## Facts

- SemCrude, L.P. and numerous affiliates operated as midstream oil-and-gas purchasers and marketers that bought crude oil from producers and resold it to downstream purchasers.
- On July 22, 2008, SemCrude and affiliates filed Chapter 11 bankruptcy petitions in the District of Delaware.
- At filing, more than 1,000 producers had delivered oil (and related product) to SemCrude but had not been paid, with unpaid amounts alleged to total about $400 million.
- Downstream purchasers had bought and paid for oil they received from SemCrude in ordinary commodity transactions; SemCrude commonly warranted that sales were free and clear of liens.
- Producers asserted that they held security interests (and related lien rights) in the oil they sold to SemCrude and/or in the proceeds from SemCrude’s resale of that oil.
- The court found that, to the extent producers claimed Article 9 security interests, those interests were unperfected because the producers did not perfect them under applicable state law.
- Downstream purchasers filed summary-judgment motions in consolidated adversary proceedings seeking a declaration that the oil and gas they purchased from SemCrude was free and clear of any liens or security interests asserted by the producers.
- The downstream purchasers argued three principal bases: (1) they were buyers for value entitled to take free of unperfected security interests, (2) they were buyers in the ordinary course of business, and (3) producers waived any security interests by selling on credit to SemCrude.
- The court’s analysis focused mainly on whether the downstream purchasers qualified as buyers for value who took delivery without knowledge of the producers’ security interests before any perfection.

## Issues

1. Whether downstream purchasers who gave value and received delivery of oil from SemCrude before producers perfected any Article 9 security interests took free of those unperfected interests under UCC § 9-317(b).
2. Whether the downstream purchasers had “knowledge” of the producers’ security interests—based on awareness of producer-lien statutes, producer identities, or nonpayment risk—sufficient to defeat UCC § 9-317(b).
3. Whether the downstream purchasers also prevailed as buyers in the ordinary course and/or because producers waived any security interests by delivering oil to SemCrude under credit arrangements.

## Decision

- The court recommended granting summary judgment for the downstream purchasers on the Article 9 “buyer takes free” theory addressed under UCC § 9-317(b).
- The court determined the purchasers gave value and received delivery of the oil from SemCrude before any producer security interest was perfected.
- The court held the record did not show the purchasers had the required knowledge of a producer’s security interest; generalized awareness of lien laws or market risk did not establish knowledge of a specific security interest in the goods delivered.
- Because producers’ Article 9 interests were unperfected and the purchasers met § 9-317(b)’s requirements, the purchasers took the oil free of those unperfected interests.
- The court treated the buyers-in-ordinary-course and waiver theories as additional grounds argued by purchasers, but the primary basis for relief was the § 9-317(b) analysis centered on value, delivery, and knowledge.

## Legal Principles

- Under UCC § 9-317(b), a buyer of goods (other than a secured party) takes free of an unperfected security interest if the buyer gives value, receives delivery, and does so without knowledge of the security interest and before it is perfected.
- “Knowledge” in this setting requires awareness of the security interest itself, not merely awareness that lien statutes exist, that producers may be unpaid, or that producers supply the seller.
- A creditor that holds an Article 9 security interest must perfect it under applicable state law to protect priority against later buyers for value who take delivery.
- A seller’s contractual warranty that goods are transferred free and clear of liens supports a purchaser’s showing that it lacked knowledge of another party’s security interest.
- In commodity resale chains, Article 9 allocates risk largely through perfection rules and buyer protections rather than reallocating losses caused by an intermediary’s insolvency.

## Conclusion

In re SemCrude held that downstream purchasers who paid value and received delivery of oil from SemCrude without actual knowledge of producers’ security interests took the oil free of producers’ unperfected Article 9 security interests under UCC § 9-317(b), entitling the purchasers to summary judgment and leaving producers with unsecured claims against the bankruptcy estate.


In re SemCrude, L.P., 504 B.R. 39 (2013)