Official Unsecured Creditors Committee For Qmect, v. Electrochem Funding, LLC et al

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 04-41044 T
Chapter 11
QMECT, INC., etc.,
Debtor-in-Possession.
_______________________________/
THE OFFICIAL CREDITORS’ 	A.P. No. 04-4189 AT
COMMITTEE FOR QMECT, INC.,
Plaintiff,
vs.
ELECTROCHEM FUNDING, LLC and
BURLINGAME CAPITAL PARTNERS II,
L.P.,
Defendants.
_______________________________/
MEMORANDUM OF DECISION RE MOTION TO AMEND COMPLAINT
The 	Official 	Unsecured 	Creditors’ 	Committee 	(the 	“Committee”)
for 	the 	above-captioned 	debtor 	(the 	“Debtor”) 	moves 	to 	amend 	its
complaint 	in 	the 	above-captioned 	adversary 	proceeding 	(the
“Complaint”) 	to 	add 	and 	delete 	certain 	claims 	as 	well 	as 	to 	change
the 	wording 	slightly 	of 	some 	of 	the 	existing 	claims. 	Defendants
Electrochem Funding, LLC (“Funding”) and Burlingame Capital Partners
Signed: September 21, 2006
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
September 22, 2006
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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II, 	L.P. 	(“Burlingame”)(collectively 	“Defendants”) 	oppose 	the
addition 	or 	modification 	of 	the 	existing 	claims. 	They 	oppose 	the
dismissal of any claims unless the dismissal is with prejudice to the
claims 	being 	reasserted 	by 	any 	party 	acting 	on 	behalf 	of 	the
bankruptcy estate. 	The motion was fully briefed and was argued and
submitted 	to 	the 	Court 	for 	decision 	on 	September 	7, 	2006. 	The
Court’s 	decision 	and 	the 	reasons 	for 	its 	decision 	are 	set 	forth
below.
DISCUSSION
A. 	BACKGROUND
The 	Complaint 	was 	filed 	on 	June 	28, 	2004. 	The 	charging
allegations 	are 	set 	forth 	in 	two 	parts: 	i.e., 	one 	dealing 	with
objections 	to 	the 	secured 	claims 	of 	Funding 	and 	the 	other 	dealing
with objections to the secured claims of Burlingame. 	Primarily, the
objections allege that Funding’s and Burlingame’s security interests
were 	not 	properly 	perfected 	so 	that 	their 	liens 	on 	the 	Debtor’s
assets are avoidable, either as a whole or as to certain assets. 	The
prayer of the Complaint seeks declaratory relief.
The Committee filed a motion for summary adjudication of various
issues 	presented 	by 	Burlingame’s 	and 	Funding’s 	secured 	claims.
Burlingame 	and 	Funding 	opposed 	the 	motion 	and 	filed 	a 	cross-motion
for 	summary 	adjudication. 	On 	September 	21, 	2005, 	the 	Court 	issued
its decision, granting the motions in part and denying them in part.
On 	August 	10, 	2006, 	the 	Committee 	filed 	a 	motion 	to 	amend 	the
Complaint 	to 	add 	certain 	claims 	and 	delete 	others. 	The 	proposed
changes 	to 	the 	body 	of 	the 	Complaint 	are 	nonsubstantive. 	The
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Committee 	proposes 	to 	split 	into 	separate 	paragraphs 	claims
previously 	lumped 	together 	in 	a 	single 	paragraph. 	It 	proposes 	to
change the order of certain paragraphs. 	It proposes to add certain
clarifying language to certain claims. 	For example, it seeks to add
the 	phrase 	“prior 	to 	the 	petition 	date” 	to 	the 	allegation 	that
Funding’s 	lien 	did 	not 	extend 	to 	fixtures 	and 	personal 	property
described 	in 	financing 	statement 	releases 	filed 	by 	Comerica. 	As
another 	instance, 	it 	proposes 	to 	change 	the 	word 	“purported” 	to
“purportedly.” 	In the Court’s view, the only substantive addition is
to 	the 	prayer 	of 	the 	Complaint. 	The 	Committee 	seeks 	to 	amend 	the
Complaint to add a prayer for avoidance of any unperfected liens.
