United States Court of Appeals
Fifth Circuit
F I L E D
In the March 28, 2007
United States Court of Appeals Charles R. Fulbruge III
for the Fifth Circuit Clerk
_______________
m 05-11492
_______________
IN THE MATTER OF:
TXNB INTERNAL CASE,
Debtor.
EDGE PETROLEUM OPERATING COMPANY, INC.,
Appellant,
VERSUS
GPR HOLDINGS, L.L.C.; AURORA NATURAL GAS, L.L.C.;
DUKE ENERGY TRADING AND MARKETING, L.L.C.;
GOLDEN PRAIRIE SUPPLY SERVICES, L.L.C.,
Appellees.
_________________________
Appeal from the United States District Court
for the Northern District of Texas
______________________________
Before SMITH, BENAVIDES, and PRADO, debtors for the gas; Duke answers that it did
Circuit Judges. pay for the gas, based on the theory that it
overpaid the debtors in the months before May
JERRY E. SMITH, Circuit Judge: 2001 and, to offset its overpayment, accepted
delivery of gas in May and June 2001.
Edge Petroleum Operating Company, Inc.
(“Edge”), appeals the summary judgment en- The debtors are suing Duke for payment for
tered in its conversion action against Duke En- the later deliveries in separate litigation.2 Edge
ergy Trading and Marketing, L.L.C. (“Duke”). contends that even if Duke overpaid for the
We affirm. earlier gas, the fact that it offset that payment
by failing to pay for Edge’s gas means that it
I. accepted Edge’s gas as payment for a debt,
Edge, a producer of natural gas, sold gas to and it thereby abrogated any possible status as
GPR Holdings, L.L.C. (“GPR”), Aurora Nat- a holder in due course and subjected itself to
ural Gas, L.L.C. (“Aurora”), and Golden double liability in the case of conflicting deter-
Prairie SupplyServices, L.L.C. (“GPSS”) (col- minations by state and federal courts.3
lectively “the debtors”), through its marketing
agent, Upstream Energy Services Company Shortly before a scheduled trial in state
(“Upstream”). The gas was delivered by pipe- court, Duke removed to the United States Dis-
line in May and June 2001, and the debtors trict Court for the Southern District of Texas,
were obliged by contract to pay Edge on the predicating jurisdiction on the bankruptcy of
twenty-fifth day of the month following deliv- Aurion Technologies, L.L.C. (“Aurion”),
ery, i.e., on June 25 and July 25. The debtors which was the majority shareholder of Aurora
sold the gas to Duke, which resold it to third and was controlled by a common owner, Den-
parties. In the pipeline, the gas produced by nis McLaughlin III.4 Duke conceded in the
Edge was commingled with gas from other district court that its removal was untimely
producers; the gas has since been consumed. with regard to the ongoing bankruptcy cases
Edge has not been paid for the gas, nor has
it filed any claim against the debtors in their 2
See GPR Holdings, L.L.C. v. Duke Energy
respective bankruptcy cases, which were filed
Trading & Mktg., L.L.C. (No. 03-3430, Bankr.
in August 2001. Instead, Edge sued Duke in N.D. Tex.).
state court, seeking to recover the amount the
debtors owed for the gas and damages for 3
See TEX. BUS. & COM. CODE §§ 1.-
conversion of Edge’s security interest under 201(9), 9.320(a).
the Texas Mineral Lien Act.1 Edge and the
4
debtors allege that Duke has not paid the Shortly before the instant suit was filed, Duke
alleged in separate state court proceedings that Mc-
Laughlin had acted through Aurora, GPR, GPSS,
and Aurion to defraud it by accepting payment for
1
See TEX. BUS. & COM. CODE ANN. § 9.343, gas that he never intended to deliver, through a
formerly id. § 9.319 before recodification in 2002. scheme that induced Duke to pay twice the agreed-
The text of the statute and the existence of any ma- upon price for each shipment: one full payment to
terial difference between the codifications will be Aurora and one full payment to one of McLaugh-
discussed below. lin’s other companies.
2
of all the debtors other than Aurion. Edge ac- clined to grant leave from the stay. The court
knowledges that removal would be timely with then ruled that Texas state law did not permit
respect to the bankruptcy of Aurion but claims Edge to enforce its possible security interest
that it is not seeking to enforce a lien on the via a conversion action against Duke. The
proceeds from the sale of any gas that may court found a disputed issue of material fact as
have passed from Edge through Aurion, so to whether Edge had a security interest.
this case is not related to Aurion’s bankruptcy.
