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IN THE UNITED STATES COURT OF APPEALS
FOR THE FIFTH CIRCUIT

No. 97-51067

In The Matter of: EL PASO REFINERY, L P
Debtor
ANDREW B KRAFSUR, Trustee for El Paso Refinery, L P
Appellee - Cross-Appellant
versus
SCURLOCK PERMIAN CORPORATION
Appellant - Cross-Appellee
*****************************************************************
No. 98-50043
In the Matter Of: EL PASO REFINERY, L P
Debtor
SCURLOCK PERMIAN CORPORATION
Appellant - Cross-Appellee
versus
ANDREW B KRAFSUR, Trustee for El Paso Refinery, L P
Appellee - Cross-Appellant

Appeals from the United States District Court
for the Western District of Texas

March 26, 1999
Before HIGGINBOTHAM, DUHÉ, and DeMOSS, Circuit Judges.
HIGGINBOTHAM, Circuit Judge:

This is an appeal of a bankruptcy case, affirmed by the
district court, in which the Trustee, Andrew Krafsur, was permitted
to avoid payments by the debtor, El Paso Refinery, to one of its
creditors, Scurlock Permian Corporation, on the basis of
preferential transfers. We find no such transfers and REVERSE.
I
El Paso operated a refinery to which Scurlock supplied crude
oil on credit under a written supply agreement established by
Scurlock's predecessor, the Permian Operating Partnership. On
October 23, 1992, El Paso filed for bankruptcy protection under
Chapter 11, later converted to Chapter 7. The Trustee sought to
avoid $82,000,000 in payments made by El Paso to Scurlock during
the preference period.
El Paso's obligation to Scurlock was secured by a first lien
on collateral such as accounts receivable, inventory, contract
rights, and proceeds. El Paso was also financed by Bank Brussels
Lambert, with whom Scurlock had an Intercredit Agreement. The
Intercredit Agreement between Scurlock and BBL provided that, in
the event of a default, Scurlock and BBL shared Scurlock's first
lien and that BBL's lien was of "equal dignity" subject to a pro
rata allocation in accordance with the outstanding principal amount
of BBL's debt and Scurlock's debt. The parties stipulated, for the
purposes of the adversary proceeding only, that they shared the
collateral in the following proportion: 54.53% to Scurlock and
45.47% to BBL.
2

Before July 1, 1991, El Paso had usually paid Permian
promptly. Most of the money used to pay Permian, however, was
borrowed from BBL, and by July 1991, BBL had advanced over
$25,000,000 to El Paso. After Scurlock succeeded Permian, El Paso
fell behind in its payments. By the end of September 1991, El Paso
was "past due" to Scurlock by $37,450,000 and owed BBL
approximately $37,000,000. At Scurlock's request, in September
1991, El Paso began to pay weekly, sometimes daily, instead of
monthly.
On November 12, 1991, presumably at Scurlock's insistence, El
Paso asked BBL to issue an irrevocable letter of credit in favor of
Scurlock, in the amount of $5,000,000, to secure repayment of any
advances by Scurlock in excess of the $37,450,000 already past due,
plus interest, for further continued shipments of crude oil. El
Paso gave BBL a priming lien, which by agreement was given a
priority over the preexisting first lien of a group of Term
Lenders, on the refinery's hard assets to secure this letter of
credit. Scurlock continued to provide approximately $1 million of
crude daily on an "as needed"1 basis as long as the total amount El
Paso owed Scurlock did not exceed $42,420,000 ($37,450,000 plus $5
million credit line).2
1Scurlock leased crude oil storage tanks adjacent to El Paso
and fully controlled the flow of crude oil.
2The unused portion of the credit line was termed the "L/C
Cushion."
3

