In Re Ahaza Systems, Inc., Debtor. Edmund J. Wood, in His Capacity as Chapter 7 Trustee v. Stratos Product Development, LLCIn Re Ahaza Systems, Inc., Debtor. Edmund J. Wood, in His Capacity as Chapter 7 Trustee v. Stratos Product Development, LLC
Lead Opinion
This сase concerns whether payments for product design services made by Ahaza Systems, Inc. to Stratos Product Development LLC shortly before Ahaza filed for bankruptcy were preferential payments that must be returned to the bankruptcy estate. Plaintiff Edmund J. Wood, trustee of Ahaza’s estate for the bankruptcy proceedings, seeks to recover two payments made to Stratos, maintaining that they were preferential and therefore voidable under the Bankruptcy Code. See
We agree with the BAP’s basic holding. Athough we normally decide whether a debt is “ordinary” by comparing it to the parties’ past practice with each other, we conclude that when the transaction at issue is the parties’ first, “ordinary” can be determined in reference to the parties’ practice with others. Because the standard we announce today was not available to the parties at the time of the bankruptcy court proceedings, and because summary judgment is not otherwise justified, we remand for further development of the summary judgment record, or, in the alternative, for trial.
BACKGROUND
Stratos agreed to help develop products for Ahaza as part of a relationship that eventually soured. Alleging that Ahaza owed it money for work performed, Stra-tos threatened to sue Ahaza for breach of contract and other causes of action. Instead of heading to court, Stratos and Aha-za in 2001 entered into a Settlement Agreement and Release (“Agreement”). The Agreement provided that Ahaza would pay to Stratos $380,000 immediately, and $35,000 per month for the following year. Payments were due on the fifteenth day of each month. If Ahaza failed to pay within ten days of receiving notice of payment due, the entire remaining balance would immediately become due. The Agreement also provided that if Ahaza became subject to bankruptcy proceedings, the entire remaining balance would immediately be
Both any underlying contract for services and the 2001 Agreement were the first such transactions between Ahaza and Stratos, as far as the record shows. There is no evidence in the record of Ahaza’s and Stratos’s interactions prior to the Agreement.
Check Check
Date due written cleared Amount
6/11/01 6/11/01 6/14/01 $380,000
7/15/01 7/11/01 7/18/01 $ 35,000
8/15/01 8/8/01 8/14/01 $ 35,000
9/15/01 9/4/01 9/7/01 $ 35,000
10/15/01 10/3/01 10/15/01 $ 35,000
11/15/01 11/15/01 12/6/018 $ 35,000
12/15/01 1/2/02 1/7/02 $ 35,000
1/15/02 1/28/02 1/31/02 $ 35,000
2/15/02 3/4/02 3/7/02 , $ 35,000
After Ahaza filed a voluntary Chapter 7 bankruptcy petition on April 24, 2002, Wood, the trustee of Ahaza’s estate, filed a complaint on January 27, 2004, to recover under
In support of its motion, Stratos submitted two declarations describing its business practices generally. One, from Michael Curneen, a principal owner and Chief Operating Officer of Stratos, states that a “large percentage” of the company’s business is with “start-up companies whose cash positions are typically restricted,” and that Stratos has often entered into agreements with start-ups that require payment on “predetermined calendar dates or at specific milestones.” Curneen declared that such agreements often must be revised and that Stratos revised twenty-eight of the fifty-eight client agreements it entered into during 2001 and 2002 in various ways, including restructuring the debt, assuming an ownership interest in the client company, or instigating or threatening litigation.
Although the term “start-up” is not defined in Curneen’s declaration, the other declaration filed by Stratos on summary judgment, from Myles Mutnick, an officer of a national trade association of high-tech companies, explains that “start-up companies” are “companies dependent on venture capital to sustain ongoing operations.” He further reports that such companies “often face two uncertainties: the ability to raise venture capital and the time over
The Mutnick declaration goes on to state that because “[i]n the ordinary course of many of the vendor/start-up relationships, cash-flow of the start-up will be tight for a variety of well recognized reasons[,] ... vendors typically resort to a variety of financial relationship strategies, including debt restructuring.” The reason such debt restructuring or forgiveness “is ... done in the ordinary course of vendor/start-up relationships [is] in recognition that forceful collection action can jeopardize any potential for a future relationship and, depending on timing, sufficiently diminish cash reserves so as to imperil the viability of the start-up.”
