TCJL SUPPORTS HB 1859 – Rep. Myra Crownover (R-Lake Dallas), vice chair of the House Committee on Energy Resources, has filed legislation to clarify the priority of liens held by oil and gas producers against the first purchaser of oil and gas production. The need for clarification arises under a Delaware bankruptcy court’s decision in In re SemCrude, 407 B.R. 112 (Bankr. D. Del 2009). The court determined that Texas oil and gas producers who sold their production to SemCrude failed to perfect their security interests because they did not file UCC-1 financing statements in Delaware and Oklahoma. Texas law (§9.343 of the Texas Uniform Commercial Code) currently provides that producer liens are automatically perfected without filing financing statements. SemCrude subsequently sold the production to subsequent purchasers and then declared bankruptcy without paying the proceeds of the sale to the producers. As unsecured creditors in bankruptcy, the producers’ claims went to the end of the line. They have subsequently filed suit in an effort to recover from the subsequent purchasers that bought and paid for the production from SemCrude.
HB 1859 clarifies Texas law to give the producer automatic perfection of a security interest against the first purchaser (e.g., SemCrude), regardless of the jurisdiction in which the first purchaser is organized: (1) for oil and gas production owned by, received by, or due the first purchaser; and (2) in the identifiable proceeds of that production, if the proceeds are oil or gas production, inventory of raw, refined, or manufactured oil or gas production, or rights to or products of any of those. Automatic perfection of a security interest in oil and gas production against the first purchaser also extends to a purchase-money security interest.
HB 1859 also provides that a sale of oil and gas production by a first purchaser to a subsequent purchaser cuts off the liens and security interests in the production and its proceeds. In other words, once a subsequent purchaser (e.g, a distributor, terminal, or retail seller) has bought and paid for the production from the first purchaser, the producers cannot enforce their lien against the first purchaser any further down the chain, as some are attempting to do in the SemCrude litigation. The public policy rationale for this change is simple: innocent purchasers who are not affiliated with or representative of the first purchaser should not have to pay twice for the same production. This policy is current Texas law, expressed in §9.320(a), Business & Commerce Code, which provides that a buyer in the ordinary course of business takes free of a security interest created by the buyer’s seller, even if the security interest is perfected and the buyer knows of its existence. HB 1859 affirms that, in the case of oil and gas production, Texas law does not make a bona fide subsequent purchaser for value liable for the financial condition or business dealings of the first purchaser.
HB 1859 further establishes an optional financing statement for security interests in oil and gas production and the proceeds of production. Although the sale of the production to a first purchaser automatically perfects the producer’s lien under §9.343(b), a producer may elect to file a financing statement in the jurisdiction in which the first purchaser is organized (in the SemCrude case, the jurisdiction is Delaware).
TCJL applauds Rep. Crownover for filing this important legislation to assure that both oil and gas producers and subsequent purchasers of oil and gas production have perfected and enforceable liens against a first purchaser of the production. HB 1859 will assure that the financing of oil and gas production and distribution continues on solid footing.