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In re Gabriel Technologies Corporation

United States District Court, Ninth Circuit

August 30, 2013



WILLIAM H. ORRICK, District Judge.

On August 28, 2013, the Court heard argument on appellee's motion to dismiss this appeal of an order of the Bankruptcy Court of the Northern District of California. For the reasons discussed below, the Court GRANTS the motion to dismiss this appeal.


Appellant Qualcomm is a creditor of appellees, Gabriel Technologies Corporation and Trace Technologies, LLC (collectively "debtors"), following the award of $12.4 million dollars in attorney's fees and costs to Qualcomm in a lawsuit brought by the debtors alleging misappropriation of intellectual property and patent infringement in the United States District Court, Southern District of California. See Exhibit A to Reply Br., May 27, 2013 Order of Bankruptcy Court at 2. The award of attorney's fees as well as the adverse judgment against the debtors are on appeal to the Federal Circuit. Id.

Appellees filed voluntary bankruptcy petitions under Chapter 11 on February 14, 2013. See May 27, 2013 Order. The Bankruptcy Court granted the debtors' motion for joint administration. On April 3, 2013, Qualcomm Inc. filed a motion to convert the bankruptcy to Chapter 7 or to appoint a Chapter 11 trustee under 11 U.S.C. section 1112. See May 27, 2013 Order at 1. On May 27, 2013, the Bankruptcy Court for the Northern District of California issued its written decision denying Qualcomm's motion. Id. The Court noted that under section 1112, conversion must be "for cause" and that Qualcomm argued cause existed under section 1112(b)(4)(A), "substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation" and section 1112(b)(4)(B), "gross mismanagement of the estate." May 27, 2013 Order at 5. The Bankruptcy Court found:

Because the debtor has no tangible assets or realizable value and no operations, there has not been and is no "substantial" loss or diminution of the estate. Simply stated, there is nothing left to lose. The question then becomes whether accrual of fees of professionals employed by the Debtors and the Committee, and the possibility of additional Delaware state taxes, amount to the type of "continuing loss" that Congress had in mind to trigger the nearly mandatory conversion, dismissal or chapter 11 trustee options ยง 1112(b)(1) contemplates.

Id. As to that question, the Court concluded:

Perhaps from an accounting perspective (profit and loss), such accruals would constitute such losses. But the accrual of liabilities are not the same as the incurring of actual out-of-pocket losses, such as the dissipation of assets that diminishes the estate. Leaving the Debtors in possession of the chapter 11 estate is not risking some ever-diminishing pool of assets.

Id., at 5-6.[1] The Bankruptcy Court also noted that even if accrual of liabilities could constitute diminution of the estate, the Court was also required to determine how long that risk would exist. Id. at 6. In light of the recent filing of the petitions and the filing of a Plan, "[t]he accrual of liabilities (losses) will end soon, either with a confirmed joint plan or conversion to chapter 7, a point conceded by Debtors' counsel to be inevitable if confirmation is denied. Thus, even if there is any continuing loss at all, it will not be continuing very long at all." Id. at 6.[2]

As to "gross mismanagement of the estate, " the Court concluded that in absence of evidence that the managers of the debtors had actual conflicts or were actually mismanaging the estate, Qualcomm failed to demonstrate conversion was appropriate under section 1112(b)(4)(B). Id. at 6-7.

On July 2, 2013, Qualcomm filed a notice of appeal from the May 27, 2013 Order. Docket No. 1. The debtors have moved to dismiss that appeal, arguing that the May 27, 2013 Order is an interlocutory order that is not final or otherwise appealable to this Court. Qualcomm opposes that motion and argues that even if it should have sought leave to file an appeal, that its notice of appeal be treated as a request for leave to appeal.


Under 28 U.S.C. section 158(a), the district courts have jurisdiction to hear appeals from bankruptcy court of: (1) final judgments, orders, and decrees; (2) interlocutory orders and decrees issued under section 1121(d) of title 11; and (3) with leave of the court, from other interlocutory orders and decrees. In the Ninth Circuit, in order to determine when a bankruptcy dispute is final for appeal, courts apply the concept of "flexible finality, " which focuses upon whether the order affects substantive rights and finally determines a discrete issue. In re Belli, 268 B.R. 851, 854 (B.A.P. 9th Cir. 2001). Leave to appeal, under section 158(a)(3), is governed by standards set forth in 28 U.S.C. section 1292(b), including whether the "order on appeal involves a controlling question of law as to which there is a substantial ground for difference of opinion and whether an immediate ...

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