In re Healthcentral.Com

• Decision Date: 21 September 2007
• Docket Number: No. 04-17565.,04-17565.
• Citation: 504 F.3d 775
• Parties: In re HEALTHCENTRAL.COM, a Delaware Corporation, Debtor, Sigma Micro Corporation, Appellant, v. Healthcentral.com, Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

504 F.3d 775

In re HEALTHCENTRAL.COM, a Delaware Corporation, Debtor Sigma Micro Corporation, Appellant, v. Healthcentral.com, Appellee.

No. 04-17565.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted October 19, 2006.

Filed September 21, 2007.

Iain Macdonald, Macdonald & Associates, San Francisco, CA, for the appellant.

Tobias Keller, Pachulski, Stang, Ziehl, Young, Jones & Weintraub PC, San Francisco, CA, for the appellee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel; Perris, Smith, and Brandt, Bankruptcy Judges, Presiding. BAP No. NC-04-01010-BSP.

Before: MELVIN BRUNETTI, DIARMUID F. O'SCANNLAIN, and STEPHEN S. TROTT, Circuit Judges.

BRUNETTI, Circuit Judge:

INTRODUCTION

Sigma Micro Corporation ("Sigma") appeals from a grant of summary judgment in favor of the responsible individual for a group of consolidated debtors avoiding several payments made to Sigma. Sigma asserts that: (1) the bankruptcy court who issued the summary judgment lacked the jurisdiction to do so and (2) even if jurisdiction was proper, summary judgment should not have been granted. We affirm in part, reverse in part, and remand.

BACKGROUND

On January 23, 1998, Sigma entered into a binding license agreement ("the Agreement") with L & H Vitamins, Inc. ("L & H"). The basic terms of the Agreement called for Sigma to provide L & H with critical hardware and software, as well as routine maintenance and support services. In turn, the Agreement obligated L & H to pay Sigma a one-time set fee for the hardware and software, as well as ongoing fees for its maintenance and support services. Sigma was to bill L & H by invoice and L & H was to pay Sigma as soon as the relevant invoice was received, otherwise an interest charge would apply.

In addition to these basic terms, Sigma and L & H also agreed all rights and obligations under the Agreement would be binding not only on L & H, but also on each of its "affiliates." At the time of the Agreement, L & H was part of a vast network of companies who together provided "online healthcare-related e-commerce and content to consumers" ("the Network"). The Network was managed by the Healthcentral.com ("Healthcentral"), and further included Vitamins.com, Inc., Vitamins.com LLC, J & M Direct Corporation, HealthCentralRX.com, Inc., WebRx.com, HCEN Acquisition Corp., HealthCentral Enterprise Web Services, Inc. and HealthCentral.ca.

Once their agreement was in place, Sigma and L & H maintained an "ordinary" relationship for the next several years. Sigma would send L & H invoices for its maintenance and support services. And Healthcentral would send Sigma a payment on L & H's behalf, anywhere from 16 to 105 days after the invoice was received. According to the evidence, this pattern was completely "ordinary" for the "industry" at the time.

Starting in 2000 however, L & H, as well as the other Network companies, started to experience financial problems. In particular, problems arose over the Network's available cash-flow and ability to secure additional funding. As such, by 2001, Healthcentral instituted an "old school" cash-flow management system, whereby core staff would meet in person on a weekly basis to discuss which creditors were to be paid. The meetings were attended by Healthcentral's Controller, or Assistant Controller, accounts payable team, Vice President of Finance, and Vice President of Merchandising. From these meetings a list of preferred creditors was produced and given to Healthcentral's President, who ultimately decided which creditors to pay.

One of the creditors who continued to be paid during this period was Sigma. Healthcentral's core staff determined Sigma's maintenance and support services were critical to keeping L & H's software running, and L & H's software was essential to its business. Accordingly, despite a serious period of financial difficulty, Healthcentral still made three payments to Sigma, including: (1) an August 8, 2001, payment in the amount of $7,484.50 for invoices dated May 15, 2001; (2) an August 16, 2001, payment in the amount of $4,608.03 for invoices dated May 31 and June 15, 2001; and (3) a September 16, 2001 payment in the amount of $11,003.00 for invoices dated July 15, July 31, August 15, and August 31, 2001.

Less than a month after the last payment, however, L & H, as well each of the other Network companies, filed voluntary petitions for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Northern District of California. The Network companies submitted a proposed plan for reorganization and liquidation, which was ultimately approved by the court on June 27, 2002. Pursuant to the plan, L & H was substantively consolidated with all other Network companies into a single liquidating debtor ("the debtor"), and all the debtor's available funds were then transferred into a single claims account. John Barnard ("Barnard") was appointed responsible individual for the debtor and instructed to pursue any and all actions on behalf of the debtor.

