Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_05-cv-01281/USCOURTS-cand-5_05-cv-01281-8/pdf.json

Nature of Suit Code: 422
Nature of Suit: Bankruptcy Appeals Rule 28 USC 158
Cause of Action: 28:0158 Notice of Appeal re Bankruptcy Matter (BAP)

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28 This disposition is not designated for publication and may not be cited. 1

Case No. C 05-01281 JF

ORDER AFFIRMING ORDER OF THE BANKRUPTCY COURT

(JFLC3)

**E-filed 12/06/07**

NOT FOR CITATION

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF CALIFORNIA

SAN JOSE DIVISION

In re:

UNITED STATES VOTING MACHINES, INC.,

 Debtor.

Case Number C 05-01281 JF

ORDER AFFIRMING ORDER OF THE 1

BANKRUPTCY COURT

[re: docket no. 62]

UNITED STATES VOTING MACHINES, INC.,

 Appellant,

 v.

JUDITH POWELSON,

 Respondent.

 

Appellant United States Voting Machines, Inc., (“USVM”) appeals an order of the 

Bankruptcy Court granting the motion of Respondent Judith Powelson (“Powelson”) to dismiss

the underlying bankruptcy proceeding. For the reasons stated below, this Court will affirm the

order of the Bankruptcy Court.

Case 5:05-cv-01281-JF Document 68 Filed 12/06/07 Page 1 of 8
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The amount in dispute is now $84,653.18; the increase reflects accumulated 2

interest. This amount is hereinafter referred to as the Colorado funds. 

Powelson v. Weinman, Malpass et al., Boulder (Colorado) County District Court 3

# CV 663.

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Case No. C 05-01281 JF

ORDER AFFIRMING THE DECISION OF THE BANKRUPTCY COURT

(JFLC3)

I. BACKGROUND

In 1996, United States Voting Machines, Inc. (“USVM”), a Colorado business venture,

filed for corporate bankruptcy in the District Court of Colorado under Chapter 7 of the

Bankruptcy Code, 11 U.S.C. § 701 et seq. (“Chapter 7"). A trustee was appointed to liquidate the

company’s assets. Kenneth Malpass (“Malpass”), USVM’s chief executive officer and 93%

owner, filed a claim for unpaid wages in that case. After liquidating USVM’s assets and paying

all creditors, the trustee of USVM’s Colorado bankruptcy estate had $79,000 remaining.2

Several months later Malpass himself filed for bankruptcy protection under Chapter 13 of

the Bankruptcy Code, 11 U.S.C. § 1301 et seq. (“Chapter 13"). On October 20, 2004, Malpass’s

individual bankruptcy case was dismissed. On May 23, 1997, while USVM’s Colorado

bankruptcy was pending, Malpass individually executed a promissory note for $250,000 in favor

of Powelson in connection with another business venture. The note was secured with Malpass’s

interest in USVM’s Colorado bankruptcy estate and other proceeds of litigation.

In 1999, Powelson commenced a state court action against Malpass in Boulder, Colorado,

to recover on the promissory note. