J. Aron & Co. v. SemCrude, L.P. (In re SemCrude, L.P.)

Chapter 11

Related to Adv. Docket Nos. 659, 660, 701, 704, 710, 711, 716, & 737

Related to Adv. Docket Nos. 702, 721, 733, 734, 735, 738, 741, 748, 750, 751, 772, & 774

Related to Adv. Docket Nos. 425, 426, 427, 444, 447, 448, 449, 450, 453, 454, 459, 460, 464, 472, & 491

Related to Adv. Docket Nos. 430, 431, 432, 471, 474, 475, 476, 477, 480, 487, 491, 499, & 518

Related to Adv. Docket Nos. 126, 127, 140, 143, & 158

Related to Adv. Docket Nos. 66, 67, 68, 76, 79, 80, & 96

PROPOSED FINDINGS OF FACT AND CONCLUSIONS OF LAW PURSUANT TO 28 U.S.C. § 157(c)(1) AND FED. R. BANKR. P. 9033(a)

In these adversary proceedings, the Court has before it a collection of motions for summary judgment (the “Motions”) filed by the Downstream Purchasers.1 The sequence of relevant events is not in dispute: before the Petition Date, the Producers sold oil and gas to the Debtors, and the Debtors promptly sold that oil and gas to third parties, including the Downstream Purchasers. By these Motions, the Downstream Purchasers are seeking a ruling from this Court that they purchased that oil and gas from the Debtors free and clear of any liens or other rights of the Producers who originally sold such product to the Debtors. As set forth in detail below, the Court finds that the Downstream Purchasers are “buyers for value” within the meaning of U.C.C. § 9-317 and are thus insulated from the claims of the *44Producers. Further, the Court also finds that the Downstream Purchasers are buyers in the ordinary course under U.C.C. § 9-320, providing a separate, complete defense to the Producers’ claims. The Court will therefore recommend that the Downstream Purchasers’ Motions be granted.

I. BACKGROUND

On July 22, 2008 (the “Petition Date”), SemGroup, L.P. and certain direct and indirect subsidiaries (collectively, the “Debtors”)2 each filed voluntary petitions for relief under Chapter 11 of the Bankruptcy Code (the “Code”). By Order dated October 28, 2009 (the “Confirmation Order”),3 the Court confirmed the Debtors’ Fourth Amended Joint Plan of Affiliated Debtors (the “Plan”).4 The Plan and the Confirmation Order expressly preserved certain claims and causes of action and provided for this Court’s retention of jurisdiction over those claims, including the claims currently before the Court in these adversary proceedings.5

As of the Petition Date, the Debtors were engaged in a number of different business segments in the energy industry. The Debtors’ primary business was providing midstream oil and gas services, moving petroleum products and natural gas via trucks and a network of pipelines, and storing these products in Oklahoma and elsewhere. The Debtors’ consolidated revenues for the fiscal year of 2007 totaled approximately $13.2 billion.

In addition to their physical purchasing and selling of petroleum products and natural gas, the Debtors had a substantial marketing business, which consisted of purchasing and reselling physical product, and other producer services. As part of this marketing business, the Debtors also traded in derivatives on both the New York Mercantile Exchange (“NYMEX”) and the over-the-counter (“OTC”) markets.

In the weeks leading up to the Petition Date, the Debtors’ business experienced a series of setbacks, including massive trading losses and increased margin requirements on futures contracts driven by volatility in the energy commodities markets.6 As a result of a liquidity crisis brought on by the trading losses and margin calls, the Debtors were forced to seek Chapter 11 bankruptcy protection in the summer of 2008.

