Qmect, Inc.

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26 	1Burlingame was formerly the principal secured creditor in the
case. 	However, after obtaining relief from the automatic stay, it
foreclosed its security interest. 	At present, it holds an
unliquidated claim for attorneys’ fees and costs.
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 04-41044 TK
Chapter 7
QMECT, INC.,
Debtor.
___________________________/
MEMORANDUM OF DECISION
The above-captioned case was converted to chapter 7 on October
6, 	2006, 	and 	John 	T. 	Kendall 	(“Kendall”), 	a 	panel 	trustee, 	was
appointed 	as 	the 	interim 	trustee. 	At 	a 	continued 	meeting 	of
creditors 	on 	December 	5, 	2006, 	various 	creditors 	requested 	an
election of a permanent trustee. 	At the election, the four creditors
who 	voted 	all 	cast 	their 	votes 	in 	favor 	of 	Carol 	Wu 	(“Wu”). 	The
validity 	of 	the 	election 	was 	contested 	by 	Kendall 	and 	Burlingame
Capital Partners II, L.P. and Electrochem Funding, LLC (“collectively
“Burlingame”). 1
Signed: January 25, 2007
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
January 25, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Entered on Docket
January 25, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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2
On 	December 	12, 	2006, 	the 	Office 	of 	the 	United 	States 	Trustee
(“UST”) filed a Report of Disputed Election of Chapter 7 Trustee (the
“UST’s 	Report”). 	On 	December 	13, 	2006, 	a 	motion 	to 	confirm 	the
election was filed by Philip J. Nicholsen (“Nicholsen”), on his own
behalf, as an administrative creditor and as attorney for Frank Nagy
(“Nagy”), 	a 	purported 	general 	unsecured 	creditor. 	The 	motion 	was
opposed by Kendall and Burlingame. 	The motion came on for hearing on
January 	12, 	2007 	and 	was 	taken 	under 	submission. 	This 	Memorandum
addresses the issues raised by the motion.
DISCUSSION
There are two issues presented by this motion. 	The first issue
is 	whether 	the 	election 	was 	timely. 	The 	second 	issue 	is 	whether
qualifying creditors holding a sufficient amount of claims requested
the 	election. 	Unless 	these 	issues 	are 	both 	answered 	in 	the
affirmative, Kendall is the permanent trustee. 	If the election was
timely and qualifying creditors holding a sufficient amount of claims
requested 	the 	election, 	Wu 	is 	the 	permanent 	trustee 	since 	no 	votes
were cast for Kendall. 	As discussed below, the Court concludes that
the 	election 	was 	timely 	but 	that 	qualifying 	creditors 	holding 	a
sufficient amount of claims did not request the election. 	Therefore,
the Court concludes that Kendall is the permanent trustee.
A. 	WAS ELECTION OF WU AS TRUSTEE TIMELY?
The UST appoints an interim trustee promptly after the order for
relief 	is 	entered. 	11 	U.S.C. 	§ 	701(a)(1). 	Normally, 	the 	interim
trustee becomes the permanent trustee. 	However, creditors may elect
a 	different 	trustee 	as 	the 	permanent 	trustee 	at 	the 	meeting 	of
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3
creditors 	held 	under 	11 	U.S.C. 	§ 	341. 	11 	U.S.C. 	§ 	702(b). 	The
service of the interim trustee terminates when the person elected to
be the trustee files a bond with the court. 	11 U.S.C. § 701(b).
In 	the 	above-captioned 	case, 	after 	the 	case 	was 	converted 	to
chapter 	7, 	a 	meeting 	of 	creditors 	pursuant 	to 	11 	U.S.C. 	§ 	341 	was
scheduled 	for 	November 	7, 	2006. 	Fred 	Koelling 	(“Koelling”), 	the
responsible 	person 	for 	the 	debtor 	(the 	“Debtor”), 	appeared 	at 	the
meeting 	on 	this 	date 	but 	counsel 	for 	the 	Debtor 	did 	not. 	Kendall
declined 	to 	examine 	Koelling 	without 	counsel 	present 	and 	continued
the meeting to December 5, 2006. 	An election of a different trustee
was requested at that time. 	The election took place the same day.
