Qmect, Inc.

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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.
__________________________________/
MEMORANDUM RE ISSUES RAISED IN TRIAL BRIEF
An evidentiary hearing on the third motion of Burlingame Capital
Partners 	II, 	L.P. 	and 	Electrochem 	Funding, 	LLC 	(collectively
“Lenders”) 	for 	relief 	from 	the 	automatic 	stay 	is 	scheduled 	for 	May
24, 2006 at 9:30 a.m. 	On May 17, 2006, the Lenders, on the one hand,
and 	the 	above-captioned 	debtor 	(the 	“Debtor”) 	and 	the 	Official
Creditors’ 	Committee 	(the 	“Committee”), 	on 	the 	other, 	filed 	trial
briefs. 	The 	Court 	has 	read 	the 	trial 	briefs 	and 	considered 	the
issues discussed. 	As a result, the Court now questions the wisdom of
proceeding with valuation evidence at this time.
In 	their 	trial 	brief, 	the 	Lenders 	note 	that 	the 	Court 	has
previously concluded that they effectively hold a blanket lien on all
Signed: May 19, 2006
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
May 19, 2006
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 04-41044 Doc# 544 Filed: 05/19/06 Entered: 05/19/06 15:07:37 Page 1 of
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1The Debtor and the Committee are correct that some of the
issues regarding the perfection of the Lenders’ liens have not been
resolved. 	The asset that comes to mind in this respect is the
Debtor’s grid flooring which may or may not be a fixture. 	However,
the Court concluded that, because the Lenders are affiliates and
can cooperate with each other in foreclosing on their collateral,
defects in one lender’s liens may be remedied by the other lender’s
properly perfected security interest. 	However, as the Court
previously noted, if these two debts and liens are treated as if
they were one for blanket lien purposes, the senior lien should
probably not be able at the same time to claim post-petition
interest and attorneys’ fees as a fully secured claim. 	In their
trial brief, the Lenders ignore this conclusion.
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of the Debtor’s pre-petition assets. 1 	They contend that, as a result
of 	this 	blanket 	lien, 	all 	of 	the 	Debtor’s 	post-petition 	assets 	are
the proceeds of their security interest. 	Thus, they are entitled to
foreclose 	upon 	them, 	even 	if 	the 	value 	of 	the 	post-petition
collateral has increased since the petition date. 	According to the
Lenders, 	although 	the 	cash 	collateral 	orders 	gave 	them 	replacement
liens, they do not need to rely on those liens. 	They correctly note
that, in its previous tentative rulings, the Court did not consider
this argument.
The Court is inclined to agree with the Lenders on this point.
If so, holding an evidentiary hearing to determine whether there has
been any post-petition increase in the value of the Debtor’s assets
would be a waste of time. 	However, the Debtor and Committee did not
address this argument in their trial brief. 	The Court would like to
hear their argument to the contrary.
However, the Court may not simply vacate the hearing and 	grant
the Lenders relief from the automatic stay. 	The Lenders’ rationale
only 	works 	if 	their 	combined 	claim 	exceeds 	the 	value 	of 	their
Case: 04-41044 Doc# 544 Filed: 05/19/06 Entered: 05/19/06 15:07:37 Page 2 of
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2The Court is not persuaded that valuation must be done on a
liquidation basis. 	The Debtor’s business is being operated by a
receiver. 	Clearly, the Lenders’ desire and intention is to
liquidate their collateral as a going concern. 	Under these
circumstances, using liquidation value would give the Lenders an
unmerited windfall.
3The Court is mindful that the Debtor and Committee’s trial
brief also asserts that the Lenders have lost their security
interest based on the one action doctrine. 	The Court is not
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collateral. 	As noted above, the Court has serious doubts concerning
Burlingame 	Funding’s 	right 	to 	post-petition 	interest 	(let 	alone
default 	rate 	interest) 	and 	attorneys’ 	fees 	given 	the 	Court’s
effective merger of the liens for blanket lien purposes. 	Moreover,
the Debtor and Committee remind the Court in their trial brief that
the issue of usury has still not been resolved. 	A resolution of that
issue 	unfavorable 	to 	Burlingame 	might 	also 	cause 	the 	Lenders’
combined claims to be less than the value of the collateral. 2
The Court may not determine the usury issue in the context of a
motion 	for 	relief. 	However, 	the 	Court 	may 	deny 	relief 	if 	it
concludes 	that 	there 	is 	a 	substantial 	question 	presented 	regarding
the issue. 	As the Court recalls, there is a threshold factual issue
concerning 	whether 	Burlingame’s 	license 	was 	posted 	in 	Burlingame’s
office and whether the loan transaction was conducted at Burlingame’s
office or, if elsewhere, at the Debtor’s request. 	Unless the Debtor
or Committee presents substantial evidence on these factual issues,
the Court would be inclined to grant the Lenders’ relief from stay.
If such evidence is presented, the Court would be inclined to proceed
to 	determine 	the 	usury 	issue 	before 	hearing 	perhaps 	unnecessary
valuation testimony. 3
Case: 04-41044 Doc# 544 Filed: 05/19/06 Entered: 05/19/06 15:07:37 Page 3 of
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persuaded.
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To 	avoid 	inconvenience 	to 	potential 	witnesses 	on 	valuation
issues, the Court believes that a conference call should be conducted
in advance of the May 24, 2006 hearing. 	The Court directs the Debtor
to 	schedule 	a 	conference 	call, 	if 	possible 	for 	Monday 	morning, 	May
22, 2006, to discuss how they wish to proceed on May 24, 2006. 	Since
the 	Court’s 	calendar 	clerk 	is 	not 	at 	work 	today, 	the 	Court 	directs
the Debtor to schedule this call through the judge’s law clerks.
END OF DOCUMENT
Case: 04-41044 Doc# 544 Filed: 05/19/06 Entered: 05/19/06 15:07:37 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
Robert R. Moore
Allen Matkins Leck Gamble & Mallory LLP
Three Embarcadero Center, 12 th 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# 544 Filed: 05/19/06 Entered: 05/19/06 15:07:37 Page 5 of
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