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 11 U.S.C. § 547(c)(2) (2000). The bankruptcy court granted summary judgment for defendant Stratos. Determining that the payments fell within the “ordinary course of business” exception to thе prohibition on preferential transfers, id., the Bankruptcy Appellate Panel of the Ninth Circuit (BAP) affirmed, holding that repayment of a debt can be within the “ordinary course of business” exception to the prohibition on preferential transfers even if both the underlying debt and any restructuring agreement are the first such transactions between the parties.
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 11 U.S.C. § 547(b) (2000)
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 of “preferential transfers” under § 547(b), as in effect at the time Stratos filed for bankruptcy.
At the time of the litigation in the bankruptcy court, the “ordinary course of business” exception, 11 U.S.C. § 547(c)(2), provided that the trustee may not avoid a transfer under § 547(b)
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 have an established course of dealing that § 547(c)(2)(A) and § 547(c)(2)(B) rеquire that “the debt and its payment are ordinary in relation to past practices between the debtor and this particular creditor.” Mordy v. Chemcarb, Inc. (In re Food Catering & Hous., Inc.),
As a consequence, with regard to § 547(c)(2)(B), we evaluate the challenged transfers in light of Ahaza’s prior transfers to Stratos. Our task is more difficult with regard to § 547(c)(2)(A), however, for two reasons: (1) as far as appears in the present record, the debt fоr services in question is the result of the first transaction between Stratos and Ahaza, and (2) the Agreement between Stratos and Ahaza revised the terms of repayment of the debt. We address today, as a matter of first impression in this circuit, what “ordinary” in § 547(c)(2)(A) means if the debt in question is a first-time transaction between the parties, and what “debt” means when the original agreement between two parties is revised.
Although we have never addressed how § 547(c)(2)(A) applies when the debt in question is a first-time transaction between the parties,
We agree that first-time transactions may satisfy the requirements of § 547(c)(2)(A). “Obviously every borrower who does something in the ordinary course of her affairs must, at some point, have done it for the first time.” In re Finn,
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 § 547(c)(2)(A), a first-time debt must be ordinary in relation to this debtor’s and this creditor’s past practices when dealing with other, similarly situated parties. Only if a party has never engaged in similar transactions would we consider more generally whether the debt is similar to what we would expeсt of similarly situated parties, where the debtor is not sliding into bankruptcy. See Union Bank,
Wood maintains that referencing similar third-party transactions — or, in their absence, expected practice of similarly situated parties — collapses § 547(c)(2)(A) into § 547(c)(2)(C), under which we always assess “ordinary” by reference to “prevailing business standards,” In re Food Catering & Hous., Inc.,
II. Section 547(c)(2)(A): Relevant debt when a revision of an original agreement is involved
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-restructuring debts are relevant to the prohibition оn preferential transfers. On the one hand, in considering whether a challenged transfer satisfied § 547(c)(2)(C), we have treated a restructuring agreement as relevant to the “ordinariness” of the terms of the disputed transfers. In re Kaypro,
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,” 11 U.S.C. § 101(12), and defines claim broadly to include “right[s] to payment, whether or not ... reduced to judgment, liquidated, unliqui-dated, fixed, contingent, matured, unma-tured, disputed,[or] undisputed,” id. § 101(5)(A). Moreover, it would be inconsistent with the purpose of the ordinary course of business exception to exclude either the Agreement or the underlying transaction from our consideration. Our goal is to determine whether the payments made by Ahaza to Stratos were routine. We cannot make this determination by evaluating only a portion of the relationship that resulted in the challenged transfers.
Thus, we hold that both the pre-Agreement arrangement between Ahaza and Stratos and the Agreement itself are relevant to § 547(a)(2)(A). To the extent that
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,” § 547(c)(2)(C), “is a question of fact that depends on the nature of industry practice .... [and] is appropriately left to the bankruptcy court,” In re Kaypro,
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.” Fed. R. Civ. P. 56(c). “A factual dispute is genuine only if a reasonable trier of fact could find in favor of the nonmoving party. A mere scintilla of evidence supporting [a nonmovant’s] position is insufficient to withstand summary judgment.” Galen v. County of L.A.,
With regard to § 547(c)(2)(A), the BAP concluded that “the underlying debt was incurred under normal circumstances, as debtor originally owed Stratos money under a product design and development agreement.” To the contrary, we find no facts in this record about the nature of the original agreement between Ahaza and Stratos, and nothing that would signal whether the debt was arms-length, routine, and ordinary, or otherwise. Although Stratos’s two declarations discuss the company’s and industry’s practice with “start-ups,” nothing in the record shows whether or not Ahaza resembled the start-ups discussed in the declarations. Similarly, although the Curneen declaration lists litigation as one means of revising its payment agreements, the declaration does not establish that the Agreement, entered into under threat of litigation, was in that respect entered into in the ordinary course of business. Cf. Energy Coop., Inc. v. SOCAP Int’l, Ltd. (In re Energy Cooperative),
We will not decide at this juncture, however, whether or not the evidence is so “one-sided” as to warrant summary judgment on the § 547(c)(2)(A) issue in favor of Wood. See State Farm Fire and Cas. Co.,
Summary judgment is equally inappropriate with regard to § 547(c)(2)(B), which requires a determination of whether the challenged payments themselves were ordinary. Although more informative than the record regarding the underlying debt, the evidence regarding Ahaza’s payments to Stratos is insufficient to support summary judgment for either party.
When, as here, there is a history of payments among the parties,
[a]mong the factors courts consider in determining whethеr 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 nonetheless affirmed summary judgment to Stratos on this issue, holding that although the chаllenged 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 evidence, 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 instead that a reasonable trier of fact could, on the present record, find in favor of Wood on thе § 547(c)(2)(B) issue for two reasons.
? “[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 indicators of the prior course of business between Stratos and Ahaza adequately enough to permit summary judgment in Stratos’s favor. Thеre 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.),
Consequently, 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 11 U.S.C. § 547 in this opinion are to the statute as it existed prior to the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, Pub.L. No. 109-8, 119 Stat. 23 ("2005 Act”), whose amendments do not apply to proceedings like this one, which commenced prior to the Act's enactment on April 20, 2005. Tit. XII, § 1213,
. Section 547(b) defines a preferential transfer as “any transfer of an interest of the debtor in property” that was:
(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],
11 U.S.C. § 547(b) (2000).
. The 2005 Act maintained the basic requirements for the ordinary course of business exception but expanded the exception by making former § 547(c)(2)(B) (now codified as (A)), and § 547(c)(2)(C) (now codified as (B)) alternative, rather than cumulative, requirements. As amended, § 547(c)(2) now exempts transfers
to the extent that such transfer was in payment of а debt incurred by the debtor in the ordinary course of business or financial affairs of the debtor and the transferee, and such transfer was—
*1124 (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 under the new amendments. The amendments still require, however, that the "debt” have been incurred "in the ordinary course of business оr 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 § 547(c)(2)(A), but both link the § 547(c)(2)(A) inquiry, as well as the § 547(c)(2)(B) inquiry, to "past practices.”
. 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 there was no history of "past prаctices” — 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 or clarification of our law regarding whether a debt is аntecedent to challenged transactions.
. The Agreement — and the threat of litigation of litigation that preceded it — may also be relevant to § 547(c)(2)(B) as evidence of whether Stratos’s efforts to collect the challenged payments support the conclusion that the particular transfers were made in the ordinary course of business.
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 when the debt in question was the first transaction between the particular debtоr and the particular creditor — doesn’t obviously square with either the statutory construct or what we said in In re Food Catering & Housing, Inc.,