Enforcing a pipeline carrier's liens

UCC LIEN. A carrier will also likely enjoy statutory lien rights under a given state's version of the UCC. For this article, we focus on the Texas UCC, though similar provisions can be found in other states' versions of the UCC as well. Section 7.307 of the Texas UCC provides a statutory carrier's lien on goods transported within the State of Texas. While the UCC lien is similar to a carrier's tariff lien, it is worth noting that the UCC lien will not secure payment of prior charges for other shipments, while the tariff lien may do so. Still, the UCC lien will remain even in the event the tariff is unexpectedly rendered, or judicially determined to be, ineffective or inapplicable. Thus, whenever a carrier moves to enforce its rights in collection of claims against shippers, it is advisable that the carrier invoke both any tariff lien as well as its UCC lien.

TSA RIGHTS. A TSA may provide a third source of rights against a shipper. While they vary, TSAs typically incorporate certain terms of the carrier's tariff, in addition to terms that vary from or are beyond the scope of the tariff, such as ship-or-pay obligations. Given that the carrier's tariff may also incorporate or refer to specific provisions of the TSA as well, the two documents should be read together when considering collection issues against a TSA counterparty. The TSA likely will provide that in the event a shipper defaults on its payment obligations, the carrier has the right to, among other things, sell shipper's goods in order to clear the pipeline. Under a well-drafted TSA, the carrier's rights and remedies will be in addition to the tariff and UCC lien rights. At the same time, because there are well-established minimum standards for exercising a power to sell another party's property as a means of collecting a debt, the rights under the TSA must be understood in accordance with applicable lien foreclosure procedures.

PERFECTING A CARRIER'S LIENS

The Texas UCC provides the rules for perfection and priority of liens. Generally, a security interest in goods may be perfected either by filing a financing statement or by possession of the collateral. Unperfected security interests take the lowest priority outside of bankruptcy; inside bankruptcy, unperfected security interests are disregarded. So perfection is important, and the carrier's possession of the shipper's goods operates to perfect its tariff and UCC liens.

The priority of the pipeline's lien is one key to its utility; it has the highest priority among competing liens and security interests in the same goods. In enacting a non-uniform provision of Article 9, the Texas Legislature has addressed unique oil and gas issues pertaining to security interests and liens. See Texas UCC § 9.343. This section provides for a self-executing and automatically perfected security interest in favor of oil and gas interest owners, as "secured parties," against the obligations of the first purchaser of oil and gas production, as debtor, with the lien to be treated as a "purchase-money security interest" for purposes of lien priority. See Texas UCC §§ 9.343(a) & (f)(1). Notwithstanding those provisions, another subsection provides for an even higher priority of the lien of a pipeline, providing that a carrier's tariff lien and its Article 7 lien have priority over any other security interests or statutory liens arising under § 9.343. See Texas UCC § 9.343(h). Moreover, a carrier's tariff lien and its UCC lien are effective even as against a bankruptcy trustee.

While it appears there are no reported judicial opinions discussing these provisions in Article 9 of the Texas UCC, a carrier's tariff lien and UCC lien are entitled to priority over competing security interests or liens-such as the security interests of the secured lenders to the shipper-in the same goods that are within the carrier's possession. Indeed, the UCC lien is expressly made effective "against the consignor or any person entitled to the goods." See Texas UCC § 7.307(b). Also a carrier's tariffs and TSA often contain provisions calling for the shipper to warrant that the goods shipped are unencumbered (or else that the right to ship the goods is unencumbered). Many shippers may not be able to accurately so warrant that the goods they seek to transport are lien-free, considering that secured credit is the sine qua non for the operations of independent E&P companies. In certain circumstances, it may be useful to assert against a shipper a breach of this warranty. However, such a claim exceeds the limited scope of this article and is geared more toward litigation, not being as presently useful as a foreclosable lien against the shipper for collecting past-due amounts.

ENFORCING A CARRIER'S LIENS

While a tariff may describe its liens as "self-executing," the enforcement of any lien is never automatic and always entails legal work. Counsel should be consulted. At all times, a carrier must bear in mind that, absent a filed financing statement, its liens depend on possession of the goods delivered to it by the shipper. To re-deliver the resources to the shipper or to otherwise relinquish possession of them will vitiate the liens. Maintenance of possession is the key to effective foreclosure, and withholding of possession of the shipper's goods may itself serve as a sufficient inducement to persuade the defaulting shipper to pay up. The separate procedures for enforcing liens under tariffs and Article 7 of the UCC should be harmonized when enforcing the carrier's liens by foreclosure; and the decision to invoke and execute the liens should be informed by consideration of the carrier's other rights against the shipper that are activated when an invoice becomes past due.

One of those rights is to assess interest on the defaulted amount after its due date, assuming such right is provided under its tariffs or TSA. A second, stronger right is setoff, which is to net the amounts owed to the carrier against amounts the carrier owes the shipper. Some tariffs provide that the right of setoff includes both "amounts owed and future amounts owed" by the shipper; but a carrier must beware because an oil-and-gas decision from the Delaware bankruptcy court holds that the traditional, common law right of setoff cannot-at least for bankruptcy purposes-be enlarged by contract. See In re SemCrude, LP, 399 B.R. 388 (Bankr. D. Del.), aff'd 428 B.R. 590 (D. Del. 2010). Furthermore, given that the traditional right of setoff is limited to debts and claims arising prepetition, it seems problematic that setoff may be enlarged to include "future amounts" or debts not yet owed.

Finally, a carrier should be cognizant of the fact that the automatic stay of the Bankruptcy Code prevents the exercise of setoff, at least temporarily. A carrier's third post-default right, short of lien foreclosure, is to demand "adequate assurance of future performance." The carrier's tariff may list forms of assurance such as a letter of credit or a guaranty of a third party. If the shipper provides such assurance, the carrier may avoid having to foreclose. And if the shipper fails or refuses here, the carrier likely has the right to suspend transportation for the shipper.

