## Facts

- El Paso Refinery, L.P. operated an oil refinery and purchased crude oil from Scurlock Permian Corporation on credit under a supply agreement.
- Scurlock’s claim was secured by a first lien on collateral including accounts receivable, inventory, contract rights, and proceeds.
- El Paso also borrowed from Bank Brussels Lambert (BBL); Scurlock and BBL executed an intercredit agreement providing that, upon default, they would share Scurlock’s first lien and that BBL’s lien would be of equal dignity, with a stipulated pro rata allocation of collateral value: 54.53% to Scurlock and 45.47% to BBL.
- El Paso’s financial condition worsened; it became substantially past due to Scurlock and also owed significant sums to BBL, and Scurlock pressed for more frequent payments.
- El Paso caused BBL to issue a $5 million irrevocable letter of credit in favor of Scurlock to support continued shipments beyond the past-due balance.
- Within 90 days before El Paso filed Chapter 11 (later converted to Chapter 7), El Paso paid Scurlock about $82 million, largely from proceeds of receivables and inventory subject to the shared lien.
- The Chapter 7 trustee sued to avoid the payments as preferential transfers under 11 U.S.C. § 547; the bankruptcy court and district court ruled for the trustee.

## Issues

1. Whether the trustee proved the § 547(b)(5) element that the preference-period payments enabled Scurlock to receive more than it would have received in a hypothetical Chapter 7 liquidation had the payments not been made.
2. How the intercredit agreement’s equal-dignity lien sharing and stipulated pro rata collateral allocation affected Scurlock’s secured status for the § 547(b)(5) analysis.

## Decision

- The Fifth Circuit reversed the district court’s judgment affirming avoidance.
- The court held the trustee failed to show the challenged payments produced a greater recovery for Scurlock than it would have received in a Chapter 7 liquidation.
- Treating Scurlock’s interest in the collateral (as allocated under the stipulation) as sufficient to secure its claim, the court concluded the payments were not avoidable preferences.
- The trustee’s cross-appeal was rejected.

## Legal Principles

- A transfer is avoidable under 11 U.S.C. § 547(b) only if each element is proven, including § 547(b)(5): the creditor received more than it would have received in a Chapter 7 liquidation if the transfer had not occurred.
- The trustee bears the burden of proving the § 547(b)(5) “greater-than-Chapter-7” element.
- Payments to a fully secured creditor, made from or attributable to the creditor’s collateral, generally do not satisfy § 547(b)(5) because the creditor would realize the same value from collateral in liquidation.
- When multiple creditors share collateral under intercreditor arrangements, the § 547(b)(5) analysis must account for actual lien priority and agreed allocations of the collateral pool in determining whether a creditor is undersecured.

## Conclusion

The Fifth Circuit held the trustee did not prove that Scurlock’s preference-period receipts exceeded what Scurlock would have obtained in a hypothetical Chapter 7 liquidation, given Scurlock’s effectively fully secured position under the shared-collateral and allocation arrangement; the avoidance judgment was therefore reversed.


In re El Paso Refinery, L.P., 171 F.3d 249 (5th Cir. 1999)