The Fifth Circuit Says Bank of Delaware UCC Lien Priority Over Texas Oil Producers Statutory Lien Over Product – Insolvency / Bankruptcy / Restructuring
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The Uniform Commercial Code was established to ensure predictability and compliance in commercial transactions. Some states have adopted non-standard UCC provisions, which create an unreliable and unpredictable market for secured creditors. In addition, statutory liens, which are liens deriving from federal and state laws, can disrupt the priority of secured creditors’ interests in a debtor’s assets. Regarding First River Energy, LLC (986 F.3d 914, 917 (5th Cir. 2021)) illustrates the problems arising from the competing interests of creditors secured under the laws of different states.
In that case, the Fifth Circuit upheld a ruling by the U.S. West District Bankruptcy Court of Texas, which found that in the bankruptcy of a debtor incorporated in Delaware, Delaware law governed competing interests between oil producers. and Texas gas and bank lenders. in the property of the debtor. Accordingly, the statutory lien of the Texas producers was subordinated to the perfect lien of the lender under the Delaware UCC. In contrast, the Oklahoma Lien Act protected Oklahoma oil producers by granting them a statutory lien based on real estate law, which is not preempted by the Delaware UCC.
Secured lenders should be aware of statutory liens which may take precedence over lender liens in the event of a debtor’s bankruptcy. Lenders should modify their due diligence and do additional research to mitigate risk.
Statutory links and other hidden privileges
Bankruptcy cases frequently involve challenges to the validity, scope and priority of secured creditors’ collateral. Certain liens may not be disclosed in standard tax, lien and judgment searches that may affect the priority of lenders’ collateral. These “hidden” privileges, including statutory privileges, can trigger the creditor’s privileges in bankruptcy.
Statutory liens do not require the consent of the debtor or a security agreement with him. The creditor has the right to impose a statutory lien on the debtor’s property due to the relationship between the creditor and the debtor. For example, landlords have the right to impose landlord liens on tenants’ personal property as security for lease payments. Other statutory privileges include custodian (or warehouse) privileges and unemployment compensation and workers’ compensation privileges.
Debtor First River Energy LLC is a mid-level service provider in the oil and gas industry, headquartered in Texas and organized in Delaware. Intermediate suppliers, also known as first buyers, typically buy oil and gas from upstream producers who extract the hydrocarbons, and then market to downstream buyers, such as refineries, retailers, traders or commodity traders. raw. First River purchased crude oil and condensate from upstream producers in Texas and Oklahoma, which it then sold to downstream buyers. First River filed for Chapter 11 bankruptcy in January 2018, without paying upstream producers in Texas and Oklahoma for the oil it purchased.
To mitigate the risk that intermediate suppliers will not pay upstream producers, some states, such as Texas and Oklahoma, have enacted laws (Texas UCC § 9.343 and Oklahoma Oil and Gas Owners’ Lien Act of 2010), offering to upstream producers a perfect security interest in the oil and gas transferred to the first buyers until the upstream producer is fully paid. Both the Oklahoma producers and the Texas producers in the First River case asserted statutory privileges in Oklahoma and Texas, respectively, over production and proceeds from sales to First River.
Deutsche Bank Trust Company Americas, along with other banks and financial institutions, gave First River a loan before filing for bankruptcy. Deutsche Bank secured its security interest in the proceeds of the sale by filing UCC-1 financing statements in Delaware. First River defaulted on the loan. Deutsche Bank has filed adversarial proceedings as a secured creditor in the bankruptcy, seeking to determine that it has priority over the proceeds of the sale.
Differences between the statutes of Texas and Oklahoma
The court determined that Delaware law applied to producers in Texas. The Delaware UCC does not include the non-uniform provisions of Texas UCC’s first purchaser of Texas § 9.343, so the court ignored Texas protective law. Enforcing Delaware law, the Fifth Circuit asserted that Deutsche Bank held first-rate security interest in Texas producers through its filed Delaware UCC-1 funding statement.
In contrast, the Fifth Circuit found that the privilege of Oklahoma producers took precedence over that of Deutsche Bank. The Oklahoma Lien Act differs from Texas UCC law in that the liens arise in connection with the related real estate interest materials, as opposed to personal property security interests under the Oklahoma UCC. The Delaware UCC does not anticipate the non-UCC statutory privileges of other states based on real estate law, so the Deutsche Bank security interest was subordinated to the Oklahoma producer statutory privilege.
While the Texas UCC Act and the Oklahoma Lien Act were designed to protect oil and gas producers in their respective states, the Oklahoma Lien Act avoids the weakness of the Texas UCC Act. by anchoring statutory law in property law so that its objective is achieved. outside.
Take away food
Although the Texas government is considering legislation to correct loopholes in Texas law through Bill 3794, the law remains unchanged. Texas oil and gas producers should ensure their security interests come first by filing UCC funding statements instead of relying on Texas’ shaky statutory regime.
More generally, although this case worked in favor of the secured creditor in Texas, the results may differ elsewhere. Secured creditors should be aware that certain aspects of transactions, such as the debtor’s industry, may give rise to hidden liens. Secured creditors should be mindful of legal liens and exercise due diligence by:
- determine whether there are statutory privileges under the law of the state or local where the debtor is located or particular to the industry or business of the debtor;
- search for liens in counties where the debtor owns real estate; and
- ask the debtor to disclose any lien or security and any dispute, claim or dispute that may give rise to lien.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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