Filed: Jul. 19, 2017
Latest Update: Mar. 03, 2020
Summary: PRECEDENTIAL UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT _ Nos. 15-3094, 15-3095, 15-3096 & 15-3097 _ In re: SEMCRUDE L.P., et al., Debtors ARROW OIL & GAS, INC., et al v. J. ARON & COMPANY, et al ANSTINE & MUSGROVE, INC; ARROW OIL & GAS INC; BEASLEY OIL COMPANY; BLAKE EXPLORATION LLC; BRADEN-DEEM INC; CALVIN NOAH, d/b/a Calvin Noah Oil Company; CMX INC; CASEY MUSGROVE OIL CO, INC; CENTRAL OPERATING INC; CLARK EXPLORATION COMPANY; CORAL COAST PETROLEUM INC; CRAWLEY PETROLEUM CORP; DC EN
Summary: PRECEDENTIAL UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT _ Nos. 15-3094, 15-3095, 15-3096 & 15-3097 _ In re: SEMCRUDE L.P., et al., Debtors ARROW OIL & GAS, INC., et al v. J. ARON & COMPANY, et al ANSTINE & MUSGROVE, INC; ARROW OIL & GAS INC; BEASLEY OIL COMPANY; BLAKE EXPLORATION LLC; BRADEN-DEEM INC; CALVIN NOAH, d/b/a Calvin Noah Oil Company; CMX INC; CASEY MUSGROVE OIL CO, INC; CENTRAL OPERATING INC; CLARK EXPLORATION COMPANY; CORAL COAST PETROLEUM INC; CRAWLEY PETROLEUM CORP; DC ENE..
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PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
________________
Nos. 15-3094, 15-3095, 15-3096 & 15-3097
________________
In re: SEMCRUDE L.P., et al.,
Debtors
ARROW OIL & GAS, INC., et al
v.
J. ARON & COMPANY, et al
ANSTINE & MUSGROVE, INC;
ARROW OIL & GAS INC;
BEASLEY OIL COMPANY;
BLAKE EXPLORATION LLC;
BRADEN-DEEM INC;
CALVIN NOAH, d/b/a Calvin Noah Oil Company;
CMX INC; CASEY MUSGROVE OIL CO, INC;
CENTRAL OPERATING INC;
CLARK EXPLORATION COMPANY;
CORAL COAST PETROLEUM INC;
CRAWLEY PETROLEUM CORP; DC ENERGY INC;
D.E. EXPLORATION INC;
DAVIS PETROLEUM INC;
DAYSTAR PETROLEUM INC; DK OPERATING INC;
DOUBLE EAGLE EXPLORATION INC;
DRILLERS AND PRODUCERS INC;
DUNCAN OIL PROPERTIES INC;
FAIRFIELD OIL & GAS CORP;
THE GLOCO LLC; GMX RESOURCES INC;
GRA EX, LLC;
GREAT PLAINS ENERGY, INC;
GROUND DEVELOPMENT CO; HERMAN L LOEB, LLC;
H.I. INC; J&D INVESTMENTS, LLC;
JACK EXPLORATION, INC;
KAHAN & ASSOCIATES INC;
KEITH F. WALKER OIL & GAS CO., LLC;
KINGERY DRILLING CO;
KLM EXPLORATION COMPANY INC;
LANCE RUFFEL OIL & GAS CORPORATION;
LANDMARK RESOURCES INC; LARIO OIL & GAS CO;
L&J OIL PROPERTIES, INC;
LD DRILLING, INC; LITTLE BEAR RESOURCES, INC;
MCCOY PETROLEUM CORPORATION;
MCGINESS OIL COMPANY OF KANSAS;
MESA EXPLORATION COMPANY, INC;
MID-CONTINENT ENERGY CORPORATION;
MOLITOR OIL, INC;
MULL DRILLING COMPANY, INC;
MURFIN DRILLING COMPANY, INC;
MUSGROVE ENERGY INC; MUSTANG FUEL CORP;
NYTEX ENERGY LLC;
OIL COMPANY OF AMERICA INC;
OKLAHOMA OIL & GAS MANAGEMENT INC;
PICKRELL DRILLING COMPANY, INC;
PROLIFIC RESOURCES, LLC;
RAMA OPERATING COMPANY, INC; RANDON
PRODUCTION COMPANY INC;
2
RED OAK ENERGY INC; RITCHIE EXPLORATION INC;
RJ SPERRY CO; ROSS HOENER, INC; SEEKER, LLC;
SHORT & SHORT, LLC; SNYDER PARTNERS;
STEPHENS & JOHNSON OPERATING CO;
TEMPEST ENERGY RESOURCES LP;
TEX-OK ENERGY LIMITED PARTNERSHIP; TGT
PETROLEUM CORPORATION;
THREE-D RESOURCES, INC;
THOROUGHBRED ASSOCIATES, LLC;
TRIPLEDEE DRILLING CO., LLC;
TRIPOWER RESOURCES, LLC;
VIKING RESOURCES, INC;
V.J.I. NATURAL RESOURCES INC;
VEENKER RESOURCES, INC;
VESS OIL CORPORATION;
VINCENT OIL CORPORATION;
W.D. SHORT OIL COMPANY, LLC;
WELLCO ENERGY, INC;
WELLSTAR CORPORATION;
WHITE EXPLORATION INC;
WHITE PINE PETROLEUM CORPORATION,
Appellants
________________
No. 15-3121
________________
In re: SEMCRUDE L.P., et al.,
Debtors
3
BP OIL SUPPLY COMPANY
v.
SEMGROUP, L.P., et al
Star Production, Inc; LSC Production Company,
Appellants
________________
No. 15-3123
________________
In re: SEMCRUDE L.P., et al.,
Debtors
J. ARON & COMPANY
v.
SEMGROUP, L.P., et al
IC-Co, Inc.,
Appellant
4
________________
No. 15-3124
________________
In re: SEMCRUDE L.P., et al.,
Debtors
IC-CO, INC; WEOC, INC.;
RESERVE MANAGEMENT INC
v.
J. ARON & COMPANY
IC-CO, Inc.,
Appellant
________________
Appeal from the United States District Court
for the District of Delaware
(D. Del. Nos. 1-14-cv-00038, 1-14-cv-00039, 1-14-cv-00040,
1-14-cv-00041, 1-14-cv-00357 & 1-14-cv-00358)
District Judge: Honorable Sue L. Robinson
________________
Argued April 4, 2017
Before: AMBRO, JORDAN, and FISHER, Circuit Judges
(Opinion filed: July 19, 2017)
5
Blake H. Bailey
Paul D. Moak
Basil A. Umari
McKool Smith
600 Travis Street, Suite 7000
Houston, TX 77002
Peter S. Goodman
Sarah O. Jorgensen
Michael R. Carney
Hugh M. Ray
McKool Smith
One Bryant Park, 47th Floor
New York, NY 10036
Lewis T. LeClair [Argued]
McKool Smith
300 Crescent Court, Suite 1500
Dallas, TX 75201
Adam G. Landis
Matthew B. McGuire
Landis Rath & Cobb
919 Market Street, Suite 1800
P.O. Box 2087
Wilmington, DE 19899
Counsel for Anstine & Musgrove Inc., et. al.
(The Associated Producers)
6
Don A. Beskrone
Stacy L. Newman
Ashby & Geddes
500 Delaware Avenue
P.O. Box 1150, 8th Floor
Wilmington, DE 19899
Boaz S. Morag
Rishi Zutshi
Thomas J. Moloney [Argued]
Cleary Gottlieb Steen & Hamilton
One Liberty Plaza
New York, NY 10006
Counsel for J. Aron & Co.
