of nature in oil or gas production
at the time of severance, or a person who has an express, implied, or constructive right to
receive a monetary payment determined by the value of oil or gas production or by the amount
of production.” Texas UCC § 9.343(r)(2).
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proceeds of production owned by, received by, or due to the first purchaser.
Texas UCC § 9.343(c)(1). 16 The security interest exists for an “unlimited time”
in oil or gas production, accounts, or cash proceeds, and the periodic
requirement to update any filing is dispensed with. Texas UCC
§ 9.343(c)(l)(A), (f). Moreover, “[a] security interest created by this section is
treated as a purchase-money security interest for purposes of determining its
relative priority under Section 9.324 over other security interests not provided
for by this section.” Texas UCC § 9.343(f)(1). 17
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.” Tex. UCC § 9.343(r)(2). 18
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.” Texas UCC § 9.343(p) (emphasis added).
16 One court has held that “tracing” proceeds is not required to render them
“identifiable” under this provision. In re Aurora Nat’l Gas, LLC, 312 B.R. 318, 322 (Bankr.
N.D. Tex. 1994).
17 The statute disclaims granting a “statutory lien” except for taxes payable by the
first purchaser or the rights of a person who would be entitled, but for the lack of a writing,
to the protection of § 9.343(a). See Texas UCC § 9.343(d).
18 An early expositor of the statute stated, “[w]hen interpreting the statute, it must
be noted that added protection of the interest owner’s position is frequently contrary to the
policies underlying and traditional business practices based on Article 9 of the U.C.C.”
Cynthia Grinstead, The Effect of Texas U.C.C. Section 9.319 on Oil and Gas Secured
Transactions, 63 Tex. L.Rev. 311 (1984).
11
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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.” Oklahoma Lien Act § 549.3.
“Oil and gas rights” are broadly defined in the Oil and Gas Owner’s Lien Act
of 2010 as “any right, title or interest, whether legal or equitable” in and to oil,
gas and proceeds. Further,
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;
Oklahoma Lien Act § 549.2.
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. Oklahoma
Lien Act § 549.3. Such liens are created and “perfected automatically without
the need to file a financing statement or any other type of documentation.”
Oklahoma Lien Act § 549.4. Liens created under this statute “take[] priority
over any other lien . . . or any security interest” “except for a permitted lien.”
Oklahoma Lien Act § 549.7. As noted in a comment to the statute, the created
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interest takes “automatic super-priority without any public notice by filing or
possession.” Oklahoma Lien Act § 549.7 cmt. 1.
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.” Oklahoma Lien Act § 549.3
cmt. 2. Moreover, comment 2 clarifies that “the governing law . . . is the law of
the state where the well is located . . . [to avoid] application of the UCC
Article 9 choice of law rules for personal property.” Id. (citations omitted).
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 Del. Code Ann. tit. 6, § 9-310(a) (filing required
with exceptions not relevant here). A perfected security interest attaches only
to “identifiable” proceeds of collateral in which the original collateral’s security
interest was perfected. Del. Code Ann. tit. 6, §§ 9-315(a)(2), (c). And Delaware
follows the first-to-file-or-perfect rule. Del. Code Ann. tit. 6, § 9-322(a)(1).
Delaware’s UCC has no nonstandard provision comparable to Texas UCC
§ 9.343 or the Oklahoma Lien Act.
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. Del.
Code Ann. tit. 6, § 9-304(a), (b)(1). In this case, there is no disagreement that
FRE and the Bank chose New York law as the law of the depositary bank’s
(JPMorgan Chase’s) jurisdiction. Nor is it disputed that, through the Blocked
Account Control Agreement, the Bank perfected its security interests by
control of the deposit accounts. See N.Y.U.C.C. § 9-312(b)(1).
