Sigma Micro Corporation v. healthcentral.com ( 2007 )

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
In re: HEALTHCENTRAL.COM, a 
Delaware Corporation,
Debtor,
No. 04-17565
SIGMA MICRO CORPORATION,  BAP No.
NC-04-01010-BSP
Appellant,
OPINION
v.
HEALTHCENTRAL.COM,
Appellee.

Appeal from the Ninth Circuit
Bankruptcy Appellate Panel
Perris, Smith, and Brandt, Bankruptcy Judges, Presiding
Argued and Submitted
October 19, 2006—San Francisco, California
Filed September 21, 2007
Before: Melvin Brunetti, Diarmuid F. O’Scannlain, and
Stephen S. Trott, Circuit Judges.
Opinion by Judge Brunetti
12823
12826 IN RE: HEALTHCENTRAL.COM
COUNSEL
Iain Macdonald, Macdonald & Associates, San Francisco,
California, for the appellant.
Tobias Keller, Pachulski, Stang, Ziehl, Young, Jones & Wein-
traub PC, San Francisco, California, for the appellee.
IN RE: HEALTHCENTRAL.COM 12827
OPINION
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 judg-
ment 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 “affili-
ates.” 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 Health-
central.com (“Healthcentral”), and further included Vita-
mins.com, Inc., Vitamins.com LLC, J&M Direct Corporation,
12828 IN RE: HEALTHCENTRAL.COM
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 main-
tained an “ordinary” relationship for the next several years.
Sigma would send L&H invoices for its maintenance and sup-
port 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 Net-
work 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 man-
agement 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 Septem-
ber 16, 2001 payment in the amount of $11,003.00 for
IN RE: HEALTHCENTRAL.COM 12829
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 avail-
able funds were then transferred into a single claims account.
John Barnard (“Barnard”) was appointed responsible individ-
ual 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 posses jurisdiction over all cases arising under Title 11
which were “referred” by the district court). In his action Bar-
nard sought to avoid and recover the August 8th, August 16th,
and September 16th payments, claiming each was “preferen-
tially” made to Sigma during a period of severe financial dis-
tress. § 547(b). The total amount of these payments, Barnard
1
Unless stated otherwise, all statutory references hereinafter are to Title
11 of the United States Code.
2
Unless stated otherwise, all “Local Rule” references hereinafter are to
the Local Bankruptcy Rules for the Northern District of California, at
http://www.canb.uscourts.gov/.
12830 IN RE: HEALTHCENTRAL.COM
alleged, was $23,095.53. The action against Sigma was only
one of approximately 30 preference actions brought by Bar-
nard 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 debt-
or’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 lon-
ger 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 “cer-
tified” 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 refer-
ence to the bankruptcy court, Local Rule 5011-1(a), had to be
withdrawn and the action transferred to the district court.
IN RE: HEALTHCENTRAL.COM 12831
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 posi-
tion Sigma cited In re Granfinanciera, S.A. v. Nordberg, 492
U.S. 33 (1989).
Following Sigma’s Motion for Certification the debtor filed
an opposition arguing jurisdiction was proper in the bank-
ruptcy 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 eco-
nomic 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 fil-
ing 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
12832 IN RE: HEALTHCENTRAL.COM
§ 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). The payments were
sent to Sigma within 90 days of the debtor filing for Chapter
11 bankruptcy, a period of severe financial distress.
§ 547(b)(3), (4)(A). And the payments, which paid 100 per-
cent of the submitted invoices, allowed Sigma to recover
more than it would have had the payments been made in a
Chapter 7 liquidation. § 547(b)(5).
Second, the debtor asserted that Sigma had not shown it
possessed an ordinary course of business defense under
§ 547(c)(2). In light of its cash-flow and funding problems the
debtor instituted an unusual cash management system,
whereby the debtor’s core staff met weekly to determine
which creditors would be paid. That Sigma was preferred over
other creditors and paid as a result of this unusual cash-flow
management system was anything but “ordinary” for the
debtor or the debtor’s industry. § 547(c)(2)(B), (C).
To support its motion the debtor offered three pieces of evi-
dence, including: (1) duplicate copies of the August 8th,
August 16th, and September 16th payments, as well as the rel-
evant invoices; (2) a full and complete copy of the Agree-
ment; and (3) a declaration by Rita Schilling (“Schilling”),
Healthcentral’s controller, who provided all of the back-
ground surrounding the August 8th, August 16th and Septem-
ber 16th payments.
A month later Sigma filed an opposition to the Motion for
Summary Judgment. Sigma’s opposition was also based on
two arguments.
First, Sigma asserted the debtor had not met its “burden” of
“showing” preference payments under § 547(b). According to
Sigma, the Schilling declaration, which provided all of the
facts used by the debtor to prove its § 547(b) action, was “rid-
IN RE: HEALTHCENTRAL.COM 12833
dled with evidentiary problems” and thus could not be consid-
ered. Without this declaration the debtor had clearly not
shown that the August 8th, August 16, and September 16th
payments were preferences.
Second, Sigma asserted that it had shown that it possessed
an ordinary course of business defense under § 547(c)(2). The
debtor’s payments accounted for past maintenance and sup-
port services provided by Sigma in the ordinary course of
business. § 547(c)(2)(A). And the payments were made within
an ordinary time frame, and in an ordinary manner, even if
they came out of an “old-school” cash management system.