Unlike GPR, GPSS, and Aurora, Aurion has Edge perceived, in the bankruptcy court’s
not intervened in the instant case. opinion, a determination that Edge did, in fact,
hold a security interest in the proceeds from
The Southern District court ruled, in re- sale of the gas, so Edge moved for amendment
sponse to Edge’s first motion for remand, that of the summary judgment order to reflect such
this matter is related to the Aurion bankruptcy a finding. The court explained that it had de-
proceedings and thus that removal was timely. termined that Edge possessed a security inter-
It then transferred the case to the United est in whatever proceeds were actually due to
States District Court for the Northern District the first purchaser but that such determination
of Texas, where Edge renewed its motion for did not imply summary judgment that Edge
remand (either for lack of jurisdiction or had any security interest in the proceeds of the
abstention), which was once again denied, this sale currently in possession of Duke; the court
time by the bankruptcy court. Edge then declined to amend its order.
consented to jurisdiction in the bankruptcy
court rather than the district court. The district court affirmed the bankruptcy
court without separate opinion. Edge now ap-
The bankruptcy court granted the debtors’ peals only in regard to its conversion action to
motion to intervene. The debtors asserted that enforce its lien; in the summary judgment pro-
they are the real party in interest to Edge’s ceeding, Edge did not address the action to re-
lawsuit, because Edge is seeking to enforce a cover the purchase price of the gas.
lien against property owned by them in the
form of accounts receivable. The bankruptcy II.
court granted summary judgment in favor of We first address subject matter jurisdiction,
Duke and the debtors, reasoning that, even ac- which is a question of law that we review de
cepting, arguendo, that Edge possessed a valid novo. See McKnight v. Comm’r, 7 F.3d 447,
lien, Edge sought to enforce that lien against 450 (5th Cir. 1993). Although Edge alleges
the debtors’ accounts receivable. that it seeks assets from Duke solely under
state law, there is federal jurisdiction because
Hence, the bankruptcy court held that the of implications for the debtors’ estates.6
action was automatically stayed,5 and it de-
6
Duke asserts that Edge waived any jurisdic-
tional objection by consenting to trial in bank-
5
See 11 U.S.C. § 362(a)(3), (4), (5) and (6) ruptcy court, but this argument is meritless accord-
(staying, automatically upon filing of a bankruptcy ing to the well settled doctrine that federal subject
petition, creditors’ actions to exercise control over matter jurisdiction may be challenged at any time
property of the bankruptcy estate and to collect or on appeal; “parties cannot waive a want of subject
recover on a pre-bankruptcy petition claim). (continued...)
3
Duke removed pursuant to 28 U.S.C. federal jurisdiction.
§ 1452, which allows removal of claims where
federal jurisdiction arises under 28 U.S.C. Although, as we explain, this case involves
§ 1334. Section 1334(b) provides for federal only a claim against Duke’s assets, the district
jurisdiction over proceedings “related to” cas- court was wrong to assume that a claim by
es arising under the Bankruptcy Code. We Edge solely against Duke’s property does not
have read this jurisdictional grant broadly, stat- relate to the debtors’ bankruptcy proceedings.
ing that the test for whether a proceeding Someone owes Edge money for the gas; if it is
properly invokes federal “related to” jurisdic- not Duke, it is the debtors. See id.. If it is
tion is whether the outcome of the proceeding Duke, then Duke will have discharged a liabil-
could conceivably affect the estate being ad- ity of the debtors and, as the bankruptcy court
ministered in bankruptcy. See Arnold v. Gar- recognized, probably will file a claim against
lock, Inc., 278 F.3d 426, 434 (5th Cir. 2001). the debtors’ estates for reimbursement. Al-
Certainty is unnecessary; an action is “related though there likely would be no change in the
to” bankruptcy if the outcome could alter, pos- amount of liability claimed against the debtors,
itively or negatively, the debtor’s rights, liabil- Duke and Edge presumably had different con-
ities, options, or freedom of action or could tractual arrangements with the debtors and dif-
influence the administration of the bankrupt ferent statutory bases for their claims.
estate. See Feld v. Zale Corp. (In re Zale
Corp.), 62 F.3d 746, 752 (5th Cir. 1995). For example, Edge holds a secured gas pro-
ducer’s lien, but Duke does not. See § 9.-
The district court appears to have assumed 343(a). Because of these divers contractual
that, if this case merely involved a claim by and statutory frameworks, the identity of the
Edge against Duke’s assets, there would be no party that the debtors owe for Edge’s gas is
federal jurisdiction.7 The court determined, likely to affect the administration of the debt-
however, that Edge’s rights extend only to a ors’ estates and may alter the debtors’ rights
lien on “the identifiable proceeds of that pro- and liabilities. Under the lenient test set forth
duction owned by, received by, or due to [the above, that possibility is sufficient to confer
debtors].” See TEX. BUS. & COM. CODE ANN. federal jurisdiction.
§ 9.343(c). Because the district court rea-
soned that any assets in Duke’s possession on III.
which Edge had a lien must at least be “due to Edge urges that we order a remand to state
[the debtors],” it ruled that this case relates to court because Duke’s removal was untimely.
the bankruptcy estates and properly invokes We disagree.
Duke contends, as it did with respect to
6
(...continued) subject matter jurisdiction, that Edge waived
matter jurisdiction.” Hospitality House, Inc. v. any objection to the timeliness of removal by
Gilbert, 298 F.3d 424, 429 (5th Cir. 2002). consenting to bankruptcy court jurisdiction.