El Paso's business did not improve and by March 1992, it had
exhausted the $5 million credit line. On March 11, 1992, again at
Scurlock's insistence, El Paso arranged for a second letter of
credit from BBL in favor of Scurlock for $6 million. Like the $5
million credit letter, this letter was designed to continue to
secure sales of crude by Scurlock to El Paso. Similarly, as long
as the sales of crude did not cause El Paso's total indebtedness to
Scurlock to exceed the $42,420,000 plus the new $6 million line of
credit, Scurlock would continue to ship crude to El Paso.
Scurlock, BBL, and other lenders participated in the loan for the
$6 million letter of credit, which was secured by another lien on
the refinery's hard assets.
On October 16, 1992, Scurlock notified El Paso of a default
and invoked its contractual right to stop the supply of crude oil.
El Paso filed for Chapter 11 on October 23, 1992; the case was
converted to Chapter 7 in November 1993. El Paso's Trustee filed
this preference lawsuit to avoid and recover payments made to
Scurlock during the 90 days preceding the bankruptcy filing (July
24, 1992 - October 23, 1992).
After deciding that the Intercredit Agreement operated as a
partial assignment and not a subordination agreement, the
bankruptcy court ruled that 54.53% of the payments from El Paso to
Scurlock in the 90 day period preceding the bankruptcy filing were
proceeds from Scurlock's own collateral and therefore not
recoverable as preferences. The remaining 45.47% of the
4

transferred payments, however, were deemed preferential because,
according to the bankruptcy court's interpretation of the
Intercredit Agreement, that portion had been assigned to BBL. The
bankruptcy court held that Scurlock received a preferential
transfer equal to 45.47% of the total payments ($37,285,400 of a
total $82 million), but concluded that some of it qualified as new
value. After applying the new value exception, the bankruptcy
court calculated that Scurlock received a preference in the amount
of $10,696,460. It rejected Scurlock's "ordinary course of the
business" defense. The district court affirmed and both parties
appealed. We have jurisdiction pursuant to 28 U.S.C. § 158(d).
II
We apply the same standards of review to the bankruptcy
court's findings of fact and conclusions of law as applied by the
district court. See Kennard v. MBank Waco, N.A. (In re Kennard),
970 F.2d 1455 (5th Cir. 1992). A bankruptcy court's findings of
fact are reviewed under the clearly erroneous standard, and its
conclusions of law are reviewed de novo. See Traina v. Whitney
Nat'l Bank, 109 F.3d 244, 246 (5th Cir. 1997).
III
Our ultimate issue is whether any of the payments from El Paso
to Scurlock during the 90 days preceding the bankruptcy filing were
preferential. Scurlock argues that none of the payments made to it
during the 90 day period preceding the bankruptcy filing were
preferential transfers. In the alternative, Scurlock claims that
5

if the payments were preferential, the maximum recoverable
preference not subject to its new value defense would be $751,703.
The Trustee argues that all payments, approximately $82,000,000,
were preferential and recoverable.
The elements of a preference are set out in § 547(b),
providing:
[T]he trustee may avoid any transfer of an interest of the
debtor in property--
(1) to or for the benefit of a creditor;
(2) for or on account of an antecedent debt owed by the debtor
before such transfer was made;
(3) made while the debtor was insolvent;
(4) made--
(A) on or within 90 days before the date of filing of the
petition; or
(B) between ninety days and one year before the date of
the filing of the petition, if such creditor at the time
of such transfer was an insider; and
(5) that enables such creditor to receive more than such
creditor would receive if--
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the
extent provided by the provisions of this title.
Once the trustee meets this burden, the defendant must establish
one of the exceptions contained in § 547(c) to prove the
nonavoidability of a transfer. See 11 U.S.C. § 547(g).
6