Based on these declarations and the evidence of Ahaza’s payments under the Agreement, the bankruptcy court granted Stratos’s motion for summary judgment and denied Wood’s cross-motion. On appeal, the BAP affirmed the summary judgment. This timely appeal followed.
STANDARD OF REVIEW
We review decisions of the BAP de novo and apply the same standard of review that the BAP applied to the bankruptcy court’s ruling — here, de novo review of the summary judgment ruling. Arrow Elecs., Inc. v. Justus (In re Kaypro),
DISCUSSION
Stratos, the creditor, does not dispute that the last two payments satisfied the definition оf “preferential transfers” under
At the time of the litigation in the bankruptcy court, the “ordinary course of business” exception,
to the extent that such transfer was—
(A) in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debt- or and the transferee;
(B) made in the ordinary course of business or financial affairs of the debtor and the transferee; and
(C) made according to ordinary business terms.4
Although the statutory language does not specifically so provide, we have held previously in cases in which parties havе an established course of dealing that
As a consequence, with regard to
Although we have never addressed how
We agree that first-time transactions may satisfy the requirements of
Having held first-time debts eligible for the exception, we now must determine the criteria for deciding when a debt is incurred “in the ordinary course of business,” albeit for the first time between the parties. Other courts’ decisions point to several options. Through citation to Huffman v. New Jersey Steel Corp. (In re Valley Steel Corp.),
When there are no prior transactions with which to compare, the court may analyze other indicia, including whether the transaction is out of the ordinary for a person in the debtor’s position, or whether the debtor complied with the terms of the contractual arrangement, generally looking to the conduct of the parties, or to the parties’ ordinary course of dealing in other business transactions.
Meeks v. Harrah’s Tunica Corp. (In re Armstrong),
We agree with the thrust of all three analyses that, when we have no past debt between the parties with which to compare the challenged one, the instant debt should be compared to the debt agreements into which we would expect the debtor and creditor to enter as part of their ordinary business operations. Consistent with Food Catering, however, this analysis should be as specific to the actual parties as possible. Thus, we hold that to fulfill
Wood maintains that referencing similar third-party transactions — or, in their absence, expected practice of similarly situated parties — collapses
II.
Underlying the parties’ dispute in this case is a second legal question: When the payment agreement between two parties has been revised or restructured, what
In two separate contexts, we have found that both restructuring agreements and pre-rеstructuring debts are relevant to the prohibition on preferential transfers. On the one hand, in considering whether a challenged transfer satisfied
A broad understanding of “debt,” encompassing both the original and the revised agreement, is consistent with the Bankruptcy Code, which defines debt as a “liability on a claim,”
Thus, we hold that both the pre-Agreement аrrangement between Ahaza and Stratos and the Agreement itself are relevant to
III. Summary judgment
With these clarifications of the law, we turn to the facts. We previously have determined that whether a transfer was “made according to ordinary business terms,”
Summary judgment is appropriate when “there is no genuine issue as to any material fact and ... the moving party is entitled to a judgment as a matter of law.”
With regard to
We will not decide at this juncture, however, whether or not the evidence is so “one-sided” as to warrant summary judgment on the
Summary judgment is equally inappropriate with regard to
When, as here, there is a history of payments among the parties,
[a]mong the fаctors courts consider in determining whether transfers are ordinary in relation to past practices are: 1) the length of time the parties were engaged in the transactions at issue; 2) whether the amount or form of tender differed from past practices; 3) whether the debtor or creditor engaged in any unusual collection or payment activity; and, 4) whether the creditor took advantage of the debtor’s deteriorating financial condition.
