In a recent decision related to the SemCrude bankruptcy, the federal district court upheld the Bankruptcy Court’s rulings on the efficacy of certain common risk-mitigation tools used in the energy trading and marketing business – namely product payment netting and cross-product setoff upon liquidation and closeout. The decision comes amid long-running challenges from producers who had sold product to the SemGroup entities on credit. Failure to uphold these netting practices in favor of the producers’ assertions of the priority of their unrecorded liens would have caused a significant disruption to the energy supply chain. Even so, practical lessons may be taken from the decision: (i) it is important for purchasers of product from a counterparty of questionable credit to check for recorded producer liens before doing business with such counterparties, and (ii) in a bankruptcy involving companies like SemGroup, downstream purchasers may want to consider filing protective claims for potential breaches by the debtor of representations related to title to the product being sold.
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