Montoya v. Citizens Bank of Las Cruces et al

1 This section of the statute was amended pursuant to the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005, (“BAPCPA”) Pub.L. No. 109-8, § 409 (2005), applicable
to cases commenced on or after October 17, 2005. The main bankruptcy proceeding herein was
filed before October 17, 2005. Thus, the 2005 amendments do not apply to this adversary
proceeding.
1
UNITED STATES BANKRUPTCY COURT
FOR THE DISTRICT OF NEW MEXICO
In Re: Ashok K. Khera,
Case No. 07-05-20733 ML
Debtor.
__________________________________________________________________________
PHILIP J. MONTOYA, Trustee,
Plaintiff,
v. 	Adversary No.: 07-1116M
CITIZENS BANK OF LAS CRUCES,
ADIL RIZVI, HASAN ADNAN, VIDYA BAKSHI,
Defendants.
ORDER GRANTING DEFENDANT CITIZENS BANK OF LAS CRUCES’
MOTION FOR SUMMARY JUDGMENT AND DENYING PLAINTIFF’S CROSS-
MOTION FOR SUMMARY JUDGMENT
THIS MATTER came before the Court on Cross-Motions for Summary Judgment filed
by Defendant Citizens Bank of Las Cruces, by and through its attorneys, Martin, Lutz, Hosford,
& Eubanks, P.C. (David P. Lutz) and Plaintiff, Philip J. Montoya, Trustee, by and through his
attorneys, Moore, Berkson & Gandarilla, P.C. The Trustee filed this adversary proceeding
against the Defendants to avoid preferential transfers and to recover their value under 11 U.S.C.
§547. Defendant requests summary judgment on the Plaintiff’s Complaint to Avoid Preferences,
arguing that the ordinary course exception under 11 U.S.C.§547(c)(2)1 applies to prevent the
Case 07-01116-m Doc 29 Filed 08/21/08 Entered 08/21/08 10:13:06 Page 1 of 14

2In re Harris, 209 B.R. 990, 998 (10th Cir. BAP 1997) (citing Renfro v. City of Emporia,
948 F.2d 1529, 1534 (10th Cir.1991) and SEC v. American Commodity Exch., Inc., 546 F.2d
1361, 1365 (10th Cir.1976)) .
3 In re Baines, 337 B.R. 392, 396 (Bankr.D.N.M. 2006.)
2
Plaintiff from recovering any loan payments made to Citizens Bank during the preference period.
Trustee counters that the ordinary course exception is inapplicable because (1) the underlying
debt was not incurred by the individual defendants or the debtor’s former business and (2) the
fact that the initial loan payments on the restructured debt were late.
Upon review of the Motion, Cross Motion, responses and reply in light of the applicable
standards for summary judgment, the Court finds that Defendant’s arguments raise a valid
defense to the Complaint, that there are no genuine issues of material fact, and that Defendant is
entitled to summary judgment as a matter of law. Accordingly, the Court will grant the
Defendant’s Motion and Deny the Plaintiff’s Cross-Motion.
SUMMARY JUDGMENT STANDARDS
Summary judgment is appropriate when there are no genuine issues of material fact, and
the moving party is entitled to judgment as a matter of law. Rule 56(c), Fed.R.Civ.P., made
applicable to bankruptcy proceedings by Rule 7056, Fed.R.Bankr.P. Cross motions for summary
judgment raise an inference that summary judgment will be appropriate; however, the Court
must nevertheless determine whether plaintiff or defendant independently satisfies the
requirements for summary judgment.2 “[A] party opposing a properly supported motion for
summary judgment may not rest on mere allegations or denials of his pleading, but must set forth
specific facts showing that there is a genuine issue for trial” through affidavits or other
supporting evidence.3 In determining whether genuine issues of material fact preclude summary
Case 07-01116-m Doc 29 Filed 08/21/08 Entered 08/21/08 10:13:06 Page 2 of 14

4Harris v. Beneficial Oklahoma, Inc., (In re Harris), 209 B.R. 990, 995 (10 th Cir. BAP
2007; Henderson v. Inter-Chem Coal Co., 41 F. 3d 567, 569 (10 th Cir. 1994)
3
judgment, the Court will construe the evidence in the light most favorable to the party opposing
summary judgment.4 In light of these standards the Court will consider the cross motions for
summary judgment.
UNDISPUTED FACTS
The following facts are not in dispute:
1. Debtor Ashok Khera was a principal of TNM, LLC. See Statement of Financial
Affairs filed in Case No. 11-05-10788. (Docket #20); see also Statement of Financial Affairs
filed in Case No. 7-05-20733 (Docket # 5).
2. Debtor and Defendants Adnan, Rizvi and Bakshi were personal guarantors on an
unsecured business line of credit for TNM, LLC held by Defendant Citizens Bank of Las Cruces.
See Schedule F in Case No. 11-05-10788. (Docket #20); See also Affidavit of Hotch Manning,
attached as Exhibit “A” to Citizens Bank’s Motion for Summary Judgment, at para. 3.
3. In 2004, the TNM, LLC line of credit became past due. See Affidavit of Hotch
Manning, attached as Exhibit “A” to Citizens Bank’s Motion for Summary Judgment, at para. 4.
4. Debtor sought to restructure the TNM, LLC debt to a term loan. Id.
5. Debtor and Defendants Adnan and Rizvi entered into a Promissory Note with Citizens
Bank dated July 29, 2004 in the principal amount of 75,409.24. See Answer to Trustee’s
Complaint to Avoid Preference (Docket # 4 ).
6. The Promissory Note restructured TNM, LLC’s debt which included the past due
credit line, an overdraft account and attorneys fees. See Affidavit of Hotch Manning attached to
Case 07-01116-m Doc 29 Filed 08/21/08 Entered 08/21/08 10:13:06 Page 3 of 14

4
Defendant Citizen Bank’s Memorandum in Support of Motion for Summary Judgment; Affidavit
of Philip J. Montoya In Support of Plaintiff’s Response to Citizen Bank of Las Cruces’ Motion
for Summary Judgment.
7. The first payment on the Promissory Note was due on August 29, 2004, but was not
made until November 2004. See Affidavit of Hotch Manning attached to Defendant Citizen
Bank’s Reply in Support of Motion for Summary Judgment ; Affidavit of Philip J. Montoya In
Support of Plaintiff’s Response to Citizen Bank of Las Cruces’ Motion for Summary Judgment.
at para. 7.
8. TNM, LLC filed for bankruptcy relief under Chapter 11 on February 7, 2005. See
Case No. 11-05-10788 (Docket #1)
9. Debtor made monthly payments of $2,429.60 on the Promissory Note beginning
November 2004 and continued through September 2005. See Exhibit 3 to Affidavit of Hotch
Manning attached to Defendant Citizen Bank’s Memorandum in Support of Motion for
Summary Judgment.
10. Debtor made loan payments on or about the 7 th of each month and tendered the
payments by check. See Exhibits 3 and 4 to Affidavit of Hotch Manning attached to Defendant
Citizen Bank’s Memorandum in Support of Motion for Summary Judgment; Exhibit 4 to
Affidavit of Philip J. Montoya In Support of Plaintiff’s Response to Citizen Bank of Las Cruces’
Motion for Summary Judgment.
11. Debtor filed a voluntary petition under Chapter 7 of the Bankruptcy Code on October
13, 2005. See Case No. 7-05-20733 ML (Docket #1).
12. Debtor made two (2) payments totaling $4859.20 to Citizens Bank during the ninety
Case 07-01116-m Doc 29 Filed 08/21/08 Entered 08/21/08 10:13:06 Page 4 of 14