In re Grand Chevrolet, Inc.,
The BAP evaluated the available evidence in light of the Grand Chevrolet factors and noted that “it is difficult to determine whether the challenged payments were within the ordinary course of business between Ahaza and Stratos.” It nonethеless affirmed summary judgment to Stratos on this issue, holding that although the challenged payments were unusual because they were made a bit later than most of the previous ones, the payments were ordinary because (1) the amount and form of tender stayed constant over the course of payments under the Agreement; and (2) there is no evidence of unusual collection activity or other circumstances indicating that Stratos was taking advantage of Ahaza’s deteriorating condition. In so finding, the BAP necessarily held that Stratos met its burden of proving the exception by a preponderance of the еvidence, see In re Grand Chevrolet, Inc.,
We agree with the BAP that a reasonable trier of fact could find in favor of Stratos and that summary judgment for Wood on this point is therefore inappropriate. But given the fact-specific nature of the inquiry and the lack of a precise formula concerning how the four Grand Chevrolet factors—or other factors— should be combined, we cannot agree that summary judgment for Stratos was appropriate. We conclude instеad that a reasonable trier of fact could, on the present record, find in favor of Wood on the
? “[d]elay is particularly relevant in taking a payment outside the ordinary course of business exception.” In re
The record also does not establish other indicаtors of the prior course of business between Stratos and Ahaza adequately enough to permit summary judgment in Stratos’s favor. There is no evidence in the record of the timeliness of Ahaza’s pre-Agreement payments, or of Stratos’s pre- or post-Agreement payment demands. Cf. Bell Flavors & Fragrances, Inc. v. Andrew (In re Loretto Winery, Ltd.),
Consequеntly, on this point, we affirm the BAP’s ruling on Wood’s motion, reverse its ruling on Stratos’s motion, and remand for further proceedings. See generally In re Kaypro,
CONCLUSION
For the foregoing reasons, summary judgment is inappropriate for either party in this case. AFFIRMED in part, REVERSED and REMANDED in part.
Notes
. Stratos’s summary judgment motion states that the settlement agreement stems from a dispute over a $2.9 million product design and development contract entered into on November 8, 2000, under which Ahaza fell behind on its monthly payments. Stratos has not, however, presented evidence supporting this allegation, and Wood has not so admitted or alleged. We therefore do not accept it as an undisputed fact on summary judgment. See generally Barcamerica Int’l USA Trust v. Tyfteld Importers, Inc.,
. Unless otherwise specified, all references to
.
(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 the 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 the Bankruptcy Code];
(B) the transfer had not been made; and
(C) such creditor received payment of such debt to the extent provided by the provisions of [the Bankruptcy Code],
. The 2005 Act maintained the basic requirements for the ordinary course of business exception but expanded the exception by making former
to the extent that such transfer was in payment of a debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was—
(A) made in the ordinary course of business or financial affairs of the debtor and the transferee; or
(B) made according to ordinary business terms.
Because of this change, first-time transfers can come within the exception if they meet the “ordinary business terms” requirement, measured by industry practice, even if there is no course of business between the parties. To that degree, the problem we discuss today does not arise undеr the new amendments. The amendments still require, however, that the "debt” have been incurred "in the ordinary course of business or financial affairs of the debtor and the transferee,” so the first-time transaction issue remains pertinent with regard to the origin of the debt. See generally Charles J. Tabb, The Brave New World of Bankruptcy Preferences, 13 Am. Bankr. Inst. L. Rev. 425 (2005) (discussing the 2005 revisions to the ordinary course of business exception).
. Grand Chevrolet and Food Catering did not have occasion to apply
. This inquiry has been dubbed the "subjective” inquiry in the case law for reasons that are not clear, as no inquiry into the parties' state of mind is involved. See, e.g., Lawson v. Ford Motor Co. (In re Roblin Indus., Inc.),
. We have discussed the "past practices” test in two cases: Grand Chevrolet and Food Catering. Both cases involved situations in which there was a history of transactions between the parties, and neither case considered what is “ordinary” when thеre was no history of "past practices” — or, for that matter, explained why "past practices” are generally a useful reference. We are therefore free to consider now what test is appropriate when no past practices exist. See In re Grand Chevrolet,
. As we discuss later, there are no facts in the record about the pre-Agreement relationship between Stratos and Ahaza.
. We do not suggest today any change оr clarification of our law regarding whether a debt is antecedent to challenged transactions.
. The Agreement — and the threat of litigation of litigation that preceded it — may also be relevant to
Dissenting Opinion
dissenting:
I reluctantly part company because the majority adopts an apparently sensible solution to the “always-a-first-time” conundrum. My difficulty is that the solution— applying a three step analysis triggered only whеn the debt in question was the first transaction between the particular debtor and the particular creditor — doesn’t obviously square with either the statutory construct or what we said in In re Food Catering & Housing, Inc.,