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.
___________________________________/
SECOND MEMORANDUM OF DECISION RE PROCEEDS ISSUE
On 	June 	2, 	2006, 	the 	Court 	issued 	a 	Memorandum 	of 	Decision
(“Proceeds 	Memo 	I”) 	with 	regard 	to 	the 	claim 	of 	Burlingame 	Capital
Partners 	II, 	L.P. 	(“Burlingame”) 	and 	Electrochem 	Funding, 	LLC
(“Burlingame 	Funding”)(collectively 	the 	“Lenders”) 	for 	relief 	from
the automatic stay with respect to Qmect, Inc.’s (the “Qmect”) post-
petition 	accounts 	receivable, 	inventory 	acquired, 	and 	cash 	(the
“Post-Petition 	Assets”). 	Based 	on 	the 	applicable 	authorities, 	the
Court concluded that, if the Post-Petition Assets had been acquired
or 	generated 	solely 	through 	the 	use 	of 	the 	Lenders’ 	pre-petition
collateral, 	pursuant 	to 	11 	U.S.C. 	§ 	552(b), 	the 	Lenders 	were
entitled 	to 	claim 	the 	Post-Petition 	Assets 	as 	their 	collateral 	as
well as the proceeds of their pre-petition collateral. 	However, if
their pre-petition cash collateral had been commingled with funds not
Signed: June 26, 2006
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
June 27, 2006
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
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subject to their security interest, they would be required to trace
their 	funds 	into 	the 	Post-Petition 	Assets, 	using 	the 	lowest
intermediate balance methodology, to establish their right to claim
some or all of the Post-Petition Assets as their collateral.
The 	parties 	were 	provided 	with 	a 	schedule 	for 	providing 	an
evidentiary basis for the Court to determine the Lenders’ rights as
well as to file briefs asserting their legal positions based on the
evidence provided. 	The Court has reviewed the evidence and argument
provided and presents its factual and legal conclusions below.
SUMMARY OF FACTS
Qmect filed its chapter 11 bankruptcy petition on February 27,
2004. 	On 	the 	next 	business 	day, 	March 	1, 	2004, 	Qmect 	filed 	an
emergency 	motion 	for 	authority 	to 	obtain 	a 	post-petition 	loan 	(the
“Post-Petition 	Loan”) 	from 	an 	individual 	named 	Brian 	Fitzpatrick
(“Fitzpatrick”) 	and 	well 	as 	a 	interim 	motion 	for 	use 	of 	cash
collateral. 	In fact, Fitzpatrick had already advanced approximately
$50,000 of the proposed loan by making payments directly to various
pre-petition creditors of Qmect.
A hearing was conducted on the two motions on March 2, 2004. 	At
the conclusion of the hearing, the Court authorized Qmect to obtain
the loan. 	The only clarification sought by the Lenders in connection
with 	that 	motion 	was 	that 	the 	loan 	proceeds 	would 	become 	part 	of
their 	borrowing 	base. 	Qmect 	affirmed 	that 	this 	was 	so. 	In
connection 	with 	the 	cash 	collateral 	motion, 	the 	Lenders 	expressed
concerns 	about 	some 	of 	the 	proposed 	expenditures 	listed 	in 	the
budget. 	The parties agreed to meet and confer and so as to agree on
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26 1The remaining $1,000 may also have gone to pay pre-petition
obligations. 	The Lenders were simply unable to establish that
fact.
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a 	form 	of 	order. 	Orders 	authorizing 	the 	Post-Petition 	Loan 	and
approving 	the 	use 	of 	cash 	collateral 	were 	signed 	by 	the 	Court 	on
March 9, 2004 (the “Post-Petition Loan Order” and the “Interim Cash
Collateral Order,” respectively). 	The Interim Cash Collateral Order
stated expressly that the Lenders agreed to Qmect’s use of their cash
collateral on an interim basis.
