In Re Ahaza Systems, Inc., Debtor. Edmund J. Wood, in His Capacity as Chapter 7 Trustee v. Stratos Product Development, LLC

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. Athough we normally decide whether a debt is “ordinary” by comparing it to the parties’ past practice with each other, we conclude…

482 F.3d 1118 In re AHAZA SYSTEMS, INC., Debtor. Edmund J. Wood, in his capacity as Chapter 7 Trustee, Appellant, v. Stratos Product Development, LLC, Appellee. No. 05-35455. United States Court of Appeals, Ninth Circuit. Argued and Submitted November 14, 2006. Filed April 3, 2007. 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. 1 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.…

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 Section 547(c)(2)(A), applicable to this case, stated that a transfer fell under the ordinary course exception only if it 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”; 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 *1131 and this particular creditor; and 2) the payment was ordinary in relation to prevailing business standards.” Id. at 398 . Thus, while neither §…