Fifth Circuit Affirms Bankruptcy Court Order in Lien Priority Dispute

The Fifth Circuit recently affirmed a Bankruptcy Court’s order, finding that a bank's properly perfected security interest in a debtor’s assets had priority over oil producers’ unfiled, unperfected security interests in oil proceeds, but did not have priority over a statutory lien granted to certain producers under the Oklahoma Lien Act. See Matter of First River Energy, L.L.C., 986 F.3d 914 (5th Cir. 2021). In the case, First River Energy, LLC (the “Debtor”), a Delaware limited liability company headquartered in Texas, filed a petition for Chapter 11 bankruptcy. A month prior to filing, the Debtor purchased crude oil and condensate from Texas and Oklahoma producers (collectively the “Producers”), which it sold to downstream purchasers, but failed to compensate the Producers. The Producers asserted first-priority, perfected purchase money security interests in the proceeds of the oil and condensate pursuant to Texas UCC § 9.343 and the Oklahoma Lien Act. However, Deutsche Bank Trust Company Americas, as Agent for various secured lenders (collectively as the “Bank”), also asserted a first-priority claim to the sale proceeds based on a UCC-1 financing statement filed with the Delaware Department of State in 2015. The Bankruptcy Court first concluded that Delaware law governed the validity, perfection and priority of the parties’ liens. Notwithstanding Texas UCC § 9.343, the Court held that the Bank’s valid, perfected security interests in the Debtor’s accounts and proceeds had priority over unperfected or later-filed secured claims of the Texas Producers. The court also concluded, however, that the Bank’s interests were subordinate to the statutory liens asserted by the Oklahoma Producers.

On appeal, the Fifth Circuit affirmed. First, the Court held that Delaware law applied, noting that Texas UCC § 9.301(1) governs the perfection, effect of perfection, and priority of security interests by applying the local law of the jurisdiction where “a debtor is located.” Because the Debtor is a limited liability company, it was considered to be located in Delaware, its state of organization. Next, the Court addressed the priority of the parties’ respective liens. Relying on Texas UCC § 9.343, “which grants a first priority purchase money security interest in oil and gas produced in Texas as well as proceeds in the hands of any ‘first purchaser[,]’” the Texas Producers argued that they had a first-priority lien on the cash proceeds. Conversely, the Oklahoma Producers argued that they held a first, prior and automatically perfected lien pursuant to the Oklahoma Lien Act, which creates a state statutory lien not connected with the UCC. The Court noted that Delaware UCC law requires filing financing statements with its state authorities to perfect security interests in goods, inventory and proceeds and determines priority according to the first-to-file rule. Here, the Bank’s financing statements were perfected and continuously updated since 2015. Thus, the Court found that the Texas Producers’ lien was subordinate to the Bank’s first-in-time filings, noting that the Texas Producers “[were] out of luck under Delaware UCC law, which does not recognize the priority of their unfiled, unperfected security interests in proceeds under Texas UCC Section 9.343.” However, the Court found that the Oklahoma Producers had a first-priority statutory lien in the proceeds, noting that “[a]lthough Delaware law contains no statutory lien provision similar to the Oklahoma Lien Act, the Delaware UCC does not preempt statutory liens created by other states.”

For a copy of the decision, please contact Michael O’Donnell at modonnell@riker.com, Michael Crowley at mcrowley@riker.com, Desiree McDonald at dmcdonald@riker.com, or Andrew Raimondi at araimondi@riker.com.