On March 3, 2004, the remaining post-petition loan funds in the
approximate 	amount 	of 	$100,000 	were 	wire 	transferred 	into 	Qmect’s
checking account at the Bank of America (the “BofA Account”). 	Just
prior 	to 	the 	wire 	transfer, 	the 	BofA 	Account 	held 	approximately
$41,000 of Qmect’s funds, which the Court has assumed constituted the
Lenders’ collateral. 	Thus, immediately after the wire transfer, the
BofA Account held approximately $141,000. 	Thereafter, from March 3
to 	5, 	2004, 	Qmect 	issued 	checks 	or 	caused 	funds 	to 	be 	transferred
automatically 	to 	creditors 	in 	amounts 	totaling 	approximately
$100,000. 	Thus, 	when 	these 	disbursements 	had 	been 	made, 	there 	was
again 	a 	balance 	of 	approximately 	$41,000 	in 	the 	BofA 	Account. 	The
Lenders 	have 	established 	that 	all 	but 	slightly 	more 	than 	$1,000 	of
the $100,000 disbursed between March 3 and 5, 2004 went to pay pre-
petition obligations. 1
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DISCUSSION
A. 	ARGUMENTS
The 	Lenders 	contend 	that 	all 	of 	Qmect’s 	Post-Petition 	Assets
were 	acquired 	or 	generated 	solely 	through 	the 	use 	of 	its 	cash
collateral 	and 	thus 	constitutes 	the 	proceeds 	of 	their 	pre-petition
security 	interest 	pursuant 	to 	11 	U.S.C. 	§ 	552(b)(1). 	Thus, 	they
contend that they are entitled to relief from the automatic stay to
foreclose on the Post-Petition Assets.
The 	Lenders 	acknowledge 	that 	traditionally, 	when 	funds 	are
commingled, the secured creditor has the burden of proof of tracing
its 	collateral 	into 	the 	debtor’s 	current 	assets. 	However, 	the
Lenders 	contend 	that 	the 	burden 	should 	be 	shifted 	to 	Qmect 	under
these 	circumstances 	because 	Qmect 	acted 	improperly 	by 	failing 	to
segregate their cash collateral as required by 11 U.S.C. § 363(b)(2)
and 	by 	using 	the 	proceeds 	of 	the 	Post-Petition 	Loan 	to 	pay 	pre-
petition debt without obtaining a court order authorizing them to do
so. 	In 	support 	of 	this 	contention, 	they 	cite 	Freightliner 	Market
Dev. Corp. v. Silver Wheel Freightlines, Inc., 823 F.2d 362, 368 (9 th
Cir. 1987).
Moreover, 	even 	if 	they 	are 	required 	to 	trace, 	the 	Lenders
contend that they have effectively done so. 	They note that they have
established that virtually all of the Post-Petition Loan was used to
pay 	pre-petition 	debt, 	not 	to 	generate 	new 	inventory 	and 	accounts
receivable. 	Finally, 	the 	Lenders 	reiterate 	their 	argument 	that,
because 	the 	Court 	has 	found 	that 	they 	hold 	a 	“blanket 	lien,” 	they
should automatically be entitled to claim the Post-Petition Assets as
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2Qmect and the Official Committee of Unsecured Creditors (the
“Committee”) filed a joint brief. 	For simplicity, when referring
to the positions taken in the brief, the Court will refer to these
two parties collectively as Qmect.
5
the proceeds of their pre-petition security interest. 	In support of
this proposition, they cite In re Bumper Sales, Inc., 907 F.2d 1430
(4 th Cir. 1990).
The Lenders note that, in In re Skagit Pacific Corp., 316 B.R.
330 (Bankr. 9 th Cir. 2004), in which the Court required the creditor
to trace, the creditor did not have a “blanket lien.” 	In addition,
the creditor was an insider and was responsible for the commingling.
Thus, it was fair under those circumstances to require the creditor
to bear the burden of tracing. 	It would not be fair here, according
to the Lenders, where Qmect was responsible for the commingling.
By contrast, Qmect argues that the burden of proof should not be
shifted 	under 	these 	circumstances. 2 	It 	disputes 	that 	it 	acted
improperly by failing to segregate and commingling the Lenders’ pre-
petition 	cash 	collateral 	or 	by 	paying 	pre-petition 	debt 	without 	an
express order authorizing it to do so. 	Qmect notes that the Lenders
consented to the Interim Cash Collateral Order, which did not require
segregation 	and 	clearly 	contemplated 	the 	payment 	of 	pre-petition
debt.
While 	the 	Court 	did 	not 	expressly 	approve 	the 	payment 	of 	pre-
petition debt, they assert, such approval was implicit in the Interim
Cash 	Collateral 	Order. 	In 	addition, 	according 	to 	Qmect, 	it 	would
have 	made 	no 	sense 	to 	segregate 	the 	Lenders’ 	pre-petition 	cash
collateral 	from 	the 	proceeds 	of 	the 	Post-Petition 	Loan 	since 	the
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3Qmect concedes that the Bumper Sales court disapproved the
holding in Lovelady. 	See Bumper Sales at 1440, n.13. 	Thus,
according to Qmect, Ninth Circuit law differs from Fourth Circuit
law on this point.