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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-
19 There is a circuit split on which this court has not taken sides. Fishback Nursery,
Inc. v. PNC Bank, Nat’l Ass’n, 920 F.3d 932, 935 (5th Cir. 2019). Some courts apply the choice
of law of the bankruptcy forum on the basis of Erie principles, specifically Klaxon v. Stentor
Elec. Mfg. Co., 313 U.S. 487, 616 S. Ct 1020 (1941). Under that principle, because bankruptcy
must allocate the debtor’s assets according to state law, except to the extent superseded by
federal law, the choice of law of the forum state prevails. See, e.g., Robeson Indust. Corp. v.
Hartford Accid. & Indem. Co., 178 F.3d 160, 164-65 (3d. Cir. 1999); In re Gaston & Snow,
243 F.3d 599, 605-07 (2d Cir. 2001); In re Merritt Dredging Co., 839 F.2d 203, 206 (4th Cir.
1988).
Others derive the imperative to employ federal choice of law rules, and specifically the
Restatement factors, from Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156,
67 S. Ct. 237 (1946), see In re Lindsay, 59 F.3d 942, 948 (9th Cir. 1995). Vanston’s adoption
of a federal choice of law in that case was met with a dissent by Justice Frankfurter, who
noted that underlying creditors’ rights in bankruptcy nearly always derive from and therefore
must be adjudicated according to state law. Frankfurter’s views were powerfully echoed by
the unanimous Supreme Court in Butner v. United States, 440 U.S. 48, 99 S. Ct. 914 (1979).
Lower courts may not prematurely declare Supreme Court cases to be “overruled,” however,
it is very doubtful that Vanston survives either the enactment of the Bankruptcy Code or the
import of Butner. In addition, Vanston did not apply a federal choice of law to an adversary
proceeding arising wholly under state law.
20 The Bank argues that the “forum” law should be that of Delaware, inasmuch as the
FRE bankruptcy was filed in Delaware, then transferred to Texas. The Supreme Court holds
that in diversity cases, the “forum” for choice of law as well as the substantive law is the state
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40 (5th Cir. 2019); Reddy Ice Corp. v. Travelers Lloyds Ins. Co., 145 F.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 Nursey, 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 Texas UCC Section 9.302. Fishback went on to hold that
this court had previously applied the Section 6 factors as a “touchstone” in the
independent judgment test. Id. at 939.
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 Texas UCC § 9.301. Here, Texas UCC § 9.301(1) governs the
perfection, effect of perfection and priority of security interests by applying the
in which the case was originally filed. Piper Aircraft v. Reyno, 454 U.S. 235, 243 n.8,
102 S. Ct. 252, 259 (1981); Van Dusen v. Barrack, 376 U.S. 612, 84 S. Ct. 805 (1964). The
Bank’s position is arguable, but unlikely: the Bank commenced this declaratory judgment
action, which is an adversary proceeding within the bankruptcy case, in Texas bankruptcy
court following the transfer. The adversary proceeding was never itself transferred from
Delaware. Texas is the forum.
Section 6 comment (a) singles out the Uniform Commercial Code to support its
21
statement that courts generally “must apply a local statutory provision directed to choice of
law.”
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local law of the jurisdiction where “a debtor is located.” 22 Texas UCC
Section 9.307(e) defines the debtor’s “location” as the state of “organization” for
a L.L.C. like FRE. Therefore, following Fishback Nursery, Delaware law
governs the competing priorities under either Texas choice of law or the federal
independent judgment test.
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.
22 Section 9.301(1) states: “Except as otherwise provided in this section, while a debtor
is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of
perfection or nonperfection, and the priority of a security interest in collateral.” Texas U.C.C.
§ 9.301(1).
23 The need for deference is magnified by the replacement of previous Article 9 choice
of law provisions referenced in the Second Restatement with what is now UCC Sections 9.301
et seq., which provide more uniformity and clarity in choice of law for secured transactions.
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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. Texas UCC § 9.343(p). This argument is practically appealing.
Enforcing Sections 9.301(1) and 9.307(e) eviscerates the intended scope of
Section 9.343 24 and renders its protection useless when a debtor to the
Producers is organized outside the state of Texas, as no doubt a majority are.