§ 547(c)(2)(B), (C).
To support its opposition, Sigma offered a single piece of
evidence: a declaration by Theresa Backof (“Backof”), a
credit executive certified by the National Association of
Credit Management (“NACM”) with 24 years of credit and
payment experience. After reviewing all the evidence, includ-
ing NACM data, Backof made findings, which included: (1)
that in her “opinion [the] payment in the ordinary course of
business between the debtor and Sigma, as established by
their course of dealings over a three-year period, [was] a
range of 16 to 105 days”; (2) that “[i]nformation obtained
from NACM show[ed] that, on an industry-wide basis, pay-
ments of invoices, for the period June of 2001 through Octo-
ber of 2001, ranged from 23 to 100 days from the billing date.
[And that t]his data reflect[ed] the payment history of all cus-
tomers of all reporting companies[, t]hus [making] payment in
the ordinary course of business in the industry . . . as a range
of 23 to 100 days”; (3) that the August 8th, August 16th, and
September 16th payments paid invoices anywhere from 16 to
90 days after the billing date; and (4) that the debtor’s
“[a]ccounts payable meetings [were] somewhat ‘old school’
as businesses now move forward with the use of software for
cash management; [but that] the concept [was] the same.”
On November 3, 2003, after considering all the evidence
and holding a hearing, the court granted summary judgment
12834 IN RE: HEALTHCENTRAL.COM
in favor of the debtor. First, the court held the debtor had
shown through the Schilling declaration that the August 8th,
August 16th, and September 16th payments constituted pref-
erences under § 547(b). Furthermore, none of the evidentiary
objections lodged against the Schilling declaration had any
merit. Second, the court held Sigma had not shown through
the Backof declaration that the August 8th, August 16th, or
September 16th payments were made in the ordinary course
of business under § 547(c)(2). The Backof declaration had not
established that the debtor’s “old school” cash-flow manage-
ment system for paying creditors was ordinary for the parties
or for the industry. As such, judgment was entered as a matter
of law in favor of the debtor in the amount of $23,095.53.
From there Sigma filed a timely appeal, which was heard
by the United States Bankruptcy Appellate Panel of the Ninth
Circuit (“BAP”). Sigma’s appeal raised two issues: (1)
whether the bankruptcy court erred in retaining jurisdiction
over the action in light of Local Rule 9015-2(b) and Sigma’s
valid right to a Seventh Amendment jury trial in the district
court and (2) whether the bankruptcy court erred in granting
summary judgment in favor of the debtor on its preference
action under § 547(b) and Sigma’s ordinary course of busi-
ness defense under § 547(c)(2). The BAP affirmed.
Thereafter, on October 27, 2004, Sigma filed a timely
notice of appeal to this court.
STANDARD OF REVIEW
On appeal “[t]his court reviews decisions of the BAP de
novo, and thus reviews the bankruptcy court’s decision[ ]
under the same standards used by the BAP.” Arrow Elecs.,
Inc. v. Justus (In re Kaypro), 218 F.3d 1070, 1073 (9th Cir.
2000). We review the bankruptcy court’s findings of fact for
clear error. Carillo v. Su (In re Su), 290 F.3d 1140, 1142 (9th
Cir. 2002). And we review the bankruptcy court’s conclusions
of law de novo. Am. Law Ctr. PC v. Stanley (In re Jastrem),
IN RE: HEALTHCENTRAL.COM 12835
253 F.3d 438, 441 (9th Cir. 2001); see also In re Vylene
Enters., 90 F.3d 1472, 1475 (9th Cir. 1996) (“Because the
issue here is whether the bankruptcy court had jurisdiction . . .
we conduct a de novo review.”); Beeler v. Jewel (In re Stan-
ton), 303 F.3d 939, 941 (9th Cir. 2002) (“We review a bank-
ruptcy court’s decision to grant a motion for summary
judgment de novo.”) Finally, we review any evidentiary rul-
ing by the bankruptcy court for an abuse of discretion. Ard-
mor Vending Co. v. Kim (In re Kim), 130 F.3d 863, 865 (9th
Cir. 1997).
DISCUSSION
I. Jurisdiction
At the outset we address Sigma’s argument concerning the
bankruptcy court’s jurisdiction. Sigma concedes jurisdiction
was initially proper in the bankruptcy court, pursuant to
§ 157(b)(1) and Local Rule 5011-1(a), but claims the court
was not permitted to retain jurisdiction over the action for pre-
trial proceedings. To support its argument Sigma yet again
points to (1) Local Rule 9015-2(b) and (2) its valid right to a
Seventh Amendment jury trial. We address each below and
hold the bankruptcy court did not err in retaining jurisdiction
over the action for pre-trial proceedings.
A. Local Rule 9015-2(b)
As noted above Sigma first finds support for its jurisdic-
tional argument in Local Rule 9015-2(b). According to
Sigma, under Local Rule 9015-2(b) if a party: (1) has a right
to a jury trial in the district court, (2) makes a timely demand
for jury trial in the district court, and (3) has not “consent[ed]
to a jury trial” elsewhere, the bankruptcy court must “auto-
matically” “withdraw[ ]” the district court’s jurisdictional ref-
erence. See Dunmore v. United States, 358 F.3d 1107, 1116-
17 (9th Cir. 2004).
