In re Kaypro

Citation230 BR 400
Decision Date21 January 1999
Docket NumberBAP No. SC-97-1183-RiJRY,Bankruptcy No. 90-01609-M7,Adversary No. 93-90784.
PartiesIn re KAYPRO, a California Corporation, Debtor. Arrow Electronics, Inc., Appellant, v. Howard Justus, Trustee, Appellee.
CourtBankruptcy Appellate Panels. U.S. Bankruptcy Appellate Panel, Ninth Circuit


Gary E. Scalabrini, Gibbs, Giden, et al., Los Angeles, CA, for Arrow Electronics, Inc.

Michael T. O'Halloran, Law Offices of Michael T. O'Halloran, San Diego, CA, for Howard Justus, trustee.

Before RIBLET,1 JONES, and RYAN, Bankruptcy Judges.


RIBLET, Bankruptcy Judge.

Appellant, Arrow Electronics, Inc. ("Arrow"), appeals from a series of decisions of the bankruptcy court, namely, the granting of partial summary judgment in favor of the Trustee, which judgment was based, in part, on the finding that the ordinary course of business exception did not apply; the granting of the Trustee's motion for reconsideration of a subsequent summary judgment in favor of Arrow, which decision was based on Fed.R.Civ.P. 59(e) and In re Hanna, 72 F.3d 114 (9th Cir.1995); and, after trial, the finding that the Debtor was insolvent at the time of its transfers to Arrow. We AFFIRM.


The Debtor manufactured personal computers and precision instruments. Arrow supplied electronic components to the Debtor. The Debtor became delinquent in amounts due and owing to Arrow in 1988 and 1989, resulting in a restructuring of the debt in the form of a promissory note in the amount of $117,290.06, and the execution of a personal guarantee by Andrew Kay, the Debtor's major stockholder. Between March 30 and September 12, 1989, the Debtor made a total of $58,645.02 in payments to Arrow ("transfers") under the note.

The Debtor filed its Chapter 112 petition on March 1, 1990. On January 22, 1992, a Chapter 11 Trustee was appointed. The case was subsequently converted to a case under Chapter 7 on June 9, 1992. The Trustee commenced the instant adversary action against Arrow on September 17, 1993, seeking to avoid the transfers as preferential or fraudulent under § 547, alleging that the transfers in the year prior to filing of the Debtor's petition were avoidable because such transfers benefitted Mr. Kay, an insider of the Debtor.

The bankruptcy court considered cross motions for summary judgment, and on July 27, 1995, it granted partial summary judgment in favor of the Trustee as to all elements of § 547(b), with the exception of the issue of the insolvency of the Debtor.

On October 6, 1995, Arrow filed its second motion for summary judgment contending that the adversary proceeding was barred by the expiration of the statute of limitations of § 546, as that statute was interpreted under In re IRFM, 65 F.3d 778 (9th Cir.1995). The bankruptcy court granted the motion on December 20, 1995. On December 29, 1995, the Ninth Circuit issued its decision in In re Hanna, 72 F.3d 114 (9th Cir.1995), which clarified IRFM, as well as other Ninth Circuit decisions interpreting § 546. The issuance of the Hanna opinion prompted the Trustee to file a motion for reconsideration of the December 20, 1995 order. The Trustee's counsel served Arrow with the motion on January 2, 1996, the day after a federal holiday, but did not file the motion with the court until January 3, 1996. In addition to arguing that Hanna did not apply, Arrow opposed the Trustee's motion for reconsideration on grounds that the motion was untimely under amended Fed.R.Civ.P. 59(e).3 The bankruptcy court ruled that the Trustee's motion was timely, held that Hanna controlled, and granted the motion, effectively vacating the prior summary judgment in favor of Arrow.

Thereafter, a trial was held on the issue of the Debtor's insolvency in December 1996. The bankruptcy court entered judgment in favor of the Trustee on March 4, 1997, finding that all elements required by § 547(b) to avoid the transfers were established. Judgment in the amount of $58,645.02 was entered against Arrow. Arrow timely appealed.


Three issues are presented on appeal. First, whether the bankruptcy court erred in granting partial summary judgment in favor of the Trustee based on the decision that the ordinary course of business exception did not apply. Second, whether the bankruptcy court abused its discretion in granting the Trustee's motion for reconsideration based on Fed.R.Civ.P. 59 and Hanna. And third, whether the bankruptcy court erred in finding that the Debtor was insolvent at the time of the transfers.


