Deutsche Bank Trust Co. v. U.S. Energy Dev. Corp. (In re First River Energy, L. L.C.)

• Decision Date: 03 February 2021
• Docket Number: No. 19-50646,19-50646
• Citation: 986 F.3d 914
• Parties: In the MATTER OF: FIRST RIVER ENERGY, L.L.C., Debtor Deutsche Bank Trust Company Americas, Agent; First River Energy, L.L.C., Appellees - Cross-Appellants v. U.S. Energy Development Corporation; Ageron Energy, L.L.C. ; Petroedge Energy IV, L.L.C.; Teal Natural Resources, L.L.C.; Crimson Energy Partners IV, L.L.C. ; Viceroy Petroleum, L.P.; RLU Operating, L.L.C. ; Dewbre Petroleum Corporation; Jerry C. Dewbre; American Shoreline, Incorporated; Texpata Pipeline Company; Aurora Resources Corporation ; AWP Operating Company; Texron Operating L.L.C. ; Magnum Producing, L.P.; Magnum Engineering Company; Magnum Operating, L.L.C.; Rock Resources Incorporated; Killam Oil Company, Limited; Energy Reserves Group, L.L.C., Appellants Cross-Appellees
• Court: U.S. Court of Appeals — Fifth Circuit

986 F.3d 914

In the MATTER OF: FIRST RIVER ENERGY, L.L.C., DebtorDeutsche Bank Trust Company Americas, Agent; First River Energy, L.L.C., Appellees - Cross-Appellants

v.U.S. Energy Development Corporation; Ageron Energy, L.L.C. ; Petroedge Energy IV, L.L.C.; Teal Natural Resources, L.L.C.; Crimson Energy Partners IV, L.L.C. ; Viceroy Petroleum, L.P.; RLU Operating, L.L.C. ; Dewbre Petroleum Corporation; Jerry C. Dewbre; American Shoreline, Incorporated; Texpata Pipeline Company; Aurora Resources Corporation ; AWP Operating Company; Texron Operating L.L.C. ; Magnum Producing, L.P.; Magnum Engineering Company; Magnum Operating, L.L.C.; Rock Resources Incorporated; Killam Oil Company, Limited; Energy Reserves Group, L.L.C., Appellants Cross-Appellees

No. 19-50646

United States Court of Appeals, Fifth Circuit.

FILED February 3, 2021

Toby L. Gerber, Esq., Michael M. Parker, Steve Arthur Peirce, Norton Rose Fulbright US, L.L.P., San Antonio, TX, for Appellee Cross-Appellant Deutsche Bank Trust Company Americas, Agent.

David W. Parham, Esq., Akerman, L.L.P., Dallas, TX, John Eugene Mitchell, Katten Muchin Rosenman, L.L.P., Chicago, IL, for Appellee Cross-Appellant First River Energy, L.L.C.

Mark Curtis Taylor, Waller Lansden Dortch & Davis, L.L.P., Austin, TX, Patrick Holder Autry, Branscomb, P.L.L.C., William Brand Kingman, Law Offices of William B. Kingman, P.C., San Antonio, TX, for Appellants Cross-Appellees.

Before JOLLY, JONES, and ENGELHARDT, Circuit Judges.

EDITH H. JONES, Circuit Judge:

Appellants, comprising a number of Texas and Oklahoma oil and gas producers, challenge the bankruptcy court's grant, in part, and denial, in part, of Deutsche Bank's motion for partial summary judgment in this lien priority dispute. The allegedly competing security interests arose in proceeds from the sale of oil that the debtor, First River Energy, LLC purchased from Appellants before declaring bankruptcy. This court earlier granted an interlocutory appeal from the bankruptcy court's decision. 28 U.S.C. § 158(d).

The bankruptcy court adroitly untangled a thorny conflicts of law issue, the result of which, unfortunately, undermines the efficacy of a non-standard UCC provision intended to protect Texas oil and gas producers. TEX. BUS. & COM. CODE [hereinafter Texas UCC] § 9.343. As a result, producers must beware "the amazing disappearing security interest" and continue to file financing statements.¹ The Texas legislature should take note. As the court also correctly disposed of a host of other issues, we AFFIRM the bankruptcy court's order.

BACKGROUND

First River Energy, LLC ("Debtor" or "FRE") filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code in the Delaware bankruptcy court in January 2018. In the month before filing, FRE had purchased crude oil and condensate from Texas and Oklahoma producers ("Producers"), which it sold to downstream purchasers, but FRE did not pay the Producers. The Producers assert liens created by statute in Texas and Oklahoma on the production and proceeds. However, Deutsche Bank Trust Company Americas, as Agent for various secured lenders (collectively "Bank"), also asserts the Bank's priority claim to the sale proceeds as a secured creditor of the Debtor. The Debtor, an intervenor in this adversary proceeding, agrees with the Bank.

The mechanics of fossil fuel production frame the parties’ debate. After oil and gas is extracted upstream by producers, the production is sold to "first purchasers"² at or near the wellhead. The first purchasers, also called midstream service providers, typically transport the production and market it to downstream purchasers like refineries or commodities traders.