James S. Carr
Melissa E. Byroade
David Zalman [Argued]
Monica Hanna
Kelley Drye & Warren
101 Park Avenue
New York, NY 10178
Kevin M Capuzzi
Jennifer R. Hoover
Benesch Friedlander Coplan & Arnoff
222 Delaware Avenue, Suite 801
Wilmington, DE 19801
Counsel for BP Oil Supply Co.
7
Ian C. Bifferato
Thomas F. Discoll, III
Bifferato
800 North King Street, Plaza Level
Wilmington, DE 19801
Kevin G. Collins
Barnes & Thornburg
1000 North West Street, Suite 1500
Wilmington, DE 19801
Mark D. Collins
John H. Knight
Michael Romanczuk
Zachary I. Shapiro
Richards Layton & Finger
920 North King Street
One Rodney Square
Wilmington, DE 19801
L. Katherine Good
Whiteford Taylor & Preston
405 North King Street
The Renaissance Center, Suite 500
Wilmington, DE 19801
Maris J. Kandestin
DLA Piper
1201 North Market Street
Suite 2100
Wilmington, DE 19801
8
Garvan F. McDaniel
Hogan McDaniel
1311 Delaware Avenue
Wilmington, DE 19806
R. Stephen McNeill
Potter Anderson & Corroon
1313 North Market Street, 6th Floor
Wilmington, DE 19801
Travis A. McRoberts
Akin Gup Strauss Hauer & Feld
1700 Pacific Avenu8e
4100 First City Center
Dallas, TX 75201
Benjamin L. Stewart
Bailey Brauer
8350 North Central Expressway
Suite 935, Campbell Centre I
Dallas, TX 75206
Mark Stromberg
Stromberg Stock
8750 North Central Expressway, Suite 625
Dallas, TX 75231
W. Robert Wilson
510 Kihekah Avenue
Pawhuska, OK 74056
Counsel for Semcrude LP
9
Charles J. Brown, III
Shannon Dougherty Humiston
Gellert Scali Busenkell & Brown
913 North Market Street, 10th Floor
Wilmington, DE 19801
Counsel for Star Production Inc., LCS Production Co.
Hartley B. Martyn [Argued]
Martyn & Associates
820 Superior Avenue, N.W., 10th Floor
Cleveland, OH 44113
Duane D. Werb
Werb & Sullivan
300 Delaware Avenue
13th Floor, P.O. Box 25046
Wilmington, DE 19899
Counsel for IC Co. Inc.
________________
OPINION OF THE COURT
________________
AMBRO, Circuit Judge
Appellants, who are oil producers, sold their product to
SemGroup L.P. and affiliates (including SemCrude L.P.),
midstream oil and gas service providers and the Debtors in
the underlying Chapter 11 cases. SemGroup sold oil to and
traded oil futures with Appellees, downstream oil purchasers.
The producers took no actions to protect themselves in case
10
of SemGroup’s insolvency. The downstream purchasers did;
in the case of default, they could set off the amount they owed
SemGroup for oil by the amount SemGroup would owe them
for the value of the outstanding futures trades. Accordingly,
when SemGroup filed for bankruptcy, the downstream
purchasers were paid in full while the oil producers were paid
only in part.
Because the oil producers did not take precautionary
measures to ensure payment in case of SemGroup’s
insolvency, all they have to rely on are local laws they
contend give them automatically perfected security interests
or trust rights in the oil that ended up in the hands of the
downstream purchasers. But the parties who took precautions
against insolvency do not act as insurers to those who took
none. Accordingly, we affirm the grant of summary
judgment in the downstream purchasers’ favor.
I. BACKGROUND
SemGroup’s Two Businesses
SemGroup L.P. and its subsidiaries (jointly and
severally referred to as “SemGroup”) provided “midstream”
oil services. It purchased oil from producers and resold it to
downstream purchasers. It also traded financial options
contracts for the right to buy or sell oil at a fixed price on a
future date. At the end of the fiscal year preceding
bankruptcy, SemGroup’s revenues were $13.2 billion.
Two of SemGroup’s operating companies, SemCrude,
L.P. and Eaglwing, L.P., purchased oil from thousands of
wells in several states and from thousands of oil producers,
including from Appellants, producers located in Texas,
Kansas, and Oklahoma. The producers act on behalf of many
parties who have interests in the oil at the wellhead. These
11
interest owners include the person or entity who owns the
land in fee simple, and thus owns the rights to the minerals.
That person or entity transfers the mineral rights to an oil
company through a lease. The company holds the “working
interest”—the right to drill and sell the oil from the leased
land. The working-interest owners appoint an operator to
work the well. Most of the producers in this appeal are
owners of working interests or operators.
After purchase, SemGroup moved the oil via trucks
and pipelines and stored it in major aggregation centers in
Oklahoma, Kansas, and elsewhere. Per industry custom,
SemGroup purchased the oil on credit, paying for it on the
20th day of the month following the sale. For example, oil
purchased in January would be paid for on February 20.
SemGroup always paid the producers for the oil in full
until the bankruptcy filing. It then resold the product to
downstream purchasers, including to Appellees, J. Aron &
Company and BP Oil Supply Co., both large oil distributors.
SemGroup expressly warranted to the downstream purchasers
that it sold them oil “free from all royalties, liens, and
encumbrances.” See, e.g., Conoco General Provisions § B,
J.A. 2505. Again, per industry custom the downstream
purchasers bought the oil on credit, with payment due the
20th of the following month. J. Aron and BP had no
communication with the thousands of oil producers from
whom SemGroup purchased the oil and only knew of the
existence of some of the larger producers. J. Aron and BP
dispute whether they even purchased any of Appellants’ oil
and contend that Appellants cannot trace the oil they sold, as
it was mixed with millions of barrels of oil from innumerable
other producers.
Until the bankruptcy filing, J. Aron and BP paid in full
for the oil they bought. BP also sold oil to SemGroup, so
12
when payment was due they would net out their obligations—
i.e., if BP bought $10 million from SemGroup and SemGroup
bought $8 million from BP, then BP would just pay $2
million to SemGroup.
In addition to midstream oil services, SemGroup also
traded oil futures with J. Aron and BP. This trading strategy
lead to SemGroup’s insolvency. Essentially SemGroup bet
that the price of oil would drop, while J. Aron and BP wanted
to secure a low price of oil in the event that prices would rise.
SemGroup would win the bet if the oil price dropped while J.
Aron and BP would win if the price rose. The (simplified)
mechanics are as follows.
SemGroup sold what are known as call options. In
exchange for an upfront premium, the purchaser of the call
option received the right to purchase oil at a specified price
and date. To illustrate, if in December J. Aron purchased the
right to buy 10,000 barrels of oil at $50 a barrel on March 1,
but the market price that date was $45 a barrel, that option
was worthless because J. Aron could buy oil at a cheaper
price on the market; the $50 buying right did not save J. Aron
money. SemGroup therefore would make money: it received
the upfront premium J. Aron paid for the option, but did not
end up losing the bet because it would not have to sell oil at
less than market price. Conversely, if the market price on
March 1 was $55 a barrel, J. Aron would be “in the
money”—SemGroup would have to sell J. Aron 10,000
barrels of oil at $50 a barrel, $5 below the market rate.
SemGroup thus would lose $50,000 dollars on the option
because, if J. Aron did not have the buying right, SemGroup
could have sold that oil on the market for the going price of
$55. These options did not “physically settle.” That is,
SemGroup would not actually sell these oil barrels; it would
just owe J. Aron $50,000.