Kendall contends that the election was untimely: i.e., that it
should 	have 	occurred 	on 	November 	7, 	2006. 	In 	support 	of 	this
contention, he cites In re Conco Bldg. Supplies, Inc., 102 B.R. 190
(Bankr. 9 th Cir. 1989) and In re Globe Illumination Co., 149 B.R. 614
(Bankr. C.D. Cal. 1993). 	In Conco, the issue was when the two year
limitations period for filing a preference action began to run. 	The
limitations period does not begin to run until there is a permanent
trustee. 	The interim trustee does not become the permanent trustee
until 	there 	can 	no 	longer 	be 	a 	timely 	election 	of 	a 	different
trustee. 	11 U.S.C. § 702(d); Conco 102 B.R. at 191-92.
In Conco, the debtor was not present at the initial meeting of
creditors and thus could not be examined at that time. 	The meeting
was continued, and the debtor was examined at the continued meeting.
The Conco court concluded that the limitations period did not begin
to run until the date of the continued meeting. 	It noted that Rule
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26 2Globe was also a statute of limitations case in which the
debtor had not appeared at all on the first date set for the
meeting of creditors. 	Id. at 616.
4
2003(b)(1) 	of 	the 	Federal 	Rules 	of 	Bankruptcy 	Procedure 	(“FRBP”)
provides 	that 	the 	“‘business 	of 	the 	meeting 	shall 	include 	the
examination 	of 	the 	debtor 	under 	oath’[.]” 	Id. 	at 	192. 	Thus, 	it
concluded 	that 	the 	meeting 	was 	not 	“held” 	until 	the 	trustee 	had 	an
opportunity 	to 	examine 	the 	debtor: 	i.e., 	at 	the 	continued 	meeting.
Kendall contends that, in this case, he had an opportunity to examine
Koelling on November 11, 2006 even those he chose not to do so due to
the 	absence 	of 	the 	Debtor’s 	counsel. 	See 	also 	In 	re 	Globe
Illumination Co., 149 B.R. at 617 (describing the holding in Conco as
requiring only the debtor’s “presence” at the meeting of creditors). 2
Kendall 	reads 	the 	language 	in 	Conco 	too 	broadly. 	The 	Conco
court was not presented with a situation where the debtor was present
at the first scheduled date for the meeting of creditors but was not
examined until the date of the continued meeting. 	Its holding that
the 	meeting 	of 	creditors 	was 	not 	concluded 	when 	the 	debtor 	was 	not
present 	leaves 	open 	the 	question 	of 	whether 	the 	meeting 	could 	be
concluded when the debtor was present but was not examined. 	In any
event, the meeting was not concluded; it was continued. 	A continued
meeting 	of 	creditors 	is 	still 	the 	meeting 	of 	creditors. 	See 	In 	re
Hoseeinpour-Esfahani, 	198 	B.R. 	574, 	578 	n.5 	(Bankr. 	9 th 	Cir.
1996)(“[I]f a permanent trustee is not appointed at the conclusion of
the § 341(a) meeting of creditors, then the interim trustee serves as
the permanent trustee in the case.”) Thus, the Court concludes that
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5
the request for the election was made and the election was conducted
on a timely basis.
B. 	WAS ELECTION PROPERLY REQUESTED?
Section 702(b) of the Bankruptcy Code provides that the election
of 	a 	trustee 	must 	be 	requested 	by 	creditors 	that 	may 	vote, 	as
provided 	in 	subsection 	702(a)(1), 	and 	that 	hold 	at 	least 	twenty
percent in amount of the claims specified in subsection 702(a)(1) and
which are held by creditors entitled to vote under subsection 702(a).
Section 702(a)(1) provides that:
A creditor may vote for a candidate for trustee
only if such creditor–
(1) 	holds 	an 	allowable, 	undisputed, 	fixed,
liquidated, 	unsecured 	claim 	of 	a 	kind 	entitled
to 	distribution 	under 	section 	726(a)(2),
726(a)(3), 	726(a)(4), 	752(a), 	766(h), 	or
766(i)...;
(2) 	does 	not 	have 	an 	interest 	materially
adverse, 	other 	than 	an 	equity 	interest 	that 	is
not 	substantial 	in 	relation 	to 	such 	creditor’s
interest 	as 	a 	creditor, 	to 	the 	interest 	of
creditors entitled to such distribution; and
(3) is not an insider.
