Edge Petro Oprt Co v. GPR Holdings LLC, et al

United States Court of Appeals
Fifth Circuit
F I L E D
March 28, 2007
Charles R. Fulbruge III
Clerk
In the
United States Court of Appeals
for the Fifth Circuit
_______________
m 05-11492
_______________
IN THE MATTER OF:
TXNB INTERNAL CASE,
Debtor.
EDGE PETROLEUM OPERATING COMPANY, INC.,
Appellant,
VERSUS
GPR HOLDINGS, L.L.C.; AURORA NATURAL GAS, L.L.C.;
DUKE ENERGY TRADING AND MARKETING, L.L.C.;
GOLDEN PRAIRIE SUPPLY SERVICES, L.L.C.,
Appellees.
_________________________
Appeal from the United States District Court
for the Northern District of Texas
______________________________

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Before SMITH, BENAVIDES, and PRADO,
Circuit Judges.
JERRY E. SMITH, Circuit Judge:
Edge Petroleum Operating Company, Inc.
(“Edge”), appeals the summary judgment en-
tered in its conversion action against Duke En-
ergyTrading and Marketing, L.L.C. (“Duke”).
We affirm.
I.
Edge, a producer of natural gas, sold gas to
GPR Holdings, L.L.C. (“GPR”), Aurora Nat-
ural Gas, L.L.C. (“Aurora”), and Golden
Prairie SupplyServices, L.L.C. (“GPSS”) (col-
lectively “the debtors”), through its marketing
agent, Upstream Energy Services Company
(“Upstream”). The gas was delivered by pipe-
line in May and June 2001, and the debtors
were obliged by contract to pay Edge on the
twenty-fifth day of the month following deliv-
ery, i.e., on June 25 and July 25. The debtors
sold the gas to Duke, which resold it to third
parties. In the pipeline, the gas produced by
Edge was commingled with gas from other
producers; the gas has since been consumed.
Edge has not been paid for the gas, nor has
it filed any claim against the debtors in their
respective bankruptcy cases, which were filed
in August 2001. Instead, Edge sued Duke in
state court, seeking to recover the amount the
debtors owed for the gas and damages for
conversion of Edge’s security interest under
the Texas Mineral Lien Act.1 Edge and the
debtors allege that Duke has not paid the
debtors for the gas; Duke answers that it did
pay for the gas, based on the theory that it
overpaid the debtors in the months before May
2001 and, to offset its overpayment, accepted
delivery of gas in May and June 2001.
The debtors are suing Duke for payment for
the later deliveries in separate litigation.2 Edge
contends that even if Duke overpaid for the
earlier gas, the fact that it offset that payment
by failing to pay for Edge’s gas means that it
accepted Edge’s gas as payment for a debt,
and it thereby abrogated any possible status as
a holder in due course and subjected itself to
double liability in the case of conflicting deter-
minations by state and federal courts.3
Shortly before a scheduled trial in state
court, Duke removed to the United States Dis-
trict Court for the Southern District of Texas,
predicating jurisdiction on the bankruptcy of
Aurion Technologies, L.L.C. (“Aurion”),
which was the majority shareholder of Aurora
and was controlled by a common owner, Den-
nis McLaughlin III.4 Duke conceded in the
district court that its removal was untimely
with regard to the ongoing bankruptcy cases
1 See TEX. BUS. & COM. CODE ANN. § 9.343,
formerly id. § 9.319 before recodification in 2002.
The text of the statute and the existence of any ma-
terial difference between the codifications will be
discussed below.
2 See GPR Holdings, L.L.C. v. Duke Energy
Trading & Mktg., L.L.C. (No. 03-3430, Bankr.
N.D. Tex.).
3 See TEX. BUS. & COM. CODE §§ 1.-
201(9), 9.320(a).
4 Shortly before the instant suit was filed, Duke
alleged in separate state court proceedings that Mc-
Laughlin had acted through Aurora, GPR, GPSS,
and Aurion to defraud it by accepting payment for
gas that he never intended to deliver, through a
scheme that induced Duke to pay twice the agreed-
upon price for each shipment: one full payment to
Aurora and one full payment to one of McLaugh-
lin’s other companies.

