Recent Case Offers Insight Into the Protection of Security Interests

September 15, 2015

Written By Christopher Petrucci and Jennie A. Buchanan

Wells Fargo addressed competing claims to a debtor's property in the oil and gas industry. The debtor, Big Eagle, was subject to receivership proceedings and the appointed Receiver was tasked with, among other things, selling Big Eagle's property and distributing the proceeds to creditors. Wells Fargo had taken a general security interest in all present and after acquired property of Big Eagle. Gator Frac, the competing security interest holder, had leased fracking equipment to Big Eagle. Gator Frac did not register its security interest in the Alberta Personal Property Registry, but the leases were terminated prior to the receivership. The equipment was at Big Eagle's yard waiting to be returned to Gator Frac by the time the Receivership Order was issued.

Both Wells Fargo and Gator Frac made a claim against the equipment. Wells Fargo argued that it formed some of the property of the debtor and was therefore available for sale to satisfy Wells Fargo's loan. Gator Frac argued that the leases were terminated such that the property belonged to Gator Frac - not Big Eagle.

The Court agreed with Wells Fargo and found that the equipment was available to the Receiver for sale despite the fact that the leases for the equipment were terminated prior to Big Eagle going into receivership. The Court held that possession of the equipment by Big Eagle was still sufficient to include it in the receivership proceedings.

While Wells Fargo reminds us of the importance of perfecting a security interest by registering it in the Personal Property Registry, it also instructive in other ways:

a) Possession is important - any equipment that had been returned to Gator Frac's yard in Texas may have avoided sale as part of the receivership;

b) Be creative if circumstances permit - had Gator Frac arranged a purchase money security interest with the Debtor in respect of the Units, or effectively registered one, Gator Frac's interest may have had priority; and

c) Enter into clarifying agreements at the outset “ Gator Frac could have entered into a priority and postponement agreement with Wells Fargo pursuant to which Gator Frac's interest would have been in priority to Wells Fargo's general security interest.

In today's economic climate, we may hear of more disputes over competing security claims. Parties will need to consider the variety of options available to them in order to protect and enhance their security and property interests as much as possible.

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