Qmect, Inc.

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UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re 	No. 04-41044 TK
Chapter 7
QMECT, INC.,
Debtor.
___________________________/
MEMORANDUM OF DECISION RE APPLICATION FOR APPROVAL OF COMPROMISE
The 	application 	for 	approval 	of 	a 	proposed 	compromise 	between
John T. Kendall (the “Kendall”), the interim chapter 7 trustee, and
Burlingame 	Capital 	Partners 	II, 	L.P. 	and 	related 	individuals 	and
entities (collectively “Burlingame”) came on for hearing on January
12, 2007. 	Appearances were stated on the record. 	At the conclusion
of the hearing, the Court took the matter under submission. 	Having
fully considered the application, the Court concludes that it should
be denied. 	The reasons for the Court’s decision are set forth below.
DISCUSSION
The above-captioned case was filed in February 2004 as a chapter
11 case. 	The case was converted to chapter 7 on October 6, 2006, and
Kendall 	was 	appointed 	as 	interim 	trustee. 	On 	October 	29, 	2006,
Kendall 	filed 	a 	notice 	of 	possible 	dividends. 	A 	few 	days 	later 	he
Signed: January 19, 2007
________________________________________
LESLIE TCHAIKOVSKY
U.S. Bankruptcy Judge
________________________________________
Entered on Docket
January 22, 2007
GLORIA L. FRANKLIN, CLERK
U.S BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
Case: 04-41044 Doc# 713 Filed: 01/19/07 Entered: 01/22/07 14:22:42 Page 1 of
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applied 	to 	retain 	counsel. 	On 	November 	28, 	2006, 	Kendall 	filed 	an
application for approval of a global compromise with Burlingame for
$100,000 plus 2% of the net proceeds of certain litigation against a
corporation 	owned 	by 	the 	principal 	shareholders 	of 	the 	Debtor 	(the
“Kids’ Connection Litigation”).
Kendall contends that the compromise is fair and reasonable. 	He
argues 	that, 	if 	the 	claims 	were 	litigated, 	it 	is 	far 	from 	certain
that 	the 	estate 	would 	obtain 	a 	judgment 	for 	a 	higher 	amount. 	He
notes that the estate was unsuccessful in most of the claims asserted
against 	Burlingame 	in 	the 	bankruptcy 	court. 	He 	states 	that 	it 	is
difficult to estimate what the “full upside to the estate” would be
if 	the 	estate 	prevailed 	on 	all 	of 	the 	claims 	being 	litigated.
However, he speculates that the attorneys’ fees incurred might be so
substantial that, even if the estate did prevail, there might be no
net 	monetary 	recovery 	for 	the 	estate. 	He 	notes 	that 	the 	estate’s
litigation costs during the chapter 11 were between $1 and 2 million.
Kendall 	observes 	that 	efforts 	to 	settle 	the 	various 	disputes
between 	the 	parties 	during 	the 	chapter 	11 	failed. 	He 	asserts 	that
the 	legal 	issues 	they 	present 	are 	unusually 	complex. 	Appeals 	and
cross-appeals of some of the Court’s rulings are pending before the
district court. 	Based on past history, he states, it is reasonable
to 	anticipate 	that 	appeals 	would 	be 	taken 	from 	any 	district 	court
decisions as well. 	Thus, it might be years before the litigation was
concluded. 	For 	these 	reasons, 	Kendall 	contends, 	the 	interests 	of
creditors are better served by the compromise.
Case: 04-41044 Doc# 713 Filed: 01/19/07 Entered: 01/22/07 14:22:42 Page 2 of
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26 	1The only creditor supporting the proposed settlement is
Burlingame, whose bias in this matter makes its support irrelevant.
3
An 	objection 	to 	the 	proposed 	compromise 	was 	filed 	by 	Brian
Fitzpatrick (“Fitzpatrick”), who loaned $200,000 to the Debtor during
the 	chapter 	11 	case 	and 	obtained 	a 	superpriority 	chapter 	11
administrative claim, among other things. 	It is undisputed that, if
the compromise is approved, the $100,000 would be sufficient only to
pay 	the 	chapter 	7 	administrative 	expenses 	and 	a 	portion 	of
Fitzpatrick’s claim.
Objections 	were 	also 	filed 	by 	three 	attorneys 	with 	actual 	or
potential 	chapter 	11 	administrative 	claims: 	i.e., 	Paul 	Manasian
(“Manasian”), 	the 	Debtor’s 	bankruptcy 	attorney, 	Philip 	Nicholsen
(“Nicholsen”), 	the 	Creditors’ 	Committee 	attorney, 	and 	Kirk 	Freeman
(“Freeman”), 	the 	Debtor’s 	special 	state 	court 	litigation 	counsel.