13
SemGroup’s gambling strategy was in stark contrast
with hedging oil prices. To hedge a drop in the price of oil,
SemGroup could have acquired put options—the right to sell
oil at a specified price. This would protect them against price
drops while still allowing them to take advantage of selling at
high oil prices.
As it turns out, SemGroup was a bad gambler. Oil
prices rose throughout 2007 and 2008. Its CEO believed that
eventually oil prices would drop. So each time SemGroup
lost money on these options, rather than realize the financial
loss, it would sell more options to cover the loss. This is
referred to as “rolling” in the industry, and is essentially
doubling down on a lost bet. For example, if SemGroup lost
$1 million on the March 1 trade, it would resell new options
and collect $1 million in new premiums, thus betting that the
price of oil would drop on a date in the future. SemGroup
thought that, if it kept “rolling” these options, eventually the
price of oil would drop and all the options would be
worthless. If that happened, SemGroup would have acquired
all of these upfront premium payments at no cost. This
doubling-down strategy had a downside, however. Rolling
options greatly increased SemGroup’s exposure to future
losses. By July 2008 it was exposed to a potential $2.8
billion loss if the option bets did not pay off.
Liquidity Problems, Setoff Rights, and the Bankruptcy
Filing
SemGroup had to pledge cash collateral to margin
accounts to cover its exposure on the options. The cash in
these margin accounts assured the trading counterparties that
SemGroup could pay for any loss on the options. The margin
exposure was calculated by the “mark to market” method—
the amount SemGroup would owe the counterparty if the
option liquidated that day. As SemGroup’s exposure on these
14
options increased, so did its margin requirements. Eventually
it ran out of funds to meet those margin obligations, causing
its bankruptcy.
Before the bankruptcy, J. Aron and BP started buying
oil from, and trading options with, SemGroup. In November
2007, J. Aron entered into a master agreement governing its
relationship with SemGroup, and in April 2008 BP entered
into a similar arrangement. Under the agreements, in the
event of SemGroup’s default J. Aron and BP could set off any
outstanding amount due for oil purchases with the amount
owed on options trades. Until SemGroup’s default, J. Aron
and BP always paid in full for their oil purchases and never
exercised a setoff right.
Through the late spring and early summer 2008, oil
prices kept rising and SemGroup continued losing on its
trades. It failed to receive additional financing to meet its
ever-increasing margin obligations. On July 17, 2008, as set
out in their agreement, J. Aron asked SemGroup for adequate
assurance of performance and that SemGroup meet certain
credit-support thresholds. When SemGroup did not respond,
J. Aron called a default. The parties thus set off the
outstanding amounts due. J. Aron owed to SemGroup $435
million in oil purchases, and SemGroup owed to J. Aron $345
million in outstanding options trades. Accordingly, J. Aron
owed $90 million, the net amount after the oil and options
were set off.
On July 22, 2008, soon after J. Aron called the default,
SemGroup filed for bankruptcy. This triggered a default as to
BP, so it also set off the prepetition amount it owed
15
SemGroup for oil less the amount SemGroup owed it for the
options trades. Consequently, BP owed $10 million.1
Bankruptcy Proceedings
Following its Chapter 11 filing, more than a thousand
oil producers were unpaid. Oil producers, purchasers, and
SemGroup’s lending banks inundated the Bankruptcy Court
with adversary proceedings and motions to distribute
SemGroup’s assets. The Court established omnibus
procedures to determine the producers’ rights and priorities
versus the banks, with a single adversary proceeding for each
state where the producers sold product. The relative priority
of the producers and downstream purchasers was preserved
for later rulings.
In those rulings, the Bankruptcy Court first held that
the lending banks’ security interests in SemGroup’s assets
took priority over any purported lien or trust rights granted
under state law. It certified appeals directly to our Court as
matters of first impression, 28 U.S.C. § 158(d)(2), but the
producers and lending banks settled while the appeals were
pending. By stipulation, the producers reserved their right to
pursue their claims against the downstream purchasers and to
appeal these rulings in the future.
Meanwhile, J. Aron and BP filed separate adversary
proceedings where they sought to tender the amount they
owed to the bankruptcy estate in exchange for a release from
all liability. The producers also filed nearly 30 separate
lawsuits against J. Aron and BP in state and federal courts.
These suits were transferred to the Bankruptcy Court for
1
There is no contention before us that the Bankruptcy Code
prohibited these setoffs. See generally 11 U.S.C. §§ 362(b)
and 553.
16
resolution. In September 2009, it confirmed the
reorganization plan by which J. Aron and BP’s tendered
funds were turned over to the producers for full payment of
oil delivered between July 2 and July 21, 2008.2 The
tendered funds also paid off 12.9% of the amount owed for
oil sold from June 1 to July 1, 2008.
After a discovery process involving more than 100
parties, over 150 depositions, and millions of pages of
documents, J. Aron and BP moved for summary judgment
against the Appellant-Producers (hereafter, the “Producers”).
The Bankruptcy Court filed proposed findings of facts and
conclusions of law recommending summary judgment in
favor of J. Aron and BP. It concluded in exceptional depth
and easily understood language that there was no evidence of
fraud and that J. Aron and BP purchased the oil from
SemGroup free of any purported security interest either as (1)
buyers for value, or (2) as buyers in the ordinary course. In re
SemCrude, L.P., 504 B.R. 39, 44 (Bankr. D. Del. 2013). The
District Court overruled the Producers’ objections to the
Bankruptcy Court’s recommendation and adopted it. In re
Semcrude, L.P., No. 14-CV-41 (SLR),
2015 WL 4594516 (D.
Del. July 30, 2015).
Summary of Claims on Appeal
The Producers’ claims do not rely on bankruptcy law.
They are based on state statutes and common law fraud. The
2
This followed from 11 U.S.C. § 503(b)(9), whereby an
allowable administrative expense includes “the value of any
goods received by the debtor within 20 days before the date
of commencement of a case under this title in which the
goods have been sold to the debtor in the ordinary course of
such debtor’s business.”
17
Texas and Kansas Producers argue that, under their states’
nonuniform amendments to the Uniform Commercial Code,
they had perfected security interests in the oil they sold to
SemGroup and J. Aron and BP took the oil subject to these
interests. The Oklahoma Producers bring separate claims
derived from an Oklahoma statute they contend imposes an
implied trust for their benefit. They also claim to have an
equitable interest in the oil proceeds J. Aron and BP took to
set off the options debt.
II. JURISDICTION
We have jurisdiction under 28 U.S.C. § 1291 to review
the District Court’s grant of summary judgment. Yet the
Producers argue that the District Court lacked subject matter
jurisdiction even though the confirmed Chapter 11 plan
expressly provided for jurisdiction over this controversy.
The Bankruptcy Court determined that the proceeding
before it was non-core,3 but both it and the District Court
exercised jurisdiction because that proceeding was “related
to” SemGroup’s bankruptcy case. See 28 U.S.C.
§ 157(c)(1)(“A bankruptcy judge may hear a proceeding that
is not a core proceeding but that is otherwise related to a case
under title 11.”); 28 U.S.C. § 1334(b) (“[T]he district courts
shall have original but not exclusive jurisdiction of all civil
proceedings . . . related to cases under title 11.”).
The Bankruptcy and District Courts correctly
determined that “related-to” bankruptcy jurisdiction exists
here. That is so where the adversary proceeding has any
“conceivabl[e]” effect on the bankruptcy estate. Nuveen
3
In contrast to non-core, a core bankruptcy proceeding
includes, among other things, estate administration, claims,
plans, and debt discharges. 28 U.S.C. § 157(b)(2).
