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 SANCTIONS
On 	November 	23, 	2005, 	the 	Court 	issued 	an 	order 	imposing
monetary discovery sanctions in the amount of $3,450 (the “Sanction
Order”) against Burlingame Capital Partners II, L.P. and Electrochem
Funding, 	LLC 	(the 	“Burlingame 	Entities”). 	The 	Sanction 	Order
directed the Burlingame Entities to pay the above-specified amount to
the 	Official 	Committee 	of 	Unsecured 	Creditors 	(the 	“Committee”)
within six months from the date of entry of the order. 	The Sanction
Order 	was 	entered 	on 	November 	23, 	2005. 	Thus, 	the 	sanctions 	were
ordered to be paid by May 23, 2006.
The 	Burlingame 	Entities 	have 	not 	complied 	with 	the 	Sanction
Order. 	On 	June 	2, 	2006, 	the 	Committee 	sent 	a 	letter 	to 	the 	Court,
complaining 	about 	the 	Burlingame 	Entities’ 	noncompliance 	with 	the
Signed: June 21, 2006
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
June 22, 2006
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 04-41044 Doc# 570 Filed: 06/21/06 Entered: 06/22/06 14:25:02 Page 1 of
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Sanction 	Order 	(the 	“June 	2 	Letter”). 	In 	the 	June 	2 	Letter, 	the
Committee advised the Court that the Burlingame Entities had argued
that 	they 	should 	not 	be 	required 	to 	comply 	with 	the 	Sanction 	Order
because Fred and Linda Koelling (the “Koellings”), the principals of
Qmect, Inc. (“Qmect”), the above-captioned debtor, had not complied
with 	an 	order 	directing 	them 	to 	pay 	monetary 	sanctions 	to 	the
Burlingame Entities for improper removal of a state court action to
the bankruptcy court (the “Removed Action”).
The 	Committee 	asserted 	that 	the 	Koellings’ 	noncompliance 	with
their sanction obligations did not justify the Burlingame Entities’
noncompliance with their obligations under the Sanction Order. 	The
Committee 	noted 	that 	the 	monetary 	sanctions 	imposed 	against 	the
Koellings 	were 	based 	on 	the 	Koellings’ 	conduct 	before 	they 	filed
their 	chapter 	11 	bankruptcy 	case. 	As 	a 	result, 	their 	sanction
obligation 	constituted 	a 	pre-petition 	obligation. 	Thus, 	the 	two
obligations 	are 	not 	mutual 	as 	to 	time. 	In 	addition, 	Qmect’s
bankruptcy 	estate 	was 	not 	responsible 	for 	the 	Koellings’ 	conduct.
Thus, the two obligations are not mutual as to the involved parties.
The 	Burlingame 	Entities 	responded 	to 	the 	June 	2 	Letter 	by 	a
letter 	dated 	June 	16, 	2006 	(the 	“June 	16 	Letter”). 	In 	the 	June 	16
Letter, the Burlingame Entities noted that the Court had established
that the Burlingame Entities had a pre-petition claim against Qmect
exceeding 	$5,900,000. 	They 	also 	noted 	that, 	as 	the 	Committee
acknowledged, 	the 	Koellings 	have 	not 	complied 	with 	a 	court 	order
directing 	them 	to 	pay 	sanctions 	to 	the 	Burlingame 	Entities.
According 	to 	the 	Burlingame, 	these 	sanctions 	are 	in 	the 	amount 	of
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$10,000. 	In 	addition, 	the 	Burlingame 	Entities 	represent 	that 	they
have another motion seeking sanctions pending and plan to file still
other 	motions 	seeking 	sanctions. 	Under 	the 	circumstances, 	they
contend, 	it 	would 	be 	unfair 	to 	require 	them 	to 	comply 	with 	the
Sanction Order.
The Committee responded to the June 16 Letter by a letter dated
June 	20, 	2006 	(the 	“June 	20 	Letter”). 	In 	the 	June 	20 	Letter, 	the
Committee 	repeated 	the 	argument 	that 	the 	Burlingame 	Entities 	were
attempting to offset nonmutual obligations. 	The Committee contended
that 	it 	would 	be 	unfair 	to 	penalize 	the 	Committee 	for 	pre-petition
discovery violations by the Koellings. 	Moreover, the Committee noted
that the Burlingame Entities had neither appealed the Sanction Order
nor moved for a stay of its enforcement. 	They had simply disregarded
their 	obligations 	to 	comply 	with 	it, 	putting 	the 	burden 	on 	the
Committee to move for its enforcement. 	The Committee requested the
Court’s assistance in enforcing the Sanction Order.
The Court agrees with the Committee that the Burlingame Entities
have 	no 	legitimate 	ground 	for 	refusing 	to 	comply 	with 	the 	Sanction
Order. 	Even 	if 	they 	did, 	the 	Court 	agrees 	that 	they 	have 	acted
improperly 	by 	simply 	disregarding 	the 	Sanction 	Order 	rather 	than
moving for permission not to comply with its terms.
The 	Sanction 	Order 	is 	designed 	to 	compensate 	the 	Qmect 	estate
for 	costs 	incurred 	unnecessarily 	based 	on 	the 	Burlingame 	Entities’
discovery misconduct. 	Thus, the order imposing sanctions against the
Koellings 	may 	not 	be 	asserted 	as 	an 	offset 	to 	the 	Burlingame
Entities’ 	obligations 	under 	the 	Sanction 	Order. 	Moreover, 	the
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Burlingame Entities’ sanction claim against the Koellings is a pre-
petition obligation in their bankruptcy case. 	Once their chapter 11
petition 	was 	filed, 	the 	Koellings 	were 	not 	permitted 	to 	pay 	this
obligation 	outside 	a 	confirmed 	plan. 	The 	fact 	that 	the 	Court 	has
concluded 	that 	the 	Burlingame 	Entities 	have 	a 	substantial 	pre-
petition 	secured 	obligation 	against 	Qmect 	does 	not 	justify 	their
failure to comply with the Sanction Order either. 	Otherwise, there
would be no way to effectively sanction a pre-petition creditor based
on its post-petition misconduct.
The Burlingame Entities are directed to comply with the Sanction
Order without delay at risk of being held in contempt.
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
Case: 04-41044 Doc# 570 Filed: 06/21/06 Entered: 06/22/06 14:25:02 Page 5 of
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