CRAIG A. GARGOTTA, Bankruptcy Judge.
Came on for consideration Agent's Motion for Summary Judgment and Alternative Motion for Partial Summary Judgment
As an initial matter, the Court finds that it has jurisdiction over this proceeding under 28 U.S.C. §§ 1334 and 157(a) and (b)(1). This matter is a core proceeding under 28 U.S.C. §§ 157(b)(2)(A), (B), (K), and (O). All parties have filed a Statement Regarding Consent that consents to the Court's entry of final orders and final judgment. (ECF Nos. 57, 62, 63). This matter is within the Court's jurisdiction and authority pursuant to the Supreme Court's ruling in
On January 12, 2018 ("Petition Date"), First River Energy, LLC ("Debtor" or "First River") filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware (the "Delaware Bankruptcy Court"). On January 17, 2018, the Delaware Bankruptcy Court transferred venue of this case sua sponte to the United States Bankruptcy Court for the Western District of Texas, San Antonio Division. Debtor continues to operate its business and manage its property as a debtor-in-possession pursuant to 11 U.S.C. §§ 1107(a) and 1108.
Based on the Court's review of the facts and exhibits presented in the moving papers, along with the documents included in Agent's Appendix, the Court finds following undisputed facts.
Prior to the Petition Date, Debtor provided midstream transportation services to the oil and gas industry across the southwestern United States and Great Plains. As a midstream service provider, Debtor purchased and marketed domestic crude oil and condensate directly from upstream producers. After purchasing oil from upstream producers, Debtor re-sold and delivered aggregated oil to third-party downstream purchasers through a combination of trucks and pipeline.
Pre-petition, Debtor entered into agreements with a number of upstream oil and gas producers to purchase oil and gas from wells situated in Texas and Oklahoma. The following upstream producers are defendants in the numbered adversary proceeding: U.S. Energy Development Corporation; Ageron Energy, LLC; Petroedge Energy IV, LLC; Teal Natural Resources, LLC; Crimson Energy Partners IV, LLC; Viceroy Petroleum, LP; RLU Operating, LLC; Dewbre Petroleum Corporation; Jerry C. Dewbre, Trustee; American Shoreline Inc.; Texpata Pipeline Company; Aurora Resources Corporation; AWP Operating Co.; Texron Operating LLC; Magnum Producing, LP; Magnum Engineering Company; Magnum Operating LLC; Rock Resources, Inc.; Killam Oil Co., Ltd.; and Energy Reserves Group, LLC (collectively referred to hereinafter as "Producers"). Generally, the terms of Producers' sale of oil to Debtor were delineated in purchase contracts ("Producer Agreements") entered into by Debtor and Producers individually. Pursuant to the Producer Agreements, Producers produced and delivered oil and gas to Debtor, who, in turn, would pay Producers on the twentieth day of the month following delivery.
During the relevant period (from December 1 through December 31, 2017), Producers sold Debtor oil and gas produced from wells located in Texas and Oklahoma. Under the terms of the Producer Agreements, Debtor was required to pay Producers for oil and gas provided in December 2017 on January 20, 2018. Debtor discontinued business operations on or about December 31, 2018. Debtor filed for chapter 11 bankruptcy protection on January 12, 2018.
As of the Petition Date, Debtor had not paid Producers for oil and gas provided in December 2017. Seeking payment from Debtor for unpaid invoices for December 2017 oil and gas sales, certain members of the Producers group
RADCO Operations, LP ("RADCO") and RHEACO, Ltd. ("RHEACO") (collectively referred to hereinafter as "Intervenors"), who also produced and sold oil products to Debtor pre-petition, are intervening parties in this matter. Intervenors produced oil and gas in the state of Texas. On or about April 24, 2012, RADCO entered into a Crude Oil Purchase Agreement with O.G.O Marketing, LLC, a Texas limited liability company ("RADCO Purchase Agreement"). Intervenors' Response, Ex. A (ECF No. 103). Pursuant to the RADCO Purchase Agreement, RADCO produced and sold crude oil and condensate to Debtor. RHEACO was unable to produce a copy of a purchase contract with O.G.O. Marketing, LLC, but asserts in Intervenor's Response that it entered into an agreement similar to the RADCO Purchase Agreement. Like RADCO, RHEACO produced and sold oil and gas to Debtor.
In September 2013, O.G.O. Marketing, LLC changed its name to Texas Gathering Company, LLC and continued as a Texas limited liability company. Intervenors' Response, Ex. B (ECF No. 103). RADCO continued conducting business with Texas Gathering Company, LLC under the RADCO Purchase Agreement. On or about July 23, 2015, Texas Gathering Company, LLC was acquired by Debtor in this case, First River. First River is a Delaware limited liability company.
RADCO and RHEACO continued to produce crude oil in Texas and sell it to Debtor through December 2017. Pursuant to the RADCO Purchase Agreement, payment for crude oil sold and delivered was to be made by wire transfer on the twenty-third day of the month following the month of delivery. Intervenors' Response, Ex. A (ECF No. 103). Debtor would have been required to pay Producers for oil and gas provided in December 2017 on January 23, 2018. Debtor, however, filed for bankruptcy on January 12, 2018, which is before payment of December 2017 invoices became due to Intervenors. As of the Petition Date, Debtor had not paid Intervenors for oil provided in December 2017.
