Wood v. Stratos Product Development, LLC ( 2007 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: AHAZA SYSTEMS, INC., 
Debtor.
EDMUND J. WOOD, in his capacity No. 05-35455
as Chapter 7 Trustee,
Appellant,  BAP No.
WW-04-01359-TPS
v. OPINION
STRATOS PRODUCT DEVELOPMENT,
LLC,
Appellee.

Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Tighe,* Perris, and Smith, Bankruptcy Judges, Presiding
Argued and Submitted
November 14, 2006—Seattle, Washington
Filed April 3, 2007
Before: Pamela Ann Rymer, Marsha S. Berzon, and
Richard C. Tallman, Circuit Judges.
Opinion by Judge Berzon;
Dissent by Judge Rymer
*The Honorable Maureen A. Tighe, Bankruptcy Judge for the Central
District of California, sitting by designation.
3815
IN RE: AHAZA SYSTEMS, INC. 3819
COUNSEL
Teresa H. Pearson, Seattle, Washington, for the appellant.
James R. Hermsen and Aaron D. Goldstein, Seattle, Washing-
ton, for the appellee.
OPINION
BERZON, Circuit Judge:
This case 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 bank-
ruptcy 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 prefer-
ential 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 the 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. Although we nor-
mally decide whether a debt is “ordinary” by comparing it to
3820 IN RE: AHAZA SYSTEMS, INC.
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, Stratos threatened to sue
Ahaza for breach of contract and other causes of action.
Instead of heading to court, Stratos and Ahaza 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 follow-
ing 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 become due, without
notice or opportunity to cure.
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.1 It is undisputed, however, that pursuant to the
1
Stratos’s summary judgment motion states that the settlement agree-
ment stems from a dispute over a $2.9 million product design and devel-
opment 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
IN RE: AHAZA SYSTEMS, INC. 3821
Agreement, Ahaza made the following payments by check to
Stratos:
Date due Check written Check 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)2 the last two payments that Ahaza had made
alleged. We therefore do not accept it as an undisputed fact on summary
judgment. See generally Barcamerica Int’l USA Trust v. Tyfield Importers,
Inc., 289 F.3d 589, 593 n.4 (9th Cir. 2002) (“[A]rguments and statements
of counsel are not evidence and do not create issues of material fact capa-
ble of defeating an otherwise valid motion for summary judgment.” (inter-
nal quotation omitted)).
2
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 Pre-
vention 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, 119 Stat. at 195.
3822 IN RE: AHAZA SYSTEMS, INC.
to Stratos. Section 547(b) allows trustees of bankrupt estates
to avoid certain transfers made to creditors within ninety days
of the filing of a bankruptcy petition. Stratos filed for sum-
mary judgment on May 25, 2004, and Wood cross-filed for
summary judgment shortly thereafter.
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 “predeter-
mined 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 agree-
ments it entered into during 2001 and 2002 in various ways,
including restructuring the debt, assuming an ownership inter-
est in the client company, or instigating or threatening litiga-
tion.
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 com-
panies “often face two uncertainties: the ability to raise ven-
ture capital and the time over which any such raised capital
will be ‘burned.’ ”
The Mutnick declaration goes on to state that because “[i]n
the ordinary course of many of the vendor/start-up relation-
ships, 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 forgive-
ness “is . . . done in the ordinary course of vendor/start-up
IN RE: AHAZA SYSTEMS, INC. 3823
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 bank-
ruptcy court’s ruling — here, de novo review of the summary
judgment ruling. Arrow Elecs., Inc. v. Justus (In re Kaypro),
218 F.3d 1070, 1073 (9th Cir. 2000).
DISCUSSION
Stratos, the creditor, does not dispute that the last two pay-
ments satisfied the definition of “preferential transfers” under
§ 547(b), as in effect at the time Stratos filed for bankruptcy.3
3
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
3824 IN RE: AHAZA SYSTEMS, INC.
It maintains however, that the transfers should not be voided
because they fell under the “ordinary course of business”
exception to the preferential transfers prohibition.
[1] 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 debtor 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
(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).