In this case, the parties stipulated to the first four of the
five elements of § 547(b). The Trustee had to establish the fifth
element as a result of the transfer, the creditor received a
greater percentage recovery on its debt than it would otherwise
have received had it looked solely to distribution from the Chapter
7 estate for its payment. See 11 U.S.C. § 547(b)(5); Palmer Clay
Prods. Co. v. Brown, 297 U.S. 227 (1936).
The greater percentage test is most easily understood in the
context of an unsecured creditor that receives prepetition
payments. In that case, if the unsecured creditor received more
than he would have if the payments had been retained by the estate
and then distributed to all the unsecured creditors after paying
the secured creditors in a bankruptcy proceeding, the unsecured
creditor impermissibly received a greater percentage by preference.
In contrast, a fully secured creditor who receives a prepetition
payment does not receive a greater percentage than he would have in
a bankruptcy proceeding because as a fully secured creditor he
would have recovered 100% payment in a bankruptcy proceeding.
Accordingly, a creditor who recovers his own collateral is not
deemed to have recovered a greater percentage than he would have in
bankruptcy. Similarly, an undersecured creditor who receives
prepetition payments does not receive a greater percentage recovery
when the source of the payments is the creditor's own collateral.
To determine whether an undersecured creditor received a
greater percentage recovery on its debt than it would have under
7

chapter 7 the following two issues must first be resolved: (1) to
what claim the payment is applied and (2) from what source the
payment comes. See id. at 434. Both aspects must be examined
before the issue of greater percentage recovery can be decided.
(1) The Application Aspect
If a payment to an undersecured creditor, like Scurlock, is
applied to the unsecured portion of the debt, then the undersecured
creditor will have recovered a greater percentage on this claim if
the estate cannot pay its unsecured creditors 100% of these claims.
See id. (citing Flynn v. Midamerican Bank & Trust Co. (In re Joe
Flynn Rare Coins, Inc.), 81 B.R. 1009, 1018 (Bankr.D.Kan. 1988));
In re Fitzgerald, 49 B.R. 62, 65 (Bankr.D.Mass. 1985); 4 L. KING,
COLLIER ON BANKRUPTCY, ¶ 547.09, at 547-43 (15th ed. 1990). In
contrast, if the undersecured creditor applies the payment to the
secured portion of the debt, the creditor effectively releases a
portion of its collateral from its security interest, that is, its
secured claim is reduced, freeing up a corresponding amount of
collateral. In this situation, the creditor does not receive a
greater percentage recovery. If, however, the creditor does not
actually release collateral upon application of the payment, then
the payment is ipso facto a payment on the unsecured portion of the
claim. See id. at 435-36.
The bankruptcy court found no evidence in the record that
Scurlock ever released collateral when it received payments from El
Paso. Scurlock's security instruments were designed to capture
8

"any and all indebtedness," meaning that, so long as there was
indebtedness in excess of collateral, all the collateral remained
encumbered. See id.
Scurlock argues that the bankruptcy court and district court
erred because they ignored the fact that El Paso's antecedent debt
was covered by letters of credit that were in turn collateralized
by El Paso's assets. If El Paso failed to pay Scurlock during the
90 days and Scurlock drew on the letters of credit issued by BBL,
BBL would have had a claim against El Paso's collateralized assets.
According to Scurlock, each time a payment was made, it prevented
a corresponding claim from being asserted by BBL against El Paso's
assets. Therefore, Scurlock maintains the payments were not
preferential because they were indirectly applied to the secured
portion of Scurlock's undersecured debt.
The district court found the bankruptcy court's determination
that Scurlock was undersecured and never released any collateral a
finding of fact that was not clearly erroneous. Despite Scurlock's
argument otherwise, it seems untenable to claim to have released
collateral with each payment when the entire collateral base
remained secured throughout the payments. We therefore find no
error in the ruling below on the application aspect of the greater
percentage recovery test.
(2) The "Source" Aspect
Even if the payment in question was applied to the unsecured
portion of an undersecured creditor's claim, the creditor will not
9