On July 23, 2015, a credit agreement (the "Credit Agreement") was entered into under the laws of the state of Delaware by and among (i) First River Energy, LLC as borrower; (ii) Deutsche Bank AG New York Branch as collateral agent and as a Lender, Issuing Lender, Swing Line Lender ("Lender"); (iii) Deutsche Bank Trust Company Americas as Administrative Agent ("Agent"); and (iv) several banks and other financial institutions or entities as lenders. Agent's App'x, Pt. 1 (ECF No. 90-2). To guarantee payment of the Credit Agreement, Debtor entered into a guarantee agreement ("Guarantee Agreement") with Agent and Lender on July 23, 2015, under which Debtor assumed its role as a guarantor for debt issued under the Credit Agreement. Agent's App'x, Pt. 2 (ECF No. 90-3). On July 23, 2015, Debtor entered into a security agreement ("Security Agreement") with Agent and Lender. Agent's App'x, Pts. 2, 3 (ECF No. 90-3, 90-4). The terms of the Security Agreement granted Agent a continuing security interest ("Bank Security Interest") in substantially all of Debtor's assets, including:
Agent's App'x, Pt. 3 (ECF No. 90-4). To perfect the Bank Security Interest, Agent executed UCC-1 financing statements with the Delaware Department of State on July 23, 2015 that covered "all assets of Debtor, wherever located, whether now owned and existing or hereafter acquired or coming into existence, together with all proceeds thereof." Agent's App'x, Pt. 9 (ECF No. 90-8). Agent filed amendments to the UCC-1 financing statements in Delaware that caused its Bank Security Interest to remain continuously effective since July 23, 2015. Agent's App'x, Pt. 9 (ECF No. 90-8).
Debtor's Schedule A/B demonstrates that Debtor maintained deposit accounts at JPMorgan Chase Bank, N.A. ("JPMorgan Chase") and at Deutsche Bank. Schedule A/B: Assets-Real and Personal Property, Case No. 18-50085, (ECF No. 191). On July 23, 2015, Debtor, JPMorgan Chase (as depositary), and Agent (as secured party) entered into a Blocked Account Control Agreement (the "Blocked Account Control Agreement") in which Agent was granted a security interest in all of Debtor's funds on deposit in accounts at JPMorgan Chase. Agent's App'x, Pt. 5 (ECF No. 90-4). The Blocked Account Control Agreement indicates that its terms "shall be governed by and construed in accordance with the laws of the State of New York" because "the State of New York is the jurisdiction of [JPMorgan Chase] as [d]epositary for purposes of [s]ection 9-304(b) of the Uniform Commercial Code." Agent's App'x, Pt. 5, ¶ 11 (ECF No. 90-4).
Debtor, JPMorgan Chase, and Agent entered into Amendment No. 1 to the Blocked Account Control Agreement ("Amendment No. 1") on January 31, 2017. Agent's App'x, Pt. 6 (ECF No. 90-5). The terms of Amendment No. 1 deleted two accounts from the initial Blocked Account Control Agreement and amended Debtor's company name from First River Midstream, LLC to First River Energy, LLC. Otherwise, the terms of the Blocked Account Control Agreement, including the New York choice-of-law provision, remain unchanged. Agent's App'x, Pt. 6 (ECF No. 90-5).
In November and December 2017, Debtor defaulted on making payments due under the terms of the Credit Agreement. On or about December 31, 2017, Debtor discontinued nearly all of its transactions involving the purchase and sale of oil,
Agent, Producers, and Intervenors each allege that they have a properly perfected, first priority security interest in Debtor's oil and gas production, deposit accounts, and resulting proceeds, including accounts receivable. To avoid a multiplicity of legal actions and have all claims to such collateral heard in one action, Debtor filed an Expedited Motion to Establish Procedures for the Resolution of Claims and Liens Against Estate Property in the bankruptcy case (Case No. 18-50085, ECF No. 331). After a hearing on March 28, 2018, the Court entered an Order Granting Expedited Motion to Establish Procedures for the Resolution of Claims and Liens Against Estate Property (Case No. 18-50085, ECF No. 413) (the "Claims Procedure Order").
The Claims Procedure Order establishes that this adversary proceeding serves as a declaratory judgment action to determine the extent, validity, and priority of liens and other interests in "any or all of the [oil products allegedly purchased by Debtor prior to the Petition Date] and/or its proceeds, including accounts receivable,
Agent has filed its Motion for Summary Judgment, which asserts that Agent is entitled to summary judgment that: (a) Agent and Lenders have valid, perfected first-priority liens on Debtor's accounts receivable, deposit accounts and inventory, (b) Producers have no liens on Debtor's accounts receivable, deposit accounts and inventory, or alternatively, even if Producers had liens, liens held by Agent and Lenders have priority, (c) Producers' affirmative defenses are without merit, and (d) Producers should be denied recovery under their counterclaims. Motion for Summary Judgment, (ECF No. 89).
Agent asserts that, as of the Petition Date, Debtor had the following assets eligible for distribution among the parties: (a) $27,613,066.81 in accounts receivable owed from downstream purchasers for oil sold;
In its Motion for Summary Judgment, Agent argues first that Producers waived any right they had to assert a security interest in goods, inventory, accounts, and proceeds under Texas § 9.343 because the Producer Contracts included Conoco Phillips General Provisions
Alternatively, Agent claims that there is a conflict of law between Delaware and Texas law regarding perfection and priority of security interests in Debtor's goods, inventory, accounts, and proceeds. Agent uses Restatement (Second) Conflict of Laws § 6(1) to argue that the laws of the state of Delaware govern perfection of security interests on Debtor's goods, inventory, accounts, and proceeds pursuant to the choice-of-law provisions in the Uniform Commercial Code ("UCC"). See Del. Code Ann. tit. 6, § 9-301 (West 2018); see also Tex. Bus. & Com. Code Ann. § 9.301. Agent argues that because it was the first creditor to file a financing statement with the Delaware Department of State, its security interest in substantially all of Debtor's assets primes any security interest alleged by Producers and Intervenors in the same collateral. Moreover, Agent argues that Producers and Intervenors hold unsecured claims to the extent that they did not file financing statements with the Delaware Department of State.
