Fifth circuit upholds bankruptcy court order in priority lien dispute

The Fifth Circuit recently upheld the order of a bankruptcy court, ruling that a security duly given by a bank over the assets of a debtor takes precedence over the unsettled and imperfect collateral of oil producers over the assets of a debtor. petroleum products, but did not have priority over a statutory privilege granted to certain producers. under the Oklahoma Lien Act. See First River Energy, LLC Case, 986 F.3d 914 (5th Cir. 2021). In this matter, First River Energy, LLC (the “Debtor”), a Delaware limited liability company headquartered in Texas, filed a Chapter 11 bankruptcy petition. One month before the filing, the Debtor purchased crude oil and condensate from producers in Texas and Oklahoma (collectively the “Producers”), which it sold to downstream buyers, but did not indemnify the Producers. The producers claimed first-rate and perfect security interests in the purchase of the oil and condensate product in accordance with Texas UCC § 9.343 and the Oklahoma Lien Act. However, Deutsche Bank Trust Company Americas, as agent for various secured lenders (collectively the “Bank”), also asserted a first priority claim on the proceeds of the sale based on a UCC funding statement. -1 filed with the Delaware Department of State in 2015. The Bankruptcy Court first found that Delaware law governed the validity, completeness and priority of the privileges of the parties. Notwithstanding Texas UCC § 9.343, the Court held that valid and perfect Bank security interests in the debtor’s accounts and proceeds took precedence over non-perfect or subsequently filed secured claims by the Texas producers. The court also found, however, that the bank’s interests were subordinate to the statutory privileges claimed by the Oklahoma producers.

On appeal, the fifth circuit confirmed. First, the Court held that Delaware law applied, noting that Texas UCC § 9.301 (1) governs the perfection, the effect of perfection, and the priority of security interests by applying the local law of the jurisdiction where ” a debtor is located ”. Because the debtor is a limited liability company, it was considered to be located in Delaware, its state of organization. Next, the Court considered the priority of the respective privileges of the parties. Relying on Texas UCC § 9.343, “which grants first-class security interest over the purchase price of oil and gas produced in Texas as well as the proceeds in the hands of any” first-time buyer[,]”” The Texas growers argued that they had a first priority lien on the cash product. Conversely, the Oklahoma producers argued that they had a first lien, prior and automatically rendered pristine under the Oklahoma Lien Act, which creates an unrelated state statutory lien. at UCC. The Court noted that Delaware’s UCC Act requires the filing of funding statements with its state authorities to perfect security interests in property, inventory, and proceeds and determines priority under the first-to-file rule. Here, the Bank’s funding statements have been refined and continually updated since 2015. Thus, the Court concluded that the Texas Producers’ lien was contingent on the Bank’s first deposits, noting that the Texas Producers “”[were] out of luck under Delaware’s UCC law, which does not recognize the priority of their unpaid and non-perfect security interests in the product under section 9.343 of the Texas UCC. However, the court found that the Oklahoma producers had a first priority statutory lien on the product, noting that “[a]Although Delaware law does not contain any statutory privilege provision similar to the Oklahoma Lien Act, the Delaware UCC does not preempt statutory privileges created by other states.

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