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3
of all the debtors other than Aurion. Edge ac-
knowledges that removal would be timely with
respect to the bankruptcy of Aurion but claims
that it is not seeking to enforce a lien on the
proceeds from the sale of any gas that may
have passed from Edge through Aurion, so
this case is not related to Aurion’s bankruptcy.
Unlike GPR, GPSS, and Aurora, Aurion has
not intervened in the instant case.
The Southern District court ruled, in re-
sponse to Edge’s first motion for remand, that
this matter is related to the Aurion bankruptcy
proceedings and thus that removal was timely.
It then transferred the case to the United
States District Court for the Northern District
of Texas, where Edge renewed its motion for
remand (either for lack of jurisdiction or
abstention), which was once again denied, this
time by the bankruptcy court. Edge then
consented to jurisdiction in the bankruptcy
court rather than the district court.
The bankruptcy court granted the debtors’
motion to intervene. The debtors asserted that
they are the real party in interest to Edge’s
lawsuit, because Edge is seeking to enforce a
lien against property owned by them in the
form of accounts receivable. The bankruptcy
court granted summary judgment in favor of
Duke and the debtors, reasoning that, even ac-
cepting, arguendo, that Edge possessed a valid
lien, Edge sought to enforce that lien against
the debtors’ accounts receivable.
Hence, the bankruptcy court held that the
action was automatically stayed,5 and it de-
clined to grant leave from the stay. The court
then ruled that Texas state law did not permit
Edge to enforce its possible security interest
via a conversion action against Duke. The
court found a disputed issue of material fact as
to whether Edge had a security interest.
Edge perceived, in the bankruptcy court’s
opinion, a determination that Edge did, in fact,
hold a security interest in the proceeds from
sale of the gas, so Edge moved for amendment
of the summary judgment order to reflect such
a finding. The court explained that it had de-
termined that Edge possessed a security inter-
est in whatever proceeds were actually due to
the first purchaser but that such determination
did not imply summary judgment that Edge
had any security interest in the proceeds of the
sale currently in possession of Duke; the court
declined to amend its order.
The district court affirmed the bankruptcy
court without separate opinion. Edge now ap-
peals only in regard to its conversion action to
enforce its lien; in the summary judgment pro-
ceeding, Edge did not address the action to re-
cover the purchase price of the gas.
II.
We first address subject matter jurisdiction,
which is a question of law that we review de
novo. See McKnight v. Comm’r, 7 F.3d 447,
450 (5th Cir. 1993). Although Edge alleges
that it seeks assets from Duke solely under
state law, there is federal jurisdiction because
of implications for the debtors’ estates.6
5 See 11 U.S.C. § 362(a)(3), (4), (5) and (6)
(staying, automatically upon filing of a bankruptcy
petition, creditors’ actions to exercise control over
property of the bankruptcy estate and to collect or
recover on a pre-bankruptcy petition claim).
6 Duke asserts that Edge waived any jurisdic-
tional objection by consenting to trial in bank-
ruptcy court, but this argument is meritless accord-
ing to the well settled doctrine that federal subject
matter jurisdiction may be challenged at any time
on appeal; “parties cannot waive a want of subject
(continued...)

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Duke removed pursuant to 28 U.S.C.
§ 1452, which allows removal of claims where
federal jurisdiction arises under 28 U.S.C.
§ 1334. Section 1334(b) provides for federal
jurisdiction over proceedings “related to” cas-
es arising under the Bankruptcy Code. We
have read this jurisdictional grant broadly, stat-
ing that the test for whether a proceeding
properly invokes federal “related to” jurisdic-
tion is whether the outcome of the proceeding
could conceivably affect the estate being ad-
ministered in bankruptcy. See Arnold v. Gar-
lock, Inc., 278 F.3d 426, 434 (5th Cir. 2001).
Certainty is unnecessary; an action is “related
to” bankruptcy if the outcome could alter, pos-
itively or negatively, the debtor’s rights, liabil-
ities, options, or freedom of action or could
influence the administration of the bankrupt
estate. See Feld v. Zale Corp. (In re Zale
Corp.), 62 F.3d 746, 752 (5th Cir. 1995).
The district court appears to have assumed
that, if this case merely involved a claim by
Edge against Duke’s assets, there would be no
federal jurisdiction.7 The court determined,
however, that Edge’s rights extend only to a
lien on “the identifiable proceeds of that pro-
duction owned by, received by, or due to [the
debtors].” See TEX. BUS. & COM. CODE ANN.
§ 9.343(c). Because the district court rea-
soned that any assets in Duke’s possession on
which Edge had a lien must at least be “due to
[the debtors],” it ruled that this case relates to
the bankruptcy estates and properly invokes
federal jurisdiction.
Although, as we explain, this case involves
only a claim against Duke’s assets, the district
court was wrong to assume that a claim by
Edge solely against Duke’s property does not
relate to the debtors’ bankruptcy proceedings.
Someone owes Edge money for the gas; if it is
not Duke, it is the debtors. See id.. If it is
Duke, then Duke will have discharged a liabil-
ity of the debtors and, as the bankruptcy court
recognized, probably will file a claim against
the debtors’ estates for reimbursement. Al-
though there likely would be no change in the
amount of liability claimed against the debtors,
Duke and Edge presumably had different con-
tractual arrangements with the debtors and dif-
ferent statutory bases for their claims.
For example, Edge holds a secured gas pro-
ducer’s lien, but Duke does not. See § 9.-
343(a). Because of these divers contractual
and statutory frameworks, the identity of the
party that the debtors owe for Edge’s gas is
likely to affect the administration of the debt-
ors’ estates and may alter the debtors’ rights
and liabilities. Under the lenient test set forth
above, that possibility is sufficient to confer
federal jurisdiction.
III.
Edge urges that we order a remand to state
court because Duke’s removal was untimely.
We disagree.
Duke contends, as it did with respect to
subject matter jurisdiction, that Edge waived
any objection to the timeliness of removal by
consenting to bankruptcy court jurisdiction.
Timeliness of removal is a procedural rather
than a jurisdictional issue and, accordingly,
may be waived by an untimely objection. See
Hartford Accident & Indem. Co. v. Costa
Lines Cargo Servs., Inc., 903 F.2d 352, 359-
6(...continued)
matter jurisdiction.” Hospitality House, Inc. v.
Gilbert, 298 F.3d 424, 429 (5th Cir. 2002).
7 As the bankruptcy court explained, “If Edge
were only pursuing a cause of action against
Duke’s property, this proceeding would not be re-
lated to the Debtors’ bankruptcies and there would
be no basis for federal jurisdiction.”