12836 IN RE: HEALTHCENTRAL.COM
[1] Under Sigma’s construction of Local Rule 9015-2(b)
we are confronted with an issue of first impression in this cir-
cuit, that is, the validity of Local Rule 9015-2(b).
[2] The rules associated with local bankruptcy rules are
clear. As part of the Bankruptcy Code Congress delegated to
the Supreme Court the power to make and enforce general
bankruptcy rules. 28 U.S.C. § 2075. Pursuant to this authority,
the Supreme Court promulgated Federal Rule of Bankruptcy
Procedure 9029 (“Rule 9029”), which grants district courts
the power to adopt their own local rules. Brown v. Smith (In
re Poole), 222 F.3d 618, 621 (9th Cir. 2000). Under Rule
9029, however, this power is strictly limited. 10 Collier on
Bankruptcy ¶ 9029.01[1], 9029-2 (rev. 15th ed. 2006.) Rule
9029 states a local bankruptcy rule must: (1) be consistent
with the Acts of Congress and Federal Rules of Bankruptcy
Procedure; (2) not be duplicative of the Acts of Congress or
Federal Rules of Bankruptcy Procedure; and (3) not limit the
use of Official Bankruptcy Forms. Steinacher v. Rojas (In re
Steinacher), 283 B.R. 768, 772-73 (9th Cir. BAP 2002).3 If
any of these limits are not observed, the local bankruptcy rule
must be held invalid.
[3] Considering these rules we hold Local Rule 9015-2(b)
to be invalid as it establishes a procedure for withdrawing the
district court’s jurisdictional reference inconsistent with the
Acts of Congress and Federal Rules of Bankruptcy Procedure.
Cf. Coffey v. Marina Management Servs. (In re Kool, Mann,
Coffee), 23 F.3d 66, 67-69 (3rd Cir. 1994) (finding local rule
invalid because of inconsistency with Bankruptcy Code); In
re Morrissey, 717 F.2d 100, 104-05 (3rd Cir. 1983) (same).
3
We acknowledge decisions by the BAP are not binding on this court.
Oninck v. Cardelucci (In re Cardelucci), 285 F.3d 1231, 1234 (9th Cir.
2002). That does not mean, however, BAP decisions may not be persua-
sive and aide us in our reading of the Bankruptcy Code. Id. (“While this
Court is not bound by a B.A.P. decision, we find the reasoning of [the
B.A.P.] to be persuasive and adopt it.”).
IN RE: HEALTHCENTRAL.COM 12837
Congress set forth the procedure for withdrawing a jurisdic-
tional reference under the Bankruptcy Code in 28 U.S.C.
§ 157(d). This act states:
[A] district court may withdraw, in whole or in part,
any case or proceeding referred under this section,
on its own motion or on timely motion of any party,
for cause shown. The district court shall, on timely
motion of a party, so withdraw a proceeding if the
court determines that resolution of the proceeding
requires consideration of both title 11 and other laws
of the United States regulating organizations or
activities affecting interstate commerce.
Id. § 157(d) (emphasis added); accord 9 Collier on Bank-
ruptcy ¶ 5011.01[1], 5011-3 (rev. 15th ed. 2006) (“28 U.S.C.
§ 157(d) provides the authority . . . to withdraw the reference
of the case or proceeding.”).
In keeping with this procedure, the Supreme Court promul-
gated Federal Rule of Bankruptcy Procedure 5011(a), which
states in its entirety:
A motion for withdrawal of a case or proceeding
shall be heard by a district judge.
Id. (emphasis added); see also id. advisory committee note
(“[5011(a)] makes it clear that the bankruptcy judge will not
conduct hearings on a withdrawal motion. The withdrawal
decision is committed exclusively to the district court.”).
By contrast, Local Rule 9015-2(b) establishes a very differ-
ent procedure for withdrawing the district court’s jurisdic-
tional reference. Under this rule:
If [a] 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
12838 IN RE: HEALTHCENTRAL.COM
to a jury trial before the Bankruptcy Judge, the Bank-
ruptcy 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] ref-
erence of the proceeding shall be automatically
withdrawn, and the proceeding assigned to a Judge
of the District Court . . . .
Local Fed. R. Bankr. P. 9015-2(b) (emphasis added).
[4] After careful review we find the procedure established
by Local Rule 9105-2(b) cannot be squared with the proce-
dure established by 28 U.S.C.§ 157(d), an “Act of Congress,”
and Rule 5011(a), a “Federal Rule of Bankruptcy Procedure.”
Fed. R. Bankr. Proc. 9029. At least two inconsistencies bear
mentioning. First, Local Rule 9015-2(b) allows for the bank-
ruptcy court to “withdraw[ ]” the jurisdictional reference,
whereas 28 U.S.C. § 157(d) and Rule 5011(a) make it explicit
that only a district court may “withdraw” the jurisdictional
reference. See FTC v. First Alliance Mortg. Co. (In re First
Alliance Mortg. Co.), 282 B.R. 894, 901 (C.D. Cal. 2001)
(holding that “a motion [to withdrawal] is heard by the district
court”) (emphasis added). Second, Local Rule 9015-2(b) per-
mits a party to obtain a withdrawal of the reference upon a
“Motion for Certification,” while 28 U.S.C. § 157(d) and Rule
5011(a) make it clear that a party may only obtain a with-
drawal of the reference upon a “Motion for Withdrawal.” See
Hawaiian Airlines, Inc. v. Mesa Air Group, Inc., 355 B.R.