Debtor FRE is a midstream service provider organized under Delaware law but headquartered in San Antonio, Texas. Pre-petition, the Debtor, as the first purchaser,³ bought oil under contracts with numerous upstream Producers located in Texas and Oklahoma and resold it to downstream purchasers. According to their agreements and standard oil and gas industry practice, the Debtor's payments for Producers’ deliveries that occurred in one month would be made "on or before the 20th of the month following delivery." See In re Semcrude, L.P. , 407 B.R. 112, 121 (Bankr. D. Del. 2009) (noting this industry practice). The downstream purchasers paid Debtor according to the terms of their respective agreements. As of the petition date, Debtor held $27,613,066.81 in accounts receivable from the downstream purchasers.⁴

RADCO Operations, LP ("RADCO") and RHEACO, Ltd. ("RHEACO") (collectively referred to as "RADCO Intervenors") also produced and sold Texas oil to First River pre-petition pursuant to a non-standard Crude Oil Purchase Agreement. They intervened in this adversary proceeding to collect payments for oil sold through December 2017, for which payment would have been due by the twenty-third of the following month (January). As explained below, the RADCO Intervenors are partially aligned with the Producers here.⁵

The Producers’ sales to the Debtor are governed by identical agreements, each of which incorporated certain terms and conditions known as the Conoco Phillips General Provisions.⁶ Among those terms is a warranty of title:

Warranty: The Seller warrants good title to all crude oil delivered hereunder and warrants that such crude oil shall be free from all royalties, liens, encumbrances and all applicable foreign, state and local taxes.

The RADCO Intervenors’ Purchase Agreements contain similar language.⁷ The following discussion assumes RADCO's arguments are the same as those of the Producers except where specifically noted.

Following a sweep of its deposit accounts by the Bank, the Debtor discontinued business at the end of December 2017. It had taken delivery from the Producers for that month but the purchase invoices were outstanding and unpaid. The Debtor sought Chapter 11 relief a few weeks later. The Producers filed proofs of claim in bankruptcy asserting that they have statutorily created first-priority, perfected purchase money security interests in the proceeds of the oil and condensate pursuant either to Texas UCC § 9.343 or Okla. Stat. Ann. tit. 52, [hereinafter Oklahoma Lien Act] § 549.⁸

The Bank's competing security interests stem from a credit agreement executed under Delaware law in July 2015 between FRE as borrower and the Bank. The Debtor simultaneously entered into a guarantee agreement and a security agreement with the Bank that granted a continuing security interest in substantially all of Debtor's assets, including its accounts and proceeds thereof. The security interest was perfected by filing UCC-1 financing statements with the Delaware Department of State in July 2015, and the filings have been updated to maintain continuous perfection. Debtor's indebtedness to the Bank and the validity and perfection of the Bank's security interests are not disputed.

As further protection for the Bank credit agreement, the Debtor, JPMorgan Chase, and the Bank entered into a Blocked Account Control Agreement in which the Bank was granted a security interest in all of Debtor's funds on deposit in accounts at JPMorgan Chase. The agreement indicates that its terms "shall be governed by and construed in accordance with the law of the State of New York" because "the State of New York is the jurisdiction of [JPMorgan Chase] as [d]epositary for purposes of Section 9-304(b) of the Uniform Commercial Code."

First River, a Delaware entity, initially filed its chapter 11 petition in Delaware, but the bankruptcy court transferred the case to the Western District of Texas. 28 U.S.C. § 1412. The Bank initiated an adversary proceeding seeking a declaration of the first priority of its security interests in the accounts and cash proceeds from FRE's sale of the oil notwithstanding the Producers’ claimed security interests. The Producers answered, counterclaimed, and asserted affirmative defenses; the Debtor intervened seeking a resolution of the conflict; and ultimately all sides briefed the Bank's summary judgment motion.

In March 2019, the bankruptcy court entered its Order Granting, in Part, and Denying, in Part, Agent's Motion for Summary Judgment and Alternative Motion for Partial Summary Judgment (the "Order") in the adversary proceeding. Critically, the bankruptcy court first decided that because Delaware does not have a UCC nonstandard provision comparable to Texas UCC § 9.343, a choice of law determination was required. The court's analysis led it to conclude that either Delaware or Texas, would "choose" the Delaware UCC to assess the validity, perfection and priority of the parties’ liens. Notwithstanding Texas UCC § 9.343, the court held that the Bank's valid, perfected security interests in the Debtor's accounts and proceeds takes priority over unperfected or later-filed⁹ secured claims of the Texas Producers. The court also concluded, however, that the Bank's interests are subordinate to the statutory real property liens asserted by the Oklahoma Producers. The court affirmed the Bank's valid, perfected, first-priority security interest in Debtor's deposit accounts at JPMorgan Chase.

Responding to the Producers’ request for interlocutory appeal of its decisions, the bankruptcy court certified the Producers’ appeal for direct review by this court pursuant to 28 U.S.C. § 158(d)(2). We authorized the appeal and the Bank's cross-appeal.

STANDARD OF REVIEW

A bankruptcy court's findings of fact are reviewed for clear error, and conclusions of law are reviewed de novo. In re Renaissance Hosp. Grand Prairie Inc. , 713 F.3d 285, 294 (5th Cir. 2013). This court reviews "grants and denials of summary judgment de novo . Summary judgment is appropriate when ‘there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.’ " In re Crocker , 941 F.3d 206, 210 (5th Cir. 2019), as revised (Oct. 22, 2019) (internal citations omitted). An order dismissing claims or...