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5
60 (5th Cir. 1990). Here, however, Edge’s
objection was timelySSit came only six days af-
ter removalSSand the fact that Edge was will-
ing to have its case tried by the bankruptcy
court rather than the district court after its ob-
jections to removal and the timeliness thereof
were overruled does not serve to waive those
objections.
Although removal was timely solely with
respect to Aurion’s bankruptcy petition, and
Aurion bore an attenuated relationship to the
parties, the test for “related to” bankruptcy
jurisdiction is sufficiently broad to provide fed-
eral jurisdiction for this case by relating it sole-
ly to Aurion’s bankruptcy. Because this lit-
igation related to Aurion’s bankruptcy peti-
tion, removal was timely.
In response to Edge’s arguments concern-
ing the timeliness of removal, the district court
found that Aurion was the assignee of certain
of Aurora’s contractual rights arising from its
sale of gas to Duke. We review this finding of
fact for clear error, see Bass v. Denney (In re
Bass), 171 F.3d 1016, 1021 (5th Cir. 1999),
and we decline to upset it on appeal. Even if
Aurion is not subject to Aurora’s liabilities (a
matter about which we express no opinion),
the outcome of this case could affect Aurion’s
recovery from Duke in the separate litigation
involving Duke and the debtors. This litiga-
tion thus relates to Aurion’s bankruptcy, and
Duke’s removal within ninety days of the order
for relief stemming from Aurion’s bankruptcy
petition was timely. See FED. R. BANKR. P.
9027(a)(2)(A).
IV.
Edge argues that the district court was re-
quired by the mandatory abstention provision
applicable to non-core bankruptcy proceedings
to abstain from adjudicating this case. See 28
U.S.C. § 1334(c)(2). We review the decision
not to abstain for abuse of discretion.8 South-
mark Corp. v. Coopers & Lybrand (In re
Southmark Corp.), 163 F.3d 925, 929 (5th
Cir. 1999). The court did not abuse its discre-
tion, though our conclusion is not predicated
on any argument advanced by the parties or
expressly relied on by the district court in its
discussion of abstention.9
Section 1334(c)(2) reads as follows:
Upon timely motion of a party in a pro-
ceeding based upon a State law claim or
State law cause of action, related to a case
under title 11 but not arising under title 11
or arising in a case under title 11, with re-
spect to which an action could not have
been commenced in a court of the United
States absent jurisdiction under this section,
the district court shall abstain from hearing
such proceeding if an action is commenced,
and can be timely adjudicated, in a State
forum of appropriate jurisdiction.
28 U.S.C. § 1334(c)(2). We have interpreted
this provision to mandate federal court absten-
tion where “(1) [t]he claim has no independent
basis for federal jurisdiction, other than
§ 1334(b); (2) the claim is a non-core proceed-
8 Again, we stress that Edge did not waive its
arguments on mandatory abstention by consenting
to bankruptcy court jurisdiction. Edge waived any
right it had to trial in district court rather than
bankruptcy court under 28 U.S.C. § 157 but did
not waive its contention that federal courts should
abstain from adjudicating this case. See FDIC v.
Majestic Energy Corp. (In re Majestic Energy
Corp)., 835 F.2d 87, 90 (5th Cir. 1988).
9 We may affirm for any reason supported by
the record, even if not relied on by the district
court. LLEH, Inc. v. Wichita County, Tex., 289
F.3d 358, 364 (5th Cir. 2002).

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6
ing, i.e., it is related or in a case under title 11;
(3) an action has been commenced in state
court; and (4) the action could be adjudicated
timely in state court.” Schuster v. Mims (In re
Rupp & Bowman), 109 F.3d 237, 239 (5th Cir.
1997). Section 1334(b) provides for federal
jurisdiction over cases arising under or related
to the bankruptcy code.
Edge’s complaint gives rise to two claims:
one that is a core proceeding and another that
is supplemental to it and eligible for federal
jurisdiction under 28 U.S.C. § 1367(a). Bank-
ruptcy courts may not exercise supplemental
jurisdiction. See Walker v. Cadle Co. (In re
Walker), 51 F.3d 562, 570 (5th Cir. 1995).
Section 1334(c)(2), however, addresses ab-
stention by district courts. Section 1367(a)
provides for supplemental jurisdiction (subject
to irrelevant exceptions) over claims forming
part of the same case or controversy with “any
civil action over which the district courts have
original jurisdiction.” This includes bankrupt-
cy jurisdiction.10 It follows that district courts
have supplemental jurisdiction over claims that
form part of the same case or controversy with
bankruptcy claims. See Publicker Indus. v.
United States, 980 F.2d 110, 114-15 (2d Cir.
1992).
Because neither of Edge’s claims meets the
criteria of the Schuster test, the bankruptcy
and district courts were correct in refusing to
abstain. When this case was removed and the
district court reconsidered its jurisdiction, the
court was appropriately wary of the breadth of
Edge’s complaint.11 The court noted that the
complaint was drafted broadly enough to pro-
vide the right to pursue a claim against the
proceeds of the sale from the debtors to Duke
as well as the proceeds from the sale from
Duke to third parties.12
If Edge was not pursuing both theories, it
should have sought leave to amend its com-
plaint rather than confuse the lower courts into
addressing both theories. Federal question jur-
isdiction must be determined from the face of
a well-pleaded complaint. See Louisville &
Nashville R.R. v. Mottley, 211 U.S. 149, 152
(1908). The district court was correct not to
remand the possible claim against the proceeds
of the sale from the debtors to Duke; these
would have been accounts receivable by the
debtors, and claims against them would be
core bankruptcy proceedings not entitled to
mandatory abstention.13
10 See § 1334(a) (stating that subject to a pro-
vision for concurrent jurisdiction in the bankruptcy
courts, “the district courts shall have original and
exclusive jurisdiction of all cases under title 11”).
11 The court quoted the complaint’s statement
that “[t]his is an action for recovery of the value
(contract price) of a volume of Texas gas, or pro-
ceeds thereof that Edge as the producer sold, but
for which it has not been paid.”
12 See Cohen v. Rains, 769 S.W.2d 380, 384-85
(Tex. App.SSFort Worth 1989, writ denied)
(“[W]hen a debtor is in default a secured party is
not required to elect which of these rights he wishes
to pursueSShe may take any permitted action or
combination of actions.”).
13 See 28 U.S.C. § 157(b)(E) (defining “orders
to turn over property of the estate” as within “core”
federal bankruptcy jurisdiction); Schuster, 109
F.3d at 239 (stating that core matters fail prong
two of the test recounted above); Southmark, 163
F.3d at 932 (explaining that matters within core
bankruptcy jurisdiction are subject to discretionary
rather than mandatory abstention). As Edge
acknowledges, the district court’s refusal to abstain
(continued...)