be deemed to have received a greater percentage as a result of the
payment if the source of the payment is the creditor's own
collateral. A creditor who merely recovers its own collateral
receives no more as a result than it would have received anyway had
the funds been retained by the debtor, subject to the creditor's
security interest. See In re El Paso Refinery, 178 B.R. at 435-36
(citing 4 L. KING, COLLIER ON BANKRUPTCY, ¶ 547.09, at 547-43 (15th ed.
1990)).
Scurlock offered uncontroverted expert testimony to establish
that all of the funds used to make the allegedly preferential
payments were proceeds of a security interest in current assets
(inventory, accounts receivable, contract rights, and proceeds).
The bankruptcy court held that the evidence established that the
source of all the alleged preferential payments were "proceeds" of
collateral in which Scurlock held a security interest. See id. at
436.
Scurlock maintains that once the bankruptcy court determined
that the source of the preferential payments was Scurlock's
collateral, the inquiry should have ended with no preferential
payments established. The bankruptcy court, however, rejected this
argument because of its interpretation of the Intercredit Agreement
and the parties' stipulations regarding Scurlock's collateral. We
now arrive at the determinative issue of this appeal: the
bankruptcy and district courts' treatment of the parties'
stipulations and the impact of the Intercredit Agreement.
10

IV
In the initial appeal, the district court held that the
bankruptcy court's interpretation of the parties' stipulations
conflicted with the bankruptcy court's analysis of the Intercredit
Agreement. The conflict existed because the bankruptcy court held
that the parties' stipulations concerning the Intercredit Agreement
implied a partial assignment of security interest by Scurlock to
BBL, but that the Intercredit Agreement, which was not part of the
record at that time, constituted a subordination agreement. The
district court therefore remanded the case to be supplemented with
the Intercredit Agreement and directed the bankruptcy court to
determine whether the Intercredit Agreement was a partial
assignment or a subordination agreement.
The Trustee argues that the district court erred in holding
that the bankruptcy court should not have accepted the parties'
trial stipulations about the Intercredit Agreement. There are two
stipulations at issue. Stipulation 6 provided that the first lien
Scurlock had on El Paso's collateral was also held by BBL pursuant
to an Intercredit Agreement, which provided that the first lien
position was shared on a ratable basis. Stipulation 18 provided
that, for the purposes of this adversary proceeding only, Scurlock
and BBL held perfected security interests in El Paso's collateral
and that they shared in this collateral in the following
proportion, 54.53% to Scurlock and 45.47% to BBL.
11

Generally, stipulations in a pretrial order bind the parties,
absent modification. See Save Barton Creek Ass'n v. Federal
Highway Admin., 950 F.2d 1129, 1132 n.3 (5th Cir. 1992). Federal
Rule of Civil Procedure 16 provides that a pretrial order controls
the subsequent course of the action, unless modified to prevent
manifest injustice. The Trustee argues that Scurlock failed to
show any circumstances to warrant disregard of the stipulations and
that the bankruptcy court's commentary about the stipulations
should be regarded as dicta.
A trial judge has "broad discretion in determining whether or
not a pretrial order should be modified or amended." Coastal
States Mktg., Inc. v. Hunt, 694 F.2d 1358, 1369 (5th Cir. 1983).
Although a trial court generally does not need to make findings on
stipulated facts, it may have to make a finding if conflicting
inferences can be drawn from the undisputed facts. See 9A CHARLES
A. WRIGHT & ARTHUR R. MILLER, FEDERAL PRACTICE AND PROCEDURE § 2579 at 541-42
(2d ed. 1995).
Here, the district court found conflicting inferences and
exercised its discretion to make further findings. We find that
the district court did not err in directing the bankruptcy court to
supplement the record with the Intercredit Agreement and interpret
the stipulations accordingly.
V
On remand, the bankruptcy court determined that the
Intercredit Agreement was a partial assignment and that the
12