4
The 2005 Act maintained the basic requirements for the ordinary
course of business exception but expanded the exception by making for-
mer § 547(c)(2)(B) (now codified as (A)), and § 547(c)(2)(C) (now codi-
fied 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 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—
IN RE: AHAZA SYSTEMS, INC. 3825
The parties agree that the challenged payments fulfill the
third requirement, § 547(c)(2)(C), which requires that pay-
ments be “made according to ordinary business terms” to
qualify for the exemption. See generally In re Kaypro, 218
F.3d at 1073-74 (concluding that payments made pursuant to
a debt restructuring agreement are not per se outside the “or-
dinary business terms” of an industry). They dispute, how-
ever, whether the transfers were “in payment of a debt
incurred by the debtor in the ordinary course of business or
financial affairs of the debtor and the transferee,” 11 U.S.C.
§ 547(c)(2)(A), or “made in the ordinary course of business or
financial affairs of the debtor and the transferee,” id. at
§ 547(c)(2)(B).
[2] 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) require that “the debt and its payment are ordi-
nary in relation to past practices between the debtor and this
particular creditor.” Mordy v. Chemcarb, Inc. (In re Food
Catering & Hous., Inc.), 971 F.2d 396, 398 (9th Cir. 1992);
see also Sulmeyer v. Suzuki (In re Grand Chevrolet, Inc.), 25
F.3d 728, 732 (9th Cir. 1994) (quoting In re Food Catering
(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 excep-
tion if they meet the “ordinary business terms” requirement, measured by
industry practice, even if there is no course of business between the par-
ties. 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 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).
3826 IN RE: AHAZA SYSTEMS, INC.
& Hous., Inc).5 In other words, to determine what is “ordi-
nary” among parties who have interacted repeatedly, we
inquire into the pattern of interactions between the actual
creditor and the actual debtor in question, not about what
transactions would have been “ordinary” for either party with
other debtors or creditors.6
As a consequence, with regard to § 547(c)(2)(B), we evalu-
ate 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 for 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.
I. Section 547(c)(2)(A): Ordinary course of business
for a first-time debt
[3] Although we have never addressed how § 547(c)(2)(A)
applies when the debt in question is a first-time transaction
between the parties,7 the two circuits that have considered the
5
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.”
6
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.), 78 F.3d 30, 43 (2d Cir. 1996); In re Midway Airlines, Inc., 69 F.3d
792, 797-98 (7th Cir. 1995).
7
We have discussed the “past practices” test in two cases: Grand Chev-
rolet and Food Catering. Both cases involved situations in which there
was a history of transactions between the parties, and neither case consid-
IN RE: AHAZA SYSTEMS, INC. 3827
issue, the Sixth and Seventh Circuits, have held that issuance
of debt “can be in the ordinary course of financial affairs even
if it is the first such transaction undertaken by the [parties].”
Gosch v. Burns (In re Finn), 909 F.2d 903, 908 (6th Cir.
1990); see also Kleven v. Household Bank F.S.B., 334 F.3d
638, 642 (7th Cir. 2003) (“[O]ther courts have [addressed the
‘first-time’ issue] with mixed results, although most side with
the view that a first-time transaction is not per se ineligible for
protection from avoidance under § 547(c)(2).”) (citing In re
Finn and several bankruptcy and district courts).
[4] 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, 909 F.2d at 908. With the “ordinary course of business”
exception, Congress aimed not to protect well-established
financial relations, but rather to “leave undisturbed normal
financial relations, because [the exception] does not detract
from the general policy of the preference section to discour-
age unusual action by either the debtor or his creditors during
the debtor’s slide into bankruptcy.” Union Bank v. Wolas, 502
U.S. 151, 160 (1991) (quoting H.R. REP. NO. 95-595, at 373
(1977)) (emphasis added). Together with the rule against pref-
erential transfers, the ordinary course of business exception
“deter[s] the ‘race to the courthouse’ and enabl[es] the strug-
gling debtor to continue operating its business.” Id. at 161.
This animating policy concern is not erased simply because a
ered what is “ordinary” when there 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, 25 F.3d at 732;
In re Food Catering & Hous., Inc., 971 F.2d at 398; see generally Hart
v. Massanari, 266 F.3d 1155, 1170 (9th Cir. 2001) (“In determining
whether it is bound by an earlier decision, a court considers not merely the
reason and spirit of cases but also . . . the facts giving rise to the dispute.
. . .” (citations omitted)).
3828 IN RE: AHAZA SYSTEMS, INC.
debt is the parties’ first transaction. Thus, as the BAP
observed, “[i]t would be inconsistent with the purpose of the
section for Stratos to be prevented from receiving the benefit
of the ordinary course of business exception” for otherwise
routine transactions simply because Stratos never previously
entered into a transaction with Ahaza.
