In re Semcrude: Practice Points on Choice of Law Under the UCC

In a recent opinion from the Third Circuit Court of Appeals, In re: Semcrude L.P.,[1] Judge Ambro, writing on behalf of the court, considered the proper application of choice of law rules under the Uniform Commercial Code (the "UCC") in the context of an appeal from a bankruptcy court's decision.  Judge Ambro's opinion is an eloquent and easily comprehensible discussion of the UCC's choice of law rules and should serve as a welcomed lesson for those engaging in, or providing advice with respect to, secured transactions.

This case stems from the bankruptcy filing of SemGroup, L.P. and its affiliates (collectively, "SemGroup").  As a "midstream" oil services provider, SemGroup purchased oil from producers and sold it to downstream purchasers.  As is industry practice, when SemGroup purchased oil from the producers, it did so on credit and made payment in the month following the sale.  Presumably, the oil producers believed that, in the event that SemGroup did not make payment, they could repossess the oil pursuant to the UCC.  The oil producers never filed UCC financing statements against the oil that they sold to Semcrude and as a result, the bankruptcy court held that the oil producers did not have perfected security interests in the oil.  Accordingly, Semcrude's downstream purchasers were 'buyer's for value' under Section 9-317(b) of the UCC and thus purchased the oil free of any security interest held by the oil producers.  The result in the bankruptcy proceeding was that the downstream purchasers were paid in full while the oil producers were paid only in part. 

On appeal, the oil producers located in Texas and Kansas claimed that, under non-uniform provisions of each of their states' UCC, they had automatically perfected security interests in the oil sold to Semcrude, and thus they did not need to file financing statements to perfect their security interests.  Although the court acknowledged the non-uniform UCC provisions in Texas and Kansas provided for automatic perfection, Judge Ambro properly points out that the oil producers did not correctly identify and apply the proper state's version of the UCC.  As he explains, under Section 9-301 of the UCC, the general rule for determining the law that governs perfection of security interests is the state in which the debtor is "located."  For purposes of the UCC, a registered organization, like Semcrude, is located in the state in which it is organized.  The entities comprising Semcrude were organized, and therefore "located," in Delaware and Oklahoma.  Therefore, the court applied the Delaware and Oklahoma versions of the UCC, each of which would have required the filing of financing statement to perfect security interests in this case. 

It is worth noting that the court explicitly rejected the oil producer's arguments that, by virtue of their non-uniform UCC provisions, Texas and Kansas had effectively overridden the general UCC choice of law rules.  The court similarly rejected the argument that Delaware and Oklahoma had incorporated the Texas and Kansas non-uniform provisions by way of an Official Comment to the UCC which mentions the existence of non-uniform amendments.

For participants or practioners in the secured transactions field, there are two key takeaways from this case.  First, the UCC choice of law rules can be complex and may override parties' contractual choice of governing law.  Choice of law rules under the UCC vary depending on the type of debtor and the type of collateral, and therefore it is not uncommon in complex secured transactions to implicate the laws of multiple states, each governing perfection for only a portion of the  collateral.  Second, it is important to remember that, although the UCC is a uniform law, most, if not all, states have adopted certain non-uniform provisions.  In this case, Texas and Kansas adopted non-uniform versions of the UCC to benefit oil producers located in their states.  Similarly, Delaware has certain non-uniform provisions which, among other things, facilitate securitization transactions involving Delaware entities.  Therefore, in order to give effect to the intention of the parties to a secured transaction, pracitioners must be familiar with the UCC's choice of law rules and bear in mind that not every state's UCC is the same.

[1] In re: Semcrude L.P., 2017 WL 3045889 (3d Cir. June 19, 2017).