PROCEEDINGS BELOW

On February 12, 2003, Barnard brought an action to avoid and recover certain payments made to Sigma as preferences under 11 U.S.C. § 547(b)¹. Barnard brought his action in the U.S. Bankruptcy Court for the Northern District of California, as all civil actions arising under Title 11 were automatically referred there by the district court. Local Fed. R. Bankr.P. 5011-1(a);² see 28 U.S.C. § 157(b)(1) (stating bankruptcy courts possess jurisdiction over all cases arising under Title 11 which were "referred" by the district court). In his action Barnard sought to avoid and recover the August 8th, August 16th, and September 16th payments, claiming each was "preferentially" made to Sigma during a period of severe financial distress. § 547(b). The total amount of these payments, Barnard alleged, was $23,095.53. The action against Sigma was only one of approximately 30 preference actions brought by Barnard under § 547(b) against various creditors.

In response to the action, Sigma filed an answer and demand for a jury trial. Sigma answered that none of the debtor's payments constituted preferences under § 547(b), and furthermore, the payments were made in the "ordinary course of business" and thus not recoverable under § 547(c)(2). As to the jury trial, Sigma stated it would not consent to a trial in the bankruptcy court, and therefore jurisdiction was no longer proper there. Instead, Sigma demanded the action be transferred to the district court for further proceedings.

Thereafter, on August 10, 2003, Sigma filed a Motion for Certification to the District Court. In this motion Sigma argued once more the bankruptcy court was not permitted to maintain jurisdiction over the action and it needed to be "certified" to the district court. Sigma's rationale was twofold.

First, Sigma pointed to Local Rule 9015-2(b), which states:

If the Bankruptcy Judge determines that [a] demand was timely made and the party has a right to a jury trial, and if all parties have not filed written consent to a jury trial before the Bankruptcy Judge, the Bankruptcy Judge shall certify to the District Court that the proceeding is to be tried by a jury and that the parties have not consented to a jury trial in the Bankruptcy Court. Upon such certification, [the jurisdictional] reference of the proceeding shall be automatically withdrawn, and the proceeding assigned to a Judge of the District. . . .

According to Sigma, all of the requirements of Local Rule 9015-2(b) had been satisfied, and thus the jurisdictional reference to the bankruptcy court, Local Rule 5011-1(a), had to be withdrawn and the action transferred to the district court.

Second, aside from Local Rule 9015-2(b), Sigma pointed to its valid right to a Seventh Amendment jury trial in the district court. According to Sigma, it had been "held" that once a valid jury trial right was found, the bankruptcy court could no longer maintain jurisdiction and the entire action needed to be instantly transferred to the district court. In support of its position Sigma cited In re Granfinanciera, S.A. v. Nordberg, 492 U.S. 33, 109 S.Ct. 2782, 106 L.Ed.2d 26 (1989).

Following Sigma's Motion for Certification the debtor filed an opposition arguing jurisdiction was proper in the bankruptcy court and that a transfer was not required. The debtor conceded jurisdiction was exclusively vested in the district court for trial, but that did not mean the bankruptcy court could not retain jurisdiction pre-trial. Instead, the debtor explained, foregoing jurisdiction and transferring the action to district court pre-trial was a matter of discretion to be guided by judicial economy. Under this standard, it was often the case, as it was here, that a bankruptcy court's familiarity with the present action, as well as related cases, presented real economic reasons to retain the action. Accordingly, Sigma's Motion for Certification could and should be denied.

On July 1, 2003, the bankruptcy court issued an order on the Motion for Certification to the District Court. The court's order struck a balance between the positions of Sigma and the debtor. On one hand, the court "certified" the action to district court, finding that Sigma had satisfied all of the requirements of Local Rule 9015-2(b). On the other hand, the court "stayed" the "effective date" of the "certification" so that the court could retain jurisdiction over all "pre-trial proceedings." Accordingly, the action stayed in the bankruptcy court.

With the proper court determined, the debtor turned to filing a Motion for Summary Judgment. The motion was based on two arguments.

First, the debtor asserted there was no genuine dispute that three preference payments had been made to Sigma under § 547(b). On August 8th, August 16th, and September 16th, the debtor issued payments from its own accounts to Sigma, a creditor, to account for previously rendered maintenance and support services. § 547(b)(1), (2)....