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.), 182 B.R. 728, 735
(Bank.W.D. Va. 1995), which relied upon Finn, the BAP in
this case adopted the Sixth Circuit’s position: When applied
to new transactions, § 547(c)(2)(A) requires an inquiry into
whether “the transaction would . . . be out of the ordinary for
a person in the borrower’s position.” In re Finn, 909 F.2d at
908. Discussing a debt and its related transfers, the Seventh
Circuit concluded that “[i]n some instances . . . the ordinary
course of business may be established by the terms of the par-
ties’ agreement [regarding issuance of debt], until that agree-
ment is somehow or other modified by actual performance.”
Kleven, 334 F.3d at 643 (regarding tax refund anticipation
loans). Regarding first-time transfers under § 547(c)(2)(B),
one bankruptcy court listed several additional relevant factors.
The court concluded,
When there are no prior transactions with which to
compare, the court may analyze other indicia,
including whether the transaction is out of the ordi-
nary 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), 231 B.R.
723, 731 (Bankr. E. D. Ark. 1999) (citations omitted). The
IN RE: AHAZA SYSTEMS, INC. 3829
factors listed by the Arkansas bankruptcy court are similar to
those we have used to evaluate non-first-time transfers under
§ 547(c)(2)(B). See In re Grand Chevrolet, 25 F.3d at 732.
[5] We agree with the thrust of all three analyses that, when
we have no past debt between the parties with which to com-
pare 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 opera-
tions. 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 expect of similarly situated parties, where
the debtor is not sliding into bankruptcy. See Union Bank, 502
U.S. at 160 (distinguishing the “normal financial relations”
protected by § 547(c)(2) from “unusual action by either the
debtor or his creditors during the debtor’s slide into bankrupt-
cy”). In this latter instance, the fact that a debt is the first of
its kind for a party will be relevant but not dispositive.
Wood maintains that referencing similar third-party trans-
actions — 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., 971 F.2d at 398, in the relevant indus-
try, see In re Kaypro, 218 F.3d at 1074. We disagree.
Although the inquiries may overlap in the case of first-time
transactions, they remain distinct. As we apply it today,
§ 547(c)(2)(A) still reflects the actual parties’ practices inso-
far as that is possible and focuses on the issuance of debt
itself, while § 547(c)(2)(C) focuses on the terms of the chal-
lenged transfers and reflects “the broad range of terms that
encompasses the practices employed by [similarly situated]
3830 IN RE: AHAZA SYSTEMS, INC.
debtors and creditors, including terms that are ordinary for
those under financial distress.” Ganis Credit Corp. v. Ander-
son (In re Jan Weilert RV, Inc.), 315 F.3d 1192, 1198 (9th
Cir.), amended by 326 F.3d 1028 (9th Cir. 2003) (citing In re
Kaypro, 218 F.3d at 1074).
II. Section 547(c)(2)(A): Relevant debt when
a revision of an original agreement is involved
[6] 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 is the “debt” to
be considered under § 547(c)(2)(A)? In awarding summary
judgment to Stratos, the BAP addressed both the Agreement
and the original transaction between Stratos and Ahaza. Wood
represented at oral argument on appeal, however, that the only
relevant debt was the Agreement. We believe the BAP’s
approach makes more sense, insofar as the original transac-
tion that gave rise to the Agreement would otherwise be
defined as “debt.”8
In two separate contexts, we have found that both restruc-
turing agreements and pre-restructuring debts are relevant to
the prohibition on 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, 218 F.3d at 1074. On the other hand, when we
have considered whether a debt is “antecedent” to challenged
transfers — thereby contributing to the prima facie case for a
preferential transfer — we have linked transfers to the origi-
nal agreement between the parties, rather than to any later
transaction that changes or nullifies that agreement. Futoran
v. Rush (In re Futoran), 76 F.3d 265 (9th Cir. 1996), consid-
ered a husband’s transfer in exchange for cancellation of a
8
As we discuss later, there are no facts in the record about the pre-
Agreement relationship between Stratos and Ahaza.