5 In re M & L Business Machine Company, Inc. 155 B.R. 531, 534 ((Bankr. D.Colo.
1993)(the initial burden lies on the Trustee to establish the elements of Section 547(b) by a
preponderance of the evidence.)
5
(90) day period preceding the filing of the bankruptcy petition. See Trustee’s Complaint to
Avoid Preference (Docket #1 )and Defendant Citizens Bank’s Answer (Docket # ).
13. Debtor was indebted to Citizens Bank at the time of the payments during the
preference period. See Trustee’s Complaint to Avoid Preference (Docket # 1)and Defendant
Citizens Bank’s Answer (Docket #4 ).
14. The payments were made on account of an antecedent debt. See Trustee’s Complaint
to Avoid Preference (Docket #1 )and Defendant Citizens Bank’s Answer (Docket # 4).
DISCUSSION
The Trustee may avoid a transfer of property if the transfer meets the criteria set forth in
11 U.S.C. §547(b). The Trustee has the burden of proving the transaction is avoidable by a
preponderance of the evidence.5 In his Complaint, the Trustee seeks to recover certain pre-
petition loan payments, made by the Debtor to Citizens Bank, pursuant to 11 USC § 547(b)
which provides:
(b) Except as provided in subsection (c) of this section, the trustee may avoid any transfer
of an interest of the debtor in property -
(1) to or for the benefit of a creditor;
(2) for or account of an antecedent debt owed by the debtor before such transfer
was made;
(3) made while the debtor was insolvent;
(4) made -
(A) on or within the 90 days before the date of the filing of the petition; or
(B) between 90 days and one year before the date of the filing of the
petition, if such creditor at the time of such transfer was an insider; and
(5) that enables such creditor to receive more than such creditor would receive if-
(A) the case were a case under chapter 7 of this title;
(B) the transfer had not been made; and
Case 07-01116-m Doc 29 Filed 08/21/08 Entered 08/21/08 10:13:06 Page 5 of 14

6 Jobin v. McKay ( In re M&L Business Machine Company, Inc.), 155 B.R. 531, 534
(Bankr. D. Colo 1993);
6
(C) such creditor received payment of such debt to the extent provided by
the provisions of this title.
11 U.S.C. §547(b).
The facts contained in the record establish that the elements of a preferential transfer
exist. Debtor obtained a loan in 2004 from Citizens Bank in an effort to refinance existing debt.
Citizens Bank admits that loan payments in the amount of $ 4,859.20 were received from the
Debtor within the ninety day period preceding the Debtor’s bankruptcy filing. 	Defendant
Citizens Bank further admits the payments were a benefit to the bank and made on account of an
antecedent debt. Under 11 U.S.C. §547(f), the Debtor is presumed insolvent “on and during the
90 days immediately preceding the date of the filing of the petition,” for the purposes of 11
U.S.C.§547. The refinanced loan was not secured and as such allowed Defendant to receive
more that it would in a Chapter 7. 	Therefore based on these facts, the Court finds that the
payments were preferential transfers.
Once the Trustee meets the initial burden showing within the meaning of §547 all
preference elements, the burden shifts to the creditor to establish that one of the exceptions
applies.6 In this case, Citizens Bank asserts that the transfers were made in the “ordinary course
of business” pursuant to 11 USC §547(c)(2) which provides:
(c) The trustee may not avoid under this section a transfer-
(2) 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...
Case 07-01116-m Doc 29 Filed 08/21/08 Entered 08/21/08 10:13:06 Page 6 of 14

7 In re Magic Circle Energy Corp., 64 B.R. 269, 272( Bankr. W.D. Okla.1986).
8 Id.
9 Payne v. Clarendon Nat’l Ins. Co.(In re Sunset Sales, Inc.) 220 B.R. 1005, 1020(10th
Cir. BAP 1998)
10 Id
11 Id at 1020-21.
12 In re Allied Carriers' Exchange, Inc., 375 B.R. 610, 616 (10th Cir.BAP Colo.2007); In
re Rocor International, Inc. 352 B.R. 319, 334 (Bankr.W.D.Okla.,2006); Clark v. Balcor Real
Estate Fin., Inc. ( In re Meridith Hoffman Partners), 12 F.3d 1549, 1553 (10th Cir.1993).
7
11 U.S.C. §547(c)(2).
The underlying purpose of the ordinary course exception is to leave undisturbed normal
financing relations because it does not detract from the general policy of the preference section
to discourage unusual activity by either the Debtor or his creditors during the Debtor’s slide into
bankruptcy.7 To satisfy this exception a creditor must show that the payments were made in the
ordinary course of the creditor’s business, made according to ordinary business terms and made
in the ordinary course of business.8 This exception is narrowly construed and requires that the
creditor satisfy all three elements set forth by the statute.9 The Tenth Circuit has held that this
exception contains a subjective test in subsection (B) and an objective test in subsection (C).10
The subjective test examines whether the transfers at issue were “ordinary as between the
parties” and the objective test examines whether the transfers at issue were “ordinary in the
industry”or under “ordinary business terms.”11 The creditor has the burden of establishing each
of these elements by a preponderance of the evidence.12
11 USC §547(c)(2)(A)
The first inquiry under the ordinary course of business defense is whether the debt was
Case 07-01116-m Doc 29 Filed 08/21/08 Entered 08/21/08 10:13:06 Page 7 of 14

