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Texas’ First Purchaser Statute Only Has Teeth in Texas

Texas’ First Purchaser Statute Only Has Teeth in Texas

This year, global oil markets experienced a significant surplus of supply over demand for oilnear-record domestic production and a global demand shock brought forth by the coronavirus containment measures. The imbalance between a surplus supply of oil and historic destruction in demand for oil during the beginning of the year caused the price of WTI crude oil to drop to an historic low of –$37.63 per barrel on April 20, 2020.  

Producers, especially those in the U.S., reacted quickly to the extreme drop in oil prices by curbing capital spending on new projects and shutting in the majority of productionEven under the assumption that travel restrictions and other containment measures are lifted before the end of the year, global oil demand in 2020 is expected to fall by 9.3 million barrels a day (mb/d) compared to 2019. Twenty-three producers filed for bankruptcy in the first half of this year, and it’s likely that many more will continue seek bankruptcy protection from creditors until sustained demand growth is achieved on a global scale. Under current economic conditions, producers and royalty owners in Texas should understand Texas’ First Purchaser Statute. 

In 1983, Texas added Section 9.343 (formerly Section 9.319), also known as the Texas First Purchaser Statute, to the Texas Business and Commerce Code as a non-standard provision to the Texas Uniform Commercial Code (“UCC”). It provides an interest owner (e.g., producers and royalty owners) an automatically perfected security interest [1] to secure the payment obligations of a first purchaser, who has purchased such interest owner’s share of production, [2] including oil and gas production in the first purchaser’s possession and identifiable sales proceeds owned, received or due to the first purchaser. [3] 

However, as discussed in In re SemCrude, L.P. [4] and re-affirmed in In re First River Energy, LLC, [5] Texas’ First Purchaser Statute does not always protect an interest owner who owns an interest in properties located in Texas.  The courts held that Texas’ First Purchaser of Production Statute is governed by personal property law, and the debtor must be organized in Texas for the statute to apply. In SemCrude, the court found that debtor was organized in Delaware, so a security interest in collateral would be properly perfected in Delaware.  

It’s unclear whether the Texas legislature intended the First Purchaser Statute to treat oil and gas production as real property governed by Texas law, or as personal property subject to UCC choice of law provisions. In either caseif a bankrupt first purchaser of production is organized in a state other than Texas, the law of the bankrupt company’s organizing jurisdiction will govern perfection and priority of a security interest in personal property, including goods, inventory, accounts and proceeds. [6] In other words, Texas interest owners must perfect their interests in personal property under the rules of the bankrupt first purchaser’s organizing jurisdiction in order to secure the payment obligations of a first purchaser who has purchased such interest owner’s share of production. 

In contrast, Oklahoma’s legislature responded to the holding in SemCrude by rewriting its first purchaser statute so that it treats oil and gas production as real property and not personal property. [7] As a result, any deed, mineral deed, reservation, oil or gas lease, assignment, or any other such record recorded in the real property records of a county clerk in the state of Oklahoma would secure the payment obligations of a first purchaser, who has purchased such interest owner’s share of production even if the first purchaser was incorporated in another state, without the necessity of filing of a financing statement in said jurisdiction. 

Until the Texas Legislature amends the Texas First Purchaser Statue to protect Texas interest owners to clearly state that oil and gas produced from an interest owner’s property is to be treated as real propertya party in Texas should file a financing statement in the jurisdiction where the first purchaser is organized. Additionally, a Texas interest owner may protect their interest by including a choice of law provision in any deed, mineral deed, reservation, oil or gas lease, assignment, or any other such instrument filed for record in Texas. 

[1]   “If the interest of the secured party is evidenced by a deed, mineral deed, reservation in either, oil or gas lease, assignment, or any other such record recorded in the real property records of a county clerk, that record is effective as a filed financing statement for purposes of this chapter… and there is no requirement of refiling every five years to maintain effectiveness of the filing.”  Tex. Bus. & Com. Code § 9.343(b) (West 2019). 

[2]  Tex. Bus. & Com. Code §§ 9.343(r)(2)–(r)(3) (West 2019). 

[3]  Tex. Bus. & Com. Code § 9.343(c) (West 2019). 

[4]  Samson Res. Co. v. SemCrude, L.P. (In re SemCrude, L.P.), 407 B.R. 140 (Bankr.D.Del. 2009). 

[5]  In Re: First River Energy, LLC, 2019 WL 1103294 (US Bankr. W.D. Tex., March 7, 2019). 

[6]  The commercial codes of Delaware, Texas and Oklahoma all have an identical provision that deals with this issue. That provision, Section 9.301, says that, to determine whether a security interest in collateral is properly perfected, the court must apply the law of the state where the debtor was organized – in this case Delaware. Section 9.301 contains an exception to that rule for “cash proceeds” from the sale of goods. For such cash proceeds, the law of the jurisdiction where the bank is organized shall govern. 

[7]  Sahar Jooshani, There’s a New Act in Town: How the Oklahoma Oil and Gas Owners’ Lien Act of 2010 Strengthens the Position of Oklahoma Interest Owners, 65 Okla. L. Rev. 133, 136 (2012).