## Facts

- El Paso Refinery, L.P. operated an oil refinery and held non-exclusive technology and patent licenses from UOP, with royalties owed under the license agreements.
- The debtor filed Chapter 11 in 1992; the case later converted to Chapter 7, and Andrew B. Krafsur became trustee.
- UOP filed an unsecured proof of claim for unpaid royalties and related amounts; the parties stipulated the claim amount at $4,019,028.36, subject to reduction based on the trustee’s objection.
- During the Chapter 11 case, term lenders foreclosed on the refinery assets, and the refinery was thereafter operated by successor entities (including Refinery Holding Company, L.P. and Chevron U.S.A.).
- After foreclosure, UOP entered new license agreements with the successor operators for essentially the same technology used at the same refinery, generating approximately $3.7 million in payments to UOP.
- The trustee objected to UOP’s claim, contending the successor-license payments satisfied or mitigated UOP’s damages and asserting affirmative claims for breach of contract and equitable subordination under 11 U.S.C. § 510(c).
- One contract-based count had been dismissed at summary judgment for lack of trustee standing.

## Issues

1. Whether UOP’s unsecured claim for unpaid prepetition royalties should be reduced or disallowed because UOP’s post-foreclosure licenses to the refinery’s successor operators mitigated or satisfied UOP’s damages, and whether UOP qualified as a lost-volume seller.
2. Whether the trustee had standing to assert contract claims tied to the foreclosed refinery/license rights, and whether UOP breached any contractual duties owed to the debtor.
3. Whether UOP engaged in inequitable conduct that injured creditors or gave UOP an unfair advantage, justifying equitable subordination under 11 U.S.C. § 510(c).

## Decision

- The court disallowed UOP’s royalty-based claim, concluding that the post-foreclosure successor-license payments functioned as a substitute transaction that mitigated and satisfied UOP’s damages.
- The court rejected UOP’s lost-volume seller argument, finding UOP did not show it would have made both the original and successor license deals as separate, additional transactions.
- The court enforced its prior ruling that the trustee lacked standing to pursue certain license-related contract claims after foreclosure removed the relevant rights from the estate.
- On the remaining contract theory tried, the court found no actionable breach by UOP.
- The court denied equitable subordination, finding no inequitable conduct warranting subordination under § 510(c).

## Legal Principles

- A creditor asserting contract-based damages in bankruptcy remains subject to ordinary mitigation principles; substitute performance or substitute transactions may reduce or eliminate the allowable claim.
- Lost-volume seller treatment requires proof that the later transaction would have occurred in addition to the breached transaction; absent that showing, later revenues may be treated as mitigation.
- A bankruptcy trustee generally lacks standing to sue on contract rights that are no longer estate property due to foreclosure or other transfer removing the rights from the estate.
- Equitable subordination under 11 U.S.C. § 510(c) requires inequitable conduct causing injury to creditors or an unfair advantage; aggressive self-interested conduct, without more, is insufficient.

## Conclusion

The court eliminated UOP’s allowed unsecured claim for unpaid royalties because UOP’s later licensing of the same technology at the same refinery to successor operators offset the asserted loss, rejected the trustee’s contract claims for lack of standing and failure on the merits, and denied equitable subordination for failure to prove inequitable conduct under § 510(c).


Krafsur v. UOP (In re El Paso Refinery, L.P.), 196 B.R. 58 (Bankr. W.D. Tex. 1996)