In re Ahaza Systems, Inc.

Citation482 F.3d 1118
Decision Date03 April 2007
Docket NumberNo. 05-35455.,05-35455.
PartiesIn re AHAZA SYSTEMS, INC., Debtor. Edmund J. Wood, in his capacity as Chapter 7 Trustee, Appellant, v. Stratos Product Development, LLC, Appellee.
CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)

Teresa H. Pearson, Seattle, WA, for the appellant.

James R. Hermsen and Aaron D. Goldstein, Seattle, WA, for the appellee.

Appeal from the Ninth Circuit Bankruptcy Appellate Panel; Tighe,* Perris, and Smith, Bankruptcy Judges, Presiding. BAP No. WW-04-01359-TPS.

Before RYMER, BERZON, and TALLMAN, Circuit Judges.

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 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 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 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.


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 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 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 Agreement, Ahaza made the following payments by check to Stratos:

                              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)2 the last two payments that Ahaza had made 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 summary 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 "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 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 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.


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), 218 F.3d 1070, 1073 (9th Cir.2000).


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.3 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.

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

The parties agree that the challenged payments fulfill the third requirement, § 547(c)(2)(C), which requires that payments 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 "ordinary business terms" of an industry). They dispute, however, 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).

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 ordinary 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 & Hous., Inc).5 In other words, to determine what is "ordinary" 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...

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