United States: Third Circuit Applies Delaware Choice Of Law Rules Allowing Subsequent Purchasers Of Oil And Gas And Lenders To Prevail Against Upstream Producers

On July 19, 2017, the Third Circuit Court of Appeals issued an opinion in Arrow Oil & Gas, Inc., et al. v. J. Aron & Company, et al. (In re Semcrude, L.P., et al.), Case Nos. 15-3094, 15-3095, 15-3096 and 15-3097, affirming the Delaware bankruptcy court and district court, holding that upstream oil producers do not have an automatically perfected statutory security interest in oil sold even if Texas or Kansas law applied. In order to perfect a lien to secure purchase money, upstream oil producers would need to file UCC-1 financing statements and would remain subject to the priority scheme under Article 9 of the U.C.C.

The upstream oil producers sold oil to SemGroup L.P. and affiliates ("SemGroup"). SemGroup is a conglomeration of midstream oil and gas service providers and the Debtors in the underlying Chapter 11 Cases. In turn, SemGroup sold oil to and traded oil futures with certain downstream oil purchasers, including J. Aron & Company ("J. Aron"). J. Aron purchased over $435 million of crude oil from SemGroup prior to the bankruptcy filing. J. Aron thereafter terminated its derivatives contracts with SemGroup and per the standard language of the contracts sought to "net" the amount owed to SemGroup against the amounts SemGroup owed on the derivatives contracts. The upstream oil producers only relied on the local laws of their respective states that could potentially give them automatically perfected security interests or trust rights in the oil purchased by downstream purchasers. As a result of the standard netting provisions in the derivatives contracts, when SemGroup filed for bankruptcy, many of the downstream purchasers were paid in full or left with small unpaid claims, but the upstream producers were left unpaid.

The upstream oil producers argued that Article 9 of the U.C.C. (Tex. Bus. & Com. Code § 9.343 and Kan. Stat. § 84-9-339) granted them an automatically perfected purchase money security interest in the oil sold to SemGroup. As such, the upstream oil producers argued that the Third Circuit should apply Texas's and Kansas's version of the Uniform Commercial Code ("U.C.C.").

The Third Circuit stated that "even if we were to apply Texas or Kansas law, we apply those states' versions of Article 9, not just their non-uniform amendments in isolation." The Third Circuit then went on to state the universally adopted choice-of-law provision of the U.C.C., stating that "while a debtor is located in a jurisdiction, the local law of that jurisdiction governs perfection, the effect of perfection or non-perfection, and the priority of a security interest in collateral." See U.C.C. § 9-301(1); see Tex. Bus. & Com. Code § 9.301(1) (same); Kan. Stat. § 84-9-301(1) (same). As such, even if the Third Circuit applied Texas's or Kansas's U.C.C., the choice-of-law provisions contained in the Texas or Kansas U.C.C. would still lead to the application of Delaware or Oklahoma law. The Third Circuit then addressed and summarily dismissed the potential exceptions to U.C.C. § 9-301(1). Because SemGroup and its affiliates were formed in Delaware or Oklahoma, the state law of Delaware or Oklahoma governed perfection. Oklahoma and Delaware require perfection by filing a financing statement, and because the upstream oil producers did not file a financing statement, their interests were unperfected.

The Third Circuit further held that the downstream purchasers qualify as buyers for value under U.C.C. § 9-317(b) which states that "[a] buyer, other than a secured party, of . . . goods . . . takes free of a security interest . . . if the buyer gives value and receives delivery of the collateral without knowledge of the security interest . . . and before it is perfected." If a security interest is not perfected, a buyer takes the property free of that security interest unless the buyer actually knew of the security interest, and the downstream purchasers did not know which producers' oil they received, let alone whether there was a specific security interest in that oil. As such, the downstream purchasers qualified as buyers for value under U.C.C. § 9-317(b).

The Third Circuit rejected a fraud claim by the upstream oil producers finding that there was no evidence that the downstream purchasers knew they were taking oil for which the upstream producers had not been paid.

Finally, the Third Circuit addressed a specific claim asserted by the Oklahoma upstream oil producers which provides that the Oklahoma Production Revenue Standards Act (the "PRSA"), Okla. Stat. tit. 52, §§ 570.1 et seq., creates an implied trust in their favor that, absent full payment, travels perpetually down the stream of commerce. In other words, so long as those Oklahoma upstream oil producers have not been paid, whoever possesses the oil does so for the benefit of the producers. The Third Circuit held that the PRSA regulates the relationships of the many parties at the wellhead, which include the various interest owners and the operators of those wells, and, moreover, the PRSA has no provisions relating to downstream purchasers.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

*** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.