4To illustrate this point, Qmect cites the operation of the
lowest intermediate balance methodology as applied to a bank
account containing commingled funds. 	The problem with this
illustration is that it deals with a closed system. 	In other
words, in these examples, the only question is who is entitled to
the remaining funds in the bank account. 	It does not contemplate
that the funds in the bank account have been used to generate
noncash assets of greater value than the funds.
6
Lenders were given a security interest in the proceeds of that loan.
However, Qmect contends that the Lenders should not be entitled
claim a security interest in the Post-Petition Assets by tracing. 	It
asserts that, in a footnote in Freightliner, the Ninth Circuit Court
of 	Appeals 	held 	that, 	if 	a 	creditor 	consents 	to 	the 	use 	of 	its
collateral 	or 	the 	court 	authorizes 	its 	use, 	the 	creditor 	loses 	its
right to trace proceeds. 	823 F.2d at 367, n.4. 	Qmect notes that the
Freightliner 	court 	relied 	on 	In 	re 	Lovelady, 	21 	B.R. 	182, 	184-85
(Bankr. D. Or. 1982) for this holding. 	It also notes that the Skagit
court cited Lovelady with approval. 	See Skagit at 336, n5. 3
Finally, Qmect contends that, even if the Lenders are permitted
to trace, tracing will give them nothing more than what they would be
entitled to pursuant to their replacement lien. 4 	Qmect argues that
the Lenders’ rights are essentially frozen at their secured position
at the time the bankruptcy was filed. 	Any increase in value belongs
to 	the 	estate. 	Thus, 	according 	to 	Qmect, 	a 	valuation 	hearing 	is
necessary, as previously contemplated.
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In reply, the Lenders contend that, notwithstanding the Interim
Cash Collateral Order, Qmect was legally required to segregate their
pre-petition cash collateral. 	Thus, they repeat that the burden of
tracing should be shifted to Qmect. 	They characterize as dicta the
assertion made by the Freightliner court in footnote 4 that, when a
secured 	creditor 	consents 	to 	the 	use 	of 	its 	cash 	collateral 	or 	a
court 	order 	authorizing 	its 	use 	is 	entered, 	the 	secured 	creditor
loses the right to trace.
In 	addition, 	the 	Lenders 	take 	issue 	with 	Qmect’s 	contention
that, even if they are able to trace, their security interest in the
Post-Petition 	Assets 	is 	limited 	by 	the 	value 	of 	their 	interest 	in
Qmect’s 	assets 	at 	the 	time 	the 	bankruptcy 	was 	filed. 	The 	Lenders
contend that, to the extent they can establish that all of the Post-
Petition 	Assets 	were 	produced 	solely 	through 	the 	use 	of 	their
collateral, they are entitled to all of the Post-Petition Assets up
to 	the 	amount 	of 	their 	claim. 	Thus, 	they 	contend 	that, 	under
applicable law, a secured creditor under these circumstances, not the
debtor, is entitled to any post-petition 	appreciation in the value
of their collateral.
B. 	DECISION
Based 	on 	the 	foregoing 	arguments, 	the 	Court 	identifies 	four
issues: 	(1) 	whether 	the 	Lenders 	have 	lost 	their 	right 	to 	trace 	by
consenting to Qmect’s use of cash collateral, (2) who has the burden
of proof on tracing,(3) whether the party bearing the burden on the
tracing 	issue 	has 	satisfied 	that 	burden, 	and 	(4) 	the 	extent 	of 	the
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Lenders’ 	rights 	in 	the 	Post-Petition 	Assets 	based 	on 	the 	evidence
presented. 	These issues are addressed below.
1. 	Effect 	of 	Lenders’ 	Consent 	to 	Use 	of 	Cash 	Collateral 	on
Tracing Right
As noted above, Qmect contends that the Lenders lost their right
to trace their pre-petition security interest into the Post-Petition
Assets 	by 	consenting 	the 	use 	of 	their 	cash 	collateral. 	Thus,
according to Qmect, the Lenders’ rights are limited to those obtained
by 	virtue 	of 	their 	replacement 	lien. 	As 	the 	Court 	previously
indicated, 	a 	valuation 	hearing 	would 	be 	required 	to 	establish 	the
Lenders’ rights pursuant to their replacement lien.
