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Click here for the full text of this decision FACTS:Edge Petroleum Operating Co. Inc., a producer of natural gas, sold gas to GPR Holdings, Aurora Natural Gas and Golden Prairie Supply Services LLC (collectively, the debtors), through its marketing agent, Upstream Energy Services Co. Edge delivered the gas by pipeline in May and June 2001, and the contract between the parties obliged the debtors to pay Edge on the 25th day of the month following delivery. The debtors sold the gas to Duke Energy Trading and Marketing, 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. The debtors never paid Edge for the gas, nor did Edge file claims against the debtors in their respective bankruptcy cases. 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. Edge and the debtors alleged that Duke did not pay 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 accepted delivery of gas in May and June 2001 to offset its overpayment. The debtors sued Duke for payment for the later deliveries in separate litigation. 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 determinations by state and federal courts. Shortly before a scheduled trial in state court, Duke removed Edge’s suit to the U.S. District Court for the Southern District of Texas, predicating jurisdiction on the bankruptcy of Aurion Technologies, which was the majority shareholder of Aurora. The Southern District court ruled in response to Edge’s first motion for remand that the matter was related to the Aurion bankruptcy proceedings and thus that removal was timely. It then transferred the case to the U.S. District Court for the Northern District of Texas. After making another failed motion for remand, Edge consented to jurisdiction in the bankruptcy court rather than the district court. The bankruptcy court granted summary judgment in favor of Duke and the debtors, reasoning that, even accepting, arguendo, that Edge possessed a valid lien, Edge sought to enforce that lien against the debtors’ accounts receivable. 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. As a result, Edge moved for amendment of the summary judgment order to reflect such a finding. The court denied the request, explaining that its determination did not imply that Edge had any security interest in the proceeds of the sale currently in possession of Duke. The district court affirmed the bankruptcy court without a separate opinion. Edge further appealed only in regard to its conversion action to enforce its lien. HOLDING:Affirmed. The court first found that: federal jurisdiction existed in the case; Duke’s removal of the matter to federal court was timely; and no automatic stay barred Edge from suing Duke in regard to the matter. The court agreed with the district court that Edge demonstrated that there was a disputed issue of material fact as to whether it has a gas producer’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. The court did not consider whether Edge has such a lien, because it concluded that based on the facts of the case, the legal nature of the lien rendered it unenforceable via an action for conversion. To establish conversion, the court stated that Edge must prove that: 1. it owned or had a right to possession of the property; 2. the defendant assumed and exercised dominion and control over the property inconsistent with plaintiff’s rights; and 3. the defendant refused plaintiff’s demand for return of the property. At the time Duke exercised dominion over the gas, the court stated, payment for the gas had not yet come due, and Edge had no right to enforce its interest in the gas. Edge, the court stated, contended 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 property. But the court disagreed. Conversion, the court stated, generally takes place only after refusal of a demand for return of the property, and only extraordinary circumstances excuse the need for a demand. “[I]t is difficult to see,” the court stated, “how Duke’s actions could be so egregiously violative of Edge’s rights as to foreclose the need for a demand, which Edge has not made.” Duke, the court noted, resold the gas before payment under a contract to which it was not privy came due. OPINION:Smith, J.; Smith, Benavides and Prado, J.J.

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