Thus, 	in 	determining 	whether 	an 	election 	has 	been 	effectively
requested, 	it 	is 	first 	necessary 	to 	determine 	the 	“universe” 	of
creditors entitled to vote and the total amount of their claims. 	It
is 	then 	necessary 	to 	determine 	the 	amount 	of 	the 	claims 	of 	the
creditors 	within 	this 	“universe” 	requesting 	the 	election. 	If 	the
latter amount is less than twenty percent of the former amount, the
election has not been effectively requested.
As discussed below, using the UST’s “universe” of claims as the
starting 	point, 	the 	Court 	concludes 	that, 	after 	removing 	the
disqualified claims, as discussed below, the “universe” of creditors
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3The Court calculates the starting figure for the “universe”
of claims as $2,342,797.36. 	The Court has identified a series of
errors and/or omissions made by the UST in its calculation that
account for this discrepancy. 	However, because the UST’s starting
figure was not challenged by Nicholsen or by the creditors who
requested the election and because this discrepancy does not change
the outcome of the dispute, for convenience, the Court has used the
UST’s starting figure.
6
entitled to vote is $784,342.91. 	The Court concludes that the amount
of the claims of the creditors within this “universe” requesting the
election is $1,709.81. 	Since the latter amount is less than twenty
percent of the former, the Court concludes that the election was not
effectively requested and that Kendall is the permanent trustee.
(1) “Universe” of Claims
(a) Claims Objected to By Nicholsen
According 	to 	the 	UST’s 	Report, 	the 	total 	amount 	of 	the
“universe” of claims entitled to vote is $2,285,734.50. 3 	However, as
the UST acknowledges, this figure does not deduct the claims to which
Nicholsen 	filed 	objections 	on 	December 	5, 	2006, 	just 	before 	the
continued meeting of creditors. 	FRBP 2003(b)(3) provides that:
In 	a 	chapter 	7 	liquidation 	case, 	a 	creditor 	is
entitled 	to 	vote 	at 	a 	meeting 	if, 	at 	or 	before
the 	meeting, 	the 	creditor 	has 	filed 	a 	proof 	of
claim 	or 	a 	writing 	setting 	forth 	facts
evidencing a right to vote pursuant to § 702(a)
of 	the 	Code 	unless 	objection 	is 	made 	to 	the
claim 	or 	the 	proof 	of 	claim 	is 	insufficient 	on
its face.
Based 	on 	this 	rule, 	the 	amounts 	of 	the 	claims 	to 	which 	Nicholsen
filed 	objections 	should 	be 	deducted 	from 	the 	calculation 	of 	the
“universe” of claims entitled to vote.
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4See In re Eddie Haggar Ltd., 190 B.R. 281 (Bankr. N.D. Tex.
1995); In re Klein, 110 B.R. 862, 876 (Bankr. N.D. Ill. 1990); In
re Cohoes Indus. Terminal Inc., 90 B.R. 67, 70 (S.D.N.Y. 1988);
contra In re Kopexa Realty Venture, 240 B.R. 63, 66 (Bankr. 10th
Cir. 1999).
7
Kendall and Burlingame contend that Nicholsen has no standing to
object 	to 	claims 	because 	he 	holds 	only 	an 	administrative 	priority
claim. 	Thus, his claim would be paid before any distribution is made
to 	a 	creditor 	holding 	a 	general 	unsecured 	claim. 	The 	Court 	would
agree 	were 	Nicholsen’s 	standing 	considered 	in 	connection 	with 	an
objection 	to 	claim 	for 	purposes 	of 	precluding 	the 	creditor 	from
receiving 	a 	distribution. 	However, 	as 	an 	administrative 	priority
creditor, 	Nicholsen 	has 	a 	stake 	in 	how 	the 	bankruptcy 	estate 	is
administered 	and 	thus 	what 	creditors 	are 	included 	within 	the
“universe” 	of 	creditors 	for 	purposes 	of 	determining 	whether 	an
election has been effectively requested.
The 	majority 	rule, 	with 	which 	the 	Court 	agrees, 	is 	that 	the
inability to vote for a permanent trustee does not deprive a party in
interest of standing to dispute the election.4 For the same reason,
the 	Court 	concludes 	that 	the 	administrative 	priority 	status 	of
Nicholsen’s 	claim 	does 	not 	deprive 	him 	of 	standing 	to 	object 	to
general unsecured claims for purposes of a disputed permanent trustee
election.