214, 218 (D. Hi. 2006) (holding that “a litigant who believes
that a certain [action] or portion of a [action] pending in the
bankruptcy court should be litigated in the district court may
make a motion to withdraw the reference”) (emphasis added).
[5] We find no error then in the bankruptcy court’s decision
not to adhere to this invalid rule and withdraw the reference,
IN RE: HEALTHCENTRAL.COM 12839
but instead to retain jurisdiction over the debtor’s action for
all pre-trial proceedings.4
Moreover, Sigma’s citation notwithstanding, we can dis-
cern nothing in Dunmore v. United States, the only other case
to address Local Rule 9015-2(b), which requires a different
result. 358 F.3d at 1116-17. Dunmore was limited to discuss-
ing the basic procedure established by Rule 9015-2(b). See id.In other words, in that case we merely stated that if a party
(1) has a right to a jury trial in the district court, (2) makes a
timely demand for a jury trial in the district court, and (3)
refuses to consent to a jury trial elsewhere, Local Rule 9015-
2(b) requires the bankruptcy court to “automatic[ally]” “cer-
tif[y] the withdrawal of the district court’s reference for
‘cause shown’ and sen[d] the case back to the district court.”
Id.Dunmore, however, is simply unavailing to the issue we
confront here: whether the procedure set forth in Local Rule
9015-2(b) is valid. This issue has never been addressed. See
Dunmore, 358 F.3d at 1116-17. Accordingly, while Dunmore
may be relevant for determining what procedure Local Rule
9015-2(b) sets forth, it is irrelevant for determining whether
Local Rule 9015-2(b)’s procedure is valid.
B. Seventh Amendment Jury Trial Right
In addition to Local Rule 9015-2(b) Sigma also seeks sup-
port for its jurisdictional argument by pointing to its right to
a Seventh Amendment jury trial in the district court. Sigma
argues it is has been “held” that once a jury right is found, the
bankruptcy court may no longer maintain “jurisdiction” and
the action must be instantly transferred to an “Article III
court.” Sigma specifically claims this was the holding of
4
Because we find Local Rule 9015-2(b) to be invalid, we express no
opinion as to whether the bankruptcy court could have properly “stayed”
the effective date of the Local Rule 9015-2(b) certification.
12840 IN RE: HEALTHCENTRAL.COM
Granfinanciera, S.A. v. Nordberg, 492 U.S. 33 (1989), one of
the Court’s preeminent bankruptcy cases.
We agree with Sigma that it is entitled to a Seventh
Amendment jury trial in the district court. Growe v. Bilodard
Inc., 325 B.R. 490, 491-92 (D. Me. 2005). We disagree, how-
ever, that Granfinanciera holds that in light of this jury trial
right the bankruptcy court may no longer retain jurisdiction,
and the action must be instantly transferred to an “Article III
court.” See 492 U.S. at 50, 64.
[6] Granfinanciera involved a debtor’s action under § 548
of the Bankruptcy Code to recover certain allegedly “fraudu-
lent transfers” made to two creditors. 492 U.S. at 36. In
response to the action the creditors “requested a ‘trial by
jury.’ ” Id. at 37. The bankruptcy court, however, denied the
creditors’ request and held a “bench trial,” which resulted in
a judgment for the debtor. Id. The creditors filed an appeal
and the Supreme Court granted cert “sole[ly]” to decide
“whether [the creditors had been] entitled to a jury trial”
under the Seventh Amendment. Id. at 38, 50. After a lengthy
discussion, the Court held, these creditors, who had filed no
claim of their own, had been entitled to a Seventh Amend-
ment jury trial. Id. at 64 (“[We hold] . . . the Seventh Amend-
ment entitles petitioners to the jury trial they requested.”).
That the creditors had been “entitl[ed]” to a jury trial under
the Seventh Amendment, however, was the exclusive holding
of Granfinanciera. Id. at 64-65. In fact, the Granfinanciera
Court explicitly stated it would hold no more. Id. at 50 (“We
are not obliged to decide today [anything more than] . . .
whether the Seventh Amendment confers on petitioners a
right to a jury trial . . . .”). Granfinanciera does not support
Sigma’s argument that once a jury right is found the bank-
ruptcy court must instantly give up jurisdiction and the case
must be transferred to an Article III court. See id. at 64 (stat-
ing no view as to whether action may remain in bankruptcy
in light of Seventh Amendment right to a jury trial).
IN RE: HEALTHCENTRAL.COM 12841
[7] Instead, we find Sigma’s argument to this effect is an
open issue, and one of novel impression in this circuit. E.g.,
City Fire Equip. Co., Inc. v. Ansul Fire Prot. Wormald U.S.,
Inc., 125 B.R. 645, 646-50 (N.D. Ala. 1989) (en banc) (find-
ing that Granfinanciera did not settle whether a bankruptcy
court could retain jurisdiction if there was a jury right and
thus it was a novel issue).