In the alternative, Agent asserts that even if Producers and Intervenors can establish that Texas § 9.343 applies, Agent's perfected security interests in Debtor's accounts receivable, proceeds and deposit accounts have priority over Producers and Intervenors' liens by virtue of the limitations of Tex. Bus. & Com. Code Ann. § 9.343(f). Specifically, Agent asserts that the oil held by Producers for resale was inventory, and Producers and Intervenors did not perfect their PMSI in inventory properly under Delaware law, which requires a financing statement to be filed with the Delaware Department of State. Agent argues next that even if Producers and Intervenors have a PMSI in inventory, that PMSI is limited to the inventory itself and identifiable cash proceeds but does not extend to accounts receivable. See Tex. Bus. & Com. Code Ann. § 3.324(b).
Agent asserts that it has a first lien on Debtor's deposit account located at JPMorgan Chase in New York because it has properly perfected its security interest through control. See N.Y. U.C.C. § 9-312(b)(1) (McKinney 2019). Specifically, Agent asserts that its Blocked Account Control Agreement with Debtor and JPMorgan Chase serves as an authenticated record that accomplishes control as required by New York law. See N.Y. U.C.C. § 9-314.
Agent also asserts that affirmative defenses raised in the Answers/Counterclaims are meritless because no facts were pled to support the affirmative defenses of estoppel, unclean hands, or waiver that were asserted against the Agent. Finally, Agent contends that Producers' counterclaim for conversion fails as a matter of law.
Agent filed a proof of claim in the bankruptcy case that asserts a secured claim for "money loaned" in the amount of $13,478,557.92.
Producers' Response argues that reference to the Conoco Phillips General Provisions in the Producer Agreements did not result in waiver of Producers' ability to assert a security interest in oil, gas, and proceeds thereof because: (1) on its face, the language of the Conoco Phillips General Provisions does not waive any lien as to the proceeds received from sale of oil delivered to Debtor; (2) Producers did not provide warranty representation to any other party than the downstream purchaser; and (3) there was not privity of contract between Producers and Agent, nor between Agent and downstream purchasers.
Producers contend next that they hold an automatically-perfected purchase money security interest ("PMSI") in all oil and gas produced in Texas and sold to Debtors during December 2017, along with proceeds thereof, pursuant to Texas § 9.343. Producers also contend that certain of the Producers sold oil and gas production in Oklahoma during December 2017, and that those Producers hold a first, prior, and automatically perfected lien pursuant to Okla. Stat. Ann. tit. 52, § 549.1 (the "Oklahoma Lien Act"). Producers argue that lien rights automatically arising under Texas § 9.343 and the Oklahoma Lien Act result in a PMSI that primes any security interest held by Agent.
In addition, Producers argue that, to the extent there is a conflict of law, the laws of Texas and Oklahoma control resolution of whether Producers' security interests are superior to Agent's UCC Article 9 security interests. Producers contend that the Court should use Restatement (Second) Conflict of Laws § 251(1) and federal common law to evaluate choice-of-law issues on a "case-by-case basis with deference to the state that has the most significant contacts and relationships over the affairs of [Debtor.]" Producers' Response, p. 11 (ECF No. 105).
Producers' Response included a list of the proofs of claim filed by individual Producers in Debtor's bankruptcy case, which provided the claim number and the amount of claim asserted. Producers' Response, Ex. A (ECF No. 105).
Intervenors assert that they also hold an automatically-perfected PMSI in all oil and gas sold to Debtor during December 2017, along with proceeds thereof, pursuant to Texas § 9.343. Intervenors further argue that conflict-of-law provisions found in title 6, section 9-301 of the Delaware Code ("Delaware § 9-301") and section 9.301 of the Texas Business and Commerce Code ("Texas § 9.301") are inapplicable because the language of section 9.343(p) of the Texas Business and Commerce Code 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." (emphasis added).
Additionally, Intervenors argue that Agent waived the ability to claim that Texas § 9.343 did not create a lien in favor of Producers and Intervenors because: (1) terms of the Credit Agreement between Agent and Debtor noted that "First Purchaser Liens" under Texas § 9.343 would be eliminated from Debtor's borrowing base, and (2) the Credit Agreement expressly permitted a lien arising under Texas § 9.343 to exist on Debtor's property, assets, or revenues. Intervenors also contend that estoppel by deed and estoppel by record preclude Agent from taking a position contrary to terms found in the Credit Agreement. Finally, Intervenors argue that Agent has introduced no evidence showing that Debtor's purchase of product from Intervenors was subject to the Conoco Phillips General Provisions.
RADCO asserts that, as of the Petition Date, Debtor owed $292,513.27 for oil sold to Debtor under the RADCO Purchase Agreement. Intervenors Response, ECF No. 103. RHEACO asserts that it is owed $292,519.27 for oil sold to Debtor pre-petition and $18,562.66 in royalty payments for the same products sold to Debtor. Id. Radley Corporation, an affiliate of RADCO, alleges that Debtor owes $6,977.38 in royalties for products it sold to Debtor. Id.
Summary judgment is appropriate "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c);
To the extent that the non-moving party asserts the existence of factual disputes, the evidence offered by the non-moving party to support those factual contentions must be of sufficient quality so that a rational fact finder might, at trial, find in favor of the non-moving party.
In determining whether a genuine issue of material fact exists, the nonmoving party must respond to a proper motion for summary judgment with specific facts demonstrating that such genuine issue exists. "[A] genuine issue of material fact is not raised by mere conclusory allegations or bald assertions unsupported by specific facts."
In 2009, the Delaware Bankruptcy Court issued its opinion in
The court held, in relevant part, that Delaware's choice of law rules regarding perfection and priority of security interests governed.