Burlingame 	argues 	that 	the 	claims 	objected 	to 	should 	not 	be
deducted 	because 	the 	objections 	were 	filed 	on 	the 	day 	of 	the
continued 	meeting 	of 	creditors 	and 	were 	not 	noticed 	for 	hearing 	or
served 	on 	the 	claimants 	until 	after 	the 	meeting. 	Thus, 	it 	had 	no
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8
time to investigate whether the bases for the objections were valid.
It also argues that the objections were frivolous and that the bases
for the objections were not sufficiently detailed.
The 	Court 	finds 	Burlingame’s 	arguments 	unpersuasive. 	FRBP
2003(a)(1) only requires that an objection be made to a claim for the
creditor 	to 	be 	disqualified 	from 	voting. 	It 	does 	not 	require 	that
the 	objection 	be 	noticed 	for 	hearing 	or 	served 	on 	the 	claimant 	nor
does 	it 	set 	a 	deadline 	in 	advance 	of 	the 	meeting 	of 	creditors 	for
filing such objections. 	Similarly, as set forth in FRBP 2003(a)(1),
a 	creditor 	may 	acquire 	standing 	to 	request 	an 	election 	by 	filing 	a
proof 	of 	claim 	just 	before 	the 	meeting 	of 	creditors. 	This 	timing
might 	prevent 	other 	creditors 	from 	investing 	whether 	there 	was 	a
basis 	for 	objecting 	to 	the 	claim 	so 	as 	to 	disqualify 	the 	creditor
from requesting an election of a permanent trustee. 	The drafters of
the 	rule 	obviously 	concluded 	that 	the 	need 	to 	conduct 	a 	trustee
election promptly, if at all, made it necessary to dispense with more
customary procedural protections.
The Court does not find frivolous the bases for the objections
nor 	does 	it 	find 	them 	insufficiently 	detailed 	for 	purposes 	of
disqualifying the creditors from voting for a permanent trustee. 	An
objection 	must 	state 	a 	legal 	or 	factual 	basis 	for 	the 	objection.
Before 	a 	claim 	can 	be 	disallowed, 	if 	the 	objection 	is 	factual 	in
nature, evidence supporting the facts asserted must be provided. 	No
evidence was provided in support of Nicholsen’s objections. 	However,
disqualifying a creditor from voting is not the same as disallowing
the creditor’s claim.
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FRBP 	2003(a)(1) 	makes 	it 	clear 	that 	normal 	procedural
requirements 	should 	be 	relaxed 	by 	stating 	that 	a 	creditor 	may 	have
standing to the request an election even if it has not filed a proof
of 	claim 	merely 	by 	presenting 	a 	writing 	setting 	forth 	facts
evidencing 	a 	right 	to 	vote. 	Similarly, 	some 	courts 	have 	concluded
that 	even 	an 	oral 	objection 	made 	at 	the 	meeting 	of 	creditors 	is
sufficient to place the claim in dispute as long as the court finds
that the basis for the objection is not frivolous. 	In re Valentine,
296 B.R. 384, 387 (Bankr. E.D. Va. 2001).
In 	sum, 	the 	Court 	concludes 	that 	the 	general 	unsecured 	claims
objected 	to 	by 	Nicholsen 	should 	be 	deducted 	from 	the 	“universe” 	of
claims. 	The UST calculates the amount of the claims to be deducted
$586,047.71. 	This 	is 	incorrect. 	The 	total 	amount 	of 	the 	claims
objected to by Nicholsen is $629,037.71. 	However, two of the claims
objected to asserted secured status: 	i.e., Claim Nos. 32 and 49 for
a total amount of $156,484.24. 	The UST did not include these claims
in 	the 	starting 	figure, 	and 	they 	should 	not 	be 	deducted 	from 	that
figure now. 	Thus, the amount of the claims to be deducted from the
this 	starting 	figure 	is 	only 	$472,553.47. 	This 	reduces 	the 	total
amount of claims in the “universe” of creditors entitled to vote to
$1,813,181.03.
(b) Allegedly Duplicative IRS Claims
Pursuant to FRBP 2003(b)(3), a creditor may also be disqualified
from voting (and thus its claim from inclusion in the “universe” of
claims) if the creditor’s proof of claim is insufficient on its face.