For guidance on how to address Sigma’s argument we have
canvassed the numerous courts outside this circuit who have
already addressed the issue. See, e.g., In re Stansbury Place,
Inc., 13 F.3d 122, 128 (4th Cir. 1993); Orion Pictures Corp.
v. Showtime Networks (In re Orion Pictures Corp.), 4 F.3d
1095, 1101-02 (2nd Cir. 1993); King v. Fidelity Nat’l Bank,
712 F.2d 188, 192 (5th Cir. 1983); Growe v. Bilodard Inc.,
325 B.R. 490, 492 (D. Me. 2005); Plan Adm’r v. Lone Star
RV Sales, Inc. (In re Conseco Fin. Corp.), 324 B.R. 50, 55-56
(N.D. Ill. 2005); Travelers Cas. & Sur. Co. v. Skinner Engine
Co. (In re Am. Capital Equip., LLC), 325 B.R. 372, 375
(W.D. Pa. 2005); Hayes v. Royala, Inc., 180 B.R. 476, 477
(E.D. Tex. 1995); Wittes v. Interco Inc., 137 B.R. 328, 329
n.2 (E.D. Mo. 1992); Douglas, Inc. v. Watrous & Ehlers,
P.C., 170 B.R. 169, 170 (D. Colo. 1994).
[8] Universally these courts have all reached the same hold-
ing, that is, a Seventh Amendment jury trial right does not
mean the bankruptcy court must instantly give up jurisdiction
and that the case must be transferred to the district court. E.g.,
City Fire Equip. Co., 125 B.R. at 646-50. Instead, the bank-
ruptcy court is permitted to retain jurisdiction over the action
for pre-trial matters. E.g., In re Stansbury Place, 13 F.3d at
128. As these courts have explained, two rationales justify
this holding.
First, allowing the bankruptcy court to retain jurisdiction
over pre-trial matters, does not abridge a party’s Seventh
Amendment right to a jury trial. See City Fire Equip. Co.,
125 B.R. at 649; accord Jobin v. Kloepfer (In re M & L Bus.
12842 IN RE: HEALTHCENTRAL.COM
Mach. Co.), 159 B.R. 932, 934-35 (D. Colo. 1993); Stein v.
Miller, 158 B.R. 876, 879-80 (S.D. Fla. 1993). A bankruptcy
court’s pre-trial management will likely include matters of
“discovery,” “pre-trial conferences,” and routine “motions,”
which obviously do not diminish a party’s right to a jury trial.
See In re M & L Bus. Mach. Co., 159 B.R. at 934. Moreover,
even if a bankruptcy court were to rule on a dispositive
motion, it would not affect a party’s Seventh Amendment
right to a jury trial, as these motions merely address whether
trial is necessary at all. See Diamond Door Co. v. Lane-
Stanton Lumber Co., 505 F.2d 1199, 1203 & n.6 (9th Cir.
1974) (“[S]ummary judgment is granted as a matter of law
where there is no genuine issue of material fact, and, there-
fore, the province of the jury, fact finding, is not invaded.”)
(emphasis in original); City Fire. Equip. Co., 125 B.R. at 649(“While motions to dismiss and motions for summary judg-
ment may be dispositive, they do not impact on the right to
a jury trial. They merely involve legal issues as to whether
any trial is necessary . . . . The granting of such motions does
not deprive a party of a right to a jury trial.”) (last emphasis
added).
Second, requiring that an action be immediately transferred
to district court simply because of a jury trial right would run
counter to our bankruptcy system. See In re Conseco Finance
Corp., 324 B.R. at 55; Eric Indus., Inc. v. Nat. Union Fire
Insr. Co. (In re Kenai Corp.) 136 B.R. 59, 61 (S.D.N.Y.
1992). Under our current system Congress has empowered the
bankruptcy courts to “hear” Title 11 actions, and in most
cases enter relevant “orders.” § 157(b)(1), (c)(1); see also In
re W. Asbestos Co., 313 B.R. 859, 862 (N.D. Cal. 2004)
(§ 157(b)(1)); Hassett v. BancOhio Nat’l Bank (In re CIS
Corp.), 172 B.R. 748, 763-64 (S.D.N.Y. 1994) (§ 157(c)(1)).
As has been explained before, this system promotes judicial
economy and efficiency by making use of the bankruptcy
court’s unique knowledge of Title 11 and familiarity with the
actions before them. See, e.g., City Fire Equip. Co., 125 B.R.
at 649; Douglas, Inc., 170 B.R. at 170; Barlow & Peek, Inc.
IN RE: HEALTHCENTRAL.COM 12843
v. Manke Truck Lines, Inc., 163 B.R. 177, 179 (D. Nev.
1993). Accordingly, if we were to require an action’s immedi-
ate transfer to district court simply because there is a jury
trial right we would effectively subvert this system. In re
Kenai Corp., 136 B.R. at 61 (“A rule that would require a dis-
trict court to withdraw a reference simply because a party is
entitled to a jury trial, regardless of how far along toward trial
a case may be, runs counter to the policy favoring judicial
economy that underlies the statutory scheme . . . .”). Only by
allowing the bankruptcy court to retain jurisdiction over the
action until trial is actually ready do we ensure that our bank-
ruptcy system is carried out. E.g., Disbursing Agent of Mur-
ray F. Hardesty Estate v. Severson (In re Hardesty), 190 B.R.
653, 657 (D. Kan. 1995).
[9] We find the holding reached by the great majority of
courts to have addressed this issue convincing and adopt it
here. A valid right to a Seventh Amendment jury trial in the
district court does not mean the bankruptcy court must
instantly give up jurisdiction and that the action must be trans-
ferred to the district court. Instead, we hold, the bankruptcy
court may retain jurisdiction over the action for pre-trial mat-
ters.
