In Re: Kaypro, Debtor, 99-55206

CourtUnited States Courts of Appeals. United States Court of Appeals (9th Circuit)
Citation218 F.3d 1070
Docket NumberNo. 99-55206,N,99-55206
Parties(9th Cir. 2000) In re KAYPRO, Debtor. ARROW ELECTRONICS, INC., Appellant, v. HOWARD JUSTUS, Trustee, Appellee. In re KAYPRO, Debtor. ARROW ELECTRONICS, INC., successor-in-interest to SCHWEBER ELECTRONICS, INC., Appellant, v. HOWARD JUSTUS, Trustee, Appellee. o. 99-55210 Office of the Circuit Executive
Decision Date09 June 2000

Gary E. Scalabrini, Gibbs, Giden, Locher & Turner, Los Angeles, California, for the appellant.

Cheryl L. Stengel and Michael T. O'Halloran, Law Office of Michael T. O'Halloran, San Diego, California, for the appellee.

Appeals from the Ninth Circuit Bankruptcy Appellate Panel

BAP Nos. SC-97-01183-RiJRy, SC-97-01182-RiJRy

Riblet, Jones, and Ryan, Judges, Presiding

Before: Stephen Reinhardt and Richard A. Paez, Circuit Judges, and William L. Dwyer,1 District Judge.

DWYER, District Judge:

I. INTRODUCTION

In these consolidated appeals from orders of the Ninth Circuit Bankruptcy Appellate Panel ("BAP"),2 we must decide whether the United States Bankruptcy Court for the Southern District of California erred in determining that certain payments made to two of the debtor's suppliers were avoidable under 11 U.S.C. S 547(b) as preferential transfers. The bankruptcy court ruled that the ordinary course of business exception, under 11 U.S.C. S 547(c)(2), did not apply as a matter of law to debt restructuring agreements, and granted partial summary judgment on that basis. The BAP disagreed, holding that the issue of whether payments under a restructuring agreement are made in the ordinary course of business is a question of fact that depends on the parties' dealings and industry practice. The BAP nevertheless affirmed the partial summary judgment rulings on the basis that the evidence of record failed to raise a triable issue. We hold that the evidence was sufficient to create genuine issues of material fact as to whether the challenged payments qualified under the ordinary course of business exception, and therefore reverse and remand for a trial on that issue. In all other respects -the use of a fact-dependent test, the sufficiency of the evidence to show the debtor's insolvency, and the propriety of the bankruptcy court's having granted a motion for reconsideration on the statute of limitations issue -we affirm the BAP's rulings.

II. BACKGROUND

Kaypro Corporation ("Kaypro"), the debtor, was a manufacturer of personal computers and precision instruments. Arrow Electronics, Inc. ("Arrow") and Schweber Electronics Corporation ("Schweber") supplied electronic parts and components to Kaypro. Arrow is Schweber's successor-ininterest.

In March 1989, when Kaypro owed Schweber $227,837.96, the parties restructured the debt. Kaypro executed a promissory note requiring monthly payments of about $15,000, and Andrew Kay, Kaypro's president, personally guaranteed the note. Between April and August 1989, Kaypro made five payments as required by the note, although the payments were between nine and sixteen days late. Kaypro also made a number of payments after September 1, 1989.

Also in March 1989, Kaypro and Arrow restructured a $117,290.06 past due debt by means of a personally guaranteed promissory note. That note required monthly payments to Arrow of $9,774.17. Between March and August 1989, Kaypro made six payments, between ten and twenty-eight days late, under the note.

Kaypro restructured its debts with other creditors at about the same time, but failed to recoup its fortunes and filed for bankruptcy protection on March 1, 1990. The Chapter 11 proceeding was converted to a Chapter 7 liquidation in June 1992.

In the fall of 1993, Howard Justus, Kaypro's trustee in bankruptcy, sued Arrow and Schweber to avoid alleged preferential transfers. All parties moved for summary judgment. The bankruptcy court awarded partial summary judgments to the trustee, determining that Kaypro's payments to the two creditors were not made in the ordinary course of business. A trial was held on the insolvency issue, and the court found that Kaypro was insolvent at least as of March 1, 1989. In light of then-new Ninth Circuit authority, the court granted a motion to reconsider an earlier ruling that the trustee's complaints were barred by the statute of limitations. Judgments were entered for the trustee in the amounts of $58,645.02 against Arrow and $98,519.26 against Schweber. Arrow, as to its own transactions and as Schweber's successor, has timely appealed. We have jurisdiction pursuant to 28 U.S.C. S 158(d).