Nicholsen 	contends 	that 	two 	proofs 	of 	claims 	filed 	by 	the 	Internal
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5Nicholsen also asserted that Claim No. 9 filed by Business
Debt Solutions (“BDS”) was duplicative of Claim No. 62 and should
be deducted as insufficient on its face. 	However, this claim has
already been deducted as disputed since it was included in the
claims to which Nicholsen filed an objection.
10
Revenue 	Service 	(“IRS”)--i.e., 	Claim 	Nos. 	38 	and 	53 	in 	amounts
totaling 	$206,217.70–-which 	on 	their 	face 	appear 	to 	be 	duplicative
of 	a 	third 	filed 	claim–-i.e., 	Claim 	No. 	56--should 	be 	deducted 	for
this 	reason. 5 	The 	Court 	agrees. 	Both 	Claim 	Nos. 	53 	and 	56
expressly state that they are amendments to previously filed proofs
of claim. 	Thus, the “universe” is claims must be further reduced to
$1,606,963.33.
(c) 	Burlingame’s Unsecured Claim.
Burlingame 	contends 	that 	it 	has 	an 	unsecured 	claim 	for
$1,413,132.80 	in 	attorneys’ 	fees 	and 	other 	costs 	that 	should 	be
included within the “universe” of claims held by creditors entitled
to vote. 	It notes that the Court liquidated its claim in this amount
in 	the 	judgment 	entered 	in 	Adversary 	Proceeding 	No. 	04-4190. 	The
judgment referred to was granted in connection with a claim objecting
to Burlingame’s secured proof of claim, overruling the objection and
allowing 	the 	claim, 	including 	in 	the 	amount 	of 	the 	attorneys’ 	fees
and 	costs 	set 	forth 	above. 	Thereafter, 	Burlingame 	obtained 	relief
from 	the 	automatic 	stay 	and 	foreclosed 	its 	security 	interest
nonjudicially. 	Thus, 	any 	unsecured 	deficiency 	claim 	has 	been
extinguished. 	See Cal. Civ. Proc. § 580d. 	Burlingame contends that
the portion of its judgment for attorneys’ fees and collection costs
was 	not 	extinguished 	by 	the 	foreclosure 	sale. 	In 	support 	of 	this
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contention, it cites Passanisi v. Merit-McBride Realtors, Inc., 190
Cal. 	App. 	3d 	1496, 	1508-09 	(1987). 	The 	Court 	finds 	Passanisi
distinguishable.
In 	Passanisi, 	a 	secured 	creditor 	obtained 	a 	judgment 	for 	its
attorneys’ fees and costs in successfully defending a lawsuit filed
by the debtor seeking to enjoin a nonjudicial foreclosure sale. 	The
secured creditor then conducted the sale and purchased the property
at the sale with a credit bid. 	The debtor filed a new action against
the creditor, seeking a declaration that the foreclosure sale had not
only extinguished the creditor’s secured claim but also its judgment
for 	attorneys’ 	fees 	and 	costs 	in 	the 	injunction 	action. 	The 	court
ruled against the debtor. 	It concluded that § 580d was not intended
to extinguish the secured creditor’s claim for its collection costs
in satellite litigation initiated by the debtor. 	Id. at 1507-09.
Similar 	to 	Passanisi, 	the 	adversary 	proceedings 	in 	which 	the
judgment was entered in favor of Burlingame for attorneys’ fees and
costs included a proceeding initiated by the Debtor pre-petition in
state 	court, 	asserting 	various 	tort 	claims. 	However, 	this 	was 	not
the 	proceeding 	in 	which 	Burlingame’s 	judgment 	was 	granted. 	The
judgment 	was 	granted 	in 	the 	proceeding 	filed 	in 	bankruptcy 	court,
objecting 	to 	Burlingame’s 	proof 	of 	claim. 	A 	party 	sued 	for 	tort
claims 	is 	normally 	not 	awarded 	fees, 	even 	if 	the 	creditor
successfully defends the action. 	Since the claim for attorneys’ fees
and 	costs 	was 	awarded 	as 	part 	of 	Burlingame’s 	proof 	of 	claim, 	the
Court 	concludes 	that 	it 	was 	also 	extinguished 	by 	Burlingame’s
nonjudicial foreclosure sale. 	As a result, this claim should not be
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6The Court uses the word “provisionally” because, if any of
the creditors that requested the election were not entitled to
vote, their claims must also be removed from the “universe” of
claims.