[10] The bankruptcy court here then did not err in retaining
jurisdiction over pre-trial matters, despite Sigma’s valid claim
for a Seventh Amendment jury trial in the district court.
II. Summary Judgment
Having found jurisdiction to be proper in the bankruptcy
court, we turn to Sigma’s claim that summary judgment
should not have been granted.
When reviewing a grant of summary judgment, “[o]ur task
. . . is identical to that of the [bankruptcy court].” In re Black
& White Cattle Co., 783 F.2d 1454, 1457 (9th Cir. 1986).
“We must view the evidence and inferences therefrom in the
12844 IN RE: HEALTHCENTRAL.COM
light most favorable to the party opposing the motion for sum-
mary judgment.” Jewel Cos. v. Payless Drug Stores North-
west, Inc., 741 F.2d 1555, 1559 (9th Cir. 1984). We then
determine whether the moving party has shown through the
admissible pleadings, depositions, answers to interrogatories,
and other affidavits that there is no genuine issue of material
fact. See Scheuring v. Taylor Bros., Inc., 476 F.3d 781, 784
(9th Cir. 2007). If this burden has been met, we must then
assess whether the non-moving party has come forward with
its own significant and probative evidence showing a genuine
issue of material fact as to the relevant claims or defenses.
Richards v. Neilson Freight Lines, 810 F.2d 898, 902 (9th Cir.
1987).
Applying this framework here, we affirm in part and
reverse in part. We affirm the bankruptcy court’s grant of
summary judgment on the § 547(b) claim, but we reverse the
court’s grant of summary judgment on the § 547(c)(2)
defense.
A. Section 547(b): Preference Payments
[11] Under the Bankruptcy Code, debtors are entitled to
seek “avoidance” of a limited set of pre-bankruptcy “prefer-
ence” payments. § 547(b); Hansen v. MacDonald Meat Co.
(In re Kemp Pac. Fisheries), 16 F.3d 313, 315 (9th Cir. 1994).
To establish that a pre-bankruptcy payment was a “prefer-
ence,” under § 547(b), the debtor must satisfy six elements.
Id. (discussing six elements).
Here Sigma asserts several substantive arguments which
allege that the debtor has not satisfied every element of
§ 574(b). See Richards, 810 F.2d at 902 (stating that moving
party bears “initial burden” of showing that it is entitled to
judgment as a matter of law on its claims or defenses).
Unfortunately, none of the arguments Sigma asserts were
made in, or considered by the bankruptcy court, and therefore
IN RE: HEALTHCENTRAL.COM 12845
we will not consider them now. E.g., Cold Mt. v. Garber, 375
F.3d 884, 891 (9th Cir. 2004) (“In general, we do not consider
an issue raised for the first time on appeal.”). Before the bank-
ruptcy court Sigma’s only argument against the debtor’s sum-
mary judgment motion on the § 547(b) claim was that the
Schilling declaration was “riddled with evidentiary prob-
lems.” According to Sigma, without the Schilling declaration,
the debtor could not prove its § 547(b) claim. This is much
different than the more substantive arguments Sigma raises
now. See supra. As such we find these arguments were
waived on appeal, and in light of the fact that Sigma does not
argue any exception applies, we shall not consider them. See
Sofamor Danek Group v. Brown, 124 F.3d 1179, 1186 n.4
(9th Cir. 1997). To the limited extent any of Sigma’s other
arguments were preserved, we affirm the grant of summary
judgment for the reasons stated by the bankruptcy court.
[12] Having affirmed then the bankruptcy court’s judgment
that the August 8th, August 16th, and September 16th pay-
ments were preferences under § 547(b), we must answer
whether Sigma raised a valid affirmative defense under
§ 547(c)(2). See, e.g., Committee of Creditors Holding Unse-
cured Claims v. Koch Oil Co. (In re Powerline Oil Co.), 59
F.3d 969, 973 (9th Cir. 1995).
B. Section 547(c)(2): Ordinary Course of Business
Defense
[13] In a preferential payment action, the Bankruptcy Code
provides creditors with an affirmative “ordinary course of
business” defense. § 547(c)(2); see Kupetz v. Elaine Monroe
Assocs., Inc. (In re Wolf & Vine), 825 F.2d 197, 199 (9th Cir.
1995). This defense recognizes that “preference” payments
made in the “ordinary course of business” should not be
avoided. 5 Collier on Bankruptcy ¶ 547.04[2][a], 547-55 (rev.
15th ed. 2006.) (“ ‘[T]he purpose of this [defense] is to leave
undisturbed normal financial relations because it does not
detract from the general policy of the preference section to
12846 IN RE: HEALTHCENTRAL.COM
discourage unusual action by either the debtor or his creditors
during the debtor’s slide into bankruptcy.’ ” (quoting H.R.
Rep. No. 595, at 373-74 (1997), reprinted in 1978
U.S.C.C.A.N. 5787, 6329)). At the time of this litigation, we
recognized that to establish a § 547(c)(2) defense, three dis-
tinct elements needed to be satisfied.5 Arrow Elecs., Inc. v.
Justus (In re Kaypro), 218 F.3d 1070, 1073 (9th Cir. 2000).
