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 OF DECISION RE USURY ISSUE
In 	their 	trial 	brief 	filed 	in 	connection 	with 	the 	final
evidentiary hearing on the third motion for relief from the automatic
stay filed by Burlingame Capital Partners II, L.P. (“Burlingame”) and
Electrochem 	Funding, 	LLC 	(“Burlingame 	Funding”)(collectively
“Lenders”), 	Qmect, 	Inc. 	(“Qmect”) 	and 	the 	Official 	Creditors’
Committee 	(“Committee”) 	asserted 	that 	the 	loans 	made 	by 	the
Burlingame to Qmect were usurious. 	It is undisputed that the rate of
interest 	charged 	by 	Burlingame 	would 	be 	usurious 	if 	the 	usury 	laws
applied 	to 	the 	loans. 	On 	May 	24, 	2006, 	the 	Court 	heard 	evidence
pertaining to whether the usury laws applied.
At 	the 	conclusion 	of 	the 	hearing, 	the 	Court 	set 	a 	briefing
schedule for additional briefing on the law applicable to this issue.
Those 	briefs 	have 	now 	been 	filed, 	and 	the 	Court 	has 	reviewed 	them.
The Court has also conducted its own research. 	Based on the evidence
Signed: June 02, 2006
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
June 02, 2006
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 04-41044 Doc# 556 Filed: 06/02/06 Entered: 06/02/06 15:08:06 Page 1 of
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1As the Court has frequently reminded the parties, because
this determination is being made in connection with a motion for
relief from stay, it does not constitute a summary adjudication of
the issue for collateral estoppel or res judicata purposes. 	The
Court makes the determination only so as to decide whether or not
to grant the Lenders relief from the automatic stay with respect to
their remaining collateral.
2The Court was under the impression until reading the
Committee’s reply brief that it was undisputed that Burlingame had
a license that exempted it from the usury laws at the time the
loans were made. 	However, in the Committee’s reply brief, the
Committee asserted that Burlingame was not exempt from the usury
laws because it agreed to make the loans before receiving its
license. 	The Committee notes that Burlingame’s license was not
issued until June 28, 2001 while Burlingame and Qmect signed a term
sheet earlier that month. 	The Court views this new assertion as a
red herring. 	The Court has reviewed the record and has confirmed
that the initial loan agreement was not signed and that no advance
was made by Burlingame to Qmect until September 2001. 	Burlingame
received its license well before that time. 	The Court does not
view the signing of a term sheet as the making of a loan,
particularly when the lender has not yet sought investors to fund
the loan at the time the term sheet is signed.
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and argument presented and on the Court’s own research, the Court now
concludes that the loans were exempt from the usury laws. 	The basis
for the Court’s conclusions is set forth below. 1
It 	is 	undisputed 	that 	Burlingame 	is 	a 	“finance 	lender” 	within
the meaning of FC § 22009. 2 	As such, it is governed by the California
Finance Lenders Law, FC §§ 22000 et seq. (the “FC Division 9"). 	It
is also undisputed that Burlingame’s loans to Qmect were commercial
loans. 	FC § 22502 provides that a “commercial loan” means a loan of
$5,000 	or 	more, 	the 	proceeds 	of 	which 	are 	intended 	for 	a 	use 	other
than personal, family or household purposes.
FC Division 9 covers both commercial and consumer transactions.
However, not every provision of the division applies to both types of
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26 	3Not surprisingly, the provisions of Chapter 2 Consumer Loans
are not applicable to commercial transactions. 	See FC § 22001(c).
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transactions. 	The provisions of FC Division 9 that are applicable to
commercial 	loans 	are 	set 	forth 	in 	FC 	§ 	22001(c). 	FC 	Division 	9
consists of four chapters: Chapter 1 General Provisions, commencing
with 	FC 	§ 	22000, 	Chapter 	1 	Consumer 	Loans, 	commencing 	with 	FC 	§
22200, 	Chapter 	3 	Commercial 	Loans, 	commencing 	with 	FC 	§ 	22500, 	and
Chapter 	4 	Revocation 	and 	Penalties, 	commencing 	with 	FC 	§ 	22700.