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included in the calculation of the “universe” of claims for purposes
of this dispute.
(2) Claims Requesting Election
As 	discussed 	above, 	at 	least 	provisionally, 	the 	“universe” 	of
claims 	is 	$1,606,963.33. 6 	Twenty 	percent 	of 	this 	amount 	is
$321,392.66. 	The election was requested by following creditors with
claims in the following amounts:
Ronald Oto (“Oto”) 	$ 	1,709.81
Frank Nagy (“Nagy”) 	614,203.63
Siegler Law Group (“Siegler”) 	94,067.83
Business Debt Solutions (“BDS”) 	117,141.57
Total 	$827,122.84
If 	all 	of 	these 	creditors 	were 	qualified 	to 	vote 	these 	claims, 	the
election 	was 	properly 	requested. 	However, 	the 	qualified 	status 	of
each creditor has been challenged. 	The Court addresses each of these
challenges below.
(a) Oto’s Claim
This 	creditor’s 	right 	to 	request 	an 	election 	of 	a 	permanent
trustee 	and 	to 	vote 	for 	a 	permanent 	trustee 	has 	been 	challenged 	on
the ground that he filed his proof of claim after the bar date. 	This
challenge has no merit. 	Section 702(a)(1) provides that a creditor
is 	entitled 	to 	vote 	if 	it 	holds 	a 	claim 	entitled 	to 	distribution
under 	section 	726(a)(2) 	or 	(3). 	Both 	of 	these 	subsections 	entitle
the 	holder 	of 	a 	tardily 	filed 	claim 	to 	receive 	a 	distribution,
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assuming 	there 	are 	sufficient 	funds 	left 	after 	payment 	of 	priority
and timely filed general unsecured claims. 	See In re Michelex Ltd.,
195 B.R. 993, 1001 (Bankr. W.D. Mich. 1996). 	Thus, Oto’s claim was
properly included in the claims requesting an election of a permanent
trustee.
(b) Siegler’s Claim
Siegler is a law firm that represented the Debtor prior to the
commencement 	of 	the 	bankruptcy 	case 	and 	has 	an 	unpaid 	claim 	for
attorneys’ 	fees. 	Siegler 	filed 	a 	proof 	of 	claim, 	Claim 	No. 	39, 	on
June 21, 2004 in the amount set forth above. 	Attached to the proof
of 	claim 	is 	an 	accounts 	receivable 	record 	showing 	the 	billing 	and
payment 	history 	from 	October 	17, 	2002 	through 	March 	10, 	2004. 	The
Debtor’s 	bankruptcy 	petition 	was 	filed 	on 	February 	27, 	2004. 	The
record shows $20,000 in payments received on this account within 90
days of the filing. 	Siegler gave Nicholsen its proxy to request the
election and to vote for the permanent trustee.
Siegler’s 	status 	was 	challenged 	on 	two 	grounds. 	Burlingame
contended 	that 	Nicholsen’s 	proxy 	was 	improperly 	obtained. 	Kendall
asserted that Siegler had an interest that is materially adverse to
the 	estate 	given 	its 	receipt 	of 	arguably 	preferential 	payments 	as
revealed by the proof of claim. 	Since the Court agrees with Kendall
that Siegler’s proof of claim on its face disqualifies Siegler from
voting for a permanent trustee and thus from requesting an election,
the Court need not address the proxy issue.
Siegler’s 	proof of claim indicates that it received $20,000 in
payments on the Debtor’s account, presumably from the Debtor, during
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26 7Siegler correctly notes that it is too late to file a
preference action to recover these payments. 	See 11 U.S.C. §
546(a). 	However, it is not to late to disallow Siegler’s claim.
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the 	preference 	period. 	Since 	these 	payments 	have 	not 	been
surrendered 	to 	the 	estate, 	assuming 	they 	are 	in 	fact 	preferential,
Siegler’s 	proof 	of 	claim 	is 	arguably 	subject 	to 	disallowance. 	See
11 	U.S.C. 	§ 	502(d). 7 	The 	Court 	is 	not 	holding 	that 	these 	payments
were 	preferential. 	Siegler 	might 	be 	able 	to 	successfully 	defend
against a preference action. 	However, the evidence provided by the
proof 	of 	claim 	is 	sufficient 	to 	establish 	a 	prima 	facie 	case 	for 	a
preference claim. 	Thus, Siegler’s claim is subject to dispute which
disqualifies it from voting for a permanent trustee or requesting an
election.