7
Timeliness of removal is a procedural rather
As the bankruptcy court explained, “If Edge
than a jurisdictional issue and, accordingly,
were only pursuing a cause of action against
may be waived by an untimely objection. See
Duke’s property, this proceeding would not be re-
lated to the Debtors’ bankruptcies and there would
Hartford Accident & Indem. Co. v. Costa
be no basis for federal jurisdiction.” Lines Cargo Servs., Inc., 903 F.2d 352, 359-
4
60 (5th Cir. 1990). Here, however, Edge’s not to abstain for abuse of discretion.8 South-
objection was timelySSit came only six days af- mark Corp. v. Coopers & Lybrand (In re
ter removalSSand the fact that Edge was will- Southmark Corp.), 163 F.3d 925, 929 (5th
ing to have its case tried by the bankruptcy Cir. 1999). The court did not abuse its discre-
court rather than the district court after its ob- tion, though our conclusion is not predicated
jections to removal and the timeliness thereof on any argument advanced by the parties or
were overruled does not serve to waive those expressly relied on by the district court in its
objections. discussion of abstention.9
Although removal was timely solely with Section 1334(c)(2) reads as follows:
respect to Aurion’s bankruptcy petition, and
Aurion bore an attenuated relationship to the Upon timely motion of a party in a pro-
parties, the test for “related to” bankruptcy ceeding based upon a State law claim or
jurisdiction is sufficiently broad to provide fed- State law cause of action, related to a case
eral jurisdiction for this case by relating it sole- under title 11 but not arising under title 11
ly to Aurion’s bankruptcy. Because this lit- or arising in a case under title 11, with re-
igation related to Aurion’s bankruptcy peti- spect to which an action could not have
tion, removal was timely. been commenced in a court of the United
States absent jurisdiction under this section,
In response to Edge’s arguments concern- the district court shall abstain from hearing
ing the timeliness of removal, the district court such proceeding if an action is commenced,
found that Aurion was the assignee of certain and can be timely adjudicated, in a State
of Aurora’s contractual rights arising from its forum of appropriate jurisdiction.
sale of gas to Duke. We review this finding of
fact for clear error, see Bass v. Denney (In re 28 U.S.C. § 1334(c)(2). We have interpreted
Bass), 171 F.3d 1016, 1021 (5th Cir. 1999), this provision to mandate federal court absten-
and we decline to upset it on appeal. Even if tion where “(1) [t]he claim has no independent
Aurion is not subject to Aurora’s liabilities (a basis for federal jurisdiction, other than
matter about which we express no opinion), § 1334(b); (2) the claim is a non-core proceed-
the outcome of this case could affect Aurion’s
recovery from Duke in the separate litigation
involving Duke and the debtors. This litiga- 8
Again, we stress that Edge did not waive its
tion thus relates to Aurion’s bankruptcy, and arguments on mandatory abstention by consenting
Duke’s removal within ninety days of the order to bankruptcy court jurisdiction. Edge waived any
for relief stemming from Aurion’s bankruptcy right it had to trial in district court rather than
petition was timely. See FED. R. BANKR. P. bankruptcy court under 28 U.S.C. § 157 but did
9027(a)(2)(A). not waive its contention that federal courts should
abstain from adjudicating this case. See FDIC v.
IV. Majestic Energy Corp. (In re Majestic Energy
Edge argues that the district court was re- Corp)., 835 F.2d 87, 90 (5th Cir. 1988).
quired by the mandatory abstention provision 9
We may affirm for any reason supported by
applicable to non-core bankruptcy proceedings
the record, even if not relied on by the district
to abstain from adjudicating this case. See 28 court. LLEH, Inc. v. Wichita County, Tex., 289
U.S.C. § 1334(c)(2). We review the decision F.3d 358, 364 (5th Cir. 2002).
5
ing, i.e., it is related or in a case under title 11; Edge’s complaint.11 The court noted that the
(3) an action has been commenced in state complaint was drafted broadly enough to pro-
court; and (4) the action could be adjudicated vide the right to pursue a claim against the
timely in state court.” Schuster v. Mims (In re proceeds of the sale from the debtors to Duke
Rupp & Bowman), 109 F.3d 237, 239 (5th Cir. as well as the proceeds from the sale from
1997). Section 1334(b) provides for federal Duke to third parties.12
jurisdiction over cases arising under or related
to the bankruptcy code. If Edge was not pursuing both theories, it
should have sought leave to amend its com-
Edge’s complaint gives rise to two claims: plaint rather than confuse the lower courts into
one that is a core proceeding and another that addressing both theories. Federal question jur-
is supplemental to it and eligible for federal isdiction must be determined from the face of
jurisdiction under 28 U.S.C. § 1367(a). Bank- a well-pleaded complaint. See Louisville &
ruptcy courts may not exercise supplemental Nashville R.R. v. Mottley, 211 U.S. 149, 152
jurisdiction. See Walker v. Cadle Co. (In re (1908). The district court was correct not to
Walker), 51 F.3d 562, 570 (5th Cir. 1995). remand the possible claim against the proceeds
Section 1334(c)(2), however, addresses ab- of the sale from the debtors to Duke; these
stention by district courts. Section 1367(a) would have been accounts receivable by the
provides for supplemental jurisdiction (subject debtors, and claims against them would be
to irrelevant exceptions) over claims forming core bankruptcy proceedings not entitled to
part of the same case or controversy with “any mandatory abstention.13
civil action over which the district courts have
original jurisdiction.” This includes bankrupt-
cy jurisdiction.10 It follows that district courts 11
The court quoted the complaint’s statement
have supplemental jurisdiction over claims that that “[t]his is an action for recovery of the value
form part of the same case or controversy with (contract price) of a volume of Texas gas, or pro-
bankruptcy claims. See Publicker Indus. v. ceeds thereof that Edge as the producer sold, but
United States, 980 F.2d 110, 114-15 (2d Cir. for which it has not been paid.”