Qmect bases this contention on footnote 4 in Freightliner. 	The
Lenders contend that the statement in footnote 4 is dicta and should
not 	be 	followed 	by 	the 	Court. 	The 	Court 	agrees. 	In 	Freightliner,
the 	debtor 	violated 	11 	U.S.C. 	§ 	363(c)(2) 	by 	using 	the 	secured
creditor’s cash collateral without the secured creditor’s consent or
a court order. 	The Freightliner court observed that, pursuant to 11
U.S.C. 	§ 	363(c)(4), 	unless 	a 	trustee 	obtains 	a 	court 	order 	or
consent, 	he 	is 	required 	to 	segregate 	and 	account 	for 	any 	cash
collateral. 	Because 	the 	trustee 	failed 	to 	do 	so, 	the 	parties 	were
unable to trace their pre-petition security interest into the post-
petition assets.
Two issues were presented: (1) under the circumstances, whether
the burden of proof on tracing should be shifted to the trustee and
(2) 	whether 	a 	secured 	creditor’s 	consent 	to 	use 	of 	cash 	collateral
had to be express. 	The Freightliner court answered both questions
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in the affirmative. 	The Freightliner court was not required to rule
on 	the 	effect 	of 	a 	secured 	creditor’s 	consent 	to 	the 	use 	of 	cash
collateral on its right to trace. 	Therefore, the statement made in
footnote 4 was dicta.
Moreover, 	the 	Court 	is 	persuaded 	that 	the 	statement 	misstates
the 	law. 	The 	Court 	notes 	that 	the 	case 	cited 	by 	the 	Freightliner
court in support of its statement in footnote 4–-stated that, under
Oregon law, a secured creditor loses its right to trace proceeds if
it consents to the use of its collateral. 	See Lovelady at 184. 	Like
Lovelady, Freightliner was also decided at least in part under Oregon
law. 	Thus, even if the statement were not dicta, it might not apply
here 	where 	the 	governing 	state 	law 	is 	California 	law. 	Qmect 	notes
that Lovelady was cited with approval in Skagit. 	However, the Skagit
court states the proposition more equivocally: i.e., “If the creditor
fails to obtain...[a replacement lien and/or a priority claim], its
consent to the use of proceeds may destroy its right to trace those
proceeds 	into 	other 	products.” 	See 	Skagit 	at 	336, 	n.5 	[emphasis
added].
Nothing 	in 	the 	Bankruptcy 	Code, 	of 	which 	the 	Court 	is 	aware,
states that a creditor loses its rights under 11 U.S.C. § 552(b)(1)
by consenting to the use of its cash collateral. 	Such an important
consequence 	would 	surely 	be 	set 	forth 	expressly 	in 	the 	statute.
Thus, the Court concludes that the Lenders did not waive their right
to trace by consenting to the Interim Cash Collateral Order.
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2. 	Who Has the Burden of Proof on Tracing
As 	noted 	above, 	the 	Lenders 	acknowledge 	that, 	traditionally,
when 	a 	secured 	creditor’s 	cash 	collateral 	has 	been 	commingled, 	the
secured 	creditor 	has 	the 	burden 	of 	proof 	on 	tracing. 	However, 	the
Lenders 	contends 	that, 	when 	the 	commingling 	occurs 	wrongfully, 	the
burden 	should 	be 	shifted 	to 	the 	party 	responsible 	for 	the 	wrongful
commingling. 	In support of this proposition, they cite Freightliner.
In 	this 	case, 	the 	Lenders 	contend, 	Qmect 	acted 	wrongfully 	by
commingling 	their 	cash 	collateral 	and 	should 	have 	the 	burden 	of
establishing 	that 	the 	Post-Petition 	Assets 	are 	not 	the 	proceeds 	of
their pre-petition security interest.
Qmect contends that the commingling was not wrongful. 	It notes
that, 	in 	Freightliner, 	the 	trustee 	did 	not 	obtain 	either 	the
creditor’s 	consent 	to 	the 	use 	of 	the 	cash 	collateral 	or 	a 	court
order. 	Qmect 	obtained 	a 	court 	order 	with 	the 	Lenders’ 	express
consent. 	The Interim Cash Collateral Order did not require Qmect to
segregate the proceeds from the Post-Petition Loan from the Lenders’
pre-petition 	cash 	collateral. 	Moreover, 	as 	Qmect 	points 	out, 	this
might 	well 	have 	seemed 	pointless 	since 	the 	Lenders 	were 	given 	a
replacement lien in those proceeds. 	As a result, the Court concludes
that 	Qmect 	did 	not 	act 	wrongfully 	in 	failing 	to 	segregate 	the
Lenders’ cash collateral. 	As a result, there are no grounds to shift
the burden of proof to Qmect.