A. Oil and Gas Industry

Before further discussion of the complex history of the instant litigation, the Court *45will summarize the relevant factual background on the oil and gas industries developed in earlier litigation in this bankruptcy case.7 The record reflects that the Debtors purchased oil and gas from producers in at least eight states.8 As a general matter, crude oil extracted from the ground is routed into a storage tank for ground transportation or to a gathering line into a pipeline; natural gas is always directed through gathering lines into a pipeline. Title to the oil and gas may be transferred at some point within the spacing unit, at a market center or hub, or at any place in between. Unit operators typically sell product to purchasers on behalf of various interest and royalty owners. Division orders executed by all interested parties set forth the distribution of product sale proceeds. By industry custom, purchasers pay for oil on the 20th day of the month following delivery of oil and on the 25th day of the month following delivery of gas.9

B. The Debtors’ Business with the Producers and the Downstream Purchasers

Debtors SemCrude and Eaglwing contracted with certain producers in at least eight states to purchase oil and gas. These producers — working interest owners or operators — regularly delivered substantial volumes of oil and natural gas to the Debtors pursuant to written or oral agreements between the parties.

As of the Petition Date, over one thousand producers had not been paid for oil and gas product delivered between June 1, 2008 and July 21, 2008. The total production that the Debtors purchased, but did not pay for, was valued in excess of four hundred million dollars.10

As noted above, the Debtors operated a midstream oil company. They owned neither wells nor refineries, but moved and stored petroleum products. The record reflects that after receiving oil and gas from the various producers, the Debtors sold or transferred that oil and gas to various purchasers.11

C. The Producer Adversaries

The Debtors’ Chapter 11 filing generated a wave of litigation between and among certain oil and gas producers (collectively, the “Producers”),12 the Debtors, certain purchasers of oil and gas product from the *46Debtors (collectively, the “Downstream Purchasers”),13 and the Debtors’ secured lenders (collectively, the “Banks”).14 Within a few weeks following the Petition Date, the Producers filed numerous complaints commencing adversary proceedings relating to reclamation demands and alleged liens on oil and gas (and the proceeds thereof) sold to the Debtors.15 In a nutshell, the Producers moved promptly in this Court to take back oil and gas (or related sale proceeds) that they had delivered to the Debtors on or after June 1, 2008 through the Petition Date, and for which such Producers had not been paid. The Producers either sought stay relief to pursue their asserted state law liens and trust rights (described in detail below), or to reclaim their delivered product under state laws governing reclamation. The Banks, as the Debtors’ first priority senior secured lenders, vigorously opposed the relief sought by the Producers claiming that the oil and gas (and the proceeds thereof) constituted the Banks’ collateral.

Faced with a tidal wave of disparate adversary proceedings and motion practice, the Debtors requested authorization to establish omnibus procedures for a determination of the Producers’ rights and priorities pursuant to §§ 105(a) and 362 of *47the Bankruptcy Code and Rule 9019(a) of the Federal Rules of Bankruptcy Procedure.16 On September 17, 2008, the Court entered an Order (the “Procedures Order”) 17 adopting a proposed structure negotiated and supported by the Producers, the Debtors, and the Banks. In further hopes of efficiently administering these proceedings, the Court appointed a Producers’ Committee by Order dated October 15, 2008.18 The Producers’ Committee was not a named party to the litigation commenced under the Procedures Order. Pursuant to the Procedures Order, the Producers filed one adversary proceeding with respect to each of the eight states in which the Producers sold product to the Debtors.19

The purpose of these eight lawsuits was to obtain a declaratory judgment establishing (i) the state law lien and trust rights, if any, afforded to the Producers who sold product to the Debtors; and (ii) the priority of these Producers’ rights relative to the Banks’ asserted perfected security interests in the Debtors’ existing and after-acquired inventory.20 These multiple adversary proceedings were intended to constitute “the sole procedure, means, and mechanism by and through which the Court will determine the Threshold Questions of Law that will govern the rights of all Producers, Debtors, their creditors, and all other parties in interest” with respect to the Producers’ asserted state law interests in oil and gas product and the proceeds thereof.21

By Order dated February 26, 2009, the Court granted the motions of certain Downstream Purchasers to intervene in the Producer Adversaries (the “Intervention Order”).22 The Downstream Purchasers sought declaratory relief that the oil and gas they purchased from the Debtors during the relevant period was free and clear of any liens or encumbrances, including the Producers’ asserted interests under state law, pursuant to the Downstream Purchasers’ respective contracts with the Debtors, industry custom, and applicable state and federal law.23 The Intervention Order provided that the issues raised by the Downstream Purchasers would be held in abeyance pending a decision on the relative priority of the Banks and the Producers.24 The Producers and the Banks thereafter filed cross-motions for summary judgment on complaints seeking declaratory relief in the Producer Adversaries in Kansas, Texas, and Oklahoma.25

