Banking and Finance Law Report
Perfecting Security Interests in Assets of Ohio Gas and Pipeline Companies
With the recent boom in Ohio’s oil and gas industry, secured creditors in Ohio should be sensitive to special statutory requirements for perfecting security interests granted in assets of gas and pipeline companies.
Although security interests in personal property and fixtures are most frequently perfected by filing financing statements under the UCC, there are several types of security interests which require perfection through other channels. In Ohio, pursuant to Section 1701.66 of the Revised Code, security interests in property of “public utilities” are among the interests that must be perfected by other means. “Public utility” is defined by the Ohio Revised Code Sections 4905.02 and 4905.03 to include, among others and with certain exceptions, (i) gas companies and natural gas companies, when engaged in the business of supplying artificial or natural gas, as applicable, for lighting, power, or heating purposes to consumers within Ohio and (ii) pipe-line companies, “when engaged in the business of transporting natural gas, oil or coal or its derivatives through pipes or tubing, either wholly or partly within [Ohio], but not when engaged in the business of the transport associated with gathering lines, raw natural gas liquids, or finished product natural gas liquids.” (Emphasis added). Additional discussion about this distinction among pipeline companies follows.
Revised Code Section 1701.66, titled “Recording of Railroad or Public Utility Mortgages,”provides for a special method for perfecting security interests in the assets of a public utility or a corporation organized for the purpose of constructing, acquiring, owning, or operating a public utility. This section requires mortgages of “property of any description, or any interest in the property” made by public utilities to be recorded in the office of the county recorder of each county in which any of that property is situated or employed. A mortgage by a public utility including rolling stock or movable equipment may be filed in the secretary of state’s office, and will have the same effect as if filed in the county recorder’s office. Any public utility mortgage that is filed as provided in Section 1701.66(A) is a lien on the property described from the respective times of filing the mortgage with the recorders of the appropriate counties (or secretary of state, as to rolling stock or movable equipment). A public utility mortgage encumbering after-acquired property becomes a lien on such after-acquired property from the date of its acquisition by the public utility debtor, so long as the public utility mortgage was recorded as provided above.
(Note: As used in Section 1701.66, the term “mortgage” is most likely used in its older sense to include security interests in personal property. Section 1701.66 refers to public utility mortgages including specific personal property (rolling stock and movable equipment), and provides for perfection of security interests in after-acquired property, which is generally impermissible in mortgages of real estate.)
Section 1701.66(E) provides that public utility mortgages do not need to be otherwise filed or refiled as is required for other security interests under Article 9 of the UCC. Additionally, Revised Code Section 1309.109, which defines the scope of UCC Article 9 in Ohio (with respect to both personal property and fixtures), states that it does not apply to liens created under any provision of Section 1701.66 (except with respect to a provision regarding priority of possessory liens).
Under the statutory framework, it appears that security interests in assets of pipeline companies that are not public utilities are perfected using the same method as other interests under UCC Article 9. Pipeline companies engaged in the business of transport associated with “gathering lines, raw natural gas liquids, or finished product natural gas liquids” are not public utilities. “Gathering lines” is given the same definition as in the Natural Gas Pipeline Safety Act (49 U.S.C. Chapter 601), meaning a pipeline that transports gas from a current production facility to a transmission line or main. “Raw natural gas liquids” generally include mixtures of ethane, propane, butanes, and natural gasoline, and “finished product natural gas liquids” include ethane, propane, iso-butane, normal butane, and natural gasoline.
Secured creditors lending to oil and gas companies should consult experienced legal counsel to ensure they use the proper methods to effectively perfect their security interests in collateral owed by gas and pipeline companies.
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