IN RE: AHAZA SYSTEMS, INC. 3831
marital support agreement. We concluded that the transfer
was made pursuant to the original marital support agreement
by analogizing to the installment loan context, in which “debt
is incurred when the loan is made and not when the payments
become due.” Id. at 267. In discussing whether a debt is ante-
cedent to challenged payments, the Fifth Circuit has con-
cluded even more explicitly that payments made as part of a
settlement agreement were made pursuant to the pre-
agreement arrangement, rather than pursuant to the settlement
agreement itself. See Baker Hughes Oilfield Operations, Inc.
v. Cage (In re Ramba, Inc.), 416 F.3d 394, 398-99 (5th Cir.
2005) (concluding that the relevant debt for a payment made
to stave off an involuntary bankruptcy petition was created by
the receipt of goods, not the later settlement agreement);
Southmark Corp. v. Schulte Roth & Zabel (In re Southmark
Corp.), 88 F.3d 311, 318 (5th Cir. 1996) (concluding that a
debt for costs and attorneys’ fees associated with a legal dis-
pute arose when demand was made, not when a settlement
agreement was reached).
[7] 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, unliquidated, fixed, contingent,
matured, unmatured, disputed,[or] undisputed,” id.
§ 101(5)(A). Moreover, it would be inconsistent with the pur-
pose 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.9
9
We do not suggest today any change or clarification of our law regard-
ing whether a debt is antecedent to challenged transactions.
3832 IN RE: AHAZA SYSTEMS, INC.
[8] Thus, we hold that both the pre-Agreement arrangement
between Ahaza and Stratos and the Agreement itself are rele-
vant to § 547(a)(2)(A). To the extent that it would otherwise
be considered a debt antecedent to the challenged payments,
the pre-Agreement arrangement must be considered under this
provision. The Agreement is relevant to the extent that it fur-
ther elucidated or changed Ahaza’s liability to Stratos.10
III. Summary judgment
[9] 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, 218 F.3d at 1073-74 (citations omitted).
Because § 547(c)(2)(A) and § 547(c)(2)(B), in the context of
first-time transactions, involve considerations similar to those
under § 547(c)(2)(C), we hold that whether a debt or transfer
was made “in the ordinary course of business or financial
affairs of the debtor and the transferee,” §§ 547(c)(2)(A), (B),
is also a question of fact.
Summary judgment is appropriate when “there is no genu-
ine 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., 468 F.3d 563, 568 (9th Cir. 2006) (citations
and quotation omitted). Where evidence “is so one-sided that
one party must prevail as a matter of law, a trial is unneces-
10
The Agreement — and the threat of litigation of litigation that pre-
ceded 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.
IN RE: AHAZA SYSTEMS, INC. 3833
sary.” State Farm Fire & Cas. Co. v. Otto, 106 F.3d 279, 283
(9th Cir. 1997) (quotation marks omitted) (quoting Anderson
v. Liberty Lobby, Inc., 477 U.S. 242, 251-52 (1986)). We con-
clude that summary judgment was not appropriate for either
party with regard to § 547(c)(2)(A) or § 547(c)(2)(B).
[10] With regard to § 547(c)(2)(A), the BAP concluded that
“the underlying debt was incurred under normal circum-
stances, 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. Simi-
larly, 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 ordi-
nary course of business. Cf. Energy Coop., Inc. v. Socap Int’l,
Ltd. (In re Energy Cooperative), 832 F.2d 997, 1004-05 (7th
Cir. 1987) (holding that “a one-time payment to settle a
breach of contract claim” was “not part of any recurring, cus-
tomary trade transactions”); Richardson v. Phila. Hous. Auth.
(In re Richardson), 94 B.R. 56, 60-61 (Bankr. E.D. Pa. 1988).
Stratos, which bears the burden of proof to establish qualifica-
tion for the ordinary course exception, In re Grand Chevrolet,
Inc., 25 F.3d at 732, thus did not meet its burden on the pres-
ent summary judgment record.
[11] 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., 106 F.3d at 283. We articulate
today a new legal standard for evaluating first-time debts
under § 547(a)(2)(A), and clarify what qualifies as “debt”
3834 IN RE: AHAZA SYSTEMS, INC.
under the provision. We therefore remand for further proceed-
ings to ensure that both parties have adequate opportunity to
develop the appropriate record evidence. See generally Play-
boy Enters., Inc. v. Netscape Commc’ns Corp., 354 F.3d
1020, 1033 (9th Cir. 2004) (remanding case arising on sum-
mary judgment after the Supreme Court clarified the relevant
standard); Erickson v. United States, 976 F.2d 1299, 1302
(9th Cir. 1992) (remanding a summary judgment appeal after
we clarified the burden of proof on the relevant standard).