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Edge also was not entitled to abstention on
its claim against the proceeds of Duke’s sale to
third parties, because mandatory abstention
applies solely to claims giving rise to federal
jurisdiction under no provision other than
§ 1334. Edge’s claim against the proceeds
from Duke’s sale to third parties does not
meet that requirement, because it arises from
“a common nucleus of operative fact” with the
claim against the debtors’ accounts receivable
and is thus a supplemental claim giving rise to
jurisdiction under § 1367(a).14
The fact that Edge ultimately waived the
merits of its federal-question claim and pressed
only its supplemental claim did not affect the
propriety of abstention vel non, because
Edge’s loss on the merits of its federal ques-
tion claim did not operate to defeat the district
court’s independent basis for jurisdiction over
the supplemental claim.15 In sum, the com-
plaint gave rise to two claims; because Edge’s
non-core claim was supplemental to the core
claim it could have pressed, and because
§ 1367(a) continued to provide an independent
basis for federal jurisdiction even after Edge
had waived the merits of its core bankruptcy
claim, abstention was inappropriate.
V.
Edge contests the bankruptcycourt’s ruling
that this action was automatically stayed under
11 U.S.C. § 362(a). We review the court’s in-
terpretation of the statute de novo. South-
mark, 163 F.3d at 929. Section 362(a) oper-
ates to stay only actions against bankruptcy
petitioners and their property. Because Edge’s
claim for conversion against Duke lies against
a non-debtor and does not implicate the prop-
erty of the debtors, the bankruptcy court erred
by staying it.
Section 362(a) recounts a long list of ac-
tions that are stayed by the filing of a bank-
ruptcy petition. The provision does not apply,
however, to actions not directed against the
debtor or property of the debtor. See Arnold
v. Garlock, Inc., 278 F.3d 426, 436 (5th Cir.
2001). The bankruptcy court determined that,
should the proceeding between Duke and the
debtors result in a finding that Duke had not
paid the debtors for the gas, Edge’s claim
would be against accounts receivable by the
debtors and thus would be stayed as an action
against the debtors’ property.
The court misinterpreted Edge’s claim.
Edge argues that Duke is liable to it independ-
ently of whether Duke has paid the debtors,
because (1) § 9.343 provides a lien that fol-
lows the gas or proceeds from sale thereof
until cut off by a sale in the ordinary course of
business or payment to the lienholder;
(2) Edge has not been paid for the gas; and
(3) Duke did not cut off Edge’s lien by trans-
acting in the ordinary course of business.
Under this theory, Edge’s rights hinge on
whether the manner in which Duke transacted
with the debtors immunized Duke, as a holder
in due course, from liability to Edge. Though
relevant, the factual matter at issue in the debt-
ors’ suit against DukeSSwhether Duke paid for
the gasSSis not dispositive of the holder-in-
due-course issue. Edge contends that § 9.343
13(...continued)
as a matter of discretion pursuant to § 1334(c)(1)
is unreviewable on appeal. See § 1334(d).
14 See United Mine Workers v. Gibbs, 383 U.S.
715, 725 (1966); Schuster, 109 F.3d at 239.
15 See § 1367(c) (providing for discretionary ab-
stention rather than lack of jurisdiction over sup-
plemental claims where the claim giving rise to
original jurisdiction (federal question, diversity or
admiralty) has been dismissed on the merits).