On June 19, 2009, after several days of argument on the motions for summary judgment, the Court issued three separate opinions and orders in the Producer Ad*48versaries (the “June 2009 Opinions”). For purposes of these opinions, the Court and the parties presumed the extent, validity, and priority of the Banks’ security interests and reserved for later adjudication the issue of the calculation and amount of the Producers’ claims in the respective state adversaries. See, e.g., Mull Drilling Co., 407 B.R. at 93. The Court held that the Banks’ duly perfected security interests in the Debtors’ property were superior to the lien claims and trust rights purportedly granted under the state laws of Kansas, Texas, and Oklahoma. See id. at 110; Arrow Oil & Gas, Inc. v. SemCrude, L.P., 407 B.R. 112, 138-39 (Bankr.D.Del.2009); Samson Res. Co. v. SemCrude, L.P., 407 B.R. 140, 156-57 (Bankr.D.Del.2009). The Court found that the state statutes provided, at best, unperfected security interests because the Producers in each state failed to perfect their security interests under the appropriate state law governing perfection of their security interests. Id.26

Recognizing that the June 2009 Opinions each addressed questions of first impression, this Court certified the rulings sua sponte for direct appeal to the United States Court of Appeals for the Third Circuit pursuant to 28 U.S.C. § 158(d)(2). See, e.g., Mull Drilling Co., 407 B.R. at 110-11. Prior to the scheduled date for oral argument before the Third Circuit, the Debtors, the Banks, and certain Producers reached a settlement. In light of these developments, by Order dated December 6, 2010, the Third Circuit vacated the Order authorizing the direct appeal.27 The Downstream Purchasers, however, were not parties to this settlement, and the Producers reserved their right to continue to pursue the Downstream Purchasers to recover oil and gas (or proceeds thereof) that they had delivered to the Debtors prior to the Petition Date.

D. The Tender Adversaries

During the pendency of the motions for summary judgment in the Producer Adversaries, the Downstream Purchasers filed motions and commenced separate adversary proceedings (the “Tender Adversaries”) seeking the Court’s permission to tender net settlements under their respective “umbrella” agreements28 with the Debtors, in full and complete satisfaction of their obligations to any party for the oil and gas product (and the proceeds thereof) received from the Debtors.29 The Downstream Purchasers argued that this relief was warranted because they took the oil and gas product free and clear of the Producers’ interests (if any) pursuant to their contracts with the Debtors.

*49The Producers objected to the relief sought in the Tender Adversaries. While they were supportive of the payment of millions of dollars of net obligations by the Downstream Purchasers, the Producers opposed any order or ruling that would have released or insulated the Downstream Purchasers from ongoing claims by the Producers.30

The Court issued an Order in the J. Aron adversary proceeding on June 2, 2009, and subsequently in the other Tender Adversaries, granting relief from the automatic stay to allow the Downstream Purchasers to turn over the tendered funds, to be held in escrow under the Court’s jurisdiction pending further order from the Court.31 In all, approximately $122 milhon was deposited into the Debtors’ estates from the Downstream Purchasers. The Orders expressly preserved the parties’ rights and claims with respect to the tendered funds.

On September 15, 2009, the Debtors filed a Motion in Aid of Confirmation requesting the release of the tendered funds in accordance with the Plan.32 The Debtors’ Plan memorialized the Producers’ settlement agreements,33 and the Court’s Confirmation Order incorporated these agreements and approved the release of the tendered funds from escrow to fund Plan distributions.34 The Confirmation Order required that the tendered funds be turned over to the Producers, in payment of the oil and gas product delivered from the Producers to the Debtors between July 2 and July 21, 2008.35 The Confirmation Order also preserved the Producers’ claims against the Downstream Purchasers for the unpaid portion of the Producers’ claims and required the Debtors to cooperate in discovery.36 The Court retained jurisdiction over the Tender Adversaries.