[12] 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
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 prac-
tices; 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., 25 F.3d at 732.
The BAP evaluated the available evidence in light of the
Grand Chevrolet factors and noted that “it is difficult to deter-
mine whether the challenged payments were within the ordi-
nary course of business between Ahaza and Stratos.” It
nonetheless affirmed summary judgment to Stratos on this
IN RE: AHAZA SYSTEMS, INC. 3835
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 indicat-
ing 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., 25 F.3d at
732, and that evidence of the payments’ lateness was not suf-
ficient — as a matter of law — to defeat invocation of the
“ordinary course of business exception.”
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 the § 547(c)(2)(B) issue for two reasons.
First, “[d]elay is particularly relevant in taking a payment
outside the ordinary course of business exception.” In re Food
Catering & Hous., Inc., 971 F.3d at 398. The challenged pay-
ments cleared sixteen and twenty days after the payments
were due, less time after their respective due dates than two
prior payments under the Agreement. Still, the two challenged
checks were written thirteen and seventeen days after the due
dates, later than all seven other post-Agreement checks,
except for the immediately prior one. See generally Matter of
Tolona Pizza Prods. Corp., 3 F.3d 1029, 1032 (7th Cir. 1993)
(stating that a creditor seeking an ordinary course of business
exception must show that payments “conform to the norm
established by the debtor and the creditor in the period before,
preferably well before, the preference period” (emphasis
3836 IN RE: AHAZA SYSTEMS, INC.
added)). Nothing in the record explains why some checks
cleared later than others, or whether the clearance delay was
the fault of Ahaza or its bank. The present record thus does
not sufficiently flesh out the significance or intricacies of the
delay to permit a determination of the impact of this factor.
The record also does not establish other indicators of the
prior course of business between Stratos and Ahaza ade-
quately 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 & Fra-
grances, Inc. v. Andrew (In re Loretto Winery, Ltd.), 107 B.R.
707, 710 (B.A.P. 9th Cir. 1989) (concluding that
§ 547(a)(2)(C) was not satisfied when “[t]he record of prior
conduct of the debtor and transferee is so random and haphaz-
ard that it yields no reasonable, ascertainable boundaries”).
Furthermore, the record does not establish whether the threat
of litigation overshadowing the Agreement payments was
routine for Stratos.
[13] Consequently, on this point, we affirm the BAP’s rul-
ing on Wood’s motion, reverse its ruling on Stratos’s motion,
and remand for further proceedings. See generally In re Kay-
pro, 218 F.3d at 1074-76 (remanding case for trial on “ordi-
nary course of business” exception, when the relevant
evidence included only the creditor’s declaration and the debt-
or’s deposition regarding their usual business practices, and
the trustee’s allegations of “unusual collection efforts . . . ,
lateness of payments under the notes, and an inadequate
showing of a continuing business relationship with the debt-
or”).
CONCLUSION
For the foregoing reasons, summary judgment is inappro-
priate for either party in this case. AFFIRMED in part,
REVERSED and REMANDED in part.
IN RE: AHAZA SYSTEMS, INC. 3837
RYMER, Circuit Judge, 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 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., 971 F.2d 396 (9th Cir. 1992). The former Sec-
tion 547(c)(2)(A), applicable to this case, stated that a transfer
fell under the ordinary course exception only if it was “in pay-
ment of a debt incurred by the debtor in the ordinary course
of business or financial affairs of the debtor and the transfer-
ee”; the present Section 547(c)(2) preserves this requirement.
Interpreting this statutory language, Food Catering held that
“[t]o qualify for the ‘ordinary course’ exception, a creditor
must prove that: 1) the debt and its payment are ordinary in
relation to past practices between the debtor and this particu-
lar creditor; and 2) the payment was ordinary in relation to
prevailing business standards.” Id. at 398. Thus, while neither
§ 547(c)(2)(A) nor Food Catering in so many words pre-
cludes treating a first transaction differently, neither permits
it, either. And doing so here means that evidence of the par-
ties’ other transactions and common practices in the industry
may be considered in some cases where it arguably makes
sense to do so, namely, when the transaction is the first one,
but not in all cases in which it also arguably makes sense to
do so, because Food Catering stands in the way whenever the
debtor and transferee have a history of past transactions —
even if these past transactions were simply business dealings
of a different kind that in no way suggest that the debt trans-
action in question was out of the ordinary for either party’s
business or in the industry.