(c) Nagy’s Claim
Nagy 	filed 	a 	proof 	of 	claim, 	Claim 	No. 	36, 	on 	June 	21, 	2004.
He identified the basis for the claim as a pre-petition lease between
Diablo 	Properties 	LLC 	(“Diablo”) 	as 	lessor 	and 	Koelling 	as 	lessee.
A copy of the lease is attached to the proof of claim. 	The attached
lease 	indicates 	a 	lease 	term 	expiring 	August 	31, 	2004, 	with 	a
lessee’s 	right 	to 	terminate 	the 	lease 	two 	years 	earlier. 	Nagy
alleges 	that 	Diablo 	assigned 	the 	lease 	to 	him 	and 	states 	that 	he
believes that Koelling sublet the premises to the Debtor. 	He asserts
the 	right 	to 	damages 	of 	various 	types 	in 	various 	amounts 	for 	an
estimated total of $614,203.63.
Kendall 	and 	Burlingame 	challenge 	Nagy’s 	qualification 	to 	vote
for 	a 	permanent 	trustee 	and 	thus 	to 	request 	an 	election 	on 	several
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grounds. 	First, they note that the lease is with Koelling, not the
Debtor. 	There is no evidence that the lease was assigned or sublet
to the Debtor other than Nagy’s statement on information and belief.
Second, the amount of the claim is unliquidated. 	As noted above, the
total amount requested is referred to as “estimated.”
In 	response 	to 	these 	challenges, 	Nagy 	filed 	a 	declaration
stating 	that, 	at 	the 	same 	time 	the 	lease 	attached 	to 	his 	proof 	of
claim 	was 	executed, 	he 	and 	the 	Debtor 	entered 	into 	a 	document
entitled “Short Form of Lease.” 	A copy of this document was attached
to 	his 	declaration. 	This 	document 	describes 	the 	Debtor 	as 	the
lessee. 	However, it refers to the lease term as ending in 2002 with
a right to extend to 2004. 	More troubling, as noted by Burlingame,
Nagy’s signature on the document appears markedly different that his
signature 	on 	the 	declaration. 	Thus, 	the 	authenticity 	of 	this
document is subject to question.
The Court finds these challenges, taken together, sufficient to
disqualify Nagy from voting and thus from requesting the election of
a permanent trustee. 	If the only issue were the fact that the total
claim was referred to as “estimated,” the Court would find that Nagy
was 	qualified 	to 	vote 	a 	claim 	in 	the 	liquidated 	amount 	of 	the 	pre-
petition 	rent. 	However, 	the 	Court 	would 	find 	the 	proof 	of 	claim
subject 	to 	dispute 	based 	on 	its 	description 	of 	Koelling 	as 	the
lessee. 	The 	“Short 	Form 	of 	Lease,” 	with 	its 	differing 	terms 	and
questionable 	signature 	does 	not 	resolve 	that 	dispute. 	Thus, 	Nagy’s
claim must also be removed from the “universe” of claims.
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8BDS received this equity in partial satisfaction of its pre-
petition debt in the spring of 2003. 	At that time, the Debtor
issued additional stock to various parties to prevent Burlingame
from obtaining a controlling interest in the Debtor by foreclosing
on Koelling’s stock as its collateral.
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(d) BDS’s Claim
BDS filed two proofs of claim, Claim No. 9 on March 18, 2004 and
Claim No. 62 on November 15, 2006. 	As noted above, Claim No. 9 has
already been removed from the “universe” of claims on the ground that
Nicholsen objected to it as duplicative of Claim No. 62. 	BDS’s proof
of 	claim 	described 	the 	basis 	for 	the 	claim 	as 	services 	performed.
The 	attached 	invoice 	shows 	how 	the 	amount 	of 	the 	claim 	was
calculated. 	BDS 	appears 	to 	have 	negotiated 	discounted 	claims 	with
various 	creditors 	of 	the 	Debtor 	on 	the 	Debtor’s 	behalf. 	It
purportedly had an agreement with the Debtor that it was entitled to
25% of any hypothetical savings as a result of these agreements.