1992). 12
See Cohen v. Rains, 769 S.W.2d 380, 384-85
(Tex. App.SSFort Worth 1989, writ denied)
Because neither of Edge’s claims meets the (“[W]hen a debtor is in default a secured party is
criteria of the Schuster test, the bankruptcy not required to elect which of these rights he wishes
and district courts were correct in refusing to to pursueSShe may take any permitted action or
abstain. When this case was removed and the combination of actions.”).
district court reconsidered its jurisdiction, the
13
court was appropriately wary of the breadth of See 28 U.S.C. § 157(b)(E) (defining “orders
to turn over property of the estate” as within “core”
federal bankruptcy jurisdiction); Schuster, 109
F.3d at 239 (stating that core matters fail prong
two of the test recounted above); Southmark, 163
F.3d at 932 (explaining that matters within core
10
See § 1334(a) (stating that subject to a pro- bankruptcy jurisdiction are subject to discretionary
vision for concurrent jurisdiction in the bankruptcy rather than mandatory abstention). As Edge
courts, “the district courts shall have original and acknowledges, the district court’s refusal to abstain
exclusive jurisdiction of all cases under title 11”). (continued...)
6
Edge also was not entitled to abstention on that this action was automatically stayed under
its claim against the proceeds of Duke’s sale to 11 U.S.C. § 362(a). We review the court’s in-
third parties, because mandatory abstention terpretation of the statute de novo. South-
applies solely to claims giving rise to federal mark, 163 F.3d at 929. Section 362(a) oper-
jurisdiction under no provision other than ates to stay only actions against bankruptcy
§ 1334. Edge’s claim against the proceeds petitioners and their property. Because Edge’s
from Duke’s sale to third parties does not claim for conversion against Duke lies against
meet that requirement, because it arises from a non-debtor and does not implicate the prop-
“a common nucleus of operative fact” with the erty of the debtors, the bankruptcy court erred
claim against the debtors’ accounts receivable by staying it.
and is thus a supplemental claim giving rise to
jurisdiction under § 1367(a).14 Section 362(a) recounts a long list of ac-
tions that are stayed by the filing of a bank-
The fact that Edge ultimately waived the ruptcy petition. The provision does not apply,
merits of its federal-question claim and pressed however, to actions not directed against the
only its supplemental claim did not affect the debtor or property of the debtor. See Arnold
propriety of abstention vel non, because v. Garlock, Inc., 278 F.3d 426, 436 (5th Cir.
Edge’s loss on the merits of its federal ques- 2001). The bankruptcy court determined that,
tion claim did not operate to defeat the district should the proceeding between Duke and the
court’s independent basis for jurisdiction over debtors result in a finding that Duke had not
the supplemental claim.15 In sum, the com- paid the debtors for the gas, Edge’s claim
plaint gave rise to two claims; because Edge’s would be against accounts receivable by the
non-core claim was supplemental to the core debtors and thus would be stayed as an action
claim it could have pressed, and because against the debtors’ property.
§ 1367(a) continued to provide an independent
basis for federal jurisdiction even after Edge The court misinterpreted Edge’s claim.
had waived the merits of its core bankruptcy Edge argues that Duke is liable to it independ-
claim, abstention was inappropriate. ently of whether Duke has paid the debtors,
because (1) § 9.343 provides a lien that fol-
V. lows the gas or proceeds from sale thereof
Edge contests the bankruptcycourt’s ruling until cut off by a sale in the ordinary course of
business or payment to the lienholder;
(2) Edge has not been paid for the gas; and
13
(...continued) (3) Duke did not cut off Edge’s lien by trans-
as a matter of discretion pursuant to § 1334(c)(1) acting in the ordinary course of business.
is unreviewable on appeal. See § 1334(d).
Under this theory, Edge’s rights hinge on
14
See United Mine Workers v. Gibbs, 383 U.S. whether the manner in which Duke transacted
715, 725 (1966); Schuster, 109 F.3d at 239. with the debtors immunized Duke, as a holder
15
in due course, from liability to Edge. Though
See § 1367(c) (providing for discretionary ab-
relevant, the factual matter at issue in the debt-
stention rather than lack of jurisdiction over sup-
ors’ suit against DukeSSwhether Duke paid for
plemental claims where the claim giving rise to
original jurisdiction (federal question, diversity or
the gasSSis not dispositive of the holder-in-
admiralty) has been dismissed on the merits). due-course issue. Edge contends that § 9.343
7
imposes liability on Duke even if it paid the chaser, do the facts of this case arguably sup-
debtors but did not do so in the ordinary port the conclusion that Edge has one against
course of business and did not comply with the Duke? See Anderson v. Liberty Lobby Inc.,
statutory safe harbors. Edge’s claim thus lies 477 U.S. 242, 248-49 (1986). We discuss
against the proceeds of Duke’s sale of the gas only whether Texas law allows for a produ-
to third parties (the sale that, according to cer’s lien on gas or the proceeds from resale
Edge, cut off its lien on the gas) rather than thereof that is enforceable against a down-
against any accounts receivable by the debtors. stream purchaser such as Duke. We do not
consider whether a lien was created in Edge,
It is true, as noted above in the discussion because we conclude that, on the facts before
of subject matter jurisdiction, that a successful us, the legal nature of the lien renders it unen-
claim by Edge against Duke would probably forceable via an action for conversion.