Following Plan confirmation, the Producers moved this Court to dismiss the Tender Adversaries, or in the alternative, to abstain from ruling in favor of having the disputes addressed in litigation commenced by the Producers in state court in Oklahoma, Texas, Kansas, and New Mexico.37 The Court denied the Producers’ requests, concluding that it possesses subject matter jurisdiction to hear and decide the Tender Adversaries, and further held that abstention would not be appropriate.38

In late 2010, the Downstream Purchasers filed motions for summary judgment in *50their respective Tender Adversaries.39 In short, the Downstream Purchasers sought summary judgment on three principal independent grounds: (i) the Downstream Purchasers took oil and gas from the Debtors as buyers for value under the Uniform Commercial Code (“U.C.C.”) § 9-317; (ii) the Downstream Purchaser took oil and gas from the Debtors as buyers in ordinary course pursuant to U.C.C. § 9-320; and (iii) the Producers expressly or implicitly waived their interests when they sold or transferred the oil and gas to the Debtors. The Producers opposed these Motions as premature in the absence of meaningful discovery, and therefore requested a continuance to conduct discovery pursuant to Federal Rule of Civil Procedure 56(d).40

The Producers sought discovery on factual matters ranging from the tracing of oil from the Producers through the Debtors to the Downstream Purchasers, the nature of the transactions between the Debtors and the Downstream Purchasers (including the Downstream Purchasers’ awareness of the Debtors’ deteriorating financial condition), and the Downstream Purchasers’ pre-petition institutional knowledge of the Producers’ statutory liens in oil and gas created by state law. By Opinion and Order dated June 20, 2011 (the “Discovery Opinion”), the Court granted the Producers’ motion for a continuance to allow limited discovery to go forward with respect to information relevant to the Downstream Purchasers’ defenses to the enforceability of the Producers’ asserted liens. J. Aron & Co. v. Semgroup, LP. (In re SemCrude, L.P.), Adv. No. 09-50038(BLS), 2011 WL 2471002, at *8 (Bankr.D.Del. June 20, 2011). The Discovery Opinion specifically addressed the following as issues appropriate for discovery: (i) whether the Producers waived their liens, if any; (ii) under § 9-317(b), whether the Downstream Purchasers took oil and gas free and clear of any liens as “buyers for value” and without knowledge of any existing liens; (iii) under § 9-320, whether the Downstream Purchasers took oil and gas as “buyers in ordinary course,” in good faith, and without knowledge that the sale violated the Producers’ rights. Id. at *7.

Following the issuance of the Discovery Opinion, the parties negotiated a schedule and ground rules for conducting the discovery authorized by the Court.41 The record reflects that over 150 depositions were taken at a variety of agreed-upon locations across the country, and hundreds of thousands of pages of documents were produced by both sides.

In August 2012, upon completion of the discovery described above, the Downstream Purchasers renewed their Motions in the Tender Adversaries.42 The parties, all represented by able counsel, have submitted dozens of briefs on the Motions with detailed references to the now well-developed record.43 The Court held three *51days of oral argument. The matter has been fully briefed and is ripe for decision.44

II. JURISDICTION & VENUE

The Court has jurisdiction over this matter pursuant to 28 U.S.C. § 1334(b), with the Court determining that this matter is “related to” the Debtors’ Chapter 11 cases. Venue is proper in this Court and in this District pursuant to 28 U.S.C. §§ 1408, 1409. These adversary proceedings constitute non-core proceedings under 28 U.S.C. § 157(c)(1). See Arrow Oil & Gas, Inc. v. J. Aron & Co. (In re SemCrude, L.P.), 442 B.R. 258, 271 (Bankr.D.Del.2010). As such, and in accordance with Fed. R. Bankr.P. 9033(a), the Court herewith files its proposed findings of fact and conclusions of law.

III. SUMMARY JUDGMENT STANDARD

Summary judgment is proper where, viewing the evidence in the light most favorable to the non-moving party and drawing all inferences in favor of that party, there is no genuine dispute of material fact and the moving party is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(a); Celotex v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 91 L.Ed.2d 265 (1986). Any doubt must be resolved in favor of the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986).