BDS also holds fifteen percent of the Debtor’s equity. 8 	Kendall
contends that this makes BDS an “insider” or otherwise disqualifies
him 	from 	voting 	for 	a 	permanent 	trustee. 	Section 	702(a) 	provides
that a creditor may not vote for a permanent trustee if the creditor
is 	an 	“insider” 	or 	holds 	an 	equity 	interest 	that 	is 	substantial 	in
relation 	to 	such 	creditor’s 	interest 	as 	a 	creditor. 	See 	11 	U.S.C.
§ 702(a)(2)&(3).
An equity holder is not necessarily an “insider.” 	See 11 U.S.C.
§ 101(31). 	An equity holder is an “insider” only if it is a person
in 	control 	of 	the 	Debtor. 	If 	the 	word 	“control” 	is 	construed
narrowly, no equity holder with less than a majority interest would
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qualify as an “insider.” 	However, the Court concludes that the word
“control” 	should 	not 	be 	construed 	narrowly. 	Insider 	creditors 	are
distinguished from other creditors because they are in a position to
know more about the debtor’s financial condition and thus to obtain
preferential 	treatment. 	BDS 	was 	clearly 	in 	this 	position,
particularly 	given 	its 	role 	in 	negotiating 	settlements 	with 	the
Debtor’s creditors.
Moreover, 	even 	if 	BDS 	were 	not 	an 	“insider,” 	the 	Court 	would
find BDS disqualified from voting pursuant to 11 U.S.C. § 702(a)(3).
Section 702(a)(3) compares the significance of the creditor’s equity
interest 	with 	the 	significance 	of 	the 	creditor’s 	claim. 	BDS 	held
fifteen 	percent 	of 	the 	Debtor’s 	equity. 	Its 	$117,141.57 	claim 	is
less 	than 	fifteen 	percent 	of 	the 	Debtor’s 	general 	unsecured 	debt.
Thus, 	its 	equity 	interest 	is 	not 	insubstantial 	as 	compared 	to 	its
claim as a creditor. 	Thus, BDS’s claim must also be removed from the
“universe” of claims entitled to vote for a permanent trustee.
CONCLUSION
As discussed above, the Court concludes that three of the four
creditors 	that 	requested 	the 	election 	of 	a 	permanent 	trustee 	were
disqualified 	from 	voting 	and 	thus 	from 	requesting 	the 	election:
Siegler, Nagy, and BDS. 	Their claims total $825,413.03. 	This amount
must 	be 	deducted 	from 	the 	$1,606,963.33 	previously 	computed 	as 	the
“universe” 	of 	claims. 	Thus, 	the 	final 	amount 	of 	the 	“universe” 	of
claims 	entitled 	to 	vote 	is 	$781,550.30. 	Twenty 	percent 	of 	this
amount 	is 	$156,310.06. 	The 	only 	qualified 	creditor 	requesting 	the
election was Oto who held a claim of only $1,709.81. 	This was less
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than 	twenty 	percent 	of 	the 	claims 	in 	the 	“universe” 	and 	was 	thus
insufficient. 	For that reason, the Court concludes that the election
was 	not 	requested 	by 	the 	requisite 	number 	of 	creditors 	and 	was 	not
effectively 	requested. 	As 	a 	result, 	the 	results 	of 	the 	election
should be disregarded, and Kendall is the permanent trustee. 	Counsel
for 	Kendall 	is 	directed 	to 	submit 	a 	proposed 	form 	of 	order 	denying
Nicholsen’s 	motion 	to 	confirm 	the 	election 	of 	Wu 	as 	the 	permanent
trustee.
END OF DOCUMENT
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COURT SERVICE LIST
Reidun Stromsheim
Stromsheim & Associates
201 California St., Ste. 350
San Francisco, CA 94111
Robert R. Moore
Allen Matkins Leck Gamble Mallory & Natsis LLP
Three Embarcadero Center, 12 th Floo
San Francisco, CA 94111-4074
Adam Siegler
Siegler Law Group
9454 Wilshire Blvd., Ste. M-16
Beverly Hills, CA 90212
Paul E. Manasian
Manasian & Rougeau, LLP
400 Montgomery St., Ste. 1000
San Francisco, CA 94104
William C. Lewis
Brian Fitzpatrick
Law Offices of William C. Lewis
510 Waverly St.
Palo Alto, CA 94301-2009
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