Deutsche Bank Trust Co. v. First River Energy, LLC (In re First River Energy, LLC)
| Decision Date | 02 March 2020 |
| Docket Number | ADV. PROC. NO. 18-05015-CAG,CASE NO. 18-50085-CAG |
| Citation | 615 B.R. 796 |
| Parties | IN RE: FIRST RIVER ENERGY, LLC, Debtor. Deutsche Bank Trust Company Americas, Agent, Plaintiff, v. First River Energy, LLC, Debtor-in-Possession; U.S. Energy Development Corporation; Ageron Energy, LLC ; Petroedge Energy IV, LLC; Teal Natural Resources, 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 ; Galveston Bay Operating Co. LLC; Magnum Producing, LP; Magnum Engineering Company; Magnum Operating LLC; Rock Resources, Inc; Killam Oil Co., Ltd.; and Energy Reserves Group, LLC, Defendants. |
| Court | U.S. Bankruptcy Court — Western District of Texas |
Toby L. Gerber, Norton Rose Fulbright US LLP, Dallas, TX, Michael M. Parker, Steve A. Peirce, Norton Rose Fulbright US LLP, San Antonio, TX, for Plaintiff.
William B. Kingman, San Antonio, TX, David W. Parham, Akerman LLP, Dallas, TX, for Defendants.
Came on for consideration Debtor/Cross-Claimant First River Energy, LLC's Partial Motion for Summary Judgment (ECF No. 172) ("Debtor's Partial MSJ"),1 Producers' Response to Debtor/Cross-Claimant First River Energy, LLC's Partial Motion for Summary Judgment (ECF No. 182) ("Producers' Response"), RADCO Operations, LP and RHEACO, Ltd.'s Response to First River Energy, LLC's Partial Motion for Summary Judgment (ECF No. 183) ("Intervenors' Response"), Debtor/Cross-Claimant First River Energy, LLC's Reply to Producers' Response to Partial Motion for Summary Judgment (ECF No. 187) ("Reply to Producers' Response"), and Debtor/Cross-Claimant First River Energy, LLC's Reply to RADCO Operations, LP and RHEACO, Ltd.'s Response to Partial Motion for Summary Judgment (ECF No. 188) ("Reply to Intervenors' Response"). At the hearing on December 9, 2019, the parties presented argument on Debtor's Partial MSJ. Thereafter, the Court took this matter under advisement. For the reasons stated herein, the Court finds that Debtor's Partial MSJ is DENIED.
As an initial matter, the Court finds that it has jurisdiction over the proceeding under 28 U.S.C. §§ 1334, 157(a), and 157(b)(1). This proceeding is a core proceeding under 28 U.S.C. §§ 158(b)(2)(A), (B), (K), and (O). All parties have consented to the Court's entry of final orders and final judgment. (See ECF Nos. 57, 62, 63). This matter is within the Court's authority and jurisdiction pursuant to the Supreme Court's ruling in Wellness Int'l Network, Ltd. v. Sharif (In re Sharif) , 575 U.S. 665, 135 S. Ct. 1932, 191 L.Ed.2d 911 (2015).
On January 12, 2018, First River Energy, LLC ("Debtor" or "First River") filed a voluntary petition for chapter 11 under the Bankruptcy Code. Pre-petition, Debtor was a midstream provider that purchased oil directly from upstream producers, and re-sold and delivered aggregated oil to third-party downstream purchasers. 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.2 Generally, the terms of Producers' sale of oil to Debtor were delineated in purchase contracts ("Producer Agreements") entered into by Debtor and Producers individually. Producers sold oil to Debtor through December 2017.
RADCO Operations, LP ("RADCO") and RHEACO, Ltd. ("RHEACO") (collectively, "Intervenors") also produced oil and gas in Texas and sold it to Debtor pre-petition. RADCO entered into a Crude Oil Purchase Agreement with O.G.O. Marketing, LLC ("RADCO Agreement"), a Texas limited liability company that was eventually acquired by First River. RADCO and Debtor allege that RADCO entered into a purchase agreement with O.G.O. Marketing, LLC and sold oil to Debtor through December 2017, but neither RADCO nor Debtor produced a copy of a purchase agreement.
On July 23, 2015, Debtor entered into a credit agreement (the "Credit Agreement") with Deutsche Bank AG New York Branch as collateral agent, lender, issuing lender, and swing line lender ("Lender"), Deutsche Bank Trust Company Americas as Administrative Agent ("Agent"), and several banks and other financial institutions as lenders. Also, on July 23, 2015, Debtor entered into a guarantee agreement and a security agreement (the "Security Agreement") with Agent and Lender for the funds advanced in the Credit Agreement. On July 23, 2015, Agent executed and filed UCC-1 financing statements with the Delaware Department of State to perfect its security interest in substantially all of Debtor's assets.