As an initial matter, Agent argues that, regardless of lien perfection and priority issues, Producers cannot assert a security interest in Debtor's goods, inventory, accounts, proceeds, and deposit accounts under Texas § 9.343 because the Conoco Phillips General Provisions that are incorporated by reference into certain of the Producer Agreements provide for express waiver of Producers' liens. The Producer Agreements, which are contracts between Debtor and certain of the Producers,
The Conoco Phillips General Provisions include several provisions, including the following:
Agent asserts that the Delaware Bankruptcy Court in
In
In
Producers contend that the Conoco Phillips General Provisions in certain of the Producer Agreements with Debtor are nothing more than a warranty to purchasers that oil in the hands of the purchasers is not subject to the Producers' liens. Next, Producers argue that even if the Conoco Phillips General Provisions in certain of the Producer Agreements serve as a warranty preventing Producers from asserting a lien to secure the purchase price of the oil and gas, then Producers could still assert a lien as to the proceeds received from the sale of the oil delivered to Debtor. Producers also argue that the Conoco Phillips General Provisions provided a warranty only to downstream purchasers, not to Agent or Lenders. (emphasis added). Finally, Producers assert that there is no privity between Producers and Agent, nor between Agent and downstream purchasers.
Intervenor argues that Agent failed to produce evidence showing that Debtor's purchase of product from Intervenors was subject to the Conoco Phillips General Provisions. Intervenors state that the RADCO Purchase Agreement does not contain any of the language cited by Agent that results in the alleged waiver of claims. In Agents' Reply, Agent asserts that while the RADCO Agreement does not contain a reference to the Conoco Phillips General Provisions, it contains clear waiver language:
Agent's Reply to Response, p. 15 (ECF No. 109) (emphasis in original). According to Agent, this language waives Intervenors' ability to assert security interests in Debtor's goods, inventory, accounts proceeds, and deposit accounts.
The Court finds that incorporation of the Conoco Phillips General Provisions in certain of the Producer Agreements did not cause Producers to waive their ability to assert a lien or security interest in oil and gas and proceeds thereof under Texas § 9.343. Likewise, the Court finds that the warranty language in the RADCO Agreement did not serve as a waiver. Contrary to Agent's assertions, the Delaware Bankruptcy Court's findings in
Agent's next argument is that conflict of law issues exist in the present matter. Agent assets that conflict of law disputes should be resolved through application of the Restatement (Second) of the Law Conflict of Laws (hereinafter "Restatement"). Agent asserts that § 6(1) of the Restatement requires the Court to apply UCC § 9-301, which is the same in Delaware and Texas, to determine priority and perfection of security interests being alleged in Debtor's goods, inventory, accounts, and proceeds. Under UCC § 9-301, "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." Del. Code Ann. tit. 6, § 9-301(1); Tex. Bus. & Com. Code Ann. § 9.301(1). Agent argues that because Debtor is organized under the laws of Delaware, Delaware law governs perfection. In Delaware, perfection of a security interest in goods, inventory, accounts, and proceeds arises by filing a UCC-1 financing statement with the Delaware Department of State. Del. Code Ann. tit. 6, § 9-310(a). Because Agent was the first to file UCC-1 financing statements in Delaware on substantially all of Debtor's collateral, Agent contends that its security interest primes liens asserted by Producers and Intervenors.
In response, Producers and Intervenors argue that they have an automatically arising PMSI in Debtor's oil, gas and proceeds thereof for oil produced in Texas under the plain language of Texas § 9.343. Producers and Intervenors argue that section 9.343(p) of the Texas Business and Commerce Code
Producers argue that to the extent there is a conflict of law, the Courts are not in complete agreement with addressing conflicts of law in bankruptcy. Citing to
In the present dispute, the Court must determine: (1) which state law(s) govern perfection of security interests, and (2) if the security interests are properly perfected, priority among the perfected security interests. An overview of each relevant state's law is provided below.
Producers and Intervenors argue that, to the extent they produced oil and gas in Texas and sold oil to Debtor in Texas, their security interests in Debtor's oil, gas and proceeds thereof arise under Texas § 9.343 and result in a PMSI that primes any security interests held by Agent. Texas § 9.343, which is a non-uniform amendment to Texas's version of the UCC states in part:
Tex. Bus. & Com. Code Ann. § 9.343(a). An "interest owner" is defined as a "person owning an entire or fractional interest of any kind or 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." Tex. Bus. & Com. Code Ann. § 9.343(r)(2). A "first purchaser" is defined, in relevant part, as "the first person that purchases oil or gas production from an operator or interest owner after the production is severed." Tex. Bus. & Com. Code Ann. § 9.343(r)(3). An "operator" is a "person engaged in the business of severing oil or gas production from the ground, whether for the person alone, only for other persons, or for the person and others." Tex. Bus. & Com. Code Ann. § 9.343(r)(4).
Texas § 9.343 gives rise to a "security interest" that is "perfected automatically without the filing of a financing statement." Tex. Bus. & Com. Code Ann. § 9.343(b). 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. Moreover, section 9.343(d) of the Texas Business and Commerce Code creates a "lien that secures the rights of any person who would be entitled to a security interest under [section 9.343(a)] except for lack of any adoption of a security agreement by the first purchaser or lack of possession or record required by [section 9.203] for the security interest to be enforceable." Tex. Bus. & Comm. Code Ann. § 9.343(d).
The "security interest" that arises in favor of interest owners under Texas § 9.343 exists in: (i) oil and gas production in the possession of the first purchaser, and (ii) identifiable proceeds of that production owned by, received by, or due to the first purchaser. Tex. Bus. & Com. Code Ann. § 9.343(c)(1). Interest owners' security interests in identifiable proceeds exist for "an unlimited time if: (A) the proceeds are oil or gas production, inventory of raw, refined, or manufactured oil or gas production . . .; (B) the proceeds are accounts, chattel paper, instruments, documents, or payment intangibles; or (C) the proceeds are cash proceeds, as defined in [section 9.102]. . . ." Tex. Bus. & Com. Code Ann. § 9.343(c)(1)(A). Security interests created by Texas § 9.343 have the following priorities over other Chapter 9 security interests:
Tex. Bus. & Com. Code Ann. § 9.343(f).
On the issue of priority, section 9.322 of the Texas Business and Commerce Code states, "[c]onflicting perfected security interests . . . rank according to priority in time of filing or perfection. Priority dates from the earlier of the time of a filing covering the collateral is first made or the security interest is . . . first perfected. " Tex. Bus. &. Com. Code Ann. § 9.322(a)(1).