13 In re Furrs Supermarkets, Inc. 296 B.R. 33, 40 (Bankr.D.N.M. 2003) (“reported cases
under 547(c)(2) overwhelmingly focus on subsections (B) and (C). Under those sections the
creditor must prove that the transfers were ordinary as between the parties 547(c)(2)(B), which is
a “subjective test”, and ordinary in the industry 547 (c)(2)(C), which is an “objective test”.)
8
incurred in the ordinary course of business between the debtor and transferee. “There is
generally no disagreement over the first requirement that a debt was incurred in the ordinary
course of business of the debtor and the transferee.13 But in the instant case, the Trustee argues
that the transaction at hand was not made in the ordinary course of business between the parties.
The Trustee’s affidavit cites to information contained in financial statements provided to
Citizens Bank by another defendant in this proceeding, Adil Rizvi. The Trustee asserts that
based on the information contained in Mr. Rivzi’s financial statements, provided to Citizens
Bank for the purpose of obtaining the restructured debt, the underlying debt was obtained as a
credit line for “Sky Blue Investments, LLC.” an unrelated company. He further asserts that,
since the underlying debt was not related to the Debtor or to TNM, LLC, the restructured debt is
also unrelated and therefore the transaction is not in the ordinary course of business between
these parties. In addition, Trustee argues that the transaction is not in the ordinary course
because Citizens Bank was aware that TNM, LLC, Debtor’s company, filed for bankruptcy relief
in February 2005.
Citizens Bank contends that the parties entered into a refinancing agreement of TNM,
LLC’s debt because the Debtor and the other defendants were personal guarantors. The
guarantors sought to refinance a non-performing loan as well as restructure an overdraft account.
At the time of the refinance, Citizens Bank was not aware that Debtor or TNM, LLC planned to
Case 07-01116-m Doc 29 Filed 08/21/08 Entered 08/21/08 10:13:06 Page 8 of 14

14 TNM LLC filed for relief under Chapter 11 approximately seven months after the loan
was refinanced. See Case No. 11-05-10788 (Docket # 1). Debtor filed for relief under Chapter 7
more than a year after the loan documents were executed. See Case No. 7-05-20733 ML
(Docket #1)
15 In re Magic Circle Energy Corp., 64 B.R. 269, 270-273 (Bankr. W.D. Okla.
1986)(where the debtor entered into a work out plan about a year and a half before the
bankruptcy filing and executed a promissory note calling for monthly installment payments over
a seven year period... The Court held that the mere restructuring of payment terms does not alter
the fact that the underlying debt was incurred under normal circumstances.) See also, Johnston
Industries, Inc. V. CB& T Bank of Russell County (In re: Johnston Industries, Inc.) 357 B.R.
907(Bankr. MDGa2006)(holding that the debt, where guarantors of previous business loans
obtained promissory notes, was incurred in the ordinary course of business.)
16 In re Magic Circle Energy Corp., 64 B.R. 269, 273 (Bankr WD Okla. 1986).
9
file for bankruptcy relief. 14 Citizens Bank points out that the Trustee makes statements about
the purpose of the loan based on his review and misconstrual of one page of a two year old
financial statement provided by Mr. Rivzi to Citizens Bank when the Debtor and the other
Defendants sought to restructure the line of credit. Affidavits prepared by Mr. Manning, the loan
officer who handled the processing of the loan, state that Citizens Bank requested financial
statements from Debtor and the other defendants because they were seeking to restructure TNM,
LLC’s existing credit line. Courts have found re-financing arrangements similar to the
agreement herein satisfy the first requirement of the ordinary course of business exception.15
“The mere restructuring of the payment terms does not alter the fact that the underlying debt was
incurred under normal circumstances.”16 Here, the following facts are clear: Debtor and
Citizens Bank had an existing banking relationship wherein they agreed to restructure certain
existing business debt. Whether Citizens Bank was aware of any impending bankruptcy filings
by Debtor’s business entity is irrelevant given the separation of time between the inception of the
loan and the bankruptcy filings. The Court is persuaded that this loan was established in the
Case 07-01116-m Doc 29 Filed 08/21/08 Entered 08/21/08 10:13:06 Page 9 of 14