On close examination, however, the argument fails.
Section 9.343 was deliberately enacted within the Texas UCC. 25 Texas
UCC Article 9 extensively categorizes the types of transactions to which it
applies or does not apply. See generally Texas UCC § 9.109. Interests created
by Section 9.343 fall in the general category of “a transaction . . . that creates
a security interest in personal property . . . by contract.” Id. at § 9.109(a)(1).
Agricultural liens, in contrast, are identified separately. See Id. at
§ 9.109(a)(2). Article 9 does not extend to liens created by “another statute of
this state” that expressly governs the creation, perfection, priority or
enforcement of certain state-created security interests. Id. at § 9.109(c)(2).
Nor does Article 9 cover more than a dozen other types of transactions and
enumerated liens, assigns and interest transfers. Id. at § 9.109(d). Because
Section 9.343 interests are not created by “another statute of this state,” they
24This provision, formerly codified as Texas UCC § 9.319, evinced a reaction to a wave
of 1980s oil patch bankruptcies where producers and similar interest owners, frequently
relegated to the status of general unsecured creditors, went uncompensated. See Grinstead,
supra n.18 at 322-323, describing the history of § 9.319.
25 The Producers cite cases deciding priority disputes between UCC interests and
statutory liens, but Texas UCC § 9.343 does not (with one minor exception for taxes) create
a statutory lien.
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are thus included, not singled out, in this introductory provision describing the
scope of coverage or exemption from Article 9 as a whole. Id. at § 9.109(c)(2).
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. Id. at
§ 9.301. Those exceptions cover, respectively, agricultural liens, goods covered
by a certificate of title, deposit accounts, investment property, and letter-of-
credit rights. Id. Again, no exception is made for security interests created by
Section 9.343 in produced oil and gas. Id.
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,
26See Texas UCC § 9.310(b)(11) (§ 9.343 exception to filing financing statement);
Texas UCC § 9.324(b)(2) (no authenticated notice necessary for § 9.343 lienholder to send to
conflicting security interest holders).
The Third Circuit’s reading of § 9.343 concluded as much in stating that, “these local
27
laws apply when the debtor is located in Texas . . ., or where the debtor is so closely involved
at the well-head that it has some preexisting interest in the oil before it is extracted from the
ground.” In re Semcrude, 864 F.3d at 292.
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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 & Energy L. 265, 293 (2009). 28 This
commentator describes Section 9.343 as a “hybrid statute,” more akin to a
mechanic’s and materialmen’s lien found in the Texas Property Code than the
consensual security interests dealt with in the Texas UCC. Id. Such a status
may very well characterize the goal of Section 9.343. But we are bound by the
legislature’s unambiguously expressed intent, not its uncodified intention.
Consequently, a holistic reading of Texas UCC Article 9 does not support the
Producers’ proposition that § 9.343(p) necessarily displaces § 9.301-307.
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. Texas UCC § 9.301.
The author challenged the first bankruptcy court ruling that decided choice of law
28
issues under UCC Article 9 adversely to Texas producers asserting § 9.343 security interests.
See In re Semcrude, 407 B.R. 112 (Bankr. D. Del. 2009).
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To aid the Producers, this provision would have to mean that their production
amounted to as-extracted collateral to which their Section 9.343 security
interests attached. Texas UCC defines “as-extracted collateral” to mean oil,
gas, or other minerals that are subject to a security interest that is created by
a debtor having an interest in the minerals before extraction or accounts
arising from such sales in which the debtor’s interest predated extraction.
Texas UCC § 9.102(6).
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
29 The contracts state: “Delivery: As product passes through SELLER’s [Producer’s]
exit flange from lease tankage into BUYER’s [Debtor’s] designated carrier trucks.” The
ConocoPhillips General Provisions similarly stipulate that title passes at the point of
delivery, namely, as the oil exits the flange.
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interest based on the as-extracted collateral provision. Section 9.301(4) is
inapplicable.
