Qmect, Inc.

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re No. 04-41044 T
Chapter 11
QMECT, INC., dba Electrochem,
a California corporation,
Debtor-in-Possession.
________________________________/
MEMORANDUM OF DECISION RE MOTION FOR RELIEF
The second motion of Burlingame Capital Partners (“Secured
Creditor”) for relief from the automatic stay was heard over
several days, concluding on May 4, 2005. Secured Creditor, the
above-captioned debtor-in-possession (the “Debtor”), and the
Official Creditors’ Committee (the “Committee”) appeared at the
hearing through counsel. Evidence was presented, argument made,
and the Court took the matter under submission. Having considered
applicable law and all the evidence presented in the case, the
Court concludes that relief from stay should be denied at this
time.
Secured Creditor based its motion for relief on both sections
362(d)(1) and (2) of the Bankruptcy Code. Under section
362(d)(1), the Court must grant relief from the automatic stay if
the Secured Creditor is not adequately protected. The Debtor
bears the burden of proving adequate protection. Under section
362(d)(2), the Court must grant relief if the Debtor has no equity
in the Secured Creditor’s collateral and the collateral is not
Signed: May 05, 2005
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
May 05, 2005
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 04-41044 Doc# 295 Filed: 05/05/05 Entered: 05/05/05 14:47:32 Page 1 of
5

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
2
necessary for an effective reorganization. The Secured Creditor
bears the burden of proving no equity. The Debtor bears the
burden of proving that the collateral is necessary for an
effective reorganization.
In this case, if the Secured Creditor’s liens are valid, there
is no dispute that the Debtor has no equity in the Secured
Creditor’s collateral. However, the Committee has filed a motion
for summary judgment, challenging the validity of the Secured
Creditor’s liens. The motion is set for hearing on May 6, 2005 at
2:00 p.m. The Court expects to take that motion under submission.
Until the motion is decided, it will be impossible to determine
whether the Secured Creditor can meet its burden of proving no
equity under section 362(d)(2).
Thus, the Secured Creditor is not entitled to relief from the
automatic stay unless the Debtor has failed to meet its burden of
proving adequate protection. Adequate protection is not defined
by the Bankruptcy Code. However, case law has established that it
means two things: (1) that the secured creditor’s collateral
position is not getting any worse and (2) that the debtor has a
reasonable prospect for reorganization within a reasonable time.
The evidence presented established to the Court’s
satisfaction that the Secured Creditor’s collateral position has
not deteriorated since the beginning of the case. The Secured
Creditor has been receiving interest payments, which have been
held by its counsel pending a determination by the Court of the
Case: 04-41044 Doc# 295 Filed: 05/05/05 Entered: 05/05/05 14:47:32 Page 2 of
5

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
3
validity of its liens. In addition, the value of its collateral
base has actually increased.
The Secured Creditor relied heavily in its presentation of
evidence and argument on the fact that the Debtor stopped booking
depreciation on its assets at some point during the proceeding.
The Secured Creditor’s expert accountant testified that this was
contrary to GAAP principles. The Court did not find this evidence
useful to a determination of adequate protection.
The Secured Creditor also argued that the Debtor had failed
to meet its burden of proving that it had a reasonable prospect of
reorganizing within a reasonable time. It noted that the Debtor
has been in chapter 11 for over a year and that no viable plan of
reorganization has been filed. Moreover, at the hearing on the
motion, the Debtor presented no evidence that it had a viable plan
in contemplation. The Secured Creditor argued that no viable plan
could be proposed given the amount of its debt and the amount of
revenue being generated by the Debtor. Although the Debtor
represented that there was an investor interested in the company,
the Secured Creditor had seen no evidence that this interest was
serious.
In response, the Debtor noted that the Committee’s motion for
summary judgment, challenging the validity of the Secured
Creditor’s debt was presently set for hearing. In addition, trial
was scheduled in July on the Debtor’s complaint seeking to
subordinate the Secured Creditor’s claim. Until those matters
were decided, it would be impossible to propose a plan.
Case: 04-41044 Doc# 295 Filed: 05/05/05 Entered: 05/05/05 14:47:32 Page 3 of
5

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
4
Normally, a chapter 11 debtor’s defense to a motion for
relief from the automatic stay should include at least the
outlines of a viable plan. The longer the debtor has been in
chapter 11, the more specific the outlines should be. However, in
this case, the Court agrees with the Debtor that, until the
Committee’s motion for summary judgment and the Debtor’s equitable
subordination action are decided, it would make no sense for the
Debtor to attempt to formulate a plan. Both of those matters will
soon be presented and decided. Under these circumstances, it
would be inappropriate to grant the Secured Creditor’s motion for
relief at this time.
For the reasons stated above, the Court concludes that the
Secured Creditor’s motion for relief should be denied. The Debtor
is directed to submit a proposed form of order in accordance with
this decision.
END OF DOCUMENT
Case: 04-41044 Doc# 295 Filed: 05/05/05 Entered: 05/05/05 14:47:32 Page 4 of
5

1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
5
COURT SERVICE LIST
Paul E. Manasian
Manasian & Rougeau, LLP
400 Montgomery St., Ste. 1000
San Francisco, CA 94104
Tobias S. Keller
Pachulski, Stang, Ziehl, Young,
Jones & Weintraub P.C.
Three Embarcadero Center, Ste. 1020
San Francisco, CA 94111-4023
Robert R. Moore
Allen Matkins Leck Gamble & Mallory LLP
Three Embarcadero Center, 12th Floor
San Francisco, CA 94111
Philip J. Nicholsen
Law Offices of Philip J. Nicholsen
221 Main St., #740
San Francisco, CA 94105
Case: 04-41044 Doc# 295 Filed: 05/05/05 Entered: 05/05/05 14:47:32 Page 5 of
5