17 Sunset Sales, Inc., 220 B.R. at p.1020-21.
10
ordinary course of business between the parties to restructure existing debt. 	Based on the facts
herein, the Court finds that Citizens Bank has satisfied the first requirement of the exception
under §547(c)(2)(A).
11 USC §547(c)(2)(B)
The subjective test requires the Court to consider the following four factors by
comparing pre-preference period transfers with preference period transfers: (1) the length of time
the parties were engaged in the transaction at issue; (2) whether the amount or form of tender
differed from past practices; (3) whether the debtor or creditor engaged in any unusual collection
or payment activity; and (4) the circumstances under which the payment was made.17 Citizens
Bank introduced evidence of the payments through the affidavit of Hotch Manning. 	Although
the loan was restructured in July 2004 and the initial payment was due August 29, 2004, the first
payment on the restructured debt was not made until November 15, 2004. Once the Debtor began
making the requisite payments, the records reflect the amount, method and date of each payment
was consistent with the loan documents. Mr. Manning produced copies of the checks and a
ledger reflecting the Debtor’s regular monthly payments for the better part of a year. There is
nothing contained in these documents suggesting that the amount or form of payment differed
from the historical practice during the months preceding the preference period. The records
provided by the bank do not reflect any unusual collection activity nor is there any unusual
payment activity.
The Trustee takes issue with Debtor’s initial failure to begin making payments according
to the note and the fact several payments made in November 2004 allowed the Debtor to catch
Case 07-01116-m Doc 29 Filed 08/21/08 Entered 08/21/08 10:13:06 Page 10 of 14

18 Mr. Manning’s second affidavit attached as an exhibit to Citizens Bank’s Reply
explains that the November payments were not considered late.
11
up what the Trustee believes are late payments. But the Trustee only seeks recovery of
payments made to Citizens Bank in July 2005, August 2005 and September 2005. During these
months, and in fact from November 2004 through the filing of the bankruptcy, the records
demonstrate that Debtor regularly made loan payments monthly on or about the 7 th of each
month by check in the amount designated by the loan documents. In its’ Reply Citizens Bank
asserts that the fact that the first payment was not made until November 2004 does not preclude
summary judgment since Plaintiff does not seek to recover that payment because it is not within
the preference period.18 In his affidavit attached to Citizens Bank’s Reply, Mr. Manning
explains that the four guarantors were to be signers on the restructured debt. Citizens Bank was
unable to obtain a signature from Vidya Bakshi, one of the co-defendants herein. As a result,
Citizens Bank did not begin to service the loan in July 2004. Only after Debtor’s insistence on
making payments without obtaining Mr. Bakshi’s signature did Citizens Bank agree to begin
servicing the loan.
The Trustee attempts to bolster his argument by referring to collection activity pursued
against the Debtor prior to the restructure. This is also irrelevant because the prior debt is not at
issue in this proceeding.
The facts regarding the payments from November 2004 through September 2005
illustrate that the transfers made during the preference period meet the criteria set out in the
subjective test of 11 USC §547(c)(2)(B). Therefore, the Court finds the second requirement of
the ordinary business exception is met.
Case 07-01116-m Doc 29 Filed 08/21/08 Entered 08/21/08 10:13:06 Page 11 of 14