The movant bears the initial burden of establishing the absence of a genuine issue of material fact. Celotex, 477 U.S. at 323, 106 S.Ct. 2548. Once the moving party carries its burden, the opposing party must go beyond the pleadings and identify specific facts showing more than a “mere existence of a scintilla of evidence” that a genuine dispute of material fact exists. Anderson, 477 U.S. at 252, 106 S.Ct. 2505; see also Matsushita Elec. Indus. Co., v. Zenith Radio Corp., 475 U.S. 574, 586, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986) (stating that the opposing party “must do more than simply show that there is some metaphysical doubt as to the material facts”).

At the summary judgment stage, the Court’s function is not to weigh the evidence and determine the truth of the matter, but to determine whether there is a genuine dispute of material fact for trial. See Celotex, 477 U.S. at 317, 106 S.Ct. 2548. Substantive law determines which facts are material. Anderson, 477 U.S. at 248, 106 S.Ct. 2505. Only facts that “might affect the outcome of the suit under governing law” are considered material and will preclude summary judgment. Id. Further, a dispute regarding a material fact is genuine “when reasonable minds could disagree on the result.” Matsushita Elec. Indus. Co., 475 U.S. at 587, 106 S.Ct. 1348. Thus, the Court must ask: “(1) is there no genuine issue of material fact and (2) is one party entitled to judgment as a matter of law?” Gray v. York Newspapers, Inc., 957 F.2d 1070, 1078 (3d Cir.1992) (quoting Country Floors, Inc. v. Gepner, 930 F.2d 1056, 1060 (3d Cir.1991)).

*52IV. THE PARTIES’ POSITIONS

The Producers are pursuing claims against the Downstream Purchasers. As noted above, the Producers sold oil and gas to the Debtors before the Petition Date, for which they were not paid. The Producers have settled with the Debtors and the Banks for a partial recovery,45 and seek to collect the balance from the Downstream Purchasers. The Downstream Purchasers assert a multitude of statutory and non-statutory defenses to the Producers’ claims. The Downstream Purchasers’ arguments, and the Producers’ responses, are listed below.

A. Buyer For Value Defense

The Downstream Purchasers first contend that under U.C.C. § 9-317, they qualify as a buyer for value (“BFV”).46 A BFV takes free of all security interests if the buyer gives value and receives delivery of the collateral without actual knowledge of the security interest and before perfection. They argue that the Producers never perfected and that they gave value in the form of oil setoff and payments. The Downstream Purchasers also argue that they did not have any actual knowledge of the alleged security interests and state that the Producers cannot rely on circumstantial evidence to prove actual knowledge. Finally, they argue that express warranties stating that the Debtors sold oil and gas to them free and clear of any security interest negates actual knowledge. If the Downstream Purchasers are found to be buyers for value, they contend that this finding would be a complete defense to the Producers’ claims.

The Producers respond that the BFV defense cannot apply to their security interests because BFV is not specifically enumerated in the state lien laws at issue. The Producers also argue that whether the Downstream Purchasers provided “value” is a disputed issue of material fact, and that they can prove “actual knowledge” by circumstantial evidence.

B. Buyer in the Ordinary Course Defense

The Downstream Purchasers argue that they are buyers in the ordinary course (“BIOC”) under U.C.C. § 9-320 and take free of the Producers’ alleged security interest.47 The Downstream Purchasers argue that they bought oil and gas from the Debtors in good faith, in the ordinary course of business, and without knowledge of any violation of the Producers’ alleged security interest; as a BIOC, the Downstream Purchasers contend that they should be fully insulated from the Producers’ claims.

The Producers contend that the transactions were not in the ordinary course be*53cause the sales were abnormally large in the months leading up to the Debtors’ bankruptcy filing. The Producers also argue that the Downstream Purchasers’ set-off of money owed with oil does not create “new value.” The Producers next challenge whether BP and J. Aron’s transactions with the Debtors were in good faith. They allege that BP and J. Aron used cross-product netting to hedge financial derivative exposure with the Debtors rather than buying oil in the ordinary course. The Producers contend that disputes of material fact exist as to each element of the BIOC defense asserted here, rendering summary disposition inappropriate.