After defaulting on payments due to Agent in November and December of 2017, Debtor discontinued nearly all its transactions involving the sale of oil and gas. On January 12, 2018, when Debtor filed its chapter 11 petition, Debtor had not paid Producers and Intervenors for any oil and gas product received in December 2017. As the bankruptcy case progressed, Agent, Producers, and Intervenors all alleged that each had a valid, perfected, first priority lien in substantially all of Debtor's assets, including: Debtor's oil and gas production, deposit accounts, proceeds, and accounts receivable.
On February 21, 2018, Agent initiated this adversary proceeding seeking declaratory judgment on the validity, extent, and priority of Agent's liens in substantially all of Debtor's assets. Thereafter, Agent filed its Motion for Summary Judgment and Alternative Motion for Partial Summary Judgment (ECF No. 89) (the "Agent MSJ"), to which Producers and Intervenor filed their Responses (ECF Nos. 103, 105). The Agent MSJ argued that Agent had a perfected, first-priority security interest in substantially all of Debtor's assets. Notably, as a threshold matter, the Agent MSJ argued that regardless of lien perfection and priority issues, Producers could not assert a security interest in Debtor's assets because certain Producer Agreements incorporated the Conoco Phillips General Provisions dated 1993 ("Conoco Phillips Provisions"). The Conoco Phillips Provisions are a set of oil and gas industry standards that include a warranty provision. (ECF No. 89). Agent argued that the warranty contained in the Conoco Phillips Provisions caused Producers to waive their ability to assert a lien against Debtor's assets (the "Waiver Argument"). (Id. ). The Agent MSJ also argued that warranty language in the RADCO Agreement caused RADCO to waive its ability to assert a lien against Debtor's assets. (Id. ).
The Court issued its Memorandum Opinion Granting, in Part and Denying, in Part Agent's Motion for Summary Judgment and Alternative Motion for Partial Summary Judgment (ECF No. 114) ("Opinion on Agent MSJ"). The Opinion on Agent MSJ denied summary judgment as to the Waiver Argument. The Opinion on Agent MSJ also found that—to the extent to which producers of oil and gas in Oklahoma ("Oklahoma Producers") could produce evidence demonstrating extent and amount of sums owed by Debtor for pre-petition purchase of oil and gas—Oklahoma Producers had a first-priority, automatically arising statutory lien under Section 549.1 et seq of the Oklahoma Statutes (the "Oklahoma Lien Act").3 The Opinion on Agent MSJ, however, granted summary judgment on Agent's argument that it had a first-priority security interest in Debtor's goods, inventory, accounts, and proceeds that primed any liens or security interests alleged by Producers and Intervenors that produced oil and gas in Texas ("Texas Producers"). On April 22, 2019, the Court entered its Memorandum Opinion in Support of Certification of a Direct Appeal to the Fifth Circuit Court of Appeals (ECF No. 135) and Certification of Direct Appeal (ECF No. 136) on the following questions presented:
(1) Does UCC § 9-301, which is the same in Texas and Delaware, dictate that Delaware law governs perfection and priority of liens between Texas Producers and Agent where the personal property at issue is accounts receivable, cash, cash equivalents, and inventory held by Debtor, an LLC organized under the laws of the state of Delaware?; and (2) Does UCC § 9-301, which is the same in Texas and Delaware, dictate that the law of the state where Debtor is incorporated determines perfection and priority of security interests among Agent, a secured lender, and Producers of oil and gas in Texas, regardless of the non-standard provision located at Section 9.343 of the Texas Business and Commerce Code ?
(ECF Nos. 135, 136). Producers also filed a Petition for Leave for Direct Appeal From the United States Bankruptcy Court for the Western District of Texas, San Antonio Division that the Fifth Circuit Court of Appeals ("the Fifth Circuit") granted (Court of Appeals Docket No. 19-90012, Document 00515033202). As of the date of entry of this Opinion, the legal issues certified for direct appeal to the Fifth Circuit are scheduled for oral argument.
After the Fifth Circuit granted leave to appeal certain questions of law contained in the Opinion on Agent MSJ, Debtor filed its Second Amended Answer to Complaint, Statement of Position, and Cross-Claims Against Producers (ECF No. 171) ("Debtor's Second Amended Complaint"). Debtor's Second Amended Complaint included a cross-claim requesting declaratory judgment that Producers waived their rights, if any, to assert liens or security interests in the oil they sold Debtor by expressly warranting that the oil was free of liens and encumbrances. (Id. ). The Second Amended Complaint also requested recovery of attorney's fees and costs. (Id. ). Thereafter, Debtor filed its Partial MSJ.
Debtor purchased oil from Producers pursuant to the Producer Agreements. In relevant part, the Producer Agreements state:
Special Provisions : Conoco...
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