Kellogg v. Blue Quail Energy, Inc. (In re Compton Corp.)

In March 1982, Blue Quail Energy, Inc. (Blue Quail) delivered an oil shipment to Compton Corporation (debtor). Compton was supposed to pay Blue Quail $585,443.85 for the oil in April 1982 but failed to pay. Compton induced Abilene National Bank (MBank) to issue an irrevocable standby letter of credit in Blue Quail’s favor on May 6, 1982. The letter of credit provided that MBank would pay Blue Quail up to $585,443.85 owed on Compton’s antecedent (i.e., preexisting) debt to Blue Quail if Compton did not pay by a certain date. In exchange for the letter of credit, Compton paid MBank $1,463.61 and gave MBank a $585,443.85 promissory note. MBank had a previous security agreement with Compton that covered the letter-of-credit transaction. That security interest attached in May 1980, when the security agreement went into effect. On May 7, 1982, several creditors filed an involuntary bankruptcy petition against Compton. Compton subsequently failed to pay Blue Quail, and MBank paid Blue Quail on the letter of credit. During the bankruptcy proceeding, Compton’s assets were liquidated and used to pay MBank’s secured claims against Compton, including the letter-of-credit payment to Blue Quail. Bankruptcy trustee Walter Kellogg filed an adversary proceeding against Blue Quail asserting that Blue Quail had received an avoidable preferential transfer through the letter-of-credit transaction within 90 days of the bankruptcy proceeding. Kellogg thus sought recovery of $585,443.84 from Blue Quail under 11 U.S.C. § 550. The bankruptcy court granted summary judgment for Blue Quail, and the district court affirmed. Kellogg appealed.