C.Recoupment

If a security interest exists and the Downstream Purchasers cannot prove up the defenses of BFV or BIOC, they argue that the Producers rights’ are subject to recoupment rights arising out of their contracts with the Debtors. Under U.C.C. § 9-404, the Downstream Purchasers argue that any interest provided to the Producers by the state lien laws is subordinate to the Downstream Purchasers’ rights under the netting agreements. They contend that the Producers are effectively assignees of the Debtors’ accounts receivable, and argue that the Producers cannot have greater rights in these accounts receivable than the Debtors had.

The Producers respond that they are not claiming any security interest in the Debtors’ accounts receivable; their liens are against oil and gas, and the proceeds thereof. As such, they argue that this statute simply does not apply because there is no recoupment defense against third party’s security interest in physical property, viz., the oil and gas delivered by the Debtors to the Downstream Purchasers.

D. Waiver

The Downstream Purchasers argue that the Producers waived any security interest pursuant to U.C.C. § 9-315 when they sold the oil and gas to the Debtors. The Downstream Purchasers argue that some of the Producers expressly authorized the oil to be sold free of any security interest because certain Producers included an express contractual warranty selling free and clear of all liens when the Producers sold to the Debtors. Because none of the Producers placed restrictions on what the Debtors could do with the oil and gas it received, the Downstream Purchasers contend that the Producers implicitly waived any security interest or other rights over the oil and gas delivered to the Debtors.

The Producers respond that they did not expressly or impliedly authorize the Debtors to resell the oil and gas free of their alleged security interest. They argue that waiver is a uniquely factual issue and thus, not readily susceptible to disposition on summary judgment. The Producers also allege that the purported waiver in the contracts was boilerplate language that appears in only fifteen of the Producers’ contracts with the Debtors.

E. Tort and Equitable Claims, and Constitutional Arguments

The Producers assert claims for conversion, tortious interference, unjust enrichment and quantum meruit, money-had- and-received, accounting and disgorgement, and fraud. The Downstream Purchasers argue that all of these common law claims turn on the lien analysis addressed above. They allege that if the Producers do not prevail on their statutory lien claims, then these derivative claims must also fail. The Downstream Purchasers next argue substantive independent defenses to each of these claims.

*54The Downstream Purchasers also contend that the state statutes are unconstitutional if construed to have legal force past the first purchaser. They allege that these statutes would broadly and unlawfully regulate interstate commerce by allowing secret liens to follow oil and gas through interstate commerce. The Downstream Purchasers further allege that the statutes violate the Takings Clause because the statutory liens constitute a taking without fair notice or compensation.

The Producers contend that the state lien statutes are constitutional. They argue that the Dormant Commerce Clause is not implicated here because there is no discrimination against out-of-state citizens and no impermissible benefit to local citizens. The Producers also argue that the lien statutes do not constitute a taking because they do not deprive the Downstream Purchasers of all economically beneficial use of the property.

F. Orange Creek

Orange Creek asserts statutory lien claims and common law claims on behalf of Clipper Energy, LLC and Central Kansas Crude, LLC (“CKC”). The Downstream Purchasers argue that Orange Creek cannot pursue these claims on behalf of CKC because CKC is not an “interest owner” or “operator” under the Kansas statute and the Debtors were not the first purchaser of the oil it purchased from CKC.48 Moreover, BP argues that it could not have received any of Orange Creek’s oil because its oil could not reach Cushing, Oklahoma.

Orange Creek responds that joint operating agreements authorize it to bring claims on behalf of the interest owners. Orange Creek also argues that it is an “operator,” and operators can bring claims on behalf of interest owners. However, if the Court finds that it does not have authority, Orange Creek argues that it should be permitted time to obtain ratification from the interest owners.

G. Oklahoma Claims Under the PRSA49

J. Aron seeks summary judgment for all Oklahoma Producers’ claims under the PRSA, J. Aron argues that because this Court has already ruled that the Oklahoma PRSA does not create a trust,50 all claims are prohibited by collateral estoppel. Even if collateral estoppel did not apply, J. Aron argues that there are no statutory torts in the PRSA. Further, there was no violation of the statute, and thus, J. Aron argues that it cannot be liable for tort damages.

