## Facts

- Compton Corporation owed Blue Quail Energy, Inc. $585,443.85 for oil delivered in March 1982, due around April 20, 1982, and unpaid.
- On May 6, 1982, MBank Abilene, N.A. issued an irrevocable standby letter of credit to Blue Quail (up to $585,443.85) expressly tied to the antecedent debt; Compton paid a fee and executed a demand note to MBank for the same amount.
- MBank did not take new collateral for the letter of credit; it relied on Compton’s 1980 security agreement containing a future-advances clause, supported by previously filed financing statements.
- On May 7, 1982, creditors filed an involuntary bankruptcy petition against Compton.
- Compton failed to pay by the letter-of-credit deadline; on June 22, 1982, MBank honored the letter of credit and paid Blue Quail $569,932.03.
- In liquidation, MBank’s secured claims (including reimbursement arising from the letter-of-credit payment) were paid in full from Compton’s collateral.
- The bankruptcy trustee sued Blue Quail under 11 U.S.C. §§ 547 and 550 to avoid and recover a preference, alleging the transaction depleted estate value and effectively paid an unsecured creditor in full during the 90-day preference period.
- The bankruptcy court granted summary judgment for Blue Quail; the district court affirmed.

## Issues

1. Whether reimbursement of a letter-of-credit issuer from the debtor’s collateral, used to satisfy an antecedent unsecured debt during the preference period, constitutes a avoidable transfer under 11 U.S.C. § 547.
2. Whether the letter-of-credit beneficiary is recoverable from under 11 U.S.C. § 550(a)(1) as the “entity for whose benefit” the transfer was made, even if the issuer was the immediate recipient of the debtor’s collateral value.
3. How the letter-of-credit independence principle affects preference analysis of the debtor–issuer reimbursement and collateral realization.

## Decision

- The Fifth Circuit reversed the judgment for Blue Quail and remanded.
- The court held the transaction could constitute an avoidable preference under § 547 to the extent estate collateral was used to reimburse MBank and thereby diminished assets available to unsecured creditors while satisfying Blue Quail’s antecedent debt.
- The court held the trustee could pursue recovery from Blue Quail under § 550(a)(1) as the entity for whose benefit the transfer was made.
- On rehearing, the court ordered additional remand for fact-finding on the amount of collateral value MBank actually realized for reimbursement and the amount Blue Quail actually received; recovery was capped by those amounts, and the matter also required calculation of interest.

## Legal Principles

- The independence principle protects the issuer–beneficiary obligation to honor a conforming draw, but it does not bar avoidance of the debtor’s reimbursement transfer (including collateral depletion) under § 547.
- For § 547(b), a preference may be shown where debtor collateral is applied (directly or through an issuer’s reimbursement right secured by debtor collateral) to satisfy an antecedent unsecured debt during the preference period, resulting in estate diminution and improved creditor recovery versus liquidation.
- Under § 550(a)(1), a letter-of-credit beneficiary whose antecedent debt is satisfied through a reimbursement transfer supported by debtor collateral may be liable as the “entity for whose benefit such transfer was made,” even without direct receipt of debtor property.
- Preference recovery is limited to the value of collateral actually taken to reimburse the issuer and also limited by the amount actually paid to the beneficiary under the letter of credit.

## Conclusion

The Fifth Circuit treated the estate’s loss from reimbursing the letter-of-credit issuer out of debtor collateral as the relevant preferential transfer, held the beneficiary of the letter of credit was a recoverable party as the entity benefitted under § 550, and remanded to determine the capped amount of recovery and related interest based on what the bank actually realized and what the beneficiary actually received.


Kellogg v. Blue Quail Energy, Inc. (In re Compton Corp.), 831 F.2d 586 (5th Cir. 1987)