In re El Paso Refinery, L.P.

El Paso Refinery, L.P. (El Paso) (debtor) operated an oil refinery. Scurlock Permian Corporation (Scurlock) (creditor) supplied crude oil to El Paso pursuant to a credit agreement. Scurlock provided El Paso with collateral as security for any and all indebtedness. In October 1992, El Paso filed for Chapter 11 bankruptcy, which subsequently was converted to a Chapter 7 case. El Paso had paid $82 million to Scurlock in the 90 days before El Paso’s bankruptcy filing. Even with these payments, El Paso’s indebtedness to Scurlock exceeded the value of the collateral. Scurlock did not release any collateral after any of El Paso’s payments. The bankruptcy trustee sought to avoid (i.e., recover) the $82 million from Scurlock, arguing that the payments were preferential under Bankruptcy Code (code) § 547(b) because Scurlock received more than it would have received in a Chapter 7 liquidation. Specifically, the trustee contended that Scurlock was a partially unsecured creditor and that El Paso’s payments should be applied to the unsecured portion of El Paso’s Scurlock debt. Scurlock responded that El Paso’s payments should be applied to the secured portion of El Paso’s debt, in which case Scurlock simply recovered its collateral and thus received no more than it would have received in a Chapter 7 liquidation. The bankruptcy court ruled that the trustee should be allowed to avoid the $82 million in payments. The district court affirmed. Scurlock appealed.