B. 	APPLICABLE LAW
Court approval is required to amend a complaint after an answer
has been filed. 	See Fed. R. Civ. P. 15(a), made applicable to this
adversary proceeding by Fed. R. Bankr. Proc. 7015. 	Whether to grant
such 	a 	motion 	is 	within 	the 	court’s 	sound 	discretion. 	See 	Zenith
Radio Corp. V. Hazeltine Research, Inc., 401 U.S. 321, 330-31 (1971).
However, 	motions 	to 	amend 	are 	to 	be 	granted 	freely 	when 	justice 	so
requires. 	See Eminence Capital, LLC v. Aspeon, Inc., 316 F.3d 1048,
1051-53 	(9 th 	Cir. 	2003). 	Grounds 	for 	denial 	of 	leave 	include 	undue
delay, 	bad 	faith, 	dilatory 	motive, 	repeated 	failure 	to 	cure
deficiencies 	by 	prior 	amendments, 	undue 	prejudice 	to 	the 	opposing
party by allowing the amendment, and futility of amendment. 	Foman v.
Davis, 	371 	U.S. 	178, 	182 	(1962). 	Judicial 	economy 	may 	also 	be
considered. 	Sierra 	Club 	v. 	Union 	Oil 	Co., 	813 	F.2d 	1480, 	1493 	(9 th
Cir. 1987).
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1The Defendants also oppose the addition of various phrases by
which the Committee seeks to clarify the nature of the existing
claims. 	The Defendants make no cogent argument why these
nonsubstantive changes should not be allowed. 	As a consequence,
the motion to amend will certainly be granted in this respect.
4
A 	court 	may 	impose 	reasonable 	conditions 	on 	the 	grant 	of 	a
motion 	to 	amend. 	Int’l 	Ass’n 	of 	Machinists 	& 	Aerospace 	Workers 	v.
Republic 	Airlines, 	761 	F.2d 	1386, 	1391 	(9 th 	Cir. 	1985). 	Included
among 	the 	conditions 	that 	it 	may 	impose 	is 	the 	condition 	that 	any
claims 	being 	eliminated 	are 	eliminated 	with 	prejudice.
Etablissements Neyrpic v. Elmer C. Gardner, Inc., 175 F. Supp. 355,
358 (S.D. Tex. 1959). 	Moreover, in any event, claims alleged in an
original complaint which are not alleged in an amended complaint are
waived. 	Marx v. Loral Corp., 87 F.3d 1049, 1055 (9 th Cir. 1996).
C. 	ISSUES
1. 	Proposed Additions
Defendants contend that motion to amend the Complaint should be
denied in its entirety to the extent it attempts to add allegations
or 	claims 	to 	the 	Complaint. 	Their 	primary 	objection 	is 	to 	the
addition of avoidance claims. 1 	Defendants contend that the addition
of 	these 	claims 	at 	this 	time 	is 	barred 	by 	a 	June 	28, 	2004 	deadline
stipulated 	to 	in 	a 	cash 	collateral 	order 	at 	the 	beginning 	of 	the
bankruptcy case.
The 	Defendants 	note 	that, 	pursuant 	to 	a 	stipulated 	cash
collateral 	order 	issued 	by 	the 	Court 	at 	the 	commencement 	of 	the
bankruptcy case, the Debtor and the Committee agreed that any claims
challenging 	the 	validity 	or 	enforceability 	of 	Burlingame’s 	claims
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2In their opposition to the motion, the Defendants noted that,
in the Complaint, the Committee alleged that this deadline applied
to Funding as well as Burlingame. 	However, the cash collateral
order clearly limits the June 28, 2004 deadline to claims asserted
against Burlingame. 	The Court is not bound by the Committee’s
oversight.
3In their opposition, Defendants also contended that the
Committee has no standing to bring avoidance actions on behalf of
the estate. 	However, they have since abandoned that position.
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would 	be 	filed 	by 	no 	later 	than 	June 	28, 	2004. 2 	Although 	the
Committee 	filed 	the 	Complaint 	on 	June 	28, 	2004, 	according 	to 	the
Defendants, 	permitting 	the 	Committee 	to 	add 	claims 	now 	would 	allow
the Committee to circumvent the stipulated deadline.
The 	Defendants 	concede 	that, 	much 	later, 	they 	stipulated 	to
extend 	the 	deadline 	for 	filing 	avoidance 	actions 	pursuant 	to 	11
U.S.C. 	§ 	546(a) 	and 	that 	this 	deadline 	has 	not 	yet 	expired.
However, they contend that this stipulation was meaningless because
the statutory deadline had already expired, having been advanced by
stipulation to June 28, 2004. 	Moreover, they note that some courts
have held that the 11 U.S.C. § 546(a) deadline is jurisdictional and
not 	subject 	to 	extension, 	citing 	Martin 	v. 	First 	National 	Bank 	of
Louisville, 	829 	F.2d 	596, 	600-01 	(6 th 	Cir. 	1987) 	and 	Starzynski 	v.
Sequoia Forest Industries, 72 F.3d 816, 822 (10 th Cir. 1995). 3
The Committee responds that the June 28, 2004 bar date does not
apply because the cash collateral order conditioned the deadline on
Burlingame’s 	filing 	a 	proof 	of 	claim 	on 	or 	before 	April 	30, 	2004.
Although Burlingame filed a proof of claim by that date, the proof of
claim 	did 	not 	attach 	the 	underlying 	loan 	and 	security 	documents.
Thus, according to the Committee, it was not a proper proof of claim
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4The April 28, 2004 also barred, to the extent applicable,
actions to subordinate Burlingame’s claim if not filed by June 28,
2004. 	Presumably, this referred to a claim for equitable
subordination which would be governed by bankruptcy law, not state
law. 	The fact that the cash collateral order specified this type
of claim separately supports the Court’s view that a separate
reference to avoidance claims would also have been required.
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and did not trigger the June 28, 2004 deadline. 	The Committee also
contends that the June 28, 2004 deadline was not intended to apply to
avoidance actions. 	They argue that the Defendants clearly thought so
too, given their recent stipulation to extend the deadline.
The Court concludes that the June 28, 2004 deadline does not bar
the 	amendment 	of 	the 	Complaint 	to 	add 	avoidance 	claims. 	First, 	as
noted above, the cash collateral order did not impose the deadline on
challenges 	to 	Funding’s 	claims. 	Second, 	the 	Court 	agrees 	that 	the
condition 	of 	the 	deadline 	that 	Burlingame 	file 	a 	proof 	of 	claim 	by
April 30, 2004 meant that Burlingame was required to file an adequate
proof 	of 	claim 	by 	that 	date. 	As 	the 	Court 	has 	previously 	found,
Burlingame’s 	proof 	of 	claim 	was 	seriously 	inadequate 	because 	the
underlying 	loan 	and 	security 	documents 	were 	not 	attached. 	The
Committee could not reasonably be required to evaluate the merits of
the 	Defendants’ 	claims 	until 	they 	were 	provided 	copies 	of 	the 	loan
and security documents.
Additionally, 	the 	deadline 	set 	forth 	in 	the 	cash 	collateral
order 	was 	with 	respect 	to 	challenges 	to 	the 	validity, 	priority,
perfection, 	enforceability 	of 	the 	Defendants’ 	claims. 	The 	Court
reads 	this 	phrase 	to 	apply 	only 	to 	challenges 	based 	on 	state 	law. 4
A 	claim 	may 	be 	valid 	and 	enforceable 	under 	state 	law 	and 	still 	be
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5The Committee also argued that the cash collateral order only
required the Debtor or the Committee to file a statement by June
28, 2004 that they intended to challenge Burlingame’s claim. 	It
did not require them to identify the basis for the intended
challenge. 	This argument appears to confuse the effect of a
statute of limitations with the effect of claim preclusion.
However, given its conclusion that the June 28, 2004 deadline did
not apply to Funding at all and was not triggered by Burlingame’s
filing of an incomplete proof of claim, the Court need not formally
address this argument.