A grant of summary judgment is reviewed de novo. Bellus v. United States, 125 F.3d 821, 822 (9th Cir.1997); Lewis v. Scott (In re Lewis), 97 F.3d 1182, 1185 (9th Cir.1996). Whether a transaction comports with the standards for business conduct within an industry is a factual determination which is reviewed for clear error. Luper v. Columbia Gas of Ohio, Inc. (In re Carled, Inc.), 91 F.3d 811, 813 (6th Cir.1996) (citing Yurika Foods Corp. v. United Parcel Serv. (In re Yurika Foods Corp.), 888 F.2d 42, 45 (6th Cir.1989)). The application of the legal standard to the facts, however, is reviewed de novo. Carled, 91 F.3d at 813. "To the extent that questions of fact cannot be separated from questions of law, we review these questions as mixed questions of law and fact applying a de novo standard." Jodoin v. Samayoa (In re Jodoin), 209 B.R. 132, 135 (9th Cir. BAP 1997) (citing Ratanasen v. California Dep't of Health Servs., 11 F.3d 1467, 1469 (9th Cir.1993)).

This court reviews the granting or denial of a motion for reconsideration for an abuse of discretion. Sheet Metal Workers' Int'l Ass'n Local Union No. 359 v. Madison Indus., Inc., 84 F.3d 1186, 1192 (9th Cir. 1996).

Insolvency being a question of fact, the findings of the bankruptcy court as to a debtor's insolvency are reviewed for clear error. Lawson v. Ford Motor Co. (In re Roblin Indus., Inc.), 78 F.3d 30, 35 (2nd Cir.1996).

A. Application of the Ordinary Course of Business Exception

Arrow argues that the Debtor and its creditors should be permitted to use the terms and methods of payments that are ordinary under the circumstances, including the restructure of debt if debt rescheduling is an ordinary and usual practice within the industry or between the parties. Thus, Arrow contends that the lower court's decision that the restructure of debt is outside the ordinary course of business exception as a matter of law was in error. At a minimum, Arrow argues, the determination of whether the transfers were made in the ordinary course of business is a genuine issue of fact which defeats the Trustee's motion for partial summary judgment.

The ordinary course of business exception is codified at § 547(c)(2).4 To qualify for the ordinary course of business exception, a creditor must prove that: 1) the debt and its payment are ordinary in relation to past practices between the debtor and this particular creditor; and 2) the payment was ordinary in relation to prevailing business standards. Mordy v. Chemcarb, Inc. (In re Food Catering & Hous., Inc.), 971 F.2d 396, 398 (9th Cir.1992) (citing Logan v. Basic Distrib. Corp. (In re Fred Hawes Org., Inc.), 957 F.2d 239, 243-44 (6th Cir.1992)). The transferee has the burden of proving the defense and must prove each of the three elements by a preponderance of the evidence. Fred Hawes, 957 F.2d at 242, 244.

All of the evidence as to the issue of the ordinary course of business defense was submitted by Arrow. At the hearing on the cross motions for summary judgment on May 4, 1995, Arrow's counsel argued that the statement of facts submitted with its motion was sufficient to resolve the entire case. The Trustee cross-moved for summary judgment, adopting substantially all of Arrow's statements of fact.

The evidence considered by the lower court consisted of the transcript of Mr. Kay's deposition and the exhibits thereto, and the declaration of Peter Griesbach and the exhibits thereto. Mr. Kay, a major stockholder and the President and Chairman of the Board of the Debtor, testified that the Debtor conducted business with Arrow for many, many years on a 30- or 60-day open book account. Most of the Debtor's vendors worked on the same 30- or 60-day open book account basis. The Debtor made regular and timely payments to Arrow in the early years but not after the Debtor started losing money in 1988 and 1989. Mr. Kay further testified that he signed "quite a number" of personal guaranties in 1988 and 1989, after the Debtor started experiencing hard economic times, and that most of the Debtor's vendors required personal guaranties and promissory notes for the continued delivery of product and for the avoidance of lawsuits. Mr. Kay denied any personal knowledge of whether his signing personal guaranties and promissory notes was taking place industry wide, and specifically limited his testimony to what had happened to him personally. Mr. Kay also testified that he was never asked to give a personal guarantee to a creditor if the Debtor was current on its accounts payable.

The deposition exhibits included numerous invoices from Arrow to the Debtor, several collection letters to the Debtor from Arrow's legal counsel, the Promissory Note in favor of Arrow in the amount of $117,290.06, dated March 30, 1989, the Personal Guarantee in favor of Arrow dated March 30, 1989, copies of the Debtor's checks made payable either to Arrow or its legal counsel and miscellaneous payment transmittal and acknowledgment letters, as well as a Promissory Note in favor of Schweber Electronics Corporation (another of the Debtor's creditors), dated March 28, 1989, and copies of the Debtor's checks made payable to Schweber Electronics.

Also submitted as evidence was the declaration of Peter Griesbach, the Credit Manager of Arrow. Mr. Griesbach declared that as part of its ordinary course of business, Arrow...

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