We described them as follows:
Under the ordinary course of business defense,
§ 547(c)(2), a [debtor] may not avoid a transfer to
the extent the transfer was (A) in payment of a debt
incurred by the debtor in the ordinary course of busi-
ness or financial affairs of the debtor and the trans-
feree; (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.
Gains Credit Corp. v. Anderson (In re Jan Willard RV, Inc.),
315 F.3d 1192, 1197 (9th Cir. 2003). Only if each and every
one of these elements was satisfied could a § 547(c)(2) “ordi-
nary course of business defense” be successful. See Moldy v.
Chemcarb, Inc. (In re Food Catering & Hous., Inc.), 971 F.2d
396 (9th Cir. 1992).
Sigma argues the bankruptcy court erred in granting sum-
mary judgment in favor of the debtor as to its § 547(c)(2)
5
We recognize that in 2005 Congress amended § 547(c)(2), making it
arguably even easier to prove. Pub. L. No. 109-8, § 409 (2005); see Wood
v. Stratos Prod. Dev., LLC. (In re Ahaza SYS., Inc.) 482 F.3d 1118, 1123
n.4 (9th Cir. 2007). As amended § 547(c)(2) now only requires satisfaction
of two elements (1) that the transfer was “in payment of a debt incurred
by the debtor in the ordinary course of business” and (2) that the payment
was either “made in the ordinary course of business” or “made according
to ordinary business terms.” § 547(c)(2) (emphasis added). Because this
litigation arose prior to the 2005 amendment, however, the pre-2005 ver-
sion of § 547(c)(2) still governs. See Frankfort Digital Servs. v. Costlier
(In re Reynosa), 477 F.3d 1117, 1120 n.1 (9th Cir. 2007).
IN RE: HEALTHCENTRAL.COM 12847
defense. Sigma claims, despite the bankruptcy court’s hold-
ing, it did establish a genuine issue of fact as to whether the
three payments were (1) made in the ordinary course of busi-
ness of the debtor and the transferee (§ 547(c)(2)(B)) and (2)
made according to ordinary business terms (§ 547(c)(2)(C)).
As such, Sigma explains, because the bankruptcy court
already found it satisfied § 547(c)(2)(A), summary judgment
must be reversed.
We agree.
1. Section 547(c)(2)(B)
[14] In this circuit the rules associated with § 547(c)(2)(B)
are well-settled. See In re Ahaza Sys., Inc., 482 F.3d at 1124.
To satisfy § 547(c)(2)(B) the creditor must demonstrate that
the relevant payments were “ordinary in relation to past prac-
tices between the debtor and [the] . . . creditor.” In re Food
Catering & Hous., Inc., 971 F.2d at 398. Effectively this
breaks down into two components. First, the creditor must
show a baseline of past practices between itself and the
debtor. See id.; 5 Collier on Bankruptcy ¶ 547.04[2][a], 547-
60 (rev. 15th ed. 2006.). Second the creditor must show that
the relevant payments were “ordinary in relation to [these]
past practices.” In re Food Catering & Hous., Inc., 971 F.2d
at 398. This is most commonly done by demonstrating that
the relevant payments did not differ from past payments in
“amount” or “form,” were not the result of “unusual collec-
tion or payment activit[ies],” or did not come as a result of the
“creditor [taking] advantage of the debtor’s deteriorating
financial condition.” Sulmeyer v. Suzuki (In re Grand Chevro-
let, Inc.), 25 F.3d 728, 732 (9th Cir. 1994). But see In re
Ahaza, Inc., 482 F.3d at 1129 (finding that traditional factors
are non-exclusive and other factors bearing on past practices
may be relevant).
[15] Here we believe Sigma has at least raised a triable
issue of fact as to whether § 574(c)(2)(B) has been satisfied,
12848 IN RE: HEALTHCENTRAL.COM
for it has offered evidence on both components. See In re
Grand Chevrolet, 25 F.3d at 732-33.
[16] First, the Backof declaration tends to show a baseline
of past practices between the debtor and Sigma. According to
Backof, Sigma and the debtor entered into an agreement in
January 1998. From that date, until March 2001, Sigma and
the debtor engaged in a routine “payment cycle.” Sigma
would submit invoices for its maintenance and support ser-
vices, and the debtor would pay the invoices by check, from
oldest to newest. “The invoices paid by the debtor ranged
from between 16 and 105 days” from the date the invoice was
received, with an average of 65.72 days. As Backof stated,
this was “the ordinary course of business between the debtor
and Sigma.”
[17] Second, the Backof declaration also tends to show that
the August 8th, August 16th, and September 16th payments
were ordinary in relation to these past practices. Each of the
three payments was consistent with prior payment “forms,”
that is, they each were done by check, and were attached to
a specific Sigma invoice. The three payments also conformed
to the debtor and Sigma’s prior “payment cycle.” The August
8th payment paid invoices 90 days old. The August 16th pay-
ment paid invoices between 63 and 83 days old. And the Sep-
tember 16th payment paid invoices between 16 and 78 days
old. Lastly, Backof did not mention that the three payments
“came as a result of [Sigma] tak[ing] advantage of the debt-
or’s deteriorating financial conditions.” In sum, according to
Backof, each of these payments “was made within the ordi-
nary course of business of Sigma Micro Corporation and the
debtor.”
