Qmect, Inc.

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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 ORDER TO SHOW CAUSE
RE APPOINTMENT OF CHAPTER 11 TRUSTEE
During the course of this chapter 11 case, the Court and the
parties in interest learned that the above-captioned debtor-in-
possession (the “Debtor”) had been charged with a felony for
improperly disposing of toxic waste generated by its
electroplating business. As a result, the Court issued an order
to show cause why a chapter 11 trustee should not be appointed.
The Debtor, the Official Creditors’ Committee (the “Committee”),
Burlingame Capital Partners (“Secured Creditor”), and the Office
of the United States Trustee (the “UST”) appeared through counsel
at the hearing on the order to show cause over a period of several
days. Evidence was presented. At the close of evidence, the
Secured Creditor and the UST urged the appointment of a full
powers trustee. The Debtor and the Committee opposed the
appointment of any trustee. The Court heard oral argument and
took the matter under submission.
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# 296 Filed: 05/05/05 Entered: 05/05/05 15:09:26 Page 1 of
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Based on the evidence presented and the argument made, the
Court concludes that a limited powers trustee should be appointed.
The duties of the trustee will be limited at this time to ensuring
that the Debtor complies with environmental regulations with
respect to the storage and disposal of its toxic waste. Like the
UST and the Secured Creditor, the Court views the Debtor’s
improper disposal of its toxic waste as a serious matter. The
charges against the Debtor and the Debtor’s principal, Fred
Koelling (“Koelling”), have been settled with the County.
However, this settlement does not eliminate the seriousness of the
events that occurred. It was fortunate that the Debtor’s improper
disposal of the toxic waste did not result in a public safety
problem. It easily could have.
The Debtor represents that it has retained a consultant who
will ensure that the Debtor complies with environmental
regulations in the future. The party in question testified in
court and the Court found him competent. However, the consultant
would be working for the Debtor and acting at its direction. To
find this solution satisfactory, the Court would have to be
persuaded that Koelling acted in good faith in connection with
improper disposal of the toxic waste. The Court has serious
doubts in this respect.
The Court is persuaded that Koelling knew full well how the
Debtor was required to store and dispose of its toxic waste. He
has been in the electroplating business for a considerable time.
The electroplating business is known to generate toxic waste.
Case: 04-41044 Doc# 296 Filed: 05/05/05 Entered: 05/05/05 15:09:26 Page 2 of
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Running a successful electroplating business necessarily involves
knowing how to dispose of its toxic waste. In the past, the
Debtor had contracted with a reputable company to dispose of its
toxic waste. The fact that, in February and March 2004, the
Debtor contracted with a different company strongly suggests a
conscious decision to skirt environmental regulations.
The Court is also persuaded that Koelling knew that the Debtor
was violating environmental regulations by retaining containers of
toxic waste for more than 90 days. If a container or two had
merely been retained for 120 rather than 90 days, the Court would
not view this as terribly serious. However, based on the evidence
concerning the rate at which toxic waste was generated by the
Debtor and the number of containers transported during February
and March 2004, it appears that the Debtor accumulated containers
for approximately a year. There is no way that Koelling could
not have known about this. The UST argued that the bad judgment
shown by Koelling in these respects warranted the appointment of
a full powers trustee. The Court tends to agree and has wrestled
with the decision of whether the trustee’s powers should be
limited. The Debtor was also guilty of violating the bankruptcy
law in several respects at the beginning of the case. More
recently, it has failed to file timely monthly operating reports.
The Debtor’s excuse is that the case has been extremely litigious,
and the Debtor has been busy. Busy or not, the Debtor should have
filed timely monthly operating reports. The Court questions
Case: 04-41044 Doc# 296 Filed: 05/05/05 Entered: 05/05/05 15:09:26 Page 3 of
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whether the Debtor is taking seriously its obligations as a
chapter 11 debtor-in-possession.
The only reason the Court has concluded that a limited powers
trustee should be appointed is timing. On Friday, the Court will
hear argument on the Committee’s motion for summary judgment,
challenging the validity of some of the Secured Creditor’s liens.
In July, a trial is scheduled in the Debtor’s equitable
subordination action. Considerable effort has been spent during
the past year of which these two events appear to be the
culmination. When they are concluded, it will be much clearer
whether the Debtor will be able to reorganize. It would
necessarily derail this schedule to order the appointment of a
full powers trustee at this time.
For the reasons stated above, the Court will order the
appointment of a limited powers trustee. The UST is directed to
submit a proposed form of order in accordance with this decision.
END OF DOCUMENT
Case: 04-41044 Doc# 296 Filed: 05/05/05 Entered: 05/05/05 15:09:26 Page 4 of
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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# 296 Filed: 05/05/05 Entered: 05/05/05 15:09:26 Page 5 of
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