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8
imposes liability on Duke even if it paid the
debtors but did not do so in the ordinary
course of business and did not comply with the
statutory safe harbors. Edge’s claim thus lies
against the proceeds of Duke’s sale of the gas
to third parties (the sale that, according to
Edge, cut off its lien on the gas) rather than
against any accounts receivable by the debtors.
It is true, as noted above in the discussion
of subject matter jurisdiction, that a successful
claim by Edge against Duke would probably
result in a lawsuit by Duke against the debtors
seeking indemnification for Duke’s payment of
the debtors’ debt to Edge. Edge, however,
has framed its claim so that the merits of that
probable litigation are not Edge’s problem.
Regardless of whether Edge’s reading of Tex-
as law is correct, its claim is not directed
against the debtors’ property and is not subject
to a stay under § 362(a).
VI.
A.
We agree with the district court that Edge
has demonstrated that there is a disputed issue
of material fact as to whether it has a gas pro-
ducer’s lien on the proceeds of Duke’s sale of
the gas, but that Edge may not recover from
Duke via an action for conversion. Because
the viability of a conversion action depends
critically on the nature of the property alleg-
edly converted, we address whether Edge ar-
guably has a lien at all.
The issue of whether Edge has a gas pro-
ducer’s lien on the proceeds of Duke’s sale of
the gas raises two subsidiary questions:
(1) Does Texas law, under any circumstances,
provide Edge with a lien that could be en-
forced against the proceeds of a sale of its gas
to a third party by a downstream purchaser
such as Duke; and (2) assuming Texas law
provides for a lien against a downstream pur-
chaser, do the facts of this case arguably sup-
port the conclusion that Edge has one against
Duke? See Anderson v. Liberty Lobby Inc.,
477 U.S. 242, 248-49 (1986). We discuss
only whether Texas law allows for a produ-
cer’s lien on gas or the proceeds from resale
thereof that is enforceable against a down-
stream purchaser such as Duke. We do not
consider whether a lien was created in Edge,
because we conclude that, on the facts before
us, the legal nature of the lien renders it unen-
forceable via an action for conversion.
B.
Section 9.343 is the successor of a nonuni-
form addition to Texas’s commercial code de-
signed to provide security protection for royal-
ty owners and producers when first purchasers
go bankrupt.16 The statute reads in relevant
part as follows:
(a) This section provides a security inter-
est in favor of interest owners, as secured
parties, to secure the obligations of the first
purchaser of oil and gas production, as
debtor, to pay the purchase price. An au-
thenticated record giving the interest owner
a right under real property law operates as
a security agreement created under this
chapter. The act of the first purchaser in
signing an agreement to purchase oil or gas
16 See Cynthia G. Grinstead, Note, The Effect of
Texas U.C.C. Section 9.319 on Oil and Gas Se-
cured Transactions, 63 TEX. L. REV. 311, 311
(1984). Duke alleges that the prior codification of
these sections governed at the time of the transac-
tions at issue and that the prior codification differs
in material respects. Duke concedes, however, that
the former § 9.319 is identical to § 9.343; it argues
instead that other referenced sections are critically
different. Like the parties and courts a quo, we re-
fer to the current codification and mention any
changes where relevant.

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9
production, in issuing a division order, or in
making any other voluntarycommunication
to the interest owner or any governmental
agency recognizing the interest owner’s
right operates as an authentication of a
security agreement in accordance with
Section 9.203(b) for purposes of this chap-
ter.
(b) The security interest provided by this
section is perfected automatically without
the filing of a financing statement. . . .
(c) The security interest exists in oil and
gas production, and also in the identifiable
proceeds of that production owned by, re-
ceived by, or due to the first purchaser:
(1) for an unlimited time if:
(A) the proceeds are oil or
gas production, inventory of
raw, refined, or manufactured
oil or gas production, or rights
to or products of any of those,
although the sale of those pro-
ceeds by a first purchaser to a
buyer in the ordinary course of
business as provided in Sub-
section (e) cuts off the security
interest in those proceeds;
(B) the proceeds are ac-
counts, chattel paper, instru-
ments, documents, or payment
intangibles; or
(C) the proceeds are cash
proceeds, as defined in Section
9.102; and
(2) for the length of time provided in
Section 9.315 for all other proceeds.
(d) This section creates . . . a lien that
secures the rights of any person who would
be entitled to a security interest under Sub-
section (a) except for lack of any adoption
of a security agreement by the first pur-
chaser or a lack of possession or record re-
quired by Section 9.203 for the security
interest to be enforceable.
(e) The security interests and liens cre-
ated by this section have priority over any
purchaser who is not a buyer in the ordi-
nary course of the first purchaser’s busi-
ness, but are cut off by the sale to a buyer
from the first purchaser who is in the ordi-
nary course of the first purchaser’s business
under Section 9.320(a). But in either case,
whether or not the buyer from the first pur-
chaser is in ordinary course, a security in-
terest will continue in the proceeds of the
sale by the first purchaser as provided in
Subsection (c). . . .
(l) A first purchaser who acts in good
faith may terminate an interest owner’s se-
curity interest or statutory lien under this
section by paying, or by making and keep-
ing open a tender of, the amount the first
purchaser believes to be due to the interest
owner:
(1) if the interest owner’s rights are
to oil or gas production or its pro-
ceeds, either to the operator alone, in
which event the operator is considered
the first purchaser, or to some combi-
nation of the interest owner and the
operator, as the first purchaser choos-
es;
(2) whatever the nature of the pro-
duction to which the interest owner
has rights, to the person that the inter-
est owner agreed to or acquiesced in;