stipulations accurately represented the partial assignment nature
of the Intercredit Agreement. The bankruptcy court concluded
that, by virtue of the partial assignment in the Intercredit
Agreement, Scurlock received a greater percentage of recovery than
it would have in a bankruptcy proceeding. Specifically, the
bankruptcy court held that 54.53% of the total proceeds were
indisputably Scurlock's, and its receipt of that proportion of the
proceeds was not a preferential payment. The remaining 45.47% of
the proceeds, however, were the subject of another creditor's
security interest--that of BBL. When Scurlock received those
monies, it received monies not sheltered by the source rule, which
protects only transfers of a given creditor's own collateral.
Thus, the bankruptcy court held that Scurlock recovered a greater
percentage than it otherwise would have received in a Chapter 7
liquidation (in which the stipulation of the parties regarding
BBL's security interest would be enforced). The bankruptcy court
therefore ruled that the Trustee established the fifth element of
§ 547(b), greater percentage recovery, with respect to 45.47% of
the transfers made to Scurlock during the preference period. The
district court affirmed.
Scurlock argues that the bankruptcy court's interpretation of
the Intercredit Agreement as a partial assignment was erroneous.
Scurlock claims that the Intercredit Agreement was an agreement to
modify contractually the relative lien positions of Scurlock, BBL,
and the other term lenders. Scurlock also maintains that the
13

collateral sharing contemplated by the Intercredit Agreement did
not occur until declaration of default and asserts that BBL never
made a claim for any percentage of the $82 million paid during the
preference period.
We now examine the Intercredit Agreement to determine whether
it was indeed a partial assignment or merely a subordination
agreement. Before the 1991 amended Intercredit Agreement, Scurlock
had a perfected first lien and BBL had an independently perfected
second lien in the proceeds of the common collateral. The
Intercredit Agreement changed this relationship by providing, in
pertinent part, the following:
4(f) Subject to Sections 4(b) and (c) hereof, the security
interests, liens, and other interests . . . at any time
granted to or held by (I) [BBL] and (ii) [Scurlock], in the
Common Collateral and the Common Secondary Collateral shall be
and remain at all times and in all respects of equal priority
subject to Section 4(g) and 4(h) hereof.
4(g) Subject to Sections 4(b) and (c) hereof, all proceeds
resulting from any sale, disposition, or other realization
upon any or all of the Common Collateral or the Common
Secondary Collateral occurring at any time after [BBL,
Scurlock or the Term Lenders], as the case may be, shall have
demanded payment under, declared a default or Event of Default
under or exercised any enforcement remedies under the [BBL]
Loan Documents, the [Term Lenders] Loan Documents or the
[Scurlock] Loan Documents shall be shared by [BBL] and
[Scurlock] pro rata in accordance with the outstanding
principal of the [BBL] Debt and the [Scurlock] Debt (the "Pro
Rata Allocation").
The dispute here is whether the Intercredit Agreement assigns part
of Scurlock's security interests to BBL or only modifies their
relative lien positions through a private sharing arrangement.
14

Contract interpretation is a matter of law reviewed by this
court de novo. See Liberty Mut. Ins. Co. v. Pine Bluff Sand &
Gravel Co., Inc., 89 F.3d 243, 246 (5th Cir. 1996). Our primary
concern is to give effect to the true intentions of the parties as
expressed in the written agreement. See Burns v. Exxon Corp., 158
F.3d 336, 340 (5th Cir. 1998). Absent ambiguity, the writing alone
will be deemed to express the intention of the parties, and
objective intent rather than subjective intent controls. See id.
(citing Sun Oil Co. v. Madeley, 626 S.W.2d 726, 728 (Tex. 1981)).
The two subsections in dispute are in a section of the
Intercredit Agreement entitled "Agreement to Subordinate." There
are no terms of conveyance in subsections 4(f) and (g) assigning a
portion of Scurlock's secured interest to BBL. Rather, subsection
4(k) of the Intercredit Agreement provides that BBL and Scurlock
"hereby consent to the modifications of their respective lien
priorities as effected by this agreement." This language reads as
a subordination agreement rather than a partial assignment.
The Trustee's attempt to characterize the Intercredit
Agreement as an assignment because it was filed at the Texas
Secretary of State's office is not persuasive. While § 9.405(a) of
the Tex. Bus. & Com. Code provides that a secured party may assign
of record all or part of its rights under a financing statement by
the filing in the Secretary of State's office of a separate written
statement of the assignment, the act of filing does not generate
authority for the Trustee to enforce the Intercredit Agreement.
15