3. 	Whether Burden of Proof on Tracing Has Been Satisfied
The Court concludes that, except with respect to slightly more
than 	$1,000 	of 	the 	proceeds 	of 	the 	Post-Petition 	Loan, 	the 	Lenders
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5Qmect suggests that this assumption may be inaccurate.
However, it asserts that this is an issue for another day. 	The
Court agrees that, for purposes of a final determination, the
Court’s assumption may be challenged at a later date. 	However, the
Court does not view the accuracy of this assumption as an issue for
another day with respect to the Lenders’ motion for relief from
stay. 	The purpose of this briefing schedule was made clear to the
parties. 	If Qmect wished to challenge the Court’s assumption on
this point, it should have presented evidence supporting its
challenge.
11
have met their burden of tracing their pre-petition security interest
into Qmect’s Post-Petition Assets. 	As stated in the Proceeds Memo I,
the 	Court 	assumes 	that 	the 	$41,000 	in 	the 	BofA 	Account 	on 	the
petition date was the proceeds of the Lenders’ pre-petition security
interest. 5 	The 	Lenders 	have 	effectively 	established 	that 	all 	but
slightly more than $1,000 of the $100,000 of the Post-Petition Loan
deposited 	into 	the 	BofA 	account 	on 	March 	3, 	2004 	went 	to 	pay 	pre-
petition 	debt. 	As 	a 	result, 	these 	funds 	were 	not 	used 	to 	generate
any portion of the Post-Petition Assets.
4. 	Extent of Lenders’ Rights in Post-Petition Assets Based on
Evidence Presented
The final issue presented is the extent of the Lenders’ security
interest in the Post-Petition Assets based on the evidence presented.
The Lenders contend that they have met their burden of tracing their
pre-petition collateral into the Post-Petition Assets and should be
granted relief to foreclose against those assets in their entirety.
In 	support 	of 	this 	contention, 	they 	cite 	11 	U.S.C. 	§ 	552(b)(1) 	and
various case authority, in particular, Dewsnup v. Timm, 502 U.S. 410
(1992) 	and 	In 	re 	1441 	Veteran 	Street 	Co., 	144 	F.3d 	1288, 	1292 	(9 th
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6There is at least one reported decision that supports Qmect’s
position. 	See In re Reddington/Sunarrow, Ltd., 119 B.R. 809, 813
(Bankr. D.N.M. 1990), cited in In re Machinery, Inc., 287 B.R. 755,
762 (Bankr. E.D. Mo. 2002). 	However, it clearly represents a
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Cir. 	1998). 	In 	the 	form 	applicable 	to 	this 	case, 	11 	U.S.C. 	§
552(b)(1) provides as follows:
Except as provided in sections 363, 506(c), 522,
544, 	545, 	547, 	and 	548...[of 	the 	Bankruptcy
Code], if the debtor and an entity entered into
a security agreement before the commencement of
the case and if the security interest created by
such 	security 	agreement 	extends 	to 	property 	of
the 	debtor 	acquired 	before 	the 	commencement 	of
the case and to proceeds, product, offspring, or
profits 	of 	such 	property, 	then 	such 	security
interest 	extends 	to 	such 	proceeds, 	product,
offspring, 	or 	profits 	acquired 	by 	the 	estate
after the commencement of the case to the extent
provided 	by 	such 	security 	agreement 	and 	by
applicable 	nonbankruptcy 	law, 	except 	to 	any
extent 	that 	the 	court, 	after 	notice 	and 	a
hearing 	and 	based 	on 	the 	equities 	of 	the 	case,
orders otherwise.
Qmect contends that a valuation hearing is still necessary. 	It
asserts that the Lenders’ rights established by tracing pursuant to
11 U.S.C. § 552(b)(1) are no greater than their rights pursuant to a
replacement 	lien. 	The 	Court 	has 	previously 	stated 	its 	belief 	that
the 	Lenders’ 	replacement 	lien 	in 	Qmect’s 	Post-Petition 	Assets 	was
limited 	to 	the 	value 	of 	their 	security 	interest 	in 	those 	assets 	at
the time of filing. 	The only support for this position is a citation
to illustrations of the operation of the lowest intermediate balance
methodology 	with 	respect 	to 	a 	bank 	account, 	as 	set 	forth 	in 	the
Restatement Second of Trusts. 	The problem with this citation is that
it does not address a secured creditor’s right to proceeds pursuant
to 11 U.S.C. § 552(b)(1). 6
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minority view.