IC-CO responds that the PRSA imposes legal duties on the Downstream Purchasers, which are distinct from the trust issue that was previously decided by the Court. IC-CO argues that these legal duties were violated when interest owners, such as IC-CO, were not paid for oil and gas that they sold to the Debtors. IC-CO also argues that none of the aforementioned statutory defenses apply since this is a tort claim. IC-CO contends that this claim creates a factual issue that cannot be resolved on summary judgment.

V. LEGAL ANALYSIS

A. Buyer For Value Defense

The Court turns first to the BFV defense under U.C.C. § 9-317 asserted by *55the Downstream Purchasers.51 Section 9-317, in pertinent part, states that a buyer takes free of any security interest “if the buyer gives value and receives delivery of the collateral without knowledge of the security interest or agricultural lien and before it is perfected.” U.C.C. § 9-317(b).52 A person “gives value” if the purchase is in return for a binding commitment to extend credit, as security for, or in total or partial satisfaction of a pre-exist-ing claim, by accepting delivery under a pre-existing contract for purchase, or in return for any consideration sufficient to support a simple contract. U.C.C. §§ 1-204(l)-(4). Thus, to qualify as a BFV, a person must: (i) give value, (ii) without knowledge of the security interest, and (iii) before perfection.53

1. Value and Perfection

The Court can dispose of the value and perfection prongs of the BFV defense here in summary fashion. “Value” under § 9-317 is any consideration sufficient to support a simple contract. U.C.C. §§ 1-202(b), 9-317. It cannot be seriously argued that “value” was not given under these contracts. Traditional contracts law teaches that a mere peppercorn suffices as consideration.54 See Restatement (Second) of Contracts § 71 (1981) (stating that all that is required for consideration is a bargained-for exchange); Id. § 79 cmt. C (“[C]ourts do not inquire into the adequacy of consideration.”); First Mortgage Co. of Pa. v. Fed. Leasing Corp., 456 A.2d 794, 797 (Del.1982) (holding that incurring a legal detriment “in and of itself constitutes sufficient consideration”). In fact, the Producers concede that extension of credit is considered “value given.”55 Therefore, by paying cash, buying and selling oil, netting payments, and buying on credit, *56the Downstream Purchasers have satisfied the value requirement under § 9-317.

As to perfection, this Court has already ruled that the Producers’ security interest, if any, was unperfected. See Mull Drilling Co., 407 B.R. at 110; Arrow Oil & Gas, Inc., 407 B.R. at 139-40; Samson Res. Co., 407 B.R. at 157. Thus, no genuine dispute of material fact exists as to whether the Producers’ liens were perfected: they were not.

2. Knowledge

The knowledge prong of the BFV analysis is more complicated. The parties concede that the term “knowledge” as used in § 9-317 means “actual knowledge.” See U.C.C. § l-202(b) (“ ‘Knowledge’ means actual knowledge.”). Case law teaches that the Court must evaluate a purchaser’s actual knowledge at the time of the sale, and any knowledge subsequently gained by the purchaser is irrelevant to the analysis. See, e.g., Gary Aircraft Corp. v. General Dynamics Corp. (In re Gary Aircraft Corp.), 681 F.2d 365, 374 (5th Cir.1982) (stating that knowledge is measured at the time of sale); see also Snap-On Tools Corp. v. Rice, 162 Ariz. 99, 781 P.2d 76, 78 (App.1989) (“The purchaser must have actual knowledge that the security interest exists at the time the collateral is purchased.”). Moreover, a buyer has no duty to inquire into whether a security interest exists. See Clark Oil & Ref. Co. v. Liddicoat, 65 Wis.2d 612, 223 N.W.2d 530, 536 (1974) (holding that “[w]hether the judgment creditor had reason to know, or might have been alerted to, circumstances that should reasonably have impelled him to check beyond the filed record is irrelevant ... ”). Finally, and importantly for this case, “[t]estimony as to general knowledge in the industry is insufficient to prove knowledge by a majority of creditors.” In re Downey Creations, LLC, 414 B.R. 463, 471 (Bankr.S.D.Ind.2009).