If all else fails, the carrier may resort to lien foreclosure. Foreclosure is generally regarded in the law as a drastic remedy, and conventionally the carrier must provide sufficient notice of the sale to the shipper, relevant secured creditors, and potential purchasers. It is here that the foreclosure procedures set forth in the tariff and in UCC Article 7 should be carefully parsed and coordinated to assure that the sale withstands later court scrutiny. The tariff may contain a fairly simple procedure, such as the sale of shipper's goods at a public auction on any day not a legal holiday after at least a minimum of publication or newspaper notice of the amount due, the nature of the sale, the time and the place. Section 7.308 of the UCC parallels the foreclosure provisions of Article 9 by requiring that the sale, whether public or private, be commercially reasonable as to the time, place, and any other terms.

Section 7.308(a) further requires the carrier to notify "all persons known to claim an interest in the goods," and subdivision (b) that any such third person may pay the amount of the lien and associated, reasonable expenses to avoid the foreclosure; in that event, the carrier is to retain the goods subject to the terms of their delivery. The notice of the sale should be sent by certified mail to each secured creditor with a security interest in the goods as determined from a search of the Texas Secretary of State's office or any other relevant UCC filing office. Beneficially for carriers, Article 7 further provides a safe harbor for a foreclosure sale that is made "at the price current in the market at the time of the sale" or in conformity with commercially reasonable practices of dealers in those sorts of goods.

The carrier may sell less than all of the goods it possesses and as a precaution should endeavor not to sell more than necessary to cover past-due invoices, interest, and fees, costs, and charges of the carrier. Subsection 7.308(c) of the Texas UCC provides that the carrier may purchase the goods at a public (but not private) auction, and subdivision (d) provides that a good faith purchaser takes the goods free and clear of the rights of the other persons against whom the carrier's lien was valid. Finally, § 7.308(h) makes the carrier liable for damages caused by noncompliance with the requirements for foreclosure sale, and, in case of willful violation, the carrier is liable for conversion. It is always advisable to engage counsel before launching such a foreclosure sale.

EFFECT OF SHIPPER'S BANKRUPTCY

In the post-2014 era, numerous independent E&P companies have taken refuge in Chapter 11 cases in the bankruptcy courts, in Texas and other oil-producing states, as well as Delaware and New York. While a customer's bankruptcy is never a happy event for a carrier, carriers should be able to collect unpaid pre-bankruptcy charges from bankrupt shippers-if they are proactive in seeking relief on account of their liens. First and foremost, a carrier should not willy-nilly release a shipper's goods just because of a bankruptcy filing and a demand by the debtor for release of its goods. The carrier is a secured creditor, but only to the extent of its lien, which for prudence should be regarded as the goods in its possession. The carrier will lose that secured-creditor status upon release of the goods in its custody.

Rather the carrier should step forward promptly to vindicate its rights under bankruptcy law before releasing the goods. A secured creditor in bankruptcy, and this includes a carrier with liens, is entitled to "adequate protection" of its secured claim, which may take the form of cash payments, substituted collateral, or other means assuring that, at least by the end of the case, the creditor will have received the value of its collateral. See Bankruptcy Code §§ 363(e), 362(d) & 361. If the value of the collateral exceeds the amount of the debt subject to the carrier's liens, the carrier will also be entitled to recover post-petition interest, fees, costs, and charges provided for in the tariff or the TSA. Id. § 506(b).

The automatic stay of Bankruptcy Code § 362(a) prevents the carrier from exercising its rights against the debtor until the bankruptcy court allows it to do so. Bankruptcy law provides a process for disputing and resolving claims of creditors. A debtor may sell a secured creditor's collateral, along with virtually all other property of the bankruptcy estate, free and clear of liens, so long as the liens attach to the sale proceeds. Chapter 11 bankruptcy provides a platform for bargaining, and the debtor may confirm a plan of reorganization to provide distributions to creditors and to restructure its business; or the outcome of the case may be a judicially supervised liquidation of the debtor. Ideally, a carrier should seek payment of its claim early and avoid entanglement in what can be protracted court proceedings.

Moreover, a customer's bankruptcy is also a risk to the continuation of the carrier's transportation contract (if that should be desired by the carrier). A Chapter 11 debtor has the right and the opportunity to reject, i.e., to be freed of further obligations to perform, any "executory contract," leaving the non-debtor party with a claim for its resulting breach of contract damages, which, absent a lien, will be a general unsecured claim.

CONCLUSION

A carrier is significantly benefitted by the availability of its tariff liens and the statutory lien afforded by Article 7 of the UCC. So long as possession of the shipper's goods is maintained, those liens will persist and should provide protection for the carrier against nonpayment of transportation charges.

This article is intended for educational and informational purposes only and does not constitute legal advice or services. These materials represent the views of and summaries by the authors. They do not necessarily reflect the opinions or views of Vinson & Elkins LLP or of any of its other attorneys or clients.

ABOUT THE AUTHORS

Josiah Daniel is Of Counsel to Vinson & Elkins and based in the firm's Dallas office. His practice includes the representation of debtors, lenders, asset purchasers, noteholders' committees, trustees, and unsecured creditors in corporate and commercial restructurings, and in cases under Chapter 11 and all other aspects of bankruptcy and insolvency.

Cort Thomas is a senior associate based in Vinson & Elkins' Dallas office. His primary area of practice is complex commercial litigation. He has worked on a wide variety of commercial litigation matters in both state and federal courts, including securities, fiduciary duty, fraud, and contract actions.