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10
or
(3) to a court of competent jurisdic-
tion in the event of litigation or bank-
ruptcy.
(m) A person who buys from a first pur-
chaser can ensure that the person buys free
and clear of an interest owner’s security in-
terest or statutory lien under this section:
(1) by buying in the ordinary course
of the first purchaser’s business from
the first purchaser under Section
9.320(a);
(2) by obtaining the interest owner’s
consent to the sale under Section
9.315(a)(1);
(3) by ensuring that the first pur-
chaser has paid the interest owner or,
provided that gas production is in-
volved, or the interest owner has so
agreed or acquiesced, by ensuring that
the first purchaser has paid the interest
owner’s operator; or
(4) by ensuring that the person or the
first purchaser or some other person
has withheld funds sufficient to pay
amounts in dispute and has maintained
a tender of those funds to whoever
shows himself or herself to be the per-
son entitled.
TEX. BUS. & COM. CODE ANN. § 9.343.
The commentary to § 9.320(a), which is
referenced by § 9.343(m) quoted above, ex-
plains that its definition of “buyer in the ordi-
nary course of business” derives from TEX.
BUS. & COM. CODE § 1.201(9). See § 9.320,
cmt. 3. Section 1.201(9)(b), in turn, defines
“buyer in the ordinary course of business”:
[A] person that buys goods in good faith,
without knowledge that the sale violates
the rights of another person, other than a
pawnbroker, in the business of selling
goods of that kind. A person buys in the
ordinary course if the sale to the person
comports with the usual or customary
practices of the kind of business in which
the seller is engaged or with the seller’s
own usual or customary practices. A per-
son that sells oil, gas, or minerals at the
wellhead or minehead is a person in the
business of selling goods of that kind. . . .
Only a buyer that takes possession of the
goods or has a right to recover the goods
from the seller under Chapter 2 may be a
buyer in the ordinary course of business.
“Buyer in the ordinary course of business”
does not include a person that acquires
goods in a transfer in bulk or as security
for or in total or partial satisfaction of a
money debt.
(Emphasis added.)
Edge’s claim may be summarized as fol-
lows: (1) that it had an interest in the gas cre-
ated by subsection (a); (2) that the interest was
not defeated by any notification requirement in
light of the minimal nature of the requirements
established by subsections (b) and (d); (3) that
the interest followed the gas and thus attached
to the proceeds of the sale to third parties pur-
suant to subsection (c); and thus (4) the inter-
est was not limited to the proceeds of the sale
by the debtors to Duke as provided in subsec-
tion (e), because (5) the debtors did not cut off
Edge’s lien by taking any of the actions speci-
fied in subsection (1); and (6) Duke did not cut
off Edge’s lien by taking any of the actions
specified in subsection (m). Edge asserts that
it has three sources of collateral: (1) the gas

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that Edge sold to the debtors and the debtors
sold to Duke; (2) the debtors’ accounts receiv-
able after the sale of the gas to Duke; and
(3) the cash proceeds that Duke received from
the sale of the gas to the third parties.17 The
gas is now gone, but Edge asserts that it may
recover for conversion of either the gas or the
proceeds from Duke’s sale thereof.18
According to Duke, Edge’s suit is barred
because (1) any claim brought by Edge against
Duke under the statute actually belongs to the
debtors; or (2) the claim seeks to recover the
property of the debtors’ estates.19 Duke alleg-
es that Edge lacks standing, as a matter of law,
to bring a claim against it under the statute,
because subsection (c), quoted above, states
that the lien inheres in “proceeds of that pro-
duction owned by, received by, or due to the
first purchaser.” § 9.343(c). Duke reasons
that because Edge alleges that Duke holds pro-
ceeds due to the debtors, it is asserting a harm
to the debtors rather than to itself and has no
standing to bring its claim.
We disagree. Edge does not assert harm to
the debtors by alleging that Duke converted its
security interest by selling the gas free and
clear to a third party. Because the security
interest was Edge’s property, provided by
§ 9.343(a), Edge asserts harm only to itself,
and because only Edge, as a gas producer, en-
joys the statutory protection of § 9.343, only
Edge has standing to assert a conversion claim
with respect to that interest.20
“Whether a particular state cause of action
belongs to the [debtor’s] estate depends on
whether under applicable state law the debtor
could have raised the claim as of the com-
mencement of the case.” Schertz-Cibolo-Uni-
versal City Indep. Sch. Dist. v. Wright (In re
Educators Group Health Trust), 25 F.3d
1281, 1284 (5th Cir. 1994). Only Edge could
assert a producer’s lien against the proceeds
from sale of the gas; neither the debtors nor
any other plaintiff had one. Edge does not and
need not assert that Duke converted or other-
wise improperly acquired the debtors’ prop-
erty. Instead, it must and does assert only that
Duke acquired the property outside the ordi-
nary course of business (for example by ac-
cepting it in return for a debt) and thus ac-
quired it subject to a lien. See § 1.201(b)(9).
When Edge accuses Duke of converting that
lien, it asserts that Duke improperly exercised
dominion over its property, and it presses a
claim that it has standing to bring.21
17 See TEX. BUS. & COM. CODE ANN. § 9.315-
(a)(2) (providing for the continuation of a security
interest in the proceeds of the sale of secured col-
lateral).
18 Edge also claims that it could recover from
the proceeds, in the form of accounts receivable by
the debtors from Duke, from the sale by the debtors
to Duke of the gas. As we have said, Edge has not
pressed this claim, so it is not addressed here.
19 See Adacom Corp. v. Byrne (In re Schimmel-
penninck), 183 F.3d 347, 350-51 (5th Cir. 1999);
S.I. Acquisition, Inc. v. Eastway Delivery Serv.,
Inc. (In re S.I. Acquisition, Inc.), 817 F.2d 1142,
1150 (5th Cir. 1987).
20 See Lively v. Carpet Servs., Inc., 904 S.W.2d
868, 874 (Tex. App.SSHouston [1st Dist.] 1995,
writ denied) (reasoning that where statute granted
property right to creditor rather than bankrupt
debtor, that right was enforceable by creditor
against non-bankrupt defendant).
21 See Russell v. Am. Real Estate Corp., 89
S.W.3d 204, 210 (Tex. App.SSCorpus Christi
2002, no pet.) (definition of conversion); Schertz-
Cibolo-Universal City, 25 F.3d at 1284 (stating
(continued...)