result in a lawsuit by Duke against the debtors
seeking indemnification for Duke’s payment of B.
the debtors’ debt to Edge. Edge, however, Section 9.343 is the successor of a nonuni-
has framed its claim so that the merits of that form addition to Texas’s commercial code de-
probable litigation are not Edge’s problem. signed to provide security protection for royal-
Regardless of whether Edge’s reading of Tex- ty owners and producers when first purchasers
as law is correct, its claim is not directed go bankrupt.16 The statute reads in relevant
against the debtors’ property and is not subject part as follows:
to a stay under § 362(a).
(a) This section provides a security inter-
VI. est in favor of interest owners, as secured
A. parties, to secure the obligations of the first
We agree with the district court that Edge purchaser of oil and gas production, as
has demonstrated that there is a disputed issue debtor, to pay the purchase price. An au-
of material fact as to whether it has a gas pro- thenticated record giving the interest owner
ducer’s lien on the proceeds of Duke’s sale of a right under real property law operates as
the gas, but that Edge may not recover from a security agreement created under this
Duke via an action for conversion. Because chapter. The act of the first purchaser in
the viability of a conversion action depends signing an agreement to purchase oil or gas
critically on the nature of the property alleg-
edly converted, we address whether Edge ar-
guably has a lien at all. 16
See Cynthia G. Grinstead, Note, The Effect of
Texas U.C.C. Section 9.319 on Oil and Gas Se-
The issue of whether Edge has a gas pro- cured Transactions, 63 TEX. L. REV. 311, 311
ducer’s lien on the proceeds of Duke’s sale of (1984). Duke alleges that the prior codification of
the gas raises two subsidiary questions: these sections governed at the time of the transac-
(1) Does Texas law, under any circumstances, tions at issue and that the prior codification differs
provide Edge with a lien that could be en- in material respects. Duke concedes, however, that
the former § 9.319 is identical to § 9.343; it argues
forced against the proceeds of a sale of its gas
instead that other referenced sections are critically
to a third party by a downstream purchaser
different. Like the parties and courts a quo, we re-
such as Duke; and (2) assuming Texas law fer to the current codification and mention any
provides for a lien against a downstream pur- changes where relevant.
8
production, in issuing a division order, or in (d) This section creates . . . a lien that
making any other voluntarycommunication secures the rights of any person who would
to the interest owner or any governmental be entitled to a security interest under Sub-
agency recognizing the interest owner’s section (a) except for lack of any adoption
right operates as an authentication of a of a security agreement by the first pur-
security agreement in accordance with chaser or a lack of possession or record re-
Section 9.203(b) for purposes of this chap- quired by Section 9.203 for the security
ter. interest to be enforceable.
(b) The security interest provided by this (e) The security interests and liens cre-
section is perfected automatically without ated by this section have priority over any
the filing of a financing statement. . . . purchaser who is not a buyer in the ordi-
nary course of the first purchaser’s busi-
(c) The security interest exists in oil and ness, but are cut off by the sale to a buyer
gas production, and also in the identifiable from the first purchaser who is in the ordi-
proceeds of that production owned by, re- nary course of the first purchaser’s business
ceived by, or due to the first purchaser: under Section 9.320(a). But in either case,
whether or not the buyer from the first pur-
(1) for an unlimited time if: chaser is in ordinary course, a security in-
terest will continue in the proceeds of the
(A) the proceeds are oil or sale by the first purchaser as provided in
gas production, inventory of Subsection (c). . . .
raw, refined, or manufactured
oil or gas production, or rights (l) A first purchaser who acts in good
to or products of any of those, faith may terminate an interest owner’s se-
although the sale of those pro- curity interest or statutory lien under this
ceeds by a first purchaser to a section by paying, or by making and keep-
buyer in the ordinary course of ing open a tender of, the amount the first
business as provided in Sub- purchaser believes to be due to the interest
section (e) cuts off the security owner:
interest in those proceeds;
(1) if the interest owner’s rights are
(B) the proceeds are ac- to oil or gas production or its pro-
counts, chattel paper, instru- ceeds, either to the operator alone, in
ments, documents, or payment which event the operator is considered
intangibles; or the first purchaser, or to some combi-
nation of the interest owner and the
(C) the proceeds are cash operator, as the first purchaser choos-
proceeds, as defined in Section es;
9.102; and
(2) whatever the nature of the pro-
(2) for the length of time provided in duction to which the interest owner
Section 9.315 for all other proceeds. has rights, to the person that the inter-
est owner agreed to or acquiesced in;
9
or “buyer in the ordinary course of business”:
(3) to a court of competent jurisdic- [A] person that buys goods in good faith,
tion in the event of litigation or bank- without knowledge that the sale violates
ruptcy. the rights of another person, other than a
pawnbroker, in the business of selling
(m) A person who buys from a first pur- goods of that kind. A person buys in the
chaser can ensure that the person buys free ordinary course if the sale to the person
and clear of an interest owner’s security in- comports with the usual or customary
terest or statutory lien under this section: practices of the kind of business in which
the seller is engaged or with the seller’s
(1) by buying in the ordinary course own usual or customary practices. A per-
of the first purchaser’s business from son that sells oil, gas, or minerals at the
the first purchaser under Section wellhead or minehead is a person in the
9.320(a); business of selling goods of that kind. . . .
