In re First River Energy, LLC: First Purchaser Statutes
choice-of-law and the governing law of perfection, which were both underscored in the SemCrude decision.3
By: Grant Armentor Student South Texas College of Law Houston
SemCrude
Introduction Oil and gas development is an intricate and precarious venture requiring extensive expertise and capital. In light of the complexity and risk of production, most mineral interest owners will “lease” their interest, transferring their mineral rights to oil and gas producers in exchange for a bonus payment and a royalty interest in the production. Subsequent to development, producers will then sell the oil to “first purchasers,” generally midstream services providers. Should the first purchaser fall into financial distress and file for bankruptcy protection, however, the producer and mineral interest owners may find themselves at risk of never receiving the payments due to them. To protect royalty interest owners and producers during difficult times, some oil-producing states have enacted statutes to assist producers in securing payments from first purchasers for production sold. In light of a recent bankruptcy and Fifth Circuit decision, however, Texas producers may not enjoy the full protections that its legislature has provided for them. First Purchaser Protection In response to pressures from mineral interest owners to secure their interest in delivered production, Oklahoma legislature passed the Oil and Gas Owner’s Lien Act of 1988 (“1988 Act”).1 Additionally, Texas passed Section 9.343 of the Texas Business and Commerce Code (“Texas First Purchaser Statute”), a non-standard UCC provision. 2 Each of these statutes, however, had significant deficiencies regarding the applicable
In SemCrude, producers from Oklahoma and Texas sold and delivered oil and gas production to SemCrude L.P., a limited partnership incorporated in Delaware. 4 Trouble arose when SemCrude fell into bankruptcy with hundreds of millions of dollars still owed to producers—and through the producers’ leases—with mineral owners owed royalties through leases. 5 Consequently, the Oklahoma and Texas producers asserted lien priority under the 1988 Act and the Texas First Purchaser Statute, respectively.6 Oklahoma’s 1988 Act was enacted to provide Oklahoma oil and gas producers an automatically perfected and prioritized statutory lien in the resultant proceeds of oil and gas sold and delivered to first purchasers. 7 As the SemCrude decision highlighted, however, two flaws of the 1988 Act included: (1) that the governing law was determined by the debtor’s “location”—here, Delaware as the debtor’s state of incorporation— as opposed to Oklahoma law where the producing wellheads were located; and (2) expressly subdued Oklahoma producer’s rights to the rights of those under the UCC.8 Thus, because Delaware law requires the filing of a financing statement to duly perfect, any opposing security interests that were properly perfected had primed the interests asserted by the Oklahoma producers under the 1988 Act. Similarly, the Texas First Purchaser Statute granted Texas producers a prioritized purchase money security interest in production sold and delivered to first purchasers, as well as in proceeds thereof.9 The purpose of the statute was to assist Texas producers in securing outstanding payment obligations of first purchasers by
