We hope you enjoyed the four-part series on energy financing that has run in the Banking & Finance Law Report blog during the past few weeks. We've compiled those articles into a resource that's relevant to anyone involved with lending or borrowing in the energy sector. Be sure to download the Energy Financing eBook, and feel free to forward it to colleagues who also will be interested.
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.
Last year (October 23, 2009) we posted on the topic of UCC search logic in light of the bankruptcy case of In re EDM Corporation 2009 Westlaw 367773 (Bankr.D.Neb.). In the bankruptcy court, the first-filing lender lost its priority because it had filed a UCC-1 financing statement with the debtor name listed as "EDM Corporation d/b/a EDM Equipment," which was not located by the two later-filing lenders when doing a search on "EDM Corporation," which was the debtor's true legal name. The bankruptcy court held that the financing statement was "seriously misleading" and rearranged the priority accordingly.
Under Revised 9-506(a), errors or omissions in a filed financing statement are of no consequence unless they render the financing statement “seriously misleading.” Revised 9-506(c) provides that if a search in the filing office using the filing office’s standard search logic would disclose the financing statement, then it is not “seriously misleading,” even if it fails to provide the precise name of the debtor as required under Revised 9-503(a).
This case was recently taken up on appeal to 8th Circuit Bankruptcy Appellate Panel (In re EDM Corporation, 2010 WL 1929772 (8th Cir. BAP May 14, 2010)). The appellate panel noted that the first step for creditors in attempting to find prior liens "is finding the UCC statement in the first place, and the way to do that is by searching the records under the debtor's organizational name. In other words, complete accuracy is even more important with the debtor's name than it is with the description of the collateral." The appellate panel ultimately sided with the bankruptcy court finding that the financing statement did not sufficiently provide the name of the debtor and was, therefore, "seriously misleading."
As we stated in our prior post, this result seems harsh because the first-filing lender was trying to be helpful and extra cautious by using a belt-and-suspenders, cover-all-the-bases approach. "EDM Equipment was an unregistered trade name used by the debtor in the daily conduct of its business activities. Yet, as the appellate panel pointed out, Revised Article 9 sought to "shift the responsibility of getting a debtor's name right to the party filing the financing statement. This approach would enable a searcher to rely on that name and eliminate the need for multiple searches using variants of the debtor's name, all leading to commercial uncertainty." This may seem like a small task when it involves the name “EDM,” but it could be an arduous task if the name were “Smith.”
To avoid most problems, secured creditors should simply running a search on the debtor’s precise legal name after filing their UCC-1 financing statement. If doing so fails to reveal their recent filing, then that secured creditor knows there is a problem with their financing statement. Another option would be to list the d/b/a in the additional debtor field, thereby providing helpful information without running afoul of the requirement for using just the debtor's registered name. These activities take additional time and money, but learning of the problem at that point is far better than learning of the problem once the debtor enters bankruptcy.