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Media Alerts - Semcrude L.P. v. J. Aron & Co. - Third Circuit
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July 21, 2017
  Semcrude L.P. v. J. Aron & Co. - Third Circuit
Headline: Downstream Buyers are Considered Buyers-for-Value and Purchased Oil From Bankruptcy Debtor/Midstream Purchaser Free of Security Interests Claimed by Oil Producers

Area of Law: Fraud; Bankruptcy

Issue(s) Presented: Did J. Aron and BP satisfy the three requirements of the buyer-for-value defense? Was jurisdiction of the District Court and Bankruptcy Court appropriate under Title 11? Is constructive knowledge sufficient to overcome the knowledge elements of the buyer-for-value defense?

Brief Summary:

In the aftermath of the bankruptcy of SemGroup, a midstream purchaser, the oil producers filed a suit against J. Aron and BP oil, the downstream purchasers, to obtain full payment for the oil. The District Court granted summary judgment in favor of J. Aron and BP on recommendation of the Bankruptcy Court. The Third Circuit affirmed, finding that the Producers had not perfected their claimed security interests, and that J. Aron and BP were buyers-for-value, which allowed them to purchase the oil free of any secured interest. In addition, the Third Circuit found no sufficient evidence for the fraud claim brought against J. Aron and BP.

Extended Summary:

SemGroup operated as a "midstream" company because SemGroup purchased oil from producers and sold that oil to downstream purchasers. As a result, the oil producers and downstream purchasers were both effected when SemGroup filed for bankruptcy. Based on previous agreements, the downstream purchasers were protected from SemGroup's insolvency and were paid in full after the bankruptcy. However, the producers made no protection agreement and were only paid in part. As a result, the producers filed claims against J. Aron and BP, the downstream purchasers, to recover unpaid debts. The Bankruptcy Court recommended summary judgment in favor of J. Aron and BP, finding that there was no evidence of fraud and that both companies were free of any security interest as buyers for value. The District Court adopted the Bankruptcy Court's recommendation for summary judgment.

The Third Circuit affirmed that the Bankruptcy Court and the District Court had jurisdiction under 28 U.S.C. § 157(c)(1) and 28 U.S.C. § 1334(b) because the proceedings were related to cases under title 11. Both Courts appropriately exercised related-to jurisdiction because the proceedings had a potential effect on the bankruptcy estate.

The Court affirmed that Delaware and Oklahoma law govern perfection and that J. Aron and BP qualified as buyers for value because the Producers' security interests were not perfected. The Producers claimed that their security interest in the oil continued after the oil was resold to J. Aron and BP. Under U.C.C. § 9-317(b), if a security interest were not perfected, J. Aron and BP would take the oil free of that security interest, unless they actually knew of the security interest. The Producers also argued that Texas or Kansas law should govern perfection. Under U.C.C. Article 9, the local law of the jurisdiction where a debtor is located should govern perfection. The Bankruptcy and District Courts appropriately applied Delaware's choice-of-law rules because Delaware is the forum state. Under Delaware law, a financing statement must be filed in order to have perfected security interests. The Producers failed to make this filing, and thus their interests are unperfected.

The Third Circuit determined that J. Aron and BP satisfied the second requirement of the buyer-for-value defense because they purchased oil on credit per industry custom. Under U.C.C. § 1-204, J. Arons and BP's purchases on credit were sufficient to satisfy the value requirement.

The Third Circuit also affirmed the District Court in finding that no reasonable fact finder would determine that J. Aron or BP had knowledge of the Producer's security interest. Under U.C.C. § 1-202(b), actual knowledge is required to negate the third element of the buyer-for-value defense. The Court affirmed that constructive knowledge is not sufficient to defeat this defense. J. Aron and BP satisfied the three elements required to demonstrate the buyer-for-value defense. For this reason, summary judgment was appropriate. The Court declined to determine whether they were also buyers in the ordinary course.

The Third Circuit affirmed the District Court's grant of summary judgment against the Producers' fraud claim. The Court determined that the Producers had the opportunity to fully oppose summary judgment during the discovery process. The Producers were unable to demonstrate direct evidence in the record to suggest that J. Aron or BP participated in fraud or that they even knew most of the producers. The business arrangement between SemGroup, J. Aron and BP , which involved options trading in addition to the purchase of oil, was not sufficient to demonstrate that J. Aron and BP knew that they were taking oil that had not been paid for.

Finally, the Court determined that the District Court's grant of summary judgment against the Oklahoma Producers was appropriate because the Oklahoma Production Revenue Standards Act (PRSA) did not create an implied trust or impose any duties on J. Aron. The Oklahoma Producers argued that, under the PRSA, an implied trust would be created against J. Aron and therefore, it would be responsible for full payment of the oil. The Court determined that the PRSA was not intended to be applied to downstream purchasers, like J. Aron, and that the language in the statute does not suggest the creation of an implied trust that travels down the stream of commerce. The Third Circuit further concluded that the 2010 Lien Act does not apply to this case because it was passed after SemGroup declared bankruptcy.

The Third Circuit affirmed the rulings of both the Bankruptcy and District Courts.

The full opinion can be found at http://www2.ca3.uscourts.gov/opinarch/153094p.pdf

Panel: Ambro, Jordan, and Fisher, Circuit Judges

Argument Date: April 4, 2017

Date of Issued Opinion: July 19, 2017

Docket Number: Nos. 15-3094, 15-3095, 15-3096, 15-3097, 15-3121, 15-3123, 15-3124

Decided: Affirmed

Case Alert Author: Kristina Flatley

Counsel: Blake Bailey, Paul Moak, Basil Umari, Peter Goodman, Sarah Jorgensen, Michael Carney, Hugh Ray, Lewis LeClair, Adam Landis, and Matthew McGuire, Counsel for Anstine & Musgrove Inc.; Don Beskrone, Stacy Newman, Boaz Morag, Rishi Zutshi, and Thomas Moloney, Counsel for J. Aron & Co.; James Carr, Melissa Byroade, David Zalman, Monica Hanna, Kevin Capuzzi, and Jennifer Hoover, Counsel for BP Oil Supply Co.; Ian Bifferato, Thomas Driscoll, III, Kevin Collins, Mark Collins, John Knight, Michael Romanczuk, Zachary Shapiro, L. Katherine Good, Maris Kandestin, Garvin McDaniel, R. Stephen McNeill, Travis McRoberts, Benjamin Stewart, Mark Stromberg, and W. Robert Wilson, Counsel for Semcrude LP; Charles Brown, III, Counsel for Star Production Inc.; Hartley Martyn and Duane Werb, Counsel for IC Co. Inc.

Author of Opinion: Circuit Judge Ambro

Circuit: Third Circuit

Case Alert Circuit Supervisor: Professor Susan L. DeJarnatt

    Posted By: Susan DeJarnatt @ 07/21/2017 02:01 PM     3rd Circuit  

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