## Facts

- SemGroup (including SemCrude, L.P.) operated as a midstream crude oil purchaser, buying oil from producers on credit and reselling it to downstream purchasers; it also entered into oil-related options and hedging transactions.
- Upstream producers in multiple states sold oil to SemCrude on customary trade-credit terms and were unpaid or underpaid when SemGroup filed for Chapter 11 in 2008.
- Many producers did not file UCC financing statements or take conventional steps to perfect any security interest; instead, they relied on non-uniform oil-and-gas provisions in certain states (including Texas and Kansas) that they contended created automatically perfected interests or trust/lien rights in oil and proceeds.
- Downstream purchasers (including J. Aron & Co. and BP Oil Supply Co.) bought oil from SemCrude and structured contracts to allow setoff/netting between amounts owed for oil purchases and amounts owed by SemCrude on hedging-related obligations, reducing their insolvency exposure.
- After bankruptcy, the downstream purchasers were paid in full through contractual setoff mechanisms, while producers recovered only partially.
- Producers sued the downstream purchasers in adversary proceedings, asserting that their statutory interests followed the oil (or its proceeds) downstream and had priority over the downstream purchasers’ rights.

## Issues

1. Whether UCC Article 9 choice-of-law rules required applying the debtor’s state of organization law (rather than producer-state non-uniform amendments) to determine perfection and priority of alleged security interests in oil and proceeds.
2. Whether downstream purchasers who paid value and exercised contractual setoff rights took the oil free of producers’ asserted liens/security interests under Article 9 priority rules.
3. Whether producer theories sounding in statutory trust or statutory lien avoided Article 9’s perfection and priority framework and entitled producers to priority over downstream purchasers.

## Decision

- The Third Circuit affirmed summary judgment for J. Aron and BP.
- The court held that Article 9’s debtor-location choice-of-law rule governed perfection and priority; for the relevant SemCrude entities, that meant the law of their states of organization (e.g., Delaware, and for certain affiliates, Oklahoma).
- Because the producers did not perfect under the applicable debtor-location law (e.g., by filing financing statements), their asserted security interests were unperfected and could not defeat the downstream purchasers’ rights.
- The court rejected the argument that non-uniform producer-protection statutes in Texas and Kansas displaced Article 9’s uniform choice-of-law regime in multi-state transactions involving a debtor organized elsewhere.
- The court concluded the downstream purchasers qualified as buyers for value and were not required to bear losses attributable to producers’ failure to protect themselves against insolvency risk.

## Legal Principles

- Under UCC Article 9, perfection and priority of a security interest in a debtor’s inventory and related proceeds are generally governed by the law of the debtor’s “location,” which for a registered organization is its state of organization.
- State non-uniform amendments aimed at protecting particular creditor classes do not override Article 9’s choice-of-law rules absent a valid, explicit displacement of that framework in the circumstances presented.
- An unperfected security interest is subordinate to the rights of protected transferees and does not encumber collateral in the hands of downstream buyers who take under Article 9’s priority rules.
- Contractual setoff and netting arrangements may lawfully allocate insolvency risk; a counterparty that secures itself through such arrangements is not treated as an insurer for creditors who did not perfect or otherwise protect their interests.
- Trust or statutory-lien labels do not control if the asserted rights function as security interests or otherwise remain subject to Article 9 perfection and priority requirements.

## Conclusion

The Third Circuit held that Article 9’s debtor-location choice-of-law rules controlled perfection and priority, rendering producers’ unperfected statutory-based claims ineffective against downstream purchasers who took for value and protected themselves through setoff arrangements; summary judgment for the downstream purchasers was affirmed.


Arrow Oil & Gas, Inc. v. J. Aron & Co. (In re SemCrude, L.P.), 864 F.3d 280 (3d Cir. 2017)