19 In re Rocor International, Inc. 352 B.R. 319, 334 (Bankr.W.D.Okla.,2006)
20 In re Allied Carriers’ Exchange, Inc. (citing Sunset Sales, 220 B.R. at 1021)
21 352 B.R. at 334 (citing In re Tolona Pizza Prods. Corp., 3 F.3d 1029, (7th Cir.1993).
22 352 B.R. at 335.
23 Id. at 334-335.
12
11 USC §547(c)(2)(C)
The final requirement of the ordinary business exception requires the Court to determine
whether the transfers were made according to ordinary business terms.19 The Tenth Circuit has
interpreted the phrase “ordinary business terms” in the objective test of subsection (C) to mean
those terms that are used in normal financing relations: the kind of terms that creditors and
debtors use in ordinary circumstances when debtors are healthy. 20 The creditor must show that
the disputed transaction was made in accordance with the standards of the relevant industry.21 In
addition, a creditor must produce objective evidence of the range of prevailing practices within
the creditor’s industry involving similar transactions to the transfer in question.22 Courts have
permitted such evidence to come from a variety sources including from a creditor’s own
corporate representative.23
In support of Citizens Bank’s claim that the facts of the instant case meet this objective
standard, Citizens Bank offers the Affidavit of Hotch Manning. The affidavit recites Mr.
Manning’s experience as a Board Member or bank officer for over twenty years and his
familiarity with the banking business. Citizens Bank asserts that the promissory note at issue is
on a standard industry form with terms that are not in any way unusual in the banking industry
and attaches a copy of the note as Exhibit 1 to Mr. Manning’s affidavit. Citizens Bank further
Case 07-01116-m Doc 29 Filed 08/21/08 Entered 08/21/08 10:13:06 Page 12 of 14

13
states that the interest rate and payment schedule were fair and in no way out of the ordinary.
Mr. Manning’s affidavit specifically states that the rates were within industry norms in the area
for July 2004.
The Trustee fails to provide any specific evidence to contradict any facts represented in
Mr. Manning’s affidavit regarding the banking industry. Nor does the Trustee provide his own
expert witness to refute that the terms of the Promissory Note were anything but ordinary in the
industry. Instead, Trustee asks the Court to strike certain paragraphs in Hotch Manning’s
Affidavit claiming that the testimony contains “ultimate facts and conclusions” and that Mr.
Manning is not a qualified expert able to testify as to “ordinary course.” The Court is not
persuaded that paragraphs 3, 7, 8 and 10 of Mr. Manning’s affidavit should be stricken in their
entirety. Disregarding the sentences in Mr. Manning’s affidavit containing the words “ordinary
course of business,” does not abrogate any essential facts necessary for the determination that the
objective test is met. Although Mr. Manning is not disinterested in the outcome of this
proceeding, he has personal knowledge of the facts and significant experience in the banking
industry. As such, the Court is persuaded that the Promissory Note was based on ordinary
business terms and the third requirement of the ordinary business exception is met.
Based on the foregoing, the Court concludes that the ordinary course business exception
under 11 U.S.C.§547(c)(2) applies to prevent recovery of the loan payments. Citizens Bank of
Las Cruces’ Motion for Summary Judgment is GRANTED and Trustee’s Cross-Motion for
Summary Judgment is DENIED. The Court will enter a judgment consistent with this Order.
____________________________
MARK B. McFEELEY
United States Bankruptcy Judge
Case 07-01116-m Doc 29 Filed 08/21/08 Entered 08/21/08 10:13:06 Page 13 of 14

14
Entered on Docket Date: August 21, 2008
Copy to:
David P. Lutz
PO Drawer 1837
Las Cruces, NM 88004-1837
Bonnie Bassan Gandarilla
George M. Moore
Moore, Berkson & Gandarilla, P.C.
PO Box 216
Albuquerque, NM 87103-0216
Jennie D Behles
PO Box 7070
Albuquerque, NM 87194-7070
Case 07-01116-m Doc 29 Filed 08/21/08 Entered 08/21/08 10:13:06 Page 14 of 14