[18] Based on this evidence we hold that Sigma at least
raised a triable issue of fact as to whether § 547(c)(2)(B) was
satisfied.
Furthermore, we reject the bankruptcy court’s position that
the debtor’s institution of an “old school” weekly cash-flow
IN RE: HEALTHCENTRAL.COM 12849
management system prohibited Sigma from satisfying
§ 547(c)(2)(B). Even if this system was “out-dated” it does
not follow that we must hold that the three payments did not
satisfy § 547(c)(2)(B). See In re Kaypro, 218 F.3d at 1073(“[T]he bankruptcy court erred in holding that payments made
pursuant to a restructuring agreement are per se outside the
ordinary course of business . . . .”). When determining
whether § 547(c)(2)(B) has been satisfied, no one factor is
conclusive. See In re Ahaza, Inc., 482 F.3d at 1129. On the
contrary, all evidence shedding light on the practices between
the parties, past and present, should be considered. See
Schoenmann v. BCCI Constr. Co. (In re Northpoint
Commc’ns Group, Inc.), 361 B.R. 149, 158 (Bankr. N.D. Cal.
2007). By focusing only on the “old school” weekly cash-
flow management system, the bankruptcy court failed to take
account of all the other evidence in the Backof declaration
raising a genuine issue as to whether § 547(c)(2)(B) had been
satisfied.
2. Section 547(c)(2)(C): Ordinary Business Terms
[19] In this circuit, the rules attending § 547(c)(2)(C) are
also well-settled. See In re Jan Willard RV, Inc., 315 F.3d at
1197-98. To satisfy § 547(c)(2)(C) the creditor must demon-
strate that the relevant payments were “ordinary in relation to
prevailing business terms.” In re Food Catering & Hous.,
Inc., 971 F.2d 396, 398 (9th Cir. 1992). As before, this effec-
tively breaks down into two components. First the creditor
must establish the “broad range” of business terms employed
by similarly situated debtors and creditors, including those in
financial distress, during the relevant period. In re Jan Wil-
lard RV, Inc., 315 F.3d at 1197-98. Second, the creditor must
show that the relevant payments were “ordinary in relation to
[these] prevailing business terms.” See In re Kaypro, 218 F.3d
at 1074. In general, § 547(c)(2)(C) should not pose a particu-
larly high burden for creditors. See In re Jan Willard RV, Inc.,
315 F.3d at 1198 (holding only payments which are so
12850 IN RE: HEALTHCENTRAL.COM
unusual as to be “aberration[s] in the relevant industry” do not
satisfy § 547(c)(2)(C)).
Here we yet again believe that Sigma has at least raised a
triable issue of fact as to whether § 547(c)(2)(C) has been sat-
isfied, for it has offered evidence on both components.
First, the Backof declaration does include evidence pertain-
ing to the business terms used by other debtors and creditors
in the “industry.” Backof states that in preparation for her
declaration she reviewed “industry-wide payment data pre-
pared by NACM,” including the payment history “of all cus-
tomers of all reporting companies.” According to this data, for
the period of June 2001 to October 2001, the “industry” stan-
dard was to pay invoices between 23 to 100 days after the
billing date. In other words, the “broad range” of business
terms for other “industry” participants was to pay invoices
anywhere from 23 to 100 days after the invoice was received.
[20] Second, the Backof declaration also includes evidence
showing that the August 8th, August 16th, and September
16th payments were “ordinary in relation to [these] prevailing
business standards.” As noted above, the August 8th payment
paid invoices 90 days old. The August 16th payment paid
invoices between 63 and 83 days old. And the September 16th
payment paid invoices between 16 and 78 days old. As
Backof stated then, each of these payments was made “ac-
cording to [the] ordinary business terms.” Indeed, none were
so unusual as to be “aberrations” in the “industry.” See In re
Jan Willard RV, Inc., 315 F.3d at 1198.
[21] Based on this evidence we hold that Sigma at least
raised a triable issue of fact as to whether § 547(c)(2)(C) was
satisfied.
Moreover we reject the bankruptcy court’s position that
Sigma failed to satisfy § 547(c)(2)(C) because Backof did not
adequately define what “industry” she was referring to. Back-
IN RE: HEALTHCENTRAL.COM 12851
of’s declaration states she obtained “industry” information
from NACM, which included “industry-wide” payment his-
tory for “all customers of all reporting companies.” Admit-
tedly, Backof’s declaration is far from perfect. In re Jan
Willard RV, Inc., 315 F.3d at 1198 (stating that creditor must
establish business terms used by “similarly situated” debtors
and creditors). At this point, however, we are required to
“view the evidence in the light most favorable to the non-
moving party and draw all justifiable inferences in favor of
that party.” Welles v. Turner Entm’t Co., 488 F.3d 1178, 1183
(9th Cir. 2007). Under this standard, we think Backof’s decla-
ration, which states that the three payments were ordinary for
the “industry” was sufficient to create a triable issue of fact
as to whether § 547(c)(2)(C) was satisfied. Cf. In re Delta-
corp, Inc., 179 B.R. 773, 781 (Bankr. S.D.N.Y. 1995) (hold-
ing that § 547(c)(2) defense should rarely be decided “on a
motion for summary judgment, given [its] peculiarly factual
nature”).
CONCLUSION
For all the foregoing reasons we AFFIRM in part,
REVERSE in part, and REMAND.