III. STANDARDS OF REVIEW

This court reviews decisions of the BAP de novo , and thus reviews the bankruptcy court's decisions under the same standards used by the BAP. See In re Vasseli, 5 F.3d 351, 352 (9th Cir. 1993). The rulings on the parties' motions for partial summary judgment are reviewed de novo. See In re Bakersfield Wester Ambulance, Inc., 123 F.3d 1243, 1245 (9th Cir. 1997). Findings of fact, such as the finding of insolvency, are reviewed for clear error. See In re Parker, 139 F.3d 668, 670 (9th Cir. 1998). Whether the bankruptcy court properly considered and granted the trustee's motion for reconsideration is reviewed for an abuse of discretion. Cf. In re Pintlar Corp., 133 F.3d 1141, 1145 (9th Cir. 1997) (lower court exercises discretion in deciding whether to apply amended rule to pending matter).

IV. THE ORDINARY COURSE OF BUSINESS EXCEPTION

Summary judgment may be ordered only if the record shows that "there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). The evidence, and all reasonable inferences therefrom, must be viewed in the light most favorable to the non-moving party. T.W. Elec. Serv., Inc. v. Pacific Elec. Contractors Ass'n, 809 F.2d 626, 630-31 (9th Cir. 1987).

To avoid a transfer under 11 U.S.C. S 547(b), the trustee must prove by a preponderance that the transfer was (1) made to or for the benefit of a creditor, (2) on account of an antecedent debt, (3) made while the debtor was insolvent, and (4) made within one year of the petition, and (5) enabled the creditor to receive more than it would have had the transfer not been made and the case liquidated pursuant to the provisions of chapter 7 of the bankruptcy code. Id. If, however, the creditor proves that the 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," the transfer may not be avoided. 11 U.S.C. S 547(c)(2). This is commonly referred to as the ordinary course of business exception.3

We agree with the BAP that the bankruptcy court erred in holding that payments made pursuant to a restructuring agreement are per se outside the ordinary course of business category. The better rule, as the BAP stated, is that "such determination is a question of fact that depends on the nature of industry practice." Kaypro, 230 B.R. at 406. The Second Circuit has explained why in In re Roblin Industries, Inc., 78 F.3d 30 (2d Cir. 1996):

It is not difficult to imagine circumstances where frequent debt rescheduling is ordinary and usual practice within an industry, and creditors operating in such an environment should have the same opportunity to assert the ordinary course of business exception. See, e.g. [In re] U.S.A. Inns, 9 F.3d [680,] 685 [8th Cir. 1993] (regular practice in savings and loan industry to adopt payment plans for delinquent customers); Armstrong v. John Deere Co. (In re Gilbert son), 90 B.R. 1006, 1012 (Bankr. D. N.D. 1988) (deferral agreements common in retail farm implement sales industry). Indeed, if the industry practice is to restructure defaulted debt, it would make little practical sense to require creditors to comply with any other standard in order to meet the requirement of S 547(c)(2)(C).

Id. at 42. The ordinary course of business exception, the Second Circuit noted, benefits all creditors by protecting payments received by those creditors who remain committed to a debtor during times of financial distress while at the same time affording a measure of flexibility to creditors in dealing with the debtor, provided that the steps taken are consistent with customary practice among industry participants.

Id. at 41.

Thus, to apply Section 547(c)(2)(C), the court must look to "those terms employed by similarly situated debtors and creditors facing the same or similar problems. If the terms in question are ordinary for industry participants under financial distress, then that is ordinary for the industry." Id. at 42. The determination requires "a factual inquiry that is appropriately left to the bankruptcy court." Id. at 414.

Here, after holding that the ordinary course of business exception requires fact-specific analysis, and that the bankruptcy court had erred in ruling otherwise, the BAP nevertheless affirmed the partial summary judgment rulings because "the record is devoid of any competent evidence as to whether restructuring agreements and personal guarantees were utilized within the industry in the ordinary course of business," and because the debtor "deviated from its customary business practice by executing the promissory note[s] and making monthly payments." Kaypro, 230 B.R. at 407. Our de novo review of the record leads us to a different conclusion.

The relevant evidence came chiefly from Peter Griesbach, Arrow's credit manager, and Andrew Kay, the principal of Kaypro. Griesbach stated in a declaration (emphasis added):

As part of its ordinary course of business, ARROW routinely enters into workout or debt restructuring agreements with creditors who are unable to meet their obligations. As part of a debt restructuring...

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