Arrow Oil & Gas, Inc. v. J. Aron & Co. (In re Semcrude L.P.)
| Citation | 864 F.3d 280 |
| Decision Date | 19 July 2017 |
| Docket Number | 15-3095,No. 15-3121, No. 15-3123,Nos. 15-3094,15-3096 & 15-3097, No. 15-3124,s. 15-3094,15-3121 |
| Parties | 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; 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 In re: SemCrude L.P., et al., Debtors BP Oil Supply Company v. SemGroup, L.P., et al. Star Production, Inc; LSC Production Company, Appellants In re: SemCrude L.P., et al., Debtors J. Aron & Company v. SemGroup, L.P., et al. IC-Co, Inc., Appellant In re: SemCrude L.P., et al., Debtors IC-CO, Inc; WEOC, Inc. ; Reserve Management Inc v. J. Aron & Company IC-CO, Inc., Appellant |
| Court | United States Courts of Appeals. United States Court of Appeals (3rd Circuit) |
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)
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.
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, 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 Avenue, 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
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.
Before: AMBRO, JORDAN, and FISHER, Circuit Judges
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 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.
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 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 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...
To continue reading
Request your trial
-
Fairbanks Dev., LLC v. Johnson
...adopted sub nom. In re Semcrude, L.P. , No. 14-CV-357 (SLR), 2015 WL 4594516 (D. Del. July 30, 2015), aff'd sub nom. In re SemCrude L.P. , 864 F.3d 280 (3d Cir. 2017) (quoting Chappell & Co. Ltd. v. Nestle Co. Ltd. , [1960] A.C. 87 (H.L. 1959)) ("The English House of Lords has observed that......
-
Silvestri Homes Wny, LLC v. Jones (In re Jones)
...this Court sits in Pennsylvania, it must apply Pennsylvania choice of law rules in deciding that matter. See, e.g. , In re SemCrude L.P. , 864 F.3d 280 (3d Cir. 2017). The Court must first identify whether there are any relevant differences between the laws of the two states since, if there......
-
Giuliano v. Ins. Co. of Pa. (In re LTC Holdings, Inc.)
...Inc. , 542 F.3d 90, 97 (3d Cir. 2008). A bankruptcy court's order granting summary judgment is reviewed de novo. See In re SemCrude L.P. , 864 F.3d 280, 290 (3d Cir. 2017). Summary judgment "is proper when, viewing the evidence in the light most favorable to the opposing party, there is no ......
-
Deutsche Bank Trust Co. v. U.S. Energy Dev. Corp. (In re First River Energy, L. L.C.)
...on cases where producers attempted to collect from purchasers downstream of the first purchasers. In the Third Circuit's decision In re Semcrude , upstream producers sought to enforce their Texas and Oklahoma lien rights against purchasers downstream of the first purchaser. In re Semcrude, ......
-
Secured Oil and Gas Transactions in Kansas
...84-9-339a. [107] K.S.A. 84-9-339a(p)(3). [108] K.S.A. 84-9-339a(a). [109] Arrow Oil & Gas, Inc. v. J. Aron & Co. (In re SemCrude, L.P. ), 864 F.3d 280, 291–93 (3d Cir. 2017). [110] Id. The court noted that while the collateral in this case was produced crude oil, it was goods rather than as......
-
Oil and Gas Secured Transactions in Kansas
...84-9-339a. [107] K.S.A. 84-9-339a(p)(3). [108] K.S.A. 84-9-339a(a). [109] Arrow Oil & Gas, Inc. v. J. Aron & Co. (In re SemCrude, L.P), 864 F.3d 280, 291-93 (3d Cir. 2017). [110] Id. The court noted that while the collateral in this case was produced crude oil, it was goods rather than as-e......
-
2017-2018 Commercial Law Developments, Part I.e (priority)
...because it was perfected long before the mechanic's lien would have arisen.[Page 14]3. Buyers and Other Transferees In re SemCrude, L.P., 864 F.3d 280 (3d Cir. 2017)11 - Downstream buyers of oil and gas from the debtors were buyers for value who took free of an unperfected security interest......