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 provision “would be unfair to parties who are strangers to the contract
containing the choice-of-law provision, including third-party creditors in lien
disputes like this one.” Fishback Nursery, 920 F.3d at 938. Accordingly, the
UCC limits the ability of parties to contract around which state’s substantive
law applies to the priority and perfection of security interests. 30 Id. at 938 n.6.
The choice of law for the Producers’ agreements with the Debtor cannot bind
the Bank.
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.
30 Parties taking a security interest must have a way to know whether and where to
file security interests and where to look for existing filings. Because entities outside of
contractual privity would have no way of knowing whether a contract changed the
substantive law governing the priority and perfection of their liens, courts are hesitant to
enforce choice-of-law provisions in that context. See, e.g., In re Morse Tool, Inc., 108 B.R. 384,
386 (Bankr. D. Mass. 1989); Matter of High-Line Aviation, Inc., 149 B.R. 730, 735 (Bankr.
N.D. Ga. 1992); In re Eagle Enterprises, Inc., 223 B.R. 290, 293 (Bankr. E.D. Pa. 1998).
21
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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 Texas UCC Section 9.343. The rights of those Producers
who attempted to file financing statements in Delaware about the time that
the Debtor defaulted are subordinate to the Bank’s first-in-time filings.
The Producers assert that Official Comment 7 to the Delaware Code
Section 9-320 recognizes the existence of nonuniform laws providing “special
protections to mineral owners.” Del. Code Ann. tit. 6, § 9-320 cmt. 7. So it
does, and the Producers also correctly observe that this court regards Official
Comments as instructive on the interpretation of UCC provisions. Ford Motor
Co., LLC v. Dale (In re Dale), 582 F.3d 568, 574 (5th Cir. 2009). But the Official
Comment goes on to suggest that in light of the complications that would ensue
from conforming those provisions with the UCC, 31 “a uniform solution would
not be feasible” and “this Article leaves its resolution to other legislation.” Del.
Code Ann. tit. 6, § 9-320 cmt. 7. This Comment plainly does not state that
rights created by nonstandard UCC provisions are inviolate when
controversies arise between a party claiming interests under those laws and
another secured party.
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
31More specifically, this Comment is attached to a UCC provision that describes when
the buyer in the ordinary course takes free of encumbrances. Del. Code Ann. tit. 6, § 9-320(d).
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Amount[s]” is excluded from the “Borrowing Base.” The agreement defines
“First Purchaser Lien[s]” according to the definition provided in Texas UCC
§ 9.343 and “comparable Laws of the states of Oklahoma, Kansas, Mississippi,
Wyoming, New Mexico, or North Dakota, or any other comparable Law of any
such jurisdiction or any other applicable jurisdiction.” Moreover, such First
Purchaser Liens are a permitted lien on the Debtor’s property in § 8.3(h) of the
credit agreement.
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.
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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. 407 B.R. 112 (Bankr. D. Del. 2009); Oklahoma Lien Act § 549.1
cmt. 10. In that case, the court held that Oklahoma producers were subject, as
Texas Producers still are, to UCC rules governing choice-of-law and priority
and perfection of security interests. Id. at 133. The Oklahoma legislature
acted promptly to provide greater protections for producers.
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.
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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
32 The Producers also filed counterclaims for conversion and declaratory judgment.
We need not address the court’s waiver ruling as the Producers abandoned that claim in the
Reply brief to this court. The bankruptcy court’s holding on lien priorities expressly rejected
the Producers’ counterclaim for declaratory judgment seeking recognition of their first
priority status.
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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 Oklahoma Lien Act
§ 549.10. Persisting nonetheless, the Bank asserts waiver of the Producers’
rights because they omitted to mention the provision in the bankruptcy court.
We leave this procedural argument to the bankruptcy court after the Producers
prove up their Oklahoma liens. 33
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.
33 We DENY the Bank’s request that this panel be assigned permanently to any
further appeals arising from this adversary proceeding.
26