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avoidable. 	For 	example, 	an 	unperfected 	security 	interest 	still
creates 	a 	lien 	as 	to 	the 	debtor. 	In 	the 	absence 	of 	a 	bankruptcy
case, 	it 	is 	only 	vulnerable 	in 	a 	dispute 	with 	another 	secured
creditor 	with 	a 	perfected 	security 	interest 	or 	with 	a 	bona 	fide
purchaser. 	If 	the 	Court 	had 	understood 	the 	deadline 	to 	apply 	to
avoidance actions, it would have required a carve out for a chapter
7 	trustee. 	Thus, 	the 	relevant 	statute 	of 	limitations 	is 	that 	set
forth in 11 U.S.C. § 546(a), not the June 28, 2004 date set forth in
the cash collateral order. 5
The final issue is whether the Court was without jurisdiction to
extend 	the 	deadline 	set 	forth 	in 	11 	U.S.C. 	§ 	546(a). 	The 	Court
concludes 	that 	it 	was 	not. 	Until 	recently, 	there 	was 	a 	split 	of
authority 	on 	this 	issue. 	See 	Starzynski 	v. 	Sequoia 	Forest
Industries, 72 F.3d 816, 822 (10 th Cir. 1995)(citing cases). 	However,
this 	issue 	has 	been 	laid 	to 	rest 	by 	the 	legislative 	history 	to 	the
1994 	amendments 	to 	11 	U.S.C. 	§ 	546(a). 	It 	states 	that 	“[t]he 	time
limits 	set 	forth 	therein 	are 	not 	intended 	to 	be 	jurisdictional 	and
can be extended by stipulation between the necessary parties to the
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6In their opposition, the Defendants contended that the
Committee has no standing to bring avoidance actions on behalf of
the estate. 	However, they have since abandoned that argument.
8
action 	or 	proceeding.” 	See 	140 	Cong. 	Rec. 	H. 	10752, 	H10768 	(daily
ed. Oct. 4, 1994). 6
Thus, the Court concludes that the motion to amend to add claims
and 	clarifying 	language 	and 	to 	restructure 	the 	Complaint 	should 	be
granted. 	As 	noted 	above, 	motions 	to 	amend 	should 	be 	granted
liberally absent undue prejudice. 	Given the repeated allegations in
the 	Complaint 	that 	the 	Defendants’ 	liens 	were 	unperfected 	and
therefore avoidable, the addition of the prayer for avoidance should
come as no surprise.
2. 	Proposed Deletions
As noted above, the Committee also seeks to amend the Complaint
to delete certain claims. 	The Defendants oppose this aspect of the
motion as well. 	They note that among the claims that the Committee
seeks 	to 	delete 	are 	claims 	that 	Burlingame’s 	loan 	was 	usurious 	and
that 	Burlingame 	and 	Funding 	have 	lost 	their 	liens 	by 	violating 	the
one action rule. 	They note that there has already been substantial
litigation 	concerning 	these 	claims. 	They 	contend 	that 	it 	would 	be
unfair 	to 	permit 	these 	claims 	to 	be 	dismissed 	without 	prejudice 	at
this time.
The Committee responds that it does not object to dismissal of
the 	claims 	in 	question 	with 	prejudice 	as 	long 	as 	the 	prejudicial
effect 	applies 	only 	to 	the 	Committee 	and 	not 	to 	the 	Debtor 	or 	to 	a
chapter 	7 	trustee. 	However, 	it 	argues 	that 	the 	prejudicial 	effect
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26 	7The Defendants contend that the challenges to their claims
and security interests set forth in the Complaint should not be
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cannot possibly be applied to the Debtor or to a chapter 7 trustee,
since neither is a party to this proceeding.
The law governing this issue is far from clear. 	To begin with,
it 	is 	important 	to 	distinguish 	between 	the 	various 	types 	of 	claims
that may be litigated in a bankruptcy case. 	First, there are claims
by the estate against third parties based on nonbankruptcy law which
are 	property 	of 	the 	estate 	under 	11 	U.S.C. 	§ 	541(a)(1). 	Second,
there are actions based on bankruptcy law: e.g., avoidance actions.
Third, 	there 	are 	objections 	to 	claims 	filed 	against 	the 	bankruptcy
estate.
Absent 	an 	order 	authorizing 	someone 	else 	to 	file 	an 	action
asserting one of the first two types of claims, only the trustee or
debtor-in-possession has standing to do so. 	See In re Sufolla, Inc.,
2 F.3d 977, 979 (9 th Cir. 1993); In re Spaulding Composites Co., Inc.,
207 B.R. 899, 903 (Bankr. 9 th Cir. 	1997). 	Moreover, when a creditor
or creditors’ committee is authorized to file such action, the action
is brought on behalf of the estate. 	Consequently, the estate and all
its representatives are bound by resolution of the claim.
