Judge's ruling puts Oklahoma producers' claims behind banks,

Journal Record, The (Oklahoma City), Jun 23, 2009 by Marie Price

In a decision disappointing to producers in the SemGroup case, a Delaware bankruptcy judge has held that an Oklahoma law does not create an implied or constructive trust in favor of producers to secure their interests in oil and gas proceeds until they are paid.

Judge Brendan Shannon's opinion effectively places producers' claims behind those of banks and similarly situated creditors.

"The plain language of the Oklahoma statute, fairly construed, is simply insufficient to support the contention that the remedy and protection of a trust was imposed or intended," Shannon said.

He granted summary judgment in favor of the banks in the case, holding that their security interests in oil and gas production and proceeds are superior to any interest held by Oklahoma producers.

Recognizing the significance of his decision to all sides, Shannon certified his opinion for direct appeal to the 3rd U.S. Circuit Court of Appeals.

The judge also issued opinions rejecting related arguments from producers in Texas and Kansas, whose laws differ somewhat from Oklahoma's Production Revenue Standards Act.

Oklahoma City attorney Judy Hamilton Morse said producers argued that the PRSA creates a trust.

"It says basically that the revenues are to be held for the benefit of the producers until they're paid," said Morse, with Crowe & Dunlevy. "The judge said that did not create a trust."

Morse said producers' attorneys contended that although the PRSA may not establish an express trust, it creates an implied or resulting trust as a matter of law.

"What the Oklahoma Legislature wanted, of course, was to provide protection of producers, so that they would get paid," she said.

Morse said the statute was enacted to protect producers from the financial hits they took from bankruptcies during the oil bust of the 1980s.

Producers say they are owed a total of more than $400 million from SemGroup, which filed for Chapter 11 protection last July for itself and two dozen subsidiaries. The total includes roughly $130 million from Oklahoma producers.

One of those producers is J.M.A. Energy Co., based in Oklahoma City, whose stake in the SemGroup bankruptcy came to about $3.2 million when SemGroup filed for bankruptcy.

J.M.A. President Jeffrey McDougall expressed surprise at Shannon's ruling Monday.

"It points out the need for some real legislation here that protects producers," McDougall said. "We just tried to pass a bill this last session that didn't make it out of conference committee."

McDougall was referring to House Bill 2055, which would grant a security interest to oil and natural gas owners until they have received payment in full for their products. The measure would also give oil and gas security interests priority over those claiming through a first purchaser, with certain exceptions.

"We want to take a good look at just exactly what it takes to protect us," McDougall said.

He said he will review the decision, which he expects to be appealed, with his company's attorneys.

"We knew we needed more protection in the producers' act that we had," McDougall said. "That we were able to come in and get a replacement lien under that, we felt fortunate to get that accomplished."

McDougall said the trust argument was probably a tough one to get across.

"I think there just needs to be some legislation that is black and white, that says 'this is the way it is,'" he said.

McDougall said the law needs to be clear that banks and other entities cannot collateralize the production of producers.

Morse said Texas and Kansas addressed the issue by adopting non- uniform provisions that they added to their versions of the Uniform Commercial Code. She said Shannon determined, however, that because the debtors that bought the production were either Delaware or Oklahoma corporations, the laws of those states should apply.

In the Texas case, the judge held that to the extent Texas producers perfected their security interests only under Texas law, they hold unperfected interests subordinate to interests, such as those of the banks, properly perfected against SemGroup in the appropriate state.

Similarly, Shannon held that either Delaware or Oklahoma law will govern the perfection of Kansas producers' security interests.

Morse said that in all likelihood Shannon's opinion will be appealed, unless the dispute is settled.

As she pointed out, SemGroup has filed a proposed reorganization plan and disclosure statement awaiting Shannon's review later this week. The plan calls for SemGroup to emerge as a new, publicly traded entity.

Morse said the plan calls for full payment of claims for production sold during the 20 days before bankruptcy, which was filed last July 22.

"If this decision is upheld, and if the judge is right, then for the rest of their claims they're just going to be an unsecured creditor," she said.

Currently, Morse said, the plan proposes to give unsecured creditors amounts ranging from less than 1 cent up to about 4 cents on the dollar, in the form of company stock. She said creditors will receive the larger amount if they vote to accept the plan.