7Two of the cases cited by the Lenders–-In re Tower Air, Inc.,
397 F.3d 191, 202 (3 rd Cir. 2005) and In re Muma Services, Inc.,
322 B.R. 541, 559 (Bankr. D. Del. 2005)--applied the “equity
exception” of 11 U.S.C. § 552(b)(1) and thus are also inapposite.
13
The 	Court 	finds 	Dewsnup 	inapposite. 	In 	Dewsnup, 	the 	issue
presented was whether a chapter 7 debtor could “strip down” the value
of 	a 	secured 	creditor’s 	claim 	on 	real 	property 	to 	the 	value 	of 	the
real property at the time of the discharge. 	The Supreme Court held
that a chapter 7 debtor could not. 	Id. at 502 U.S. 410-20. 	It did
not 	involve 	the 	application 	of 	a 	lien 	on 	property 	acquired 	by 	a
chapter 	11 	debtor-in-possession 	post-petition: 	i.e., 	the 	issue
presented here.
However, 1441 Veteran Street does support the Lenders’ position.
As Ninth Circuit Court of Appeals authority, 1441 Veteran Street is
binding 	on 	this 	court. 	In 	1441 	Veteran 	Street, 	as 	in 	Dewsnup, 	the
collateral 	was 	also 	real 	property. 	However, 	the 	dispute 	was 	over
whether the secured creditor’s security interest could attach to and
be 	increased 	by 	rents 	produced 	post-petition. 	The 	Ninth 	Circuit
held 	that 	it 	could 	be, 	relying 	heavily 	on 	Dewsnup. 	1441 	Veteran
Street, 144 F.3d at 1291. 	In In re Veeco Inv. Co., 170 B.R. 149, 153
(Bankr. 	E.D. 	Mo. 	1994), 	which 	involved 	a 	similar 	issue, 	the 	court
reached the same conclusion. 7
Finally, the case cited by the Lenders that is most closely on
point 	as 	a 	factual 	matter 	is 	In 	re 	Machinery, 	Inc. 	287 	B.R. 	755
(Bankr. E.D. Mo. 2002). 	As here, in Machinery, the secured creditor
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claimed a security interest in post-petition receivables pursuant to
11 	U.S.C. 	§ 	552(b)(1) 	as 	an 	increase 	to 	the 	value 	of 	its 	secured
claim. 	The 	debtor 	argued 	the 	value 	of 	the 	secured 	creditor’s
interest 	was 	frozen 	at 	its 	value 	as 	of 	the 	petition 	date. 	The
Machinery court rejected this argument, relying on Dewsnup and Veeco
as well as the plain language of 11 U.S.C. § 552(b)(1).
Based 	on 	1441 	Veteran 	Street, 	the 	Court 	concludes 	that 	it 	is
bound to conclude (and in any event is persuaded) that the value of
a 	secured 	creditor’s 	security 	interest 	in 	proceeds 	pursuant 	to 	11
U.S.C. § 552(b)(1) can exceed the value of its security interest on
the petition date. 	As a result, but for the unaccounted for proceeds
from the Post-Petition Loan in the approximate amount of $1,000, the
Lenders would clearly be entitled to foreclose on the Post-Petition
Assets in their entirety. 	The Court has puzzled over the effect of
this 	unaccounted 	for 	$1,000 	amount. 	It 	has 	considered 	various
remedies: 	e.g., disregarding the amount as de minimus, requiring the
unaccounted for amount to be paid to the estate.
The Court has concluded that the most appropriate remedy is to
place the burden of proof on tracing with respect to this amount on
Qmect. 	Because 	Qmect 	has 	failed 	to 	establish 	that 	the 	unaccounted
for 	$1,000 	amount 	was 	used 	in 	the 	production 	of 	the 	Post-Petition
Assets, the Court will find that, more likely than not, like the rest
of 	the 	$100,000 	deposited 	in 	the 	BofA 	Account, 	it 	was 	used 	to 	pay
pre-petition 	debt. 	As 	a 	result, 	the 	Court 	will 	grant 	the 	Lenders
relief 	from 	the 	automatic 	stay 	to 	foreclose 	on 	the 	Post-Petition
Assets in their entirety.
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The Lenders are directed to submit a proposed form of order in
accordance with this decision.
END OF DOCUMENT
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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
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