With respect to the third type of matter, however, the analysis
is more difficult. 	A creditor or creditors’ committee has standing
independent 	of 	the 	trustee 	or 	debtor-in-possession 	to 	object 	to
another 	creditor’s 	claim 	as 	long 	as 	it 	has 	something 	to 	gain 	if 	it
prevails. 	See 	11 	U.S.C. 	§ 	502(a)(“A 	claim...is 	deemed 	allowed,
unless a party in interest..objects.”) 7
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viewed as objections to claims because they are set forth in an
adversary proceeding. 	The Court disagrees. 	To the extent that the
challenges to Defendants’ claims do not seek an affirmative
recovery from the Defendants, they are still just objections to
claims, seeking to bar the Defendants from asserting a claim to
property of the estate.
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However, identifying who may file a claim does not necessarily
determine 	the 	impact 	of 	a 	resolution 	of 	that 	claim. 	Clearly, 	as
noted above, if only the estate representative can file the claim--
i.e., 	one 	of 	the 	first 	two 	types 	of 	claims 	specified 	above--the
resolution 	of 	the 	litigation 	will 	bind 	the 	estate 	in 	its 	entirety.
Thus, an avoidance action brought by a debtor-in-possession or, with
authorization the creditors’ committee, will also bind a subsequently
appointed 	chapter 	7 	trustee. 	See 	In 	re 	Southland 	Supply, 	657 	F.2d
1076, 	1080 	(9 th 	Cir. 	1981); 	In 	re 	Wolfberg, 	255 	B.R. 	879, 	882, 	n.4
(Bankr. 9 th Cir. 2000).
However, 	arguably, 	one 	creditor’s 	or 	a 	committee’s 	failure 	to
prevail 	on 	an 	objection 	to 	a 	claim 	asserted 	by 	another 	creditor
might-–i.e., the third type of claim specified above–-would not bind
the estate representative. 	Under these circumstances, the creditor
or committee is not acting on behalf of the estate. 	If the creditor
fails to do a competent job in litigating the objection, why should
the estate suffer? 	Conversely, a trustee may be willing to settle a
meritorious claim for less than a creditor or committee believes is
reasonable. 	On the other hand, it seems inequitable and contrary to
principles 	of 	judicial 	economy 	to 	subject 	the 	claimant 	to 	a
multiplicity of attacks.
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In 	the 	absence 	of 	any 	compelling 	authority 	on 	this 	issue, 	the
Court concludes that, if the claims are dismissed with prejudice, the
prejudicial effect will also apply to the Debtor and to a chapter 7
trustee. 	The policy arguments in favor of such a rule are stronger
than those against it. 	There are procedural safeguards against the
adverse effects supporting a contrary rule. 	A creditor or committee
may 	object 	to 	a 	proposed 	settlement 	by 	a 	debtor-in-possession 	or
trustee of an objection to claim which it views as too advantageous
to the holder of the claim. 	See Fed. R. Bankr. P. 9019. 	A trustee
or 	debtor-in-possession 	can 	move 	to 	intervene 	in 	a 	creditor’s
objection 	to 	claim 	if 	it 	fears 	that 	the 	creditor 	may 	not 	prosecute
the objection competently. 	See Fed. R. Civ. P. 24, made applicable
to this proceeding by Fed. R. Bankr. P. 7024.
Given the length of time that this proceeding has been pending
and 	the 	amount 	of 	litigation 	that 	has 	occurred 	of 	the 	claims 	in
question, 	the 	Court 	is 	unwilling 	to 	permit 	them 	to 	be 	dismissed
without 	prejudice. 	Thus, 	if 	the 	Committee 	wishes 	to 	preserve 	the
right 	of 	the 	Debtor 	and/or 	a 	chapter 	7 	trustee 	to 	prosecute 	the
claims, it should withdraw this portion of its motion.
Counsel for Committee is directed to submit a proposed form of
order in accordance with this decision.
END OF DOCUMENT
Case: 04-04189 Doc# 104 Filed: 09/21/06 Entered: 09/22/06 15:14:41 Page 11 of
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COURT SERVICE LIST
Philip J. Nicholsen
601 Montgomery St., Ste. 777
San Francisco, CA 94111
William W. Huckins
Allen Matkins Leck Gamble
Mallory & Natsis LLP
Three Embarcadero Center, 12 th Floor
San Francisco, CA 94111-4074
Case: 04-04189 Doc# 104 Filed: 09/21/06 Entered: 09/22/06 15:14:41 Page 12 of
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