18
Mun. Trust ex rel. Nuveen High Yield Mun. Bond Fund v.
WithumSmith Brown, P.C., 692 F.3d 283, 293 (3d Cir. 2012)
(citing Pacor, Inc. v. Higgins,
743 F.2d 984 (3d Cir. 1984)).
All we ask is whether the “outcome could alter the debtor’s
rights, liabilities, options, or freedom of action (either
positively or negatively) and which in any way impacts upon
the handling and administration of the bankrupt estate.”
Id. at
294 (quoting
Pacor, 743 F.2d at 994).
Related-to jurisdiction—like other types of federal
jurisdiction—is determined at the time of filing. Id. (citing
Grupo Dataflux v. Atlas Global Grp., L.P.,
541 U.S. 567,
570–71 (2004)). The Producers thus miss the mark by
arguing that, because the plan has now been confirmed, the
bankruptcy estates can no longer be affected. See
id.
(“[C]onfirmation of a bankruptcy plan does not divest a
district court of related-to jurisdiction over pre-confirmation
claims.”) (citations omitted).
At the time of filing of these adversary actions and
related Producers’ suits, which was prior to plan
confirmation, the Producers’ claims unquestionably could
have affected the bankruptcy estates. Resolving these claims
sets the competing rights among creditors to the estates’
funds. Moreover, if the Bankruptcy Court had disallowed the
setoff process (whereby J. Aron and BP set off the amount
owed for the oil less what was owed on the options contracts),
they might have had to return money to SemGroup’s estate.
Accordingly, the Bankruptcy and District Courts possessed
related-to jurisdiction, and we have jurisdiction to hear this
appeal.
III. STANDARD OF REVIEW
We exercise plenary review over a grant of summary
judgment. Rosen v. Bezner, 996 F.2d 1527, 1530 (3d Cir.
19
1993). It is proper when, viewing the evidence in the light
most favorable to the opposing party, “there is no genuine
dispute as to any material fact and the movant is entitled to
judgment as a matter of law.” Id.; Fed. R. Civ. P. 56.
IV. ANALYSIS
As noted, the Texas and Kansas Producers rely on
their states’ nonuniform amendments to the Uniform
Commercial Code, which they argue give them automatically
perfected security interests in the oil they sold to SemGroup
that J. Aron and BP ultimately received. We first conclude
that the Producers do not have a perfected security interest
even if Texas or Kansas law applied. Accordingly, J. Aron
and BP purchased the oil from SemGroup free of any lien as
buyers for value. U.C.C. § 9-317(b).
Next, we turn to these Producers’ fraud claim and
agree with the Bankruptcy and District Courts that there is no
evidence of fraud. J. Aron and BP took precautions to protect
themselves in case SemGroup became insolvent, but they did
not defraud SemGroup’s other creditors.
To conclude, we address the Oklahoma Producers’
claims based on an Oklahoma statute they contend imposes a
trust relationship between them and anyone who purchases
their oil. That interpretation lacks logic and is not supported
by the statute’s text.
A. The U.C.C. Claim
Because we must parse uniform and state-specific
versions of U.C.C. Article 9 (the Article on security interests),
it is helpful to explain briefly a few fundamental concepts. A
security interest is “an interest in personal property or fixtures
which secures payment or performance of an obligation.”
20
U.C.C. § 1-201(b)(35). In other words, it is a lien on a piece
of property that secures payment of a debt. If the debt is not
paid, the person who holds the security interest can repossess
that property—i.e., take it in satisfaction of the debt. The
person who owns that security interest is called the “secured
party.” U.C.C. § 9-102(a)(73) (“‘Secured party’ means: (A)
a person in whose favor a security interest is created or
provided for under a security agreement, whether or not any
obligation to be secured is outstanding.”). The property
subject to the security interest is called “collateral.” U.C.C.
§ 9-102(a)(12). And a “debtor” is the person with an
ownership interest in that collateral. U.C.C. § 9-102(a)(28)
(“‘Debtor’ means: (A) a person having an interest, other than
a security interest or other lien, in the collateral, whether or
not the person is an obligor. . . .”) (emphasis added).
The Producers contend that they sold the oil to
SemGroup on credit subject to a security interest—that is,
they retained a lien in the oil as long as SemGroup had not
paid them for that oil, and if SemGroup did not pay for the oil
the Producers could hypothetically repossess it. The oil they
sold here is the “collateral,” and SemGroup, who purchased
the oil, is the “debtor.” The Producers further assert that their
security interests continued in the oil even after SemGroup
resold it to J. Aron and BP. See U.C.C. § 9-315(a)(1) (“a
security interest or agricultural lien continues in collateral
notwithstanding sale”). Thus, J. Aron and BP received the oil
subject to the security interest, and, because SemGroup did
not pay the Producers in full, the Producers had the right to
reclaim the oil from J. Aron and BP. Accordingly, J. Aron
and BP would have to return to the Producers the value of the
oil used to set off options debt with SemGroup.
J. Aron and BP, however, contend that they took the
oil as buyers for value and thus free of any security interest.
See U.C.C. § 9-317(b) (“[A] buyer, other than a secured
21
party, of . . . goods . . . takes free of a security interest . . . if
the buyer gives value and receives delivery of the collateral
without knowledge of the security interest . . . and before it is
perfected.”). This defense is simple: if a security interest is
not perfected,4 a buyer takes the property free of that security
interest unless the buyer actually knew of the security
interest. As discussed below, we conclude that J. Aron and
BP qualify as buyers for value. To do so, we address whether
(1) the security interests were perfected, (2) J. Aron and BP
actually bought the oil or acquired it as secured parties, and
(3) they knew the Producers’ security interests even existed.
1. Security interests were not perfected.
To perfect a security interest, in most instances a party
must file a financing statement in the appropriate state office.
See U.C.C. § 9-310(a) (“[A] financing statement must be filed
to perfect all security interests.”). Here, the Texas and
Kansas Producers did not file a financing statement or take
any other steps to perfect their security interests. Instead,
they urge us to apply their states’ versions of the U.C.C.
because they contain nonuniform amendments that the
Producers argue give oil producers an automatically perfected
security interest in the oil they produced. See Tex. Bus. &
Com. Code § 9.343 (“(a) This section provides a security
4
The holder of a “perfected” security interest has much
stronger recourse to enforce that interest against third parties
than if the interest was not perfected. Generally perfection
comes into play to determine priority over conflicting
interests in collateral: perfected security interests have
priority over unperfected security interests, and, as between
conflicting security interests, the security interest perfected
first has priority over interests perfected later. See U.C.C.
§ 9-322.
22
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. . . . (b) The
security interest provided by this section is perfected
automatically without the filing of a financing statement.”);
Kan. Stat. § 84-9-339a(a) (same); Kan. Stat § 84-9-339a(b)
(“the security interest provided by this section is perfected as
of the date of recording [the production of that oil]”). But the
Producers miss that, even if we were to apply Texas or
Kansas law,5 we apply those states’ versions of Article 9, not
just their nonuniform amendments in isolation. See Tex. Bus.
& Com. Code § 9.343(p) (“The rights of any person claiming
under a security interest or lien created by this section are
governed by the other provisions of [Article 9] except to the
extent that this section necessarily displaces those
provisions.”); Kan. Stat. § 84-9-339a(o) (same).
