A recent court decision has reinforced the need to adequately document transactions for the physical sale of crude oil. In Arrow Oil & Gas, Inc., et al. v. J. Aron & Company, et al. (In re Semcrude, L.P., et al.), Case Nos. 15-3094, 15-3095, 15-3096 and 15-3097 (3d Cir. July 19, 2017), the United States Court of Appeals for the Third Circuit held that producers that want to perfect a security interest in crude oil which they sell to an out of state buyer must file a financing statement in the state where the buyer is located. Producers that have not filed such a financing statement do not have a perfected security interest in such crude oil.
This case stems from the sale of crude oil by a collection of upstream producer that sold crude oil on credit to Semgroup L.P and its affiliates (Semgroup). The crude oil was sold to Semgroup with Semgroup responsible for paying for the crude oil on the 20th day of the month following the sale. Semgroup in turn sold the crude oil to J. Aron and BP. Semgroup represented in its sales to J. Aron and BP that the crude oil was “free from all royalties, liens and encumbrances.” J. Aron and BP were responsible for paying for the crude oil on the 20th day of the month following the sale.