Scurlock argues that it merely subordinated its first lien
position to BBL in relation to their claims to the Common
Collateral in the event of a default. It stresses that there is
nothing to suggest that it assigned its underlying debt to BBL, and
a lien is not subject to an assignment without the underlying debt.
See Svancina v. Gardner, 905 S.W.2d 780, 783 (Tex. App.--Texarkana
1995, no writ). Indeed, the Trustee concedes, as it must, that
Scurlock did not assign its debt to BBL, and BBL did not assign its
debt to Scurlock. Again, this circumstance favors a reading of the
Intercredit Agreement as a subordination agreement.
In Section 26, entitled "No Third Party Beneficiaries," the
Intercredit Agreement provides that BBL, Scurlock, and the Term
Lenders entered into this agreement "for their mutual convenience"
and "not for the benefit of El Paso." The parties to the
Intercredit Agreement further provided that the agreement "is
intended to establish relative rights and priorities between" them.
El Paso signed a consent form acknowledging the Intercredit
Agreement and consenting to the following:
[A]ny agreement among you providing for the alteration or
modification of the priorities of the respective liens,
security interests and/or mortgages held by each of you and to
any agreement among you with respect to the order of
distribution among you of proceeds of any collateral subject
to such liens, security interests and/or mortgages.
This language further suggests that the Intercredit Agreement was
a subordination agreement and not a partial assignment.
16

The consent language also makes plain that the Intercredit
Agreement gave neither El Paso nor its Trustee standing to enforce
its terms because they were not a party to the agreement. See 11
U.S.C. § 510(a); In re Terrace Gardens Park Partnership, 96 B.R.
707, 716 (Bankr. W.D.Tex. 1989). Despite the Trustee's insistence
that, irrespective of the label given to the Intercredit Agreement,
Scurlock and BBL shared a first lien priority on the Common
Collateral mandating that the proceeds from the Common Collateral
be shared with BBL in a chapter 7 liquidation, we find the Trustee
has no standing to assert such a claim for BBL, as the bankruptcy
court
correctly
acknowledged
in
its
original
opinion.
Specifically, the Trustee cannot enforce the agreement's sharing
arrangement and cannot rely on it to demonstrate greater recovery
by Scurlock.
We are ultimately persuaded that the Intercredit Agreement is
a subordination agreement treating the order of distribution
between the parties who executed it. The Intercredit Agreement
describes the parties' intent to share pro rata, according to the
outstanding debt, the proceeds of common collateral in the event of
a declaration of default. There is no evidence that BBL sought to
recover any percentage of the $82,000,000 that was paid to Scurlock
during the 90 days preceding bankruptcy filing and no evidence that
any such right would belong to anyone else.
That said, the parties' affairs do not easily give up their
full meaning at least from what we have before us. If Scurlock
17

received more than that to which it was entitled according to its
agreement with BBL, the ball rests with BBL, not the Trustee of El
Paso.
Given this conclusion and the fact that the source of all of
the prepetition payments to Scurlock from El Paso were proceeds
from collateral in which Scurlock held a secured interest, we find
that Scurlock did not receive a greater percentage of recovery than
it would have in a bankruptcy proceeding. Therefore, the Trustee
has failed to establish the fifth element of § 547(b), which
requires a trustee to show that a creditor received a greater
percentage then he would have in a bankruptcy proceeding.
Accordingly, we hold that Scurlock did not receive any preferential
payments from El Paso. The district court is REVERSED, and the
Trustee/debtor takes nothing.
18