Texas and Kansas, along with every other state,
adopted a key feature of revised U.C.C. Article 9: its uniform
choice-of-law provision. So even starting with Texas’s or
Kansas’s U.C.C., we begin with this rule, which states that
“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.” U.C.C. § 9-301(1); see Tex. Bus. & Com. Code
§ 9.301(1) (same); Kan. Stat. § 84-9-301(1) (same); see also
5
The Bankruptcy and District Courts applied Delaware’s
U.C.C. choice-of-law rules because that is the forum state.
See, e.g., Robeson Indus. Corp. v. Hartford Accident &
Indemn. Co., 178 F.3d 160, 164–65 (3d Cir. 1999) (applying
choice of law of forum state in resolving adversary
proceeding based on state-law claim). We need not reach this
issue for the purposes of this appeal because, regardless of the
state, each has the same choice-of-law rule, U.C.C. § 9-301.
23
U.C.C. § 9-301 cmt.4 (“[T]he law governing perfection of
security interests in both tangible and intangible collateral,
whether perfected by filing or automatically, is the law of the
jurisdiction of the debtor’s location, as determined under
Section 9-307.”).
Here, as noted above, SemGroup is the debtor because
it purchased the oil on credit subject to the Producers’
security interests. SemGroup and its affiliates are registered
in Delaware or Oklahoma. U.C.C. § 9-307(e) (“A registered
organization that is organized under the law of a State is
located in that State.”). Accordingly, the “local law of
[Delaware or Oklahoma] governs perfection,” not Texas or
Kansas law. U.C.C. § 9-301(1). Oklahoma and Delaware
require perfection by filing a financing statement. Okla. Stat.
tit. 12A, § 1-9-310; Del. Code tit. 6, § 9-310. Because it is
undisputed that the Producers never made such a filing, their
interests are unperfected.
The only potential exception to § 9-301(1)’s debtor-
location rule is for as-extracted collateral. See U.C.C. § 9-
301(4) (“The local law of the jurisdiction in which the
wellhead or minehead is located governs perfection, the effect
of perfection or nonperfection, and the priority of a security
interest in as-extracted collateral.”). The Producers’ oil does
not qualify for this exception because, for oil to be as-
extracted collateral, a debtor must have a preexisting interest
in the oil before it is extracted at the wellhead. See U.C.C.
§ 9-102(a)(6) (“‘As-extracted collateral’ means (A) oil, gas,
or other minerals that are subject to a security interest that: (i)
is created by a debtor having an interest in the minerals
before extraction; and (ii) attaches to the minerals as
extracted; or (B) accounts arising out of the sale at the
wellhead or minehead of oil, gas, or other minerals in which
the debtor had an interest before extraction.”) (emphases
added). Here, SemGroup had no interest in the oil while it
24
was in the ground. Only after the Producers extracted and
sold it did SemGroup become involved.
The Producers nonetheless argue that these automatic
perfection laws “necessarily displace” the choice-of-law rule.
See Tex. Bus. & Com. Code § 9.343(p) (“The 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.”) (emphasis added); Kan. Stat.
§ 84-9-339a(o) (same). But nothing about these automatic
perfection laws “necessarily displace[s]” the rest of Article 9.
Rather, these local laws apply when the debtor is located in
Texas or Kansas, or where the debtor is so closely involved at
the wellhead that it has some preexisting interest in the oil
before it is extracted from the ground so that the oil
constitutes as-extracted collateral. U.C.C. §§ 9-301(1) & (4).
The Producers further rely on a provision referring to
security interests created by the government. U.C.C. § 9-
109(c)(3) (“This article does not apply to the extent that . . . a
statute of another State, a foreign country, or a governmental
unit of another State or a foreign country, other than a statute
generally applicable to security interests, expressly governs
creation, perfection, priority, or enforcement of a security
interest created by the state, country, or governmental unit.”)
(emphasis added). An entity of Texas or Kansas government
did not create the security interests. Instead, the security
interests were created by SemGroup purchasing oil from the
Producers.
The Producers also argue that Delaware or Oklahoma
perfection laws incorporate the automatic-perfection oil lien
laws. They rely on an Official Comment to a separate section
of Article 9 (on buyer defenses) that generally mentions the
existence of nonuniform amendments. See U.C.C. § 9-320
25
cmt.7 (“Several [states] have adopted special statutes and
nonuniform amendments to Article 9 to provide special
protections to mineral owners.”). This Comment recognizes
that certain states might adopt special provisions to protect
mineral owners; it does not automatically incorporate
unspecified local laws. Beyond that, a Comment to the
U.C.C. does not supersede statutory text, and the Comment
says nothing about overriding Article 9’s choice-of-law rules.
All told, the Producers misunderstand the burdens and
uncertainty their U.C.C. interpretation would create.
SemGroup resold oil from thousands of producers located in
eight different states. The downstream purchasers, including
J. Aron and BP, had no dealings with this diverse group of
producers, did not even know who these producers were, and
were buying oil in bulk from storage centers, so they did not
know which producers’ oil they received. To determine
possible conflicting security interests, instead of merely
checking the filing records of the states of the entities they
purchase from, downstream purchasers would have to
discover the identities and locations of potentially thousands
of producers with whom they have no contact.
Eliminating this type of uncertainty was of
foundational importance to the U.C.C.’s simplified notice
system. Prior to the 2001 revisions of the U.C.C., parties
normally had to search for financing statements wherever a
debtor had collateral to know if anything was encumbered.
See U.C.C. § 9-103(b)(1) (1995) (“Except as otherwise
provided in this subsection, perfection and the effect of
perfection or non-perfection of a security interest in collateral
are governed by the law of the jurisdiction where the
collateral is when the last event occurs on which is based the
assertion that the security interest is perfected or
unperfected.”). Now the U.C.C. requires that a party check
for filings in the debtor’s location and understand that locale’s
26
secured transactions laws. See U.C.C. § 9-101 cmt.4(c)
(“This Article changes the choice-of-law rule governing
perfection (i.e., where to file) for most collateral to the law of
the jurisdiction where the debtor is located.”). If the oil
producers want to encumber the oil they sell to an out-of-state
first purchaser, all they need to do is comply with the rules
uniformly applicable throughout the country to all sellers of
goods—file a financing statement in the state where that first
purchaser is located.
In conclusion, under U.C.C. § 9-301(1), Delaware and
Oklahoma law govern perfection. Texas and Kansas’s
nonuniform amendments to Article 9 do not save the
Producers. J. Aron and BP thus may qualify as buyers for
value because the security interests the Producers may have
claimed were not perfected. See U.C.C. § 9-317(b) (buyer-
for-value defense only applies “before [the security interest]
is perfected”).
2. J. Aron and BP purchased the oil from
SemGroup.
The second premise underlying the Producers’ claims
is that J. Aron and BP did not buy the oil from SemGroup.
Instead, under the parties’ setoff agreements, J. Aron and BP
acquired oil as a secured party—they took it as collateral for
the options trades—and thus did not give “value” for it. See
U.C.C. § 9-317(b) (“A buyer, other than a secured party, of
. . . goods . . . takes free of a security interest . . . if the buyer
gives value . . . .”).
The Producers mischaracterize J. Aron and BP’s
business relationships with SemGroup. J. Aron and BP did
not acquire the oil because it was collateral for the options
trades; they acquired it on credit per industry custom. These
purchases on credit—promises to pay—are more than
27
sufficient to satisfy the “value” requirement. See U.C.C. § 1-
204 (“[A] person gives value for rights if the person acquires
them . . . (4) in return for any consideration sufficient to
support a simple contract.”). And not only did J. Aron’s and
BP’s promises to pay satisfy the value requirement, the
purchases gave SemGroup a new, valuable asset—accounts
receivable, or simply “accounts” for U.C.C. purposes. See
U.C.C. § 9-102(a)(2) (“‘Account’ . . . means a right to
payment of a monetary obligation . . . (i) for property that has
been or is to be sold . . . .”). SemGroup’s accounts receivable
were in turn used as collateral to secure its obligations to J.