Only a buyer that takes possession of the
(2) by obtaining the interest owner’s goods or has a right to recover the goods
consent to the sale under Section from the seller under Chapter 2 may be a
9.315(a)(1); buyer in the ordinary course of business.
“Buyer in the ordinary course of business”
(3) by ensuring that the first pur- does not include a person that acquires
chaser has paid the interest owner or, goods in a transfer in bulk or as security
provided that gas production is in- for or in total or partial satisfaction of a
volved, or the interest owner has so money debt.
agreed or acquiesced, by ensuring that
the first purchaser has paid the interest (Emphasis added.)
owner’s operator; or
Edge’s claim may be summarized as fol-
(4) by ensuring that the person or the lows: (1) that it had an interest in the gas cre-
first purchaser or some other person ated by subsection (a); (2) that the interest was
has withheld funds sufficient to pay not defeated by any notification requirement in
amounts in dispute and has maintained light of the minimal nature of the requirements
a tender of those funds to whoever established by subsections (b) and (d); (3) that
shows himself or herself to be the per- the interest followed the gas and thus attached
son entitled. to the proceeds of the sale to third parties pur-
suant to subsection (c); and thus (4) the inter-
TEX. BUS. & COM. CODE ANN. § 9.343. est was not limited to the proceeds of the sale
by the debtors to Duke as provided in subsec-
The commentary to § 9.320(a), which is tion (e), because (5) the debtors did not cut off
referenced by § 9.343(m) quoted above, ex- Edge’s lien by taking any of the actions speci-
plains that its definition of “buyer in the ordi- fied in subsection (1); and (6) Duke did not cut
nary course of business” derives from TEX. off Edge’s lien by taking any of the actions
BUS. & COM. CODE § 1.201(9). See § 9.320, specified in subsection (m). Edge asserts that
cmt. 3. Section 1.201(9)(b), in turn, defines it has three sources of collateral: (1) the gas
10
that Edge sold to the debtors and the debtors security interest by selling the gas free and
sold to Duke; (2) the debtors’ accounts receiv- clear to a third party. Because the security
able after the sale of the gas to Duke; and interest was Edge’s property, provided by
(3) the cash proceeds that Duke received from § 9.343(a), Edge asserts harm only to itself,
the sale of the gas to the third parties.17 The and because only Edge, as a gas producer, en-
gas is now gone, but Edge asserts that it may joys the statutory protection of § 9.343, only
recover for conversion of either the gas or the Edge has standing to assert a conversion claim
proceeds from Duke’s sale thereof.18 with respect to that interest.20
According to Duke, Edge’s suit is barred “Whether a particular state cause of action
because (1) any claim brought by Edge against belongs to the [debtor’s] estate depends on
Duke under the statute actually belongs to the whether under applicable state law the debtor
debtors; or (2) the claim seeks to recover the could have raised the claim as of the com-
property of the debtors’ estates.19 Duke alleg- mencement of the case.” Schertz-Cibolo-Uni-
es that Edge lacks standing, as a matter of law, versal City Indep. Sch. Dist. v. Wright (In re
to bring a claim against it under the statute, Educators Group Health Trust), 25 F.3d
because subsection (c), quoted above, states 1281, 1284 (5th Cir. 1994). Only Edge could
that the lien inheres in “proceeds of that pro- assert a producer’s lien against the proceeds
duction owned by, received by, or due to the from sale of the gas; neither the debtors nor
first purchaser.” § 9.343(c). Duke reasons any other plaintiff had one. Edge does not and
that because Edge alleges that Duke holds pro- need not assert that Duke converted or other-
ceeds due to the debtors, it is asserting a harm wise improperly acquired the debtors’ prop-
to the debtors rather than to itself and has no erty. Instead, it must and does assert only that
standing to bring its claim. Duke acquired the property outside the ordi-
nary course of business (for example by ac-
We disagree. Edge does not assert harm to cepting it in return for a debt) and thus ac-
the debtors by alleging that Duke converted its quired it subject to a lien. See § 1.201(b)(9).
When Edge accuses Duke of converting that
lien, it asserts that Duke improperly exercised
17 dominion over its property, and it presses a
See TEX. BUS. & COM. CODE ANN. § 9.315-
claim that it has standing to bring.21
(a)(2) (providing for the continuation of a security
interest in the proceeds of the sale of secured col-
lateral).
20
See Lively v. Carpet Servs., Inc., 904 S.W.2d
18
Edge also claims that it could recover from 868, 874 (Tex. App.SSHouston [1st Dist.] 1995,
the proceeds, in the form of accounts receivable by writ denied) (reasoning that where statute granted
the debtors from Duke, from the sale by the debtors property right to creditor rather than bankrupt
to Duke of the gas. As we have said, Edge has not debtor, that right was enforceable by creditor
pressed this claim, so it is not addressed here. against non-bankrupt defendant).
