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In a recently decided, but long-running dispute, the U.S. Court of Appeals for the Third Circuit has found that oil producers do not hold automatically perfected security interests in product they sell to midstream intermediaries, nor are the proceeds generated through the subsequent sale of such product held in an implied trust for the benefit of the upstream producers, as held in Arrow Oil & Gas v. J. Aron (In re SemCrude), 2017 U.S. App. LEXIS 12975 (3d Cir. July 19). In its decision, the Third Circuit determined that an automatically perfected security interest or implied trust would result in “chaos” in an industry where oil is comingled and sold multiple times in the stream of commerce.
Background
SemGroup L.P. was a midstream oil service provider that, along with its subsidiaries, bought oil from thousands of producers, including those located in Kansas, Oklahoma and Texas (collectively, the appellants). SemGroup then resold the oil to downstream purchasers, including J. Aron & Co. and BP Oil Supply Co. (collectively, the appellees). Per industry custom, SemGroup expressly warranted oil sales as being “free from all royalties, liens, and encumbrances.”
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