Oklahoma Producers argue that to the extent oil and gas was produced in Oklahoma and sold to Debtor in December 2017, Oklahoma Producers are entitled to a statutory lien in Debtor's oil, gas, and proceeds thereof that takes priority over any other lien, whether arising by contract, law, equity, or otherwise. The Oklahoma Lien Act
Okla. Stat. Ann. tit. 52, § 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." Okla. Stat. Ann. tit. 52, § 549.3. Moreover, "an oil and gas lien exists until the interest owner or representative first entitled to receive the sales price has received the sales price. Id. In Oklahoma, an oil and gas lien "exists as part of and incident to the ownership of oil and gas rights and is perfected automatically without the need to file a financing statement or any other type of documentation." Okla. Stat. Ann. tit. 52, § 549.4. "Except for a permitted lien,
Agent argues that, pursuant to Delaware § 9-301, Delaware law applies to determine perfection and priority of security interests in Debtor's goods, inventory, accounts, and proceeds. Unlike in Texas, Delaware's version of UCC Article 9 does not contain a non-standard provision providing for automatic perfection of a security interest to producers of oil and gas. Likewise, Delaware's version of UCC Article 9 does not contain any statutory lien provisions similar to those arising under the Oklahoma Lien Act that determine the lien rights of producers of oil and gas.
Agent also argues that, pursuant to Delaware § 9-304(a), New York law applies to determine perfection and priority of security interests in Debtor's deposit accounts.
Under Delaware law, perfection of a security interest in inventory, accounts, and proceeds is achieved by filing a financing statement with the Delaware Department of State. See Del. Code Ann. tit. 6, § 9-310(a) (providing that "a financing statement must be filed to perfect all security interests" except otherwise stated in the exceptions, which are not relevant here); see also Del. Code Ann. tit. 6, § 9-501 (providing that if Delaware law governs perfection of a security interest, "the office in which to file a financing statement to perfect the security interest is . . . the office of the Secretary of State). A perfected security interest in collateral attaches to "any identifiable proceeds of collateral" and "is a perfected security interest if the interest in the original collateral was perfected." Del. Code Ann. tit. 6, §§ 9-315(a)(2), (c). Delaware follows the first-to-file-or-perfect rule, meaning that "conflicting perfected security interests . . . rank according to priority in time of filing or perfection." Del. Code Ann. tit. 6, § 9-322(a)(1). "Priority dates from the earlier of the time a filing covering the collateral is first made or the security interest . . . is first perfected." Id.
Delaware law provides that perfection, the effect of perfection, and priority of a security interest in a deposit account is governed by local law of the bank's jurisdiction. Del. Code Ann. tit. 6, § 9-304(a). Agent argues that its security interest in Debtor's deposit accounts was perfected by control. A bank's jurisdiction is determined by "an agreement between the bank and its customer governing the deposit account [that] expressly provides that the agreement is governed by the law of a particular jurisdiction." Del. Code Ann. tit. 6, § 9-304(b)(1). If an agreement does not expressly provide that that the agreement is governed by the law of a particular jurisdiction, then the law governing perfection is based on "an agreement between the bank and its customer governing the deposit account [that] expressly provides that the agreement is governed by the law of a particular jurisdiction." Del. Code Ann. tit. 6, § 9-304(b)(2).
Producers who produced oil and gas in Oklahoma and sold it to Debtor (hereinafter referred to as "Oklahoma Producers") argue that the Oklahoma Lien Act causes them to have a first, prior and automatically perfected lien in Debtor's oil and gas and proceeds thereof based on amounts due for oil produced in Oklahoma and sold to Debtor. The Declaration of Deborah Kryak notes that "less than $1 million of oil produced and delivered in Oklahoma was purchased by Debtor in December 2017" and that "the Oklahoma oil was primarily delivered to customers in Oklahoma." Agent's App'x, Pt. 16 (ECF No. 90-15).
The Oklahoma Lien Act states that an "oil and gas lien" exists "to the extent of the owner's interest in oil and gas rights . . . and shall exist as part of and incident to the ownership of oil and gas rights." Okla. Stat. Ann. tit. 52, § 549.3(A). Comment 2 to title 52, section 549.3(A) of the Oklahoma Statutes & Court Rules provides that the Oklahoma Lien Act "makes it clear that 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." Okla. Stat. Ann. tit. 52, § 549.3(A), cmt. a. Moreover, comment a notes 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). The Oklahoma Lien Act also provides that no interest owner shall be "required, as a condition or term of an agreement to sell or otherwise, . . . to agree to any provision that would apply the law of any state other than the State of Oklahoma insofar as the same relates to rights under this act, and any such purported waiver . . . shall be void as a matter of public policy in this state." Okla. Stat. Ann. tit. 52, § 549.9.
Under the Oklahoma Lien Act, an interest owner's lien "exists in and attaches immediately to all oil and gas on the effective date of this act." Okla. Stat. Ann. tit. 52, § 549.3(B)(1). An interest owner's lien also "continues uninterrupted and without lapse in all oil and gas upon and after severance" and "continues uninterrupted and without lapse in and to all proceeds." Okla. Stat. Ann. tit. 52, §§ 549.3(B)(2), (3). The Oklahoma Lien Act provides that an oil and gas lien "takes priority over any other lien, whether arising by contract, law, equity, or otherwise, or any security interest." Okla. Stat. Ann. tit. 52, § 549.7. Rights granted to interest owners under the Oklahoma Lien Act "are to be liberally construed" to "afford the interest owner the most comprehensive protection" to receive the sales price from a purchaser. Okla. Stat. Ann. tit. 52, § 549.12(A).
As of the date of this Opinion, the Court is unaware of an opinion by any court that interprets and applies the Oklahoma Lien Act to determine lien perfection and priority among a pool of competing creditors that includes producers of oil and gas in Oklahoma.