Section 22001(c) provides that Chapter 1 and Chapter 3 are applicable
to 	commercial 	loans. 	In 	addition, 	certain 	provisions 	of 	Chapter 	4
are applicable to commercial loans: i.e., Article 1, commencing with
FC § 22700 and Article 3, commencing with FC § 22780. 3
FC 	§ 	22151 	(a 	provision 	of 	Chapter 	1) 	requires 	that 	a 	finance
lender 	post 	its 	license 	conspicuously 	in 	the 	place 	of 	business
authorized by the license. 	Pursuant to FC § 22001(c), this provision
is 	applicable 	to 	the 	loans 	made 	by 	Burlingame 	to 	Qmect. 	At 	the
evidentiary 	hearing, 	Burlingame 	presented 	competent 	and 	persuasive
evidence 	that 	it 	had 	complied 	with 	this 	requirement 	at 	the 	time 	it
made 	the 	loans 	to 	Qmect. 	Qmect 	presented 	no 	evidence 	to 	the
contrary.
Section 22155 (also a provision of Chapter 1) provides that no
finance 	lender 	may 	make 	a 	loan 	provided 	for 	under 	FC 	Division 	9 	at
any other place of business unless (as applicable to this proceeding)
the borrower requests that it be made elsewhere, either orally or in
writing. 	Based on the evidence presented, the Court concludes that
the loans made by Burlingame to Qmect were not “made” at Burlingame’s
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4See West Pico Furniture Co. of Los Angeles v. Pacific Finance
Loans, 2 Cal. 3d 594, 613 (1970)(licensed personal property broker
retained usury exemption as to conditional sales contracts
recharacterized as loans, no evidence of purpose of evasion of
usury law having been presented).
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office within the meaning of this provision. 	The Court was persuaded
that, more likely than not, the loans were made either at Qmect’s or
Kids’ Connections’ offices or at the home of Burlingame’s principals
for 	the 	convenience 	of 	Qmect’s 	principals. 	However, 	the 	Court 	was
not persuaded that, more likely than not, the loans were made there
at the request of Qmect’s principals, either oral or written. 	More
likely, the principals of Burlingame volunteered to come to Qmect or
Kids’ 	Connection 	or 	to 	permit 	Qmect’s 	principals 	to 	come 	to 	their
home.
From 	FC 	§ 	22001(c), 	it 	would 	appear 	that 	FC 	§ 	22155 	is
applicable 	to 	Burlingame’s 	loans 	to 	Qmect. 	However, 	Burlingame
contends that it is not, citing FC § 22550. 	FC § 22550 provides that
FC 	§ 	22155, 	among 	other 	provisions, 	does 	not 	apply 	to 	commercial
loans 	“if 	the 	provisions 	of...[the] 	section 	are 	not 	used 	for 	the
purpose 	of 	evading...[FC 	Division 	9].” 	Based 	on 	the 	evidence
presented, the Court finds and concludes that, more likely than not,
the loan transactions were not conducted elsewhere for the purpose of
evading 	FC 	Division 	9. 	The 	Court 	finds 	it 	more 	likely 	that 	the
principals of Burlingame volunteered to make the loan somewhere other
than at Burlingame’s offices as a business courtesy. 	Thus, the Court
concludes that FC § 22155 does not apply to these loan transactions. 4
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Burlingame also argued that, even if either FC § 22151 or FC §
22155 had been violated, there is no private right of action for such
violations 	with 	respect 	to 	commercial 	loans. 	Given 	its 	conclusion
that 	FC 	§ 	22151 	was 	not 	violated 	and 	that 	FC 	§ 	22155 	is 	not
applicable, 	the 	Court 	need 	not 	address 	this 	argument. 	The 	Court
concludes 	that 	no 	oral 	argument 	is 	necessary 	with 	respect 	to 	this
issue.
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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