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Duke contends that this interpretation of
the statute effectively creates strict liability for,
and a live claim against, a stream of distant,
downstream purchasers. Duke points out that
gas traders frequently have few assets other
than their accounts receivable and contends
that the statute was passed to protect produc-
ers against secured creditors of bankrupt trad-
ers that provided working capital for the trades
and seized all assets upon bankruptcy or fail-
ure of the trading company. See Grinstead,
supra, 63 TEX. L. REV. at 311. Our interpre-
tation, however, reads the statute to protect
against a conceptually similar problem: self-
help remedies bydownstream creditors such as
Duke who seize all the assets of a trading
company and leave nothing left with which the
bankrupt trader can repay the producer. Duke
supplies no alternative explanation of the debt-
collection exception to the holder-in-due-
course rule, and the academic commentarythat
it cites is concerned mainly with whether the
interest in proceeds supplied by subsection (c)
is continuously perfected, not with whether a
producer’s lien on the gas may be enforced
against a downstream purchaser.
Duke protests that, even if § 9.343(c) pro-
vided Edge with a lien on the gas, that lien did
not transfer to the proceeds from Duke’s re-
sale of the gas under TEX. BUS. & COM. CODE
ANN. § 9.315(a)(2), which provides for a se-
curity interest in the sale of secured property.
Duke asserts that § 9.315 must be read in con-
junction with § 9.343(c) and emphasizes that
§ 9.315(a) provides that a security interest
shall attach to proceeds of sale of property in
which a creditor has a security interest only
“except as otherwise provided in this chapter
. . . .” Duke then urges that § 9.343(c) limits
liens on proceeds from sale of the gas to pro-
ceeds due to the first purchaser. We, how-
ever, see no inconsistency among the provi-
sions.
Section 9.343(c)’s provision of a lien upon
proceeds due to the first purchaser is an ad-
dition to, rather than a limitation on, the lien
on the gas. The fact that § 9.343(c) creates
two liensSSone on the gas and one on the pro-
ceeds due to the first purchaser from its sale
SSdoes not mean that the second lien operates
to limit the recourse that may be had under the
first. Section 9.343(c) provides that a gas pro-
ducer may pursue recourse on its lien on the
gas or the proceeds due the first purchaser,
and § 9.315 provides that, should the producer
pursue its lien on the gas, it also has a lien on
the proceeds from resale of the gas by a down-
stream purchaser who resells the gas and
whose purchase did not cut off the lien. Edge
thus arguably (depending on the facts) pos-
sessed a lien on the gas and the proceeds from
Duke’s resale thereof.
VII.
Edge, however, cannot recover its alleged
security interest through an action for conver-
sion against Duke. To show conversion, Edge
must prove that Duke improperly exercised
dominion over its security interest in the gas or
the money (the proceeds of Duke’s resale of
the gas). Unfortunately for Edge, it cannot
prove that Duke behaved improperly by resell-
ing the gas, and an action for conversion of
money is available only in limited circum-
stances that are not present here.
A.
Edge contends, without merit, that Duke
converted its interest in the gas by reselling it
free and clear of Edge’s security interest. To
21(...continued)
that creditor has standing to assert claim against
non-bankrupt debtor for injury to itself caused by
the non-bankrupt debtor).