The Court notes that Oklahoma Producers did not provide evidence demonstrating their interest in "oil and gas rights." See Okla. Stat. Ann. tit. 52, § 549.2(9). To the extent Oklahoma Producers can demonstrate that they have "oil and gas rights" subject to an oil and gas lien under the Oklahoma Lien Act, the Court finds that Oklahoma law applies to determine the perfection and priority of Oklahoma Producers' interests in oil, gas, and proceeds thereof for oil produced in Oklahoma and sold to Debtors in December 2017. See Okla. Stat. Ann. tit. 52, § 549.3. As such, the Court denies Agent's summary judgment as to Oklahoma Producers.
Next, the parties contend that the Court must determine the law that governs perfection and priority of security interests in Debtor's accounts receivable, inventory, proceeds, and deposit accounts among Agent, Texas Producers, and Intervenors. Agent argues that UCC § 9-301, which is the same in Delaware as in Texas, determines perfection and priority. Texas Producers and Intervenors contend that Texas § 9.343, a non-standard provision incorporated into the Texas Business & Commerce Code's adoption of the UCC, determines perfection and priority. The Delaware Code does not contain a non-standard provision similar to Texas § 9.343.
When a conflict of law issue arises in a bankruptcy case, the Court is faced with the unsettled question of which choice-of-law rules should be applied. See
Texas Producers argue that, to the extent there is a conflict of law, the Court should apply the federal independent judgment test expressed in
Restatement (Second) Conflict of Laws § 251(1). Texas Producers also cite to comment e of Restatement § 251(1), which provides that "greater weight will be given to the location of the chattel, or group of chattels, at the time the security interest attached than to any other contact." Id. Texas Producers argue that Texas law should apply because their security interests are created by state law and granted in oil and gas located and produced in Texas.
Agent argues that in determining how to resolve conflicts of law, the Court should apply the Restatement because both Delaware and Texas resolve choice-of-law issues through an analysis under the Restatement. See
Restatement (Second) of Conflict of Laws § 6. According to Agent, Restatement § 6(1) Restatement applies because UCC § 9-301, which is the same in Delaware and Texas, is the relevant statutory directive on choice of law that the Court must follow to determine perfection and priority of security interests in goods, inventory, accounts, and proceeds.
The Fifth Circuit has not determined whether bankruptcy courts should exercise federal choice-of-law principles or the forum state's choice-of-law rules.
In the present case, to the extent there is a "threshold question of whether the federal or forum (Texas) law applies," the Court finds that it is not necessary to make that determination.
To "promot[e] certainty and predictability in commercial transactions," Article 9 of the UCC was revised in 2001 to include UCC § 9-301. See
Here, the parties do not dispute that the Debtor is organized under the laws of Delaware. As such, regardless of whether Texas § 9.301 or Delaware § 9-301 applies, performing the analysis under each state's law results in the same outcome—because Debtor is organized under the laws of Delaware, Debtor is "located" in Delaware for the purposes of determining perfection of security interests in collateral, including goods, inventory, accounts, and proceeds. Therefore, the Court finds that Delaware's UCC governs perfection, effect of perfection or nonperfection, and the priority of security interest in collateral, which includes goods, inventory, accounts, and proceeds. See Del. Code Ann. tit. 6 § 9-301.
Texas Producers and Intervenors contend that Agent's reliance on UCC § 9-301 is misplaced, given that § 9.343(p) of the Texas Business & Commerce Code provides that "[t]he rights of any person claiming a security interest or lien created by [Texas's Article 9] are governed by the other provisions of this chapter except to the extent that this section necessarily displaces those provisions." (emphasis added). Intervenors argue that it would be "absurd" if non-Texas entities could rely upon UCC § 9-301 to eliminate all provisions of Texas § 9.343.
When construing any statute, including the UCC, "the statute must be read as a whole."
Texas Producers also cite to Official Comment 7 to Delaware § 9-320 which states in the context of a discussion of Delaware § 9-320(d) that:
Del. Code Ann. tit. 6 § 9-320(s) official cmt. ¶ 7 (emphasis added). Texas Producers argue that the "other legislation" referred to in Official Comment 7 is Texas § 9.343.
The Court finds Comment 7 to be unpersuasive for a number of reasons. First, an official comment to statutory text is not binding law. Next, Comment 7 accompanies title 6, section 9-320 of the Delaware Code, which concerns the rights of a buyer in the ordinary course of business taking free of a security interest in certain instances. Section 9-320 is not a choice of law provision. Moreover, the existence of a non-binding comment stating that a "uniform solution" to protect oil and gas interests is "[left] to other legislation" does not require the Court to infer that the non-standard provision found in Texas § 9.343 unseats the law regarding perfection and priority at Texas § 9.301 when the explicit language of the statute does not provide for such an outcome.
Intervenors further contend that Agent is barred by waiver and estoppel by deed from claiming that Texas § 9.343 did not create a lien in favor of Intervenors and Texas Producers. Specifically, Intervenors cite to two sections in the Credit Agreement entered into by Debtor and Agent. See Agent's App'x, Pt. 2 (ECF No. 90-1). The first section identified that provisions of Texas § 9.343 would create a "First Purchaser Lien"
The Court disagrees with Intervenors that the two provisions cited from Agent's Credit Agreement caused Agent to either (i) waive its priority over or (ii) subordinate its priority over a security interest asserted under Texas § 9.343. Waiver is "the intentional relinquishment of a known right or intentional conduct that is inconsistent with asserting that right."
Agent's App'x, Pt. 2 (ECF No. 90-1). The Court finds that the language at issue in the Credit Agreement did not result in Agent waiving its right to assert that it has priority over any security interests that arise under Texas § 9.343 because, as demonstrated by section 4.1.4 of the Credit Agreement above, Agent's Credit Agreement did not "unequivocally manifest" its intention to waive its lien rights or to subordinate its priority. See Agent's App'x, Pt. 2 (ECF No. 90-1) (stating "nothing herein shall be deemed to constitute an agreement to subordinate any of the Liens of the Collateral Agent"); see also
For the reasons stated above, the Court will apply UCC § 9-301, which is the same in Delaware as it is in Texas, to determine perfection and priority of security interests claimed by Agent, Texas Producers, and Intervenors.