As an initial matter, the extensive record fails to establish any direct evidence of actual knowledge of the asserted liens on the part of the Downstream Purchasers at the time of the transactions. None of the Downstream Purchasers have admitted to having knowledge of the Producers’ asserted liens. The Producers do not allege facts tending to show direct evidence of knowledge on the part of the Downstream Purchasers, and it is undisputed that the Producers did not directly inform the Downstream Purchasers of their alleged security interest, or give them notice of any kind.56

Instead, the Producers point to limited circumstantial evidence developed through discovery to show actual knowledge of the security interest. The Producers’ evidence boils down to the Downstream Purchasers’ alleged knowledge of (i) state lien laws, (ii) the identities of some of the Producers, and (iii) the fact that the Producers were unpaid.

The parties dispute as a threshold matter whether circumstantial evidence can ever be sufficient to prove actual knowledge of the security interest. As discussed in depth below, the Court finds that actual knowledge may be proven by circumstantial evidence, but the standard is high.

*57The Producers rely principally upon two cases57 for the proposition that actual knowledge may be proved by circumstantial evidence. See Longtree, Ltd. v. Res. Control Int'l Inc., 755 P.2d 195, 202 (Wyo.1988); Freeman v. Bentley, 205 Ga.App. 409, 422 S.E.2d 435, 437 (1992). In Long-tree, the Supreme Court of Wyoming held that although there was no direct evidence of actual knowledge on the part of the buyer, there was sufficient circumstantial evidence to support a finding of actual knowledge. That court stated:

Longtree knew that RCI was virtually the only logger supplying logs to Pacific Star. The quantity of logs supplied and to be supplied by RCI was enormous. Mr. Diehl knew that Pacific Star had experienced financial difficulties in the past. He also knew that Pacific Star had been closed by creditors in 1984. Both Mr. Diehl and Mr. Beck knew that Jones did not have funds to satisfy his obligations to the Bank of California yet logs were still being supplied. Mr. Diehl and Mr. Beck sought to avoid the Bank of California’s claim to the logs by structuring its transaction with Pacific Star as a purchase and sale rather than a financing arrangement, which was the same approach used by RCI. Mr. Diehl and Mr. Beck sought to avoid claims by loggers against the winter log deck by requiring that Longtree’s logs be kept separate and by requiring loggers’ invoices and evidence that previously received logs had been paid for. Finally, Mr. Jones told Jerry Harmon that Longtree was aware of RCI’s claim to the logs.

Longtree, 755 P.2d at 202 (emphasis added). Although Longtree’s witnesses denied actual knowledge, there was significant evidence in the record that they, in fact, had actual knowledge of the security interest at issue. The court stated that “the trier of fact may well conclude that where ignorance could not reasonably exist a person did in fact have knowledge.” Id. at 203 (citation omitted).

In Freeman, the second case relied upon by the Producers, the Georgia Court of Appeals acknowledged that circumstantial evidence can prove actual knowledge, but held that the facts presented failed to prove actual knowledge. See 422 S.E.2d at 437. The court reversed the lower court’s finding that the circumstantial evidence supported actual knowledge and held that “[t]here is no direct evidence, and insufficient circumstantial evidence for an inference that Freeman had actual knowledge of Mrs. Bentley’s unrecorded and unper-fected security interest.” Id. The court went on to hold that even if Mr. Freeman was aware of the divorce decree that incorporated Mrs. Bentley’s security interest, “the leap from this knowledge to knowledge of the security interest is too great to be accomplished on the strength of tenuous inference.” Id. The Court agrees with these decisions holding that circumstantial evidence can prove actual knowledge, but it is apparent that the burden is a heavy one.

Here, the Producers’ proffered circumstantial evidence is insufficient to demonstrate that the Downstream Purchasers had actual knowledge of a security interest *58in the oil and gas at the time of sale.58 First, knowledge of the identities of some of the Producers certain