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establish conversion, Edge must prove that
(1) it owned or had a right to possession of the
property; (2) the defendant assumed and ex-
ercised dominion and control over the prop-
erty inconsistent with plaintiff’s rights; and
(3) the defendant refused plaintiff’s demand
for return of the property. See Russell, 89
S.W.3d at 210. At the time Duke exercised
dominion over the gas, payment for the gas
had not yet come due, and Edge had no right
to enforce its interest in the gas. See ITT
Commercial Fin. Corp. v. Bank of the West,
166 F.3d 295, 305 n.16 (5th Cir. 1999). Edge,
however, contends that Duke’s reselling the
gas in the ordinary course of business, free of
the encumbrance of Edge’s security interest,
constituted conversion. Edge further alleges
that this repudiation of Edge’s rights was so
blatant and egregious as to foreclose any need
for Edge to have demanded return of its prop-
erty. We disagree.
It is true that Texas law recognizes some
circumstances in which the repudiation of
property rights is so blatant as to excuse the
need for a demand in order to maintain an ac-
tion for conversion. See Loomis v. Sharp, 519
S.W.2d 955, 958 (Tex. App.SSTexarkana
1975, writ denied). This is not one of them.
Damningly, Edge does not cite a single case in
which a party has recovered on a security in-
terest supplied by § 9.343 in an action for con-
version against a first purchaser, much less a
downstream possessor such as Duke. The
bankruptcy court found that Edge’s sale to the
debtors, consistent with prevailing practices in
the gas industry, constituted implied consent
to resale of the gas, before the due date of the
payment, to downstream purchasers in the or-
dinary course of business. There is no reason
to upset that finding on appeal.
Edge mounts two responses. First, it ar-
gues that implied consent is not sufficient to
defeat a security interest holder’s rights.22
Second, it contends that, even if it did impli-
edly consent to resale of the gas, it did not im-
pliedly consent to resale free and clear of its
security interest. Although we acknowledge
that rhetorical cannonballs can be hurled on
both sides,23 the bankruptcy court’s analysis of
Edge’s expectations, in light of the prevailing
practices in the oil and gas industry, is persua-
sive. And if Edge consented to resale of the
gas in the ordinary course of business, its ar-
gument that it did not consent to the cutting
off of its security interest at some point down-
stream is without merit, because that cutting
off of the upstream security interest is a direct
consequence of such sales. See § 9.343(e).
In any event, it is difficult to see how
Duke’s actions could be so egregiously viola-
tive of Edge’s rights as to foreclose the need
for a demand, which Edge has not made.
Duke resold the gas before payment under a
contract to which it was not privy came due.
Conversion generally takes place only after re-
fusal of a demand for return of the property,
and only extraordinary circumstances excuse
the need for a demand. See Permian Petro-
leum Co. v. Petroleos Mexicanos, 934 F.2d
22 See Conoco Inc. v. Amarillo Nat’l Bank, 950
S.W.2d 790, 796 (Tex. App.SSAmarillo 1997)
(“To establish that a secured party consented to a
transfer of collateral and thereby waived his se-
cured claim by implication there must be a clear,
unequivocal, and decisive act of the party showing
such a purpose or acts amounting to estoppel on
his part.”), rev’d on other grounds, 966 S.W.2d
853 (Tex. 1999).
23 See, e.g., Pan Eastern Exploration Co. v.
Hufo Oils, 855 F.2d 1106, 1125 (5th Cir. 1988)
(explaining that the defendant’s taking “must be
wholly without the owner’s sanction or assent, ei-
ther expressly or impliedly”).

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635, 651 (5th Cir. 1991). Duke, which never
even had notice of Edge’s rights, could hardly
be said to have used the property so inconsis-
tently with the manner in which it was received
as to assert a property right inconsistent with
that of the owner. See Pierson v. GFH Fin.
Servs. Corp., 829 S.W.2d 311, 314 (Tex. App.
SSAustin 1992, no writ). Because Edge’s im-
plied consent to resale and failure to demand
return of its security interest in the gas defeat
its claim for conversion of the gas, we do not
address Duke’s alternative argument that it did
not convert the gas because, on account of the
gas’s physical presence in the pipeline, Duke
never possessed it.
B.
As with its interest in the gas, Edge may
not recover on its interest in the proceeds from
Duke’s sale of the gas through an action for
conversion. Actions for conversion of money
are available in Texas only where “money is
(1) delivered for safekeeping; (2) intended to
be kept segregated; (3) substantially in the
form in which it is received or an intact fund;
and (4) not the subject of a title claim by the
keeper.” Edlund v. Bounds, 842 S.W.2d 719,
727 (Tex. App.SSDallas 1992, writ denied).
Edge’s argument that Duke, upon resale of
the gas, was in the position of a trusteeSShold-
ing Edge’s money pending payment by the
debtorsSSis somewhat feeble. This case is
similar to Mitchell Energy Corp. v. Samson
Res. Co., 80 F.3d 976, 983-84 (5th Cir. 1996),
in which we ruled that a cotenant on a mineral
estate could not maintain an action for conver-
sion of money where its cotenant had with-
drawn gas from the ground, sold the gas, and
refused to turn over the proper share of the
proceeds. The bankruptcy court was correct
to recognize that a party that benefits from
proceeds subject to a statutory lien may be lia-
ble for conversion of such proceeds only if it
has notice of the lien, then accepts and benefits
from the proceeds. See Home Indem. Ins. v.
Pate, 814 S.W.2d 497, 498-99 (Tex. App.SS
Houston [1st Dist.] 1991, writ denied).
The bankruptcy court found that Edge had
put forth no summary judgment evidence indi-
cating that Duke had notice that Edge held the
lien and that Edge had not been paid by the
debtors. Edge does not challenge that conclu-
sion but alleges that Duke’s knowledge of
§ 9.343 was enough notice to put it in the
shoes of a trustee. Duke’s notice, however,
was not even close to those in Texas cases in
which trustees have improperly disposed of as-
sets.24 Duke knew or may be presumed to
have known the law, but did not know that
Edge was owed the money. Without more,
Edge cannot overcome Texas courts’ tradi-
tional hostility to claims for conversion of
money.
Edge alleges that our construction of the
statute renders its rights nugatory. Our inter-
pretation, however, does not foreclose credi-
tors such as Edge from pursuing actions for
collection; creditors are cut off only from ac-
tions for conversion with the attendant possi-
bility of punitive damages against downstream
property holders without notice of the produ-
cer’s claims or the failure of the first purchaser
to fulfill its contractual obligations. This is a
reasonable construction of the statute and best
approximates the legislative intent.
The judgment of the district court, affirm-
ing the bankruptcy court, is AFFIRMED.
24 See Prewitt & Sampson v. City of Dallas,
713 S.W.2d 720, 722 (Tex. App.SSDallas 1986,
no writ) (in which attorney improperly disbursed
funds he knew to be due to insurance carrier).

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