Under Delaware and Texas law, UCC § 9-301 determines which states' substantive laws govern perfection and priority of security interests in personal property. Tex. Bus. & Com. Code Ann. § 9.301(1); Del. Code Ann. tit. 6 § 9-301(1). The location of a registered organization is the state in which the entity is organized. Del. Code Ann. tit. 6 § 9-307(e); Tex. Bus. & Com. Code Ann. § 9.307(e). Here, Debtor is organized in Delaware, so Delaware law applies.
Under Delaware law, Agent, Texas Producers and Intervenors were required to file a financing statement with the Delaware Department of State to perfect their security interests in goods, inventory, accounts, and proceeds. Del. Code. Ann. tit 6. § 9-310(a) (providing that, subject to exceptions provided in Del Code Ann. tit §§ 9-310(b) and 9-312(b), "a financing statement must be filed to perfect all security interests and agricultural liens"). Based on the evidence provided in the Motion for Summary Judgment, Agent has shown that it perfected its security interest in goods, inventory, accounts, and proceeds by filing UCC-1 financing statements with the Delaware Department of State on July 23, 2015 ("July 2015 Financing Statements"). Agent's App'x, Pt. 10 (ECF No. 90-9). Agent has also demonstrated that it filed the proper amendments to the July 2015 Financing Statements, which caused its security interests to remain continuously effective since July 23, 2015. Id. All Producers except Viceroy, RHEACO, and RADCO filed financing statements with the Delaware Department of State on various dates in January 2017. Plaintiff's Supplement, Pt. 2 (ECF No. 96-2). Producers and Intervenors' Responses do not discredit the validity of the July 2015 Financing Statements and amendments thereto.
Delaware law abides by the first-to-file-or-perfect rule, which causes "conflicting perfected security interests . . . [to] rank according to priority in time of filing or perfection." Del. Code Ann. tit. 6, § 9-322(a)(1). "Priority dates from the earlier of the time a filing covering the collateral is first made or the security interest . . . is first perfected." Id. Agent's July 2015 Financing Statements were filed before any of the Producers filed a UCC-1 financing statement in Delaware. Therefore, the Court finds, as a matter of law, that Agent's security interest in goods, inventory, accounts, and proceeds primes any alleged security interest held by the Producers and Intervenors because the Agent's July 2015 Financing Statements were filed first.
Cash proceeds of oil and gas produced by Texas Producers and Intervenors held by Debtor in deposit accounts as of the Petition Date are perfected subject to the "local law of [the] bank's jurisdiction." Del. Code. Ann. tit 6. § 9-304(a). "If an agreement between the bank and the debtor governing the deposit account expressly provides that a particular jurisdiction is the bank's jurisdiction for purposes of this part, this Article, or the [UCC], that jurisdiction is the bank's jurisdiction." Del. Code. Ann. tit. 6 § 9-304(b)(1). Debtor, Agent and JPMorgan Chase (as depositary), entered into the Blocked Account Control Agreement, which provides that New York law is JPMorgan Chase's jurisdiction. None of the parties dispute the validity of the Deposit Account Control Agreement. Therefore, the Court finds as a matter of law that perfection of security interests in Debtor's deposit accounts at JPMorgan Chase is governed by New York law.
Under New York law, Agent's liens on Debtor's deposit accounts as original collateral are perfected by control of the collateral. N.Y. U.C.C. § 9-312(b)(1). Control of a deposit account can be achieved through a deposit account control agreement, which is "an authenticated record that the bank will comply with instructions originated by the secured party directing disposition of the funds in the deposit account without further consent of the debtor." N.Y. U.C.C. § 9-104(a)(2); see N.Y. U.C.C. § 9-314(a). The Court finds that the Blocked Account Control Agreement establishes Agent's control over Debtor's deposit accounts at JPMorgan Chase. Producers and Intervenors do not argue that they entered into an agreement with Debtor's depository bank, nor do Producers and Intervenors contend that they attempted to establish control over Debtor's deposit accounts. As such, the Court finds as a matter of law that Agent holds a first priority security interest in Debtor's deposit accounts.
Agent's Motion for Summary Judgment argues that even if Texas Producers can meet their burden to establish all elements of a security interest under Texas § 9.343, Agent's perfected security interests in Debtor's goods, inventory, accounts, proceeds, and deposit accounts still have priority over Texas Producers' liens by virtue of Tex. Bus. & Com. Code Ann. § 9.343(f). Because the Court found that Delaware law applies to determine perfection and priority of Texas Producers and Intervenors' security interests, the Court did not evaluate the merits of this legal argument made under Texas law.
Producers assert the following affirmative defenses in their original answer:
Answers/Counterclaims, (ECF No. 50 ¶ ¶ 63, 64). Additionally, Producers assert the following counterclaims:
Answers/Counterclaims, (ECF No. 50, ¶ ¶ 76, 80). Defendant Energy Reserves Group, LLC filed its Joinder to Producers' Original Answer and Counterclaim. (ECF No. 51). Agent filed its Reply to Producers' Counterclaim. (ECF No. 55). Thereafter, Debtor filed its answer to Agent's Complaint, stating that the Court needs to determine the extent, validity, and priority of liens between Agent and Producers (ECF No. 61).
RADCO and RHEACO filed their Motion to Intervene in this Adversary Proceeding (ECF No. 66), which was granted on July 24, 2018 (ECF No. 85). Intervenors joined in the adversary proceeding as defendants seeking the same relief that Producers assert. Thereafter, Producers filed their First Amended Answer and First Amended Counterclaim (ECF No. 70). In their First Amended Answer and First Amended Counterclaim, Producers added the following affirmative defense: Agent's claims are barred by the doctrine of waiver. (ECF No. 70, ¶ 65). Producers also added a counterclaim for conversion, stating the following:
(ECF No. 70, ¶ ¶ 83, 84).
