Article courtesy of Andrew Thomison of Baker Botts L.L.P.
In Deutsche Bank Tr. Co. Ams. v. U.S. Energy Dev. Corp. (In re First River Energy, L.L.C., 986 F.3d 914 (5th Cir. 2021), the court was asked to resolve a lien priority dispute between the lender to a bankrupt entity (the “Debtor”) that had purchased oil (the “Bank”) and the producers of that oil, who were entities located in Oklahoma and Texas (the “Producers”). The Bank had perfected its security interest in the purchased oil by filing a financing statement against the Debtor with the secretary of state of the State of Delaware, which was the jurisdiction of formation of the Debtor. The Producers, on the other hand, claimed that pursuant to Texas and Oklahoma law, they had prior statutory liens on the produced oil and proceeds thereof.
Because production of the oil was based in Texas and Oklahoma, each of which has its own priority rules for oil and gas producers and sales of production, and the Debtor’s jurisdiction of formation was Delaware, the court was required to evaluate conflict of law principles to determine whether Texas, Oklahoma or Delaware law would apply. To resolve this choice of law conflict, the court looked to the ruling in Fishback Nursery, Inc. v. PNC Bank, N.A. as its guide. (920 F.3d 932 (5th Cir. 2019) for guidance and determined that Delaware law would control for purposes of evaluating lien priorities under the U.C.C.
For purposes of asserting their statutory lien, the Producers located in Texas looked to Section 9.343 of the Texas U.C.C., which grants a first priority purchase money security interest to mineral interest owners, as secured parties, on oil and gas produced in Texas, and the proceeds thereof, in the hands of any “first purchaser” (defined as the first person that purchases oil or gas from an operator or interest owner after the production is severed). However, because the court determined that Delaware law would control for purposes of evaluating lien priorities, it concluded that the Texas Producers were out of luck under the Delaware U.C.C., which does not recognize the priority of the lien granted to them under Section 9.343 of the Texas U.C.C. Therefore, as between the Bank and the Texas Producers, the court concluded that the liens of the Bank would have priority.
The Producers located in Oklahoma, however, cited the Oklahoma Lien Act for purposes of their priority claim. The Oklahoma Lien Act gives mineral interest owners in Oklahoma a first-priority lien in oil and gas interests until the purchase price has been paid to the mineral interest owners in full. It also explicitly grants this priority interest over all other lien holders and secured creditors. Critically, for purposes of the court’s evaluation of relative lien priorities, the Oklahoma Lien Act is not connected with the Oklahoma U.C.C., and the mineral interest owner’s lien is a real estate interest rather than a U.C.C. Article 9 security interest. The court noted that the Oklahoma Lien Act was specifically passed in 2010 to cure the defects of the prior Oklahoma statute which, like the Texas statute, subjected producers to the U.C.C. rules regarding choice of law and priority of security interests. The court noted that although Delaware law does not contain a statutory lien provision similar to the Oklahoma Lien Act, it also does not preempt statutory liens created by other states. Therefore the Oklahoma Producers succeeded in their claim to a first priority statutory lien in the proceeds from oil and gas produced in Oklahoma.