19 21
See Adacom Corp. v. Byrne (In re Schimmel- See Russell v. Am. Real Estate Corp., 89
penninck), 183 F.3d 347, 350-51 (5th Cir. 1999); S.W.3d 204, 210 (Tex. App.SSCorpus Christi
S.I. Acquisition, Inc. v. Eastway Delivery Serv., 2002, no pet.) (definition of conversion); Schertz-
Inc. (In re S.I. Acquisition, Inc.), 817 F.2d 1142, Cibolo-Universal City, 25 F.3d at 1284 (stating
1150 (5th Cir. 1987). (continued...)
11
Duke contends that this interpretation of “except as otherwise provided in this chapter
the statute effectively creates strict liability for, . . . .” Duke then urges that § 9.343(c) limits
and a live claim against, a stream of distant, liens on proceeds from sale of the gas to pro-
downstream purchasers. Duke points out that ceeds due to the first purchaser. We, how-
gas traders frequently have few assets other ever, see no inconsistency among the provi-
than their accounts receivable and contends sions.
that the statute was passed to protect produc-
ers against secured creditors of bankrupt trad- Section 9.343(c)’s provision of a lien upon
ers that provided working capital for the trades proceeds due to the first purchaser is an ad-
and seized all assets upon bankruptcy or fail- dition to, rather than a limitation on, the lien
ure of the trading company. See Grinstead, on the gas. The fact that § 9.343(c) creates
supra, 63 TEX. L. REV. at 311. Our interpre- two liensSSone on the gas and one on the pro-
tation, however, reads the statute to protect ceeds due to the first purchaser from its sale
against a conceptually similar problem: self- SSdoes not mean that the second lien operates
help remedies by downstream creditors such as to limit the recourse that may be had under the
Duke who seize all the assets of a trading first. Section 9.343(c) provides that a gas pro-
company and leave nothing left with which the ducer may pursue recourse on its lien on the
bankrupt trader can repay the producer. Duke gas or the proceeds due the first purchaser,
supplies no alternative explanation of the debt- and § 9.315 provides that, should the producer
collection exception to the holder-in-due- pursue its lien on the gas, it also has a lien on
course rule, and the academic commentarythat the proceeds from resale of the gas by a down-
it cites is concerned mainly with whether the stream purchaser who resells the gas and
interest in proceeds supplied by subsection (c) whose purchase did not cut off the lien. Edge
is continuously perfected, not with whether a thus arguably (depending on the facts) pos-
producer’s lien on the gas may be enforced sessed a lien on the gas and the proceeds from
against a downstream purchaser. Duke’s resale thereof.
Duke protests that, even if § 9.343(c) pro- VII.
vided Edge with a lien on the gas, that lien did Edge, however, cannot recover its alleged
not transfer to the proceeds from Duke’s re- security interest through an action for conver-
sale of the gas under TEX. BUS. & COM. CODE sion against Duke. To show conversion, Edge
ANN. § 9.315(a)(2), which provides for a se- must prove that Duke improperly exercised
curity interest in the sale of secured property. dominion over its security interest in the gas or
Duke asserts that § 9.315 must be read in con- the money (the proceeds of Duke’s resale of
junction with § 9.343(c) and emphasizes that the gas). Unfortunately for Edge, it cannot
§ 9.315(a) provides that a security interest prove that Duke behaved improperly by resell-
shall attach to proceeds of sale of property in ing the gas, and an action for conversion of
which a creditor has a security interest only money is available only in limited circum-
stances that are not present here.
21 A.
(...continued)
Edge contends, without merit, that Duke
that creditor has standing to assert claim against
non-bankrupt debtor for injury to itself caused by
converted its interest in the gas by reselling it
the non-bankrupt debtor). free and clear of Edge’s security interest. To
12
establish conversion, Edge must prove that defeat a security interest holder’s rights.22
(1) it owned or had a right to possession of the Second, it contends that, even if it did impli-
property; (2) the defendant assumed and ex- edly consent to resale of the gas, it did not im-
ercised dominion and control over the prop- pliedly consent to resale free and clear of its
erty inconsistent with plaintiff’s rights; and security interest. Although we acknowledge
(3) the defendant refused plaintiff’s demand that rhetorical cannonballs can be hurled on
for return of the property. See Russell, 89 both sides,23 the bankruptcy court’s analysis of
S.W.3d at 210. At the time Duke exercised Edge’s expectations, in light of the prevailing
dominion over the gas, payment for the gas practices in the oil and gas industry, is persua-
had not yet come due, and Edge had no right sive. And if Edge consented to resale of the
to enforce its interest in the gas. See ITT gas in the ordinary course of business, its ar-
Commercial Fin. Corp. v. Bank of the West, gument that it did not consent to the cutting
166 F.3d 295, 305 n.16 (5th Cir. 1999). Edge, off of its security interest at some point down-
however, contends that Duke’s reselling the stream is without merit, because that cutting
gas in the ordinary course of business, free of off of the upstream security interest is a direct
the encumbrance of Edge’s security interest, consequence of such sales. See § 9.343(e).
constituted conversion. Edge further alleges
that this repudiation of Edge’s rights was so In any event, it is difficult to see how
blatant and egregious as to foreclose any need Duke’s actions could be so egregiously viola-
for Edge to have demanded return of its prop- tive of Edge’s rights as to foreclose the need
erty. We disagree. for a demand, which Edge has not made.