Agent filed its Reply to Defendants' Amended Answer and Plaintiff's Answer to Amended Counterclaim, Including Motions Under Fed. R. Bankr. P. 7012(f) to Strike Affirmative Defenses and Under Fed. R. Bankr. P. 7012(b)(6) to Dismiss Counterclaim for Conversion. ("Motion to Strike") (ECF No. 91). Agent's Motion to Strike alleges that when affirmative defenses are insufficiently plead, courts apply the same pleading standards as applied with respect to a complaint under Fed. R. Civ. P. Rule 12(b)(6).
The court in
Agent contends that Producers' pleading, which does no more than state the names of the affirmative defenses, is not enough to meet the pleading standards established by the Supreme Court in
Producers filed their Response to Agent's Motion to Strike Defenses and Motion to Dismiss Counterclaim for Conversion. (ECF No. 104).
Producers also argue that a "no-evidence" motion for summary judgment is a creation of Texas state court, and is not available (and is procedurally improper) in federal court.
2017 WL 5147095 at *1. As to the burden shifting frame work in Rule 56, the district court stated in
2007 WL 1577652 at *3 (citing
Producers also argue that the issue of waiver and estoppel are fact issues that require this Court to make a factual determination, and, as such cannot be decided as a matter of law. Producers state that waiver is an intentional relinquishment of a known right or conduct inconsistent with that right.
As an initial matter, the Court agrees with Producers that a "no evidence" motion for summary judgment is a Texas state court procedural motion that has no application to federal court. As noted herein, the Western District of Texas District Courts have declined to apply "no evidence" summary judgment motions to federal practice and require the moving party to put on sufficient evidence in support of its claims.
In addition, the parties acknowledge that the Fifth Circuit has not expressly applied the
Agent argues that Producers have failed to provide any evidence in support of their counterclaim for conversion. Motion for Summary Judgment, p. 31 (ECF No. 89).
In their Amended Answer to Complaint, Producers allege a counterclaim for conversion of money on deposit in Agent's bank accounts, based on two allegations. The first allegation is that Producers, under either Texas § 9.343 or the Oklahoma Lien Act have a "first priority perfected security interest, as secured parties, to secure the obligations of Debtor as the `first purchaser' of oil and gas production," Producers' Amended Answer to Complaint, (ECF No. 70, ¶ 74). The second allegation is that "in December 2017 and/or January 2018, Deutsche and Lenders (1) exercised cash dominion over [First River] and (2) swept substantially all of the funds held by the Debtor, including the amounts that represented proceeds from [First River's] sale of oil, gas and condensate, on which the Producers held first and priority liens." Id. at ¶ 75. Producers further allege:
(ECF Nos. 70, ¶ ¶ 83 and 84).
Agent asserts that a claim for conversion is defined as "the wrongful exercise of dominion and control over another's property in denial of or inconsistent with his rights."
Agent argues that Producers must show a "right of immediate possession," or their claim for conversion fails.
Agent argues that while the Producers and Intervenors claim liens on "oil" pursuant to Texas § 9.343 and/or the Oklahoma Lien Act, Producers do not allege that they have liens on the money in deposit accounts, and they do not allege that the statutes that would entitle them to a lien on such money in deposit accounts, much less the right to "immediately possess" the money in deposit accounts. Moreover, Agent maintains that Producers do not, and cannot, allege that Agent "unlawfully and without authorization assumed and exercised control over the property." Agent notes that some of the Producers allege that Agent held a "second lien position" on the money in deposit accounts; although Agent contends that it has a first lien position, and Producers' admission of the Agent's lien on the deposit accounts precludes any finding that the Agent acted unlawfully or without authorization. Further, Agent states that Producers do not allege that Producers demanded return of the money in deposit accounts or that Agent refused to return the money in deposit accounts. Finally, Agent argues that Producers have not only failed to plead a plausible claim for conversion, their reliance on Texas § 9.343 and the Oklahoma Lien Act conclusively establishes that a claim for conversion is not available to Producers under Texas law.
Producers state that a cause of action for conversion of a secured party's collateral is available to Producers in this adversary proceeding. See
The Court has found that: (i) Agent has a first lien on the proceeds of production of oil produced in Texas, and (ii) Agent has a first lien on Debtor's deposit accounts at JPMorgan Chase in New York. As noted herein, Agent's security interest primes the Texas Producers' alleged security interest under Delaware law. As such, there is no conversion of the Texas Producers' collateral because the collateral is subject to the Agent's superior security interest. That said, the Court also found that under the Oklahoma Lien Act, Oklahoma Producers have a security interest that is superior to that of the Agent's for oil and gas and proceeds thereof of oil produced in Oklahoma. Therefore, there is a question of fact as to the extent of Oklahoma Producers' security interest in any cash proceeds from the production of the oil in Oklahoma. The Court agrees with Agent that Producers' counterclaim as plead is deficient because there are no underlying allegations to support a claim for conversion. Now that the Court has determined that Oklahoma Producers have a superior security interest in the cash proceeds from Oklahoma production, the Court will allow Oklahoma Producers to replead their counterclaim for conversion. Further, the Court will grant Oklahoma Producers' counterclaim for a declaratory judgment on the proceeds from the production of oil from Oklahoma. After the Court determines the extent and amount of Oklahoma Producers' security interest in the Oklahoma proceeds, Oklahoma Producers may file their motion for attorney's fees.
For the foregoing reasons, IT IS THEREFORE ORDERED that Agent's Motion for Summary Judgment and Alternative Motion for Partial Summary Judgment (ECF No. 89) is GRANTED, IN PART and DENIED, IN PART. The Court will issue an Order consistent with this Memorandum Opinion.