Objections were also filed two actual or potential general, unsecured
creditors: 	i.e., 	Siegler 	Law 	Group, 	(“Siegler”), 	a 	general,
unsecured 	creditor, 	and 	Frank 	Nagy 	(“Nagy”). 	Absent 	a 	substantial
recovery 	on 	the 	Kids’ 	Connection 	Litigation, 	the 	nonsuperpriority
administrative 	creditors 	and 	the 	general, 	unsecured 	creditors 	will
receive no distribution if the compromise is approved. 1
The 	objecting 	creditors 	argue 	that 	the 	proposed 	settlement 	is
not 	in 	the 	best 	interests 	of 	the 	estate. 	They 	contend 	that 	the
settlement amount is substantially too low. 	They observe that there
are 	attorneys 	who 	are 	willing 	to 	handle 	the 	litigation 	on 	a
contingent fee basis. 	Therefore, they urge the Court not to approve
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2Kendall suggests that, if the objecting creditors believe
that the settlement amount is too low, they should offer the estate
more for the claims. 	See In re Mickey Thompson Entertainment
Group, Inc., 292 B.R. 415, 421 (Bankr. 9 th Cir. 2003)(when third
party offers to purchase claims proposed to be compromised for more
than the compromise amount, proposed compromise should be analyzed
as a sale as well as a compromise). 	However, the Mickey Thompson
court made it clear that not every compromise of controversy must
be analyzed as a sale. 	See id. at 422 n.7.
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the proposed compromise. 	They argue that Kendall has not adequately
evaluated the merits of the various pieces of litigation.
The leading case setting forth the standards for approval of a
proposed compromise is In re A & C Properties, 784 F.2d 1377 (9 th Cir.
1986). 	The A & C Properties court held that, in determining whether
to approve a proposed compromise, the court must consider: “(a) the
probability 	of 	success 	in 	the 	litigation, 	(b) 	the 	difficulties, 	if
any to be encountered in the matter of collection; (c) the complexity
of the litigation involved, and the expense, inconvenience and delay
necessarily attending it; (d) the paramount interest of the creditors
and 	a 	proper 	deference 	to 	their 	reasonable 	views 	in 	the 	premises.”
Id. at 1381. 2
Kendall’s 	application 	addressed 	only 	the 	first 	and 	third 	of
these 	factors. 	He 	expressed 	no 	opinion 	on 	the 	difficulty 	of
collecting 	any 	judgment 	obtained 	by 	the 	estate 	against 	Burlingame.
He 	did 	not 	adequately 	address 	the 	paramount 	interest 	of 	the
creditors. 	He asserted that the proposed settlement would be in the
best interests of the estate but did not explain how he reached that
conclusion. 	In the Court’s view, the primary interest that would be
served is Kendall’s in that it would permit him to close the estate
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3As noted above, Kendall was appointed on October 6, 2006.
Although he did not file his application for approval of the
proposed compromise until November 28, 2006, he filed a notice of
possible dividend on October 29, 2006. 	Since this compromise is
the only identifiable source of a possible dividend at present, the
Court finds it likely that Kendall had decided to enter into the
compromise by that date.
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promptly. 	Moreover, 	the 	Court 	agrees 	that 	Kendall’s 	review 	of 	the
litigation proposed to be settled was necessarily cursory given its
complexity 	and 	the 	short 	time 	that 	elapsed 	between 	his 	appointment
and his decision to enter into the compromise. 3
The 	Court 	agrees 	with 	Kendall 	that 	the 	Debtor 	has 	an 	uphill
battle 	in 	prevailing 	on 	any 	of 	the 	litigation, 	that 	the 	issues 	are
numerous 	and 	complex, 	and 	that 	proceeding 	with 	the 	litigation 	will
likely 	result 	in 	a 	substantial 	delay 	in 	administering 	the 	case.
However, 	the 	Court 	does 	not 	believe 	that 	the 	Debtor’s 	chances 	of
prevailing on some or all of its claims are negligible. 	In view of
the 	amounts 	of 	the 	claims, 	the 	proposed 	settlement 	amount 	would 	be
appropriate only if the Court viewed the Debtor’s chances of success
as negligible.
Given 	the 	availability 	of 	counsel 	willing 	to 	handle 	the
litigation 	on 	a 	contingent 	fee 	basis, 	the 	expense 	to 	the 	estate 	of
continuing 	the 	litigation 	does 	not 	weigh 	heavily 	in 	the 	Court’s
consideration. 	Of greater weight is the unanimous opposition to the
settlement 	by 	creditors 	at 	various 	levels 	of 	priority, 	above 	all
Fitzpatrick, 	who 	would 	receive 	some 	payment 	if 	the 	compromise 	is
approved. 	The Court is unable to find that it would be in the best
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interests 	of 	the 	estate 	to 	approve 	a 	compromise 	under 	these
circumstances.
CONCLUSION
Kendall’s 	application 	for 	approval 	of 	the 	proposed 	global
settlement with Burlingame will be denied. 	Manasian is directed to
submit a proposed order in accordance with this decision.
END OF DOCUMENT
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COURT SERVICE LIST
Philip J. Nicholsen
Law Offices of Philip J. Nicholsen
601 Montgomery St. #777
San Francisco, CA 94111
Reidun Stromsheim
Law Offices of Stromsheim and Assoc.
201 California St. #350
San Francisco, CA 94111
Paul E. Manasian
Law Offices of Manasian and Rougeau
400 Montgomery St. #1000
San Francisco, CA 94104
Robert R. Moore
Allen Matkins Leck Gamble
Mallory & Natsis LLP
Three Embarcadero Center, 12 th Floor
San Francisco, CA 94111-4074
Adam Siegler
Siegler Law Group
9454 Wilshire Blvd., Ste. M-16
Beverly Hills, CA 90212
William C. Lewis
Law Offices of William C. Lewis
510 Waverley St.
Palo Alto, CA 94301-2009
Kirk B. Freeman
Law Offices of Kirk B. Freeman
214 Grant Ave., Ste. 301
San Francisco, CA 94108
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