Duke resold the gas before payment under a
It is true that Texas law recognizes some contract to which it was not privy came due.
circumstances in which the repudiation of Conversion generally takes place only after re-
property rights is so blatant as to excuse the fusal of a demand for return of the property,
need for a demand in order to maintain an ac- and only extraordinary circumstances excuse
tion for conversion. See Loomis v. Sharp, 519 the need for a demand. See Permian Petro-
S.W.2d 955, 958 (Tex. App.SSTexarkana leum Co. v. Petroleos Mexicanos, 934 F.2d
1975, writ denied). This is not one of them.
Damningly, Edge does not cite a single case in
which a party has recovered on a security in- 22
See Conoco Inc. v. Amarillo Nat’l Bank, 950
terest supplied by § 9.343 in an action for con- S.W.2d 790, 796 (Tex. App.SSAmarillo 1997)
version against a first purchaser, much less a (“To establish that a secured party consented to a
downstream possessor such as Duke. The transfer of collateral and thereby waived his se-
bankruptcy court found that Edge’s sale to the cured claim by implication there must be a clear,
debtors, consistent with prevailing practices in unequivocal, and decisive act of the party showing
the gas industry, constituted implied consent such a purpose or acts amounting to estoppel on
to resale of the gas, before the due date of the his part.”), rev’d on other grounds, 966 S.W.2d
payment, to downstream purchasers in the or- 853 (Tex. 1999).
dinary course of business. There is no reason 23
See, e.g., Pan Eastern Exploration Co. v.
to upset that finding on appeal.
Hufo Oils, 855 F.2d 1106, 1125 (5th Cir. 1988)
(explaining that the defendant’s taking “must be
Edge mounts two responses. First, it ar- wholly without the owner’s sanction or assent, ei-
gues that implied consent is not sufficient to ther expressly or impliedly”).
13
635, 651 (5th Cir. 1991). Duke, which never has notice of the lien, then accepts and benefits
even had notice of Edge’s rights, could hardly from the proceeds. See Home Indem. Ins. v.
be said to have used the property so inconsis- Pate, 814 S.W.2d 497, 498-99 (Tex. App.SS
tently with the manner in which it was received Houston [1st Dist.] 1991, writ denied).
as to assert a property right inconsistent with
that of the owner. See Pierson v. GFH Fin. The bankruptcy court found that Edge had
Servs. Corp., 829 S.W.2d 311, 314 (Tex. App. put forth no summary judgment evidence indi-
SSAustin 1992, no writ). Because Edge’s im- cating that Duke had notice that Edge held the
plied consent to resale and failure to demand lien and that Edge had not been paid by the
return of its security interest in the gas defeat debtors. Edge does not challenge that conclu-
its claim for conversion of the gas, we do not sion but alleges that Duke’s knowledge of
address Duke’s alternative argument that it did § 9.343 was enough notice to put it in the
not convert the gas because, on account of the shoes of a trustee. Duke’s notice, however,
gas’s physical presence in the pipeline, Duke was not even close to those in Texas cases in
never possessed it. which trustees have improperly disposed of as-
sets. 24 Duke knew or may be presumed to
B. have known the law, but did not know that
As with its interest in the gas, Edge may Edge was owed the money. Without more,
not recover on its interest in the proceeds from Edge cannot overcome Texas courts’ tradi-
Duke’s sale of the gas through an action for tional hostility to claims for conversion of
conversion. Actions for conversion of money money.
are available in Texas only where “money is
(1) delivered for safekeeping; (2) intended to Edge alleges that our construction of the
be kept segregated; (3) substantially in the statute renders its rights nugatory. Our inter-
form in which it is received or an intact fund; pretation, however, does not foreclose credi-
and (4) not the subject of a title claim by the tors such as Edge from pursuing actions for
keeper.” Edlund v. Bounds, 842 S.W.2d 719, collection; creditors are cut off only from ac-
727 (Tex. App.SSDallas 1992, writ denied). tions for conversion with the attendant possi-
bility of punitive damages against downstream
Edge’s argument that Duke, upon resale of property holders without notice of the produ-
the gas, was in the position of a trusteeSShold- cer’s claims or the failure of the first purchaser
ing Edge’s money pending payment by the to fulfill its contractual obligations. This is a
debtorsSSis somewhat feeble. This case is reasonable construction of the statute and best
similar to Mitchell Energy Corp. v. Samson approximates the legislative intent.
Res. Co., 80 F.3d 976, 983-84 (5th Cir. 1996),
in which we ruled that a cotenant on a mineral The judgment of the district court, affirm-
estate could not maintain an action for conver- ing the bankruptcy court, is AFFIRMED.
sion of money where its cotenant had with-
drawn gas from the ground, sold the gas, and
refused to turn over the proper share of the
proceeds. The bankruptcy court was correct 24
See Prewitt & Sampson v. City of Dallas,
to recognize that a party that benefits from
713 S.W.2d 720, 722 (Tex. App.SSDallas 1986,
proceeds subject to a statutory lien may be lia- no writ) (in which attorney improperly disbursed
ble for conversion of such proceeds only if it funds he knew to be due to insurance carrier).
14