Aron and BP under the options trades.
To illustrate, when J. Aron and BP purchased oil on
credit, SemGroup received IOUs from them. These IOUs
became SemGroup’s accounts. In turn, J. Aron and BP
contracted for a setoff right between SemGroup’s accounts
and any amount SemGroup might owe J. Aron or BP for the
options trades. In the event SemGroup ended up owing them
money on the options trades, J. Aron and BP would get their
IOUs (the accounts) back.
Hence these IOUs served as collateral for the options
trades, not the oil.6 J. Aron and BP received oil simply
6
The accounts receivable created by the oil purchases were
valuable to SemGroup, reducing its trading costs and
increasing its liquidity. For example, as part of its option
trades with J. Aron, SemGroup had to post cash collateral to
meet margin requirements based on its exposure to that entity.
This relieved SemGroup from posting the required cash
margin based on the amount J. Aron owed SemGroup for oil
purchases. To illustrate, if SemGroup had to post a $50,000
cash margin, it could substitute that amount with the accounts
receivable (meaning J. Aron’s IOUs) worth $50,000. As a
28
because they purchased it. Thus, because J. Aron and BP
purchased oil from SemGroup and did not acquire it as
secured parties, they meet this requirement of the buyer-for-
value defense. See U.C.C. § 9-317(b) (“A buyer, other than a
secured party, of . . . goods . . . .”).
3. J. Aron and BP did not have knowledge of
the Producers’ security interests.
Whether J. Aron and BP bought the oil “without
knowledge of the security interest” is the only remaining
disputed requirement. We agree with the District Court that
no reasonable factfinder could conclude that they had
result of this arrangement, SemGroup could put its cash to
other uses.
The accounts receivable also were valuable for the
Producers and others that dealt with SemGroup. The
Producers’ security interests could have extended to
SemGroup’s accounts receivable created by J. Aron and BP’s
purchases. See U.C.C. § 9-315(a)(2) (“a security interest
attaches to any identifiable proceeds of collateral”); U.C.C.
§ 9-102(a)(64) (defining “proceeds” to include “(A) whatever
is acquired upon the sale, lease, license, exchange, or other
disposition of collateral; (B) whatever is collected on, or
distributed on account of, collateral. . . .”). But the Producers
do not assert their security interests in SemGroup’s accounts
receivable, likely because their interests could have been
subordinated to J. Aron and BP’s setoff rights. See U.C.C.
§ 9-404; see also 504 B.R. at 52. The Producers could have
contracted with SemGroup to ensure that these accounts
would not be used as collateral for SemGroup’s options
trading business, but they did not.
29
knowledge of the Producers’ security interests in oil. Despite
volumes of discovery, at most the Producers have produced
indications of constructive knowledge (a reason to know), but
U.C.C. § 1-202(b) requires “actual knowledge.”
SemGroup sold oil to J. Aron and BP per the industry
standard Conoco General Provisions, which expressly
disclaim the existence of any continuing security interest:
“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,
federal, state and local taxes.” J.A. 2505. Some 15 Producers
even used this Conoco warranty language in their sales to
SemGroup, although those Producers now argue that it
applied only to third-party liens, not the ones created between
a Producer and the purchaser.
It is also undisputed that the Producers never
communicated with J. Aron and BP about any subject, let
alone a security interest. Indeed, the Producers never took
any steps to notify anyone about their purported security
interest. And despite massive document discovery and
numerous depositions, there is no evidence that anyone at J.
Aron or BP—or anyone else for that matter—knew about the
claimed security interests.
Nonetheless, the Producers contend that we can
reasonably infer actual knowledge because of testimony that
J. Aron or BP (1) were aware of state lien laws, (2) knew of
the existence of some of the Producers, (3) knew that
SemGroup purchased the oil on credit from the Producers,
and (4) were aware that SemGroup’s credit agreements with
its lending banks carved out from the lending base those
assets encumbered by “statutory Liens, if any, created under
the laws of [various states].” J.A. 9488-89. This
circumstantial evidence in no way shows that when
30
SemGroup resold the oil and expressly warranted that it was
not encumbered by security interests, J. Aron and BP actually
knew the truth was otherwise. At most, this establishes
constructive knowledge—that J. Aron and BP might have a
reason to believe that some oil was encumbered by a security
interest at some time. But constructive knowledge does not
defeat the buyer-for-value defense; only “actual knowledge”
does. U.C.C. § 1-202(b).
Thus J. Aron and BP did not have actual knowledge of
any security interest in the oil they purchased and meet all
other requirements of the buyer-for-value defense.
Accordingly, they took the oil free of the Producers’ liens to
the extent they even existed.7
7
In light of this ruling, we need not reach the District and
Bankruptcy Court’s determination in the alternative that J.
Aron and BP took the oil free of the security interests as
buyers in the ordinary course. See U.C.C. § 9-320(a) (“[A]
buyer in ordinary course of business . . . takes free of a
security interest created by the buyer’s seller, even if the
security interest is perfected and the buyer knows of its
existence.”); see also U.C.C. § 1-201(b)(9) (the seller must be
“in the business of selling goods of that kind”). BP purchased
oil from SemCrude, and it is undisputed that SemCrude was
in the business of buying and selling oil and that it created the
security interests when it purchased the oil from the
Producers on credit. After the Bankruptcy Court
recommended summary judgment, however, the Producers
belatedly argued that J. Aron cannot avail itself of this
defense because it purchased oil from SemCrude’s parent,
SemGroup. Because the Bankruptcy and District Courts did
not have the full opportunity to reach this issue, it is not clear
31
B. The Fraud Claims
The Producers’ fraud claims also fail. They do not
bring claims for fraudulent transfers under the Bankruptcy
Code. See 11 U.S.C. § 548. Rather, they bring a common
law fraud claim, contending that SemGroup did not intend to
pay for the Producers’ oil, and J. Aron and BP participated in
this scheme to defraud.
The Producers first argue that the District Court erred
procedurally by granting summary judgment sua sponte on
fraud because J. Aron and BP moved for summary judgment
only as to the causation element of fraud. Even if this were a
“sua sponte” grant, the Producers knew they needed to show
that their fraud claims should survive summary judgment and
the District Court did not abuse its discretion.
District courts “possess the power to enter summary
judgments sua sponte, so long as the losing party was on
notice that she had to come forward with all of her evidence.”
Anderson v. Wachovia Mortg. Corp., 621 F.3d 261, 280 (3d
Cir. 2010) (quoting Celotex Corp. v. Catrett,
477 U.S. 317,
326 (1986)). “Notice” simply requires that “the targeted
party ha[ve] reason to believe the court might reach the issue
and receive[] a fair opportunity to put its best foot forward.’”
Couden v. Duffy,
446 F.3d 483, 500 (3d Cir. 2006) (citations
omitted). Even if the “notice” requirement is not met, the
grant of summary judgment is only reversible if there is
prejudice. See
id. at 507.
to us whether SemGroup (the parent) was in the business of
selling oil or whether it was involved in creating the security
interests. Accordingly, out of an abundance of caution, we do
not reach this issue.
32
Here, the Producers had the full opportunity to oppose
summary judgment. The Bankruptcy Court, at the Producers’
request, continued J. Aron and BP’s initial motions for
summary judgment and gave the Producers an additional
year of discovery. Because there is no direct evidence of
fraud, the Producers base their entire fraud claim on
SemGroup’s business structure and its transactions with J.
Aron and BP. Yet all of this was the subject of discovery.
The Producers addressed the fraud claims in oral argument
before the Bankruptcy Court, and they have conducted
numerous depositions and compiled documentary evidence
that they now rely on in their effort to show fraud.
Moreover, even if we were to conclude there was
insufficient notice or opportunity to develop the record, the
Producers still have not shown prejudice. They argue that
they would have introduced expert affidavits “had they been
given proper notice that J. Aron/BP were moving for
summary judgment on all elements of all fraud claims.”
Associated Producers Br. 51. These experts merely ask us to
infer fraud because J. Aron and BP knew SemGroup’s trading
strategy was risky yet continued to trade options. But these
reports would not have defeated summary judgment.
J. Aron and BP never communicated with the
Producers, so naturally they did not make any false
statements to them. As noted already, J. Aron and BP did not
even know the identities of the thousands of producers that
sold SemGroup the oil. SemGroup, until the bankruptcy
filing, always paid the Producers in full for the oil, and J.
Aron and BP also always paid in full for the oil they
purchased.
Despite the lack of evidence that anyone did not intend
to pay for the oil, the Producers contend that SemGroup
purchased the oil without intending to pay for it and J. Aron
33
and BP aided and abetted this fraudulent scheme. But we fail
to find one item of evidence indicating that SemGroup ever
intended to avoid paying for oil.
The Producers never identify a time at which
SemGroup started buying oil without an intent to pay or with
a reckless disregard for its ability to do so. The only evidence
of SemGroup’s fraud comes from the Bankruptcy Examiner’s
report, but it has nothing to do with SemGroup’s oil
purchases. Instead, it addresses certain SemGroup
executives’ misconduct, which formed the basis of a
shareholder lawsuit. See In re SemCrude L.P., 796 F.3d 310
(3d Cir. 2015). And, if anything, the findings of the
Examiner cut against fraud, as he concluded that SemGroup
became insolvent because it kept losing on its options trades
and that “[l]ast minute attempts by it to increase its credit
facility failed.” J.A. 869. If SemGroup had successfully
increased its credit facility and avoided bankruptcy, all
evidence suggests that it would have paid the Producers.
Even if we were to assume, for the sake of argument,
that this evidence demonstrated that SemGroup defrauded the
Producers, the evidence that J. Aron and BP conspired with
SemGroup or aided and abetted this fraudulent scheme is still
nonexistent. A civil conspiracy requires a shared intent to
commit fraud—a “meeting of the minds.” See State ex rel.
Mays v. Ridenhour, 811 P.2d 1220, 1226 (Kan. 1991); Cotten
v. Weatherford Bancshares, Inc.,
187 S.W.3d 687, 701 (Tex.
App. 2006); Brock v. Thompson,
948 P.2d 279, 294 (Okla.
1997), as corrected (Apr. 3, 1998). Aiding and abetting
requires, in addition to substantial assistance or participation,
knowledge of the fraud. See
Mays, 811 P.2d at 1232;
Cotten,
187 S.W.3d at 701; Cooper v. Bondoni,
841 P.2d 608, 612
(Okla. Civ. App. 1992).
34
There simply is no evidence that either J. Aron or BP
knew it was taking oil that had not been paid for. Their mere
knowledge that SemGroup purchased oil on credit, as was
industry custom, does not suggest that they knew that any
unidentified producers were still owed money or that
SemGroup did not intend to pay for the oil when payment
was due. Again, J. Aron and BP were purchasing oil at large
aggregation centers where oil mixed with the same
commodity from myriad other producers in various states. J.
Aron and BP did not know that any of the millions of barrels
of oil they purchased—to the extent it actually was the
Producers’ oil (a point J. Aron and BP vigorously dispute)—
had not been paid for on the agreed payment date or that
SemGroup did not intend to pay for it. At most the
purchases-on-credit arrangement that is industry custom
allows for a reasonable inference that, when J. Aron and BP
transacted with SemGroup, they may have known that
SemGroup might still have owed the Producers. However, no
evidence leads to a reasonable inference that J. Aron and BP
knew SemGroup intended to avoid paying for this oil or was
reckless with its ability to pay for the oil.
The Producers also attempt to infer fraud from the
options trades. They contend that J. Aron and BP knew that
SemGroup’s trading was speculative and not legitimate
hedging, and thus, “[d]espite numerous concerns and red
flags, no one from J. Aron or BP took reasonable steps to
verify that this was a legitimate trading or hedging strategy,”
all the while continuing to do business with SemGroup.
Associated Producers Br. 56. This lawful activity simply
does not permit an inference of fraud.
J. Aron and BP paid millions in premiums up front for
options to secure a price for oil, protecting themselves against
an oil-price increase. SemGroup bet the opposite—that oil
prices would drop. The prices kept rising, so SemGroup lost.
35
While this was a risky strategy that did not pay off, and in
hindsight hedging might have served SemGroup better, this
business arrangement does not demonstrate that J. Aron and
BP intended to take the oil away from the Producers without
payment.
C. The Oklahoma Production Revenue Standards Act
Claims
The Oklahoma Producers separately argue that the
Oklahoma Production Revenue Standards Act (the “PRSA”),
Okla. Stat. tit. 52, §§ 570.1 et seq., creates an implied trust in
their favor that, absent full payment, travels perpetually down
the stream of commerce; in other words, so long as those
Producers have not been paid, whoever possesses the oil does
so for their benefit.8 In addition, the argument goes, so long
as an Oklahoma Producer has not been paid, whoever owns
the proceeds of the oil needs to account for those proceeds to
that Producer. Thus, even though downstream purchasers
(like J. Aron) generally do not know the oil producers who
sold the oil to the midstream purchasers, they allegedly have
legal obligations to each Oklahoma Producer. Based on these
trust duties, that Producer may bring claims against J. Aron
for conversion, unjust enrichment, constructive fraud, and
declaratory relief.
Fortunately for J. Aron and anyone who has
unwittingly filled a gas tank with Oklahoma-produced oil,
8
There is a sound argument that the Oklahoma Producers
waived their PRSA trust arguments by expressly disclaiming
them in the District Court. Nevertheless, in light of the
importance of the legal questions at stake, we exercise our
discretion to consider the issue despite the waiver. Issa v.
Sch. Dist. of Lancaster, 847 F.3d 121, 139 n.8 (3d Cir. 2017).
36
this interpretation simply fails the text of the statute. First,
whatever duties the PRSA creates, they do not apply to
downstream purchasers like J. Aron. The PRSA regulates the
relationships of the many parties at the wellhead, which
include the various interest owners and the operators of those
wells. Those interests are highly fractionalized and multiple
persons may have a right to revenue from any well. See Okla.
Stat. tit. 52, § 570.2 (defining an “owner[’s]” interest,
“proportionate production interest,” “royalty interest,” and
“subsequently created interest”). The Oklahoma Producers
themselves might owe many obligations to the various
interest owners of their production. As there are numerous
parties involved at the wellhead, the PRSA regulates all
manner of these parties’ relationship, for example, dictating
specific procedures for how proceeds of production are
shared among interest owners and operators, id. § 570.4, the
process for “[d]esignation of person[s] for certain royalt[ies],
accounting and remittance functions,”
id. § 570.5, detailed
reporting requirements for all those involved at the wellhead,
id. 570.8, and the “[i]nformation to be included with
payments to [the] interest owner,” including how many
decimals revenue should be calculated and the measurements
to describe gas volume.
Id. § 570.12.
The PRSA, however, has no provisions relating to
downstream purchasers. Those purchasers could be located
out of state, and, as in the case of J. Aron, could be so far
removed from the wellhead they do not even know the
identities of the producers or the interest owners those
producers represent. See Okla. Stat. tit. 52, § 570.2(1)
(“‘Owner’ means a person or governmental entity with a legal
interest in the mineral acreage under a well which entitles that
person or entity to oil or gas production or the proceeds or
revenues therefrom.”). The statute simply does not govern
the relationship of persons who later, down the line of
commerce, repurchase this oil.
37
Second, while the PRSA contains some language
suggesting a trust-like relationship, there is no language
stating that it creates an implied trust that travels perpetually
down the stream of commerce. PRSA § 570.10(a) states:
All proceeds from the sale of production shall
be regarded as separate and distinct from all
other funds of any person receiving or holding
the same until such time as such proceeds are
paid to the owners legally entitled thereto. Any
person holding revenue or proceeds from the
sale of production shall hold such revenue or
proceeds for the benefit of the owners legally
entitled thereto. Nothing in this subsection shall
create an express trust.
Okla. Stat. tit. 52, § 570.10(a).
The Oklahoma Producers rely on a 2008 Oklahoma
Attorney General Opinion that concluded the language
“owners legally entitled” to proceeds of the oil actually meant
“implied beneficiaries,” and therefore “[t]he holder of the
revenue or proceeds of oil and gas production acquires no
right, title or interest in such revenue or proceeds.” 2008 OK
AG 31 ¶ 22 (citations omitted). The Bankruptcy Court
rejected the Attorney General’s interpretation, and so have an
Oklahoma intermediate appellate court and District Courts in
Oklahoma. See In re SemCrude, L.P., et al., 407 B.R. 140,
155 (Bankr. D. Del. 2009); Gaskins v. Texon, LP,
321 P.3d
985, 989 (Okla. Civ. App. 2014); Naylor Farms, Inc. v.
Anadarko OGC Co.,
2011 WL 7267853, at *1 (W.D. Okla.
June 23, 2011); McKnight v. Linn Operating, Inc., No. CIV-
10-30-R,
2010 WL 9039794, at *3 (W.D. Okla. Apr. 1,
2010). We agree.
38
Although the PRSA’s language—that sale proceeds
“shall be regarded as separate and distinct” and shall be held
for the benefit of the owners “legally entitled thereto”—
echoes trust language, these words cannot be stretched to
create automatically an implied trust. First, it is a conceptual
leap to take the language “paid to the owners legally entitled
thereto” to mean that interest owners and producers
automatically possess the “legal entitlement” of ownership of
a beneficial interest in the proceeds, and that whoever
actually holds the proceeds has no title to them. As the
Bankruptcy Court noted, in the few instances where
Oklahoma statutes have been construed to create an implied
trust, those statutes imposed many more trust duties. See 407
B.R. at 152 (“[Those other statutes] demonstrated the
requisite clear intent to form a trust because the State of
Oklahoma (or an organ thereof) is the trustee, holding
identified funds, for the benefit of identified beneficiaries. In
sharp contrast, the PRSA does not identify a specific trustee,
actually require segregation of a trust res or otherwise impose
rights and duties typically associated with a
trustee/beneficiary relationship.”).
Second, a more faithful interpretation of the PRSA is
that it provides for the imposition of a trust only in limited
ways. As the concluding sentence of PRSA § 570.10(a)
states, “Nothing in this subsection shall create an express
trust.” In contrast to an express trust, implied trusts arise in
Oklahoma where it would be inequitable for one party to keep
title to property. There are two types of implied trusts—
resulting or constructive. A resulting trust may be judicially
imposed “where the circumstances indicate that the grantor of
legal title to property did not intend for the beneficial interest
to be enjoyed by the grantee of the legal title.” Gaskins, 321
P.3d at 989 n.5 (citation omitted). A constructive trust may
be imposed “when an individual obtains a legal right to
property through fraudulent, abusive means, or through a
39
method which violates equity and good conscience.” Id.
(citation omitted). In either case, equity or good conscience
could require imposing trustee burdens on a party who
violated a duty owed to another under the PRSA. However,
the Oklahoma Producers do not argue that equity demands
imposition of a trust, but only rely on the Attorney General’s
interpretation that the PRSA automatically implies a trust.
Finally, the Oklahoma Producers argue that the
legislature “restated” that the PRSA created trust rights when
it passed the 2010 Oklahoma Lien Act. This new Act created
automatic oil liens in favor of producers that are outside the
scope of the U.C.C. See 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); Alvin C. Harrell and
Frederick H. Miller, Aftermath of the SemGroup Case:
Oklahoma Enacts the Oil and Gas Owners’ Lien Act of
2010, 81 Okla. Bar Assoc. J. 2818 (2010).
The 2010 Lien Act does not apply to our appeal
because it post-dated SemGroup’s bankruptcy. Yet the
Oklahoma Producers point to it as evidence that the
Oklahoma Legislature believed the PRSA created
automatically an implied trust. The Lien Act includes buyer
defenses for the liens it creates, which also apply to PRSA
§ 570.10(a): if the downstream purchasers were buyers in the
ordinary course or had paid all consideration due, they take
free of “any obligations created by [the PRSA].” Okla. Stat.
tit. 52, § 549.6. The logic is that if the Oklahoma Legislature
did not believe that the PRSA creates trust rights, the 2010
Lien Act would not have included buyer defenses to the
PRSA. However, our take is that to the extent an implied
trust could be imposed under PRSA § 570.10(a), all the
Oklahoma Legislature made clear was that downstream
purchasers could avail themselves of buyer defenses.
40
In summary, the PRSA did not create an implied trust
here and did not impose any duties on J. Aron. As all the
Oklahoma Producers’ theories of relief were predicated on
this construal of the Act, the District Court correctly entered
summary judgment against the Oklahoma Producers.
* * * * *
Texas, Kansas, and Oklahoma all include statutes that
provide some protections for those who produce oil in their
States, but those protections do not reach downstream parties
like J. Aron and BP. The Producers theoretically could have
perfected their security interests, traced those interests in the
oil that extended to their accounts receivable, and forbade
SemGroup from using those accounts as margin collateral for
their options trades.
But why didn’t the Producers take such precautions?
They contend they are a loose collection of relatively
unsophisticated parties. However, these parties pool their
interests and choose operators to extract and sell their oil; it
does not seem farfetched that they could also choose a
representative to file financing statements to perfect security
interests or take other measures to protect against an oil
purchaser’s insolvency. The more likely explanation is that
no midstream or downstream oil purchaser would buy oil
from the Producers if they sought to encumber that oil as it
flowed through interstate commerce and changed hands.
The oil industry operates through sales on credit. It
involves thousands of producers and those producers
represent countless interest owners who have fractionalized
interests at the well. Downstream purchasers have no contact
with these producers and do not even know who they are.
This oil is pooled with myriad other producers’ oil and is
resold many times before consumers get it at the retail pump.
41
The industry thus uses the Conoco 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.
In sum, if any producer of oil tries to sell it subject to a
security interest or implied trust that flows endlessly down the
stream of commerce, it will be unsold. The Producers’
contention that a lien or trust follows oil from their wells to
the gas pump does not make sense for this type of market.
The effect of any opinion from us upholding the Producers’
positions would be chaos. We thus affirm the superbly
reasoned rulings of both the Bankruptcy and District Courts.
42
