## Facts

- Powerine Oil Company filed for Chapter 11 bankruptcy less than 90 days after paying Koch Oil Company $3.2 million for crude oil previously delivered.
- Powerine had a $250.6 million credit facility secured by most of its personal property; the collateral also secured letters of credit issued on Powerine’s account by syndicate members.
- Koch sold crude oil to Powerine and was the beneficiary of two irrevocable standby letters of credit issued by First National Bank of Chicago (a syndicate member), totaling about $8.7 million and sufficient to cover Koch’s shipments.
- Koch billed Powerine $3.2 million for oil delivered in December and January; Powerine later paid that amount.
- After the bankruptcy filing, the creditors’ committee sued to avoid the $3.2 million payment as a preferential transfer under 11 U.S.C. § 547(b).
- The bankruptcy court granted summary judgment for Koch under the § 547(c)(1) contemporaneous-exchange defense.
- The Bankruptcy Appellate Panel affirmed on a different ground, concluding there was no preference because Koch would have been paid in full by drawing on the letters of credit if Powerine had not paid.
- By the time of litigation, the letters of credit had expired, and the issuing bank’s reimbursement claim against Powerine was only partially secured due to insolvency and existing liens; unsecured creditors expected substantially less than full recovery.
- The committee appealed to the Ninth Circuit.

## Issues

1. Whether the $3.2 million payment enabled Koch to receive more than it would have received in a hypothetical Chapter 7 liquidation of the debtor’s estate, satisfying 11 U.S.C. § 547(b)(5), notwithstanding Koch’s ability to draw on third-party letters of credit.
2. Whether the transfer was protected, in whole or part, by the 11 U.S.C. § 547(c)(1) contemporaneous exchange for new value exception in a letter-of-credit transaction where the issuer’s reimbursement claim was only partially secured.
3. When Powerine incurred the debt to Koch for purposes of the antecedent-debt element under 11 U.S.C. § 547(b)(2).

## Decision

- The Ninth Circuit reversed the decision affirming summary judgment for Koch and remanded.
- The court held the payment was a preferential transfer under § 547(b), including § 547(b)(5), because it allowed Koch to obtain more from the estate than it would in a Chapter 7 liquidation where unsecured creditors would receive less than full payment.
- The court rejected using Koch’s potential recovery on third-party letters of credit to defeat § 547(b)(5), because the statutory comparison focuses on distributions from the debtor’s estate.
- The court held § 547(c)(1) did not fully protect the transfer; it could protect only the portion corresponding to actual new value to the estate measured by the extent of the issuer’s secured reimbursement claim.
- The court agreed that Powerine incurred its debt to Koch when Koch delivered the oil, making the payment one on an antecedent debt.

## Legal Principles

- Section 547(b)(5) requires an estate-focused, hypothetical Chapter 7 comparison: whether the challenged payment diminished the estate and let the creditor receive more from the estate than it would have received absent the transfer.
- A creditor’s potential recovery from a third party (including drawing on a letter of credit) does not negate preference status under § 547(b)(5); the analysis centers on what the creditor would receive from the debtor’s estate.
- In letter-of-credit settings, § 547(c)(1) protects a transfer only to the extent it is a substantially contemporaneous exchange for “new value” that actually reaches or preserves value in the estate, commonly measured by the extent to which the issuer’s reimbursement claim is secured.
- A debt for delivered goods is incurred on delivery, not when the invoice is issued or when the exact amount becomes finally determinable.

## Conclusion

The Ninth Circuit held that Powerine’s $3.2 million payment to Koch within 90 days of bankruptcy was avoidable as a preference because it improved Koch’s recovery from the debtor’s estate compared to a Chapter 7 liquidation, and Koch’s letter-of-credit rights could not be used to avoid § 547(b)(5). The court further held that any contemporaneous-exchange protection under § 547(c)(1) could extend only to the portion of the transfer supported by genuinely secured new value, requiring a remand to determine that amount.


In re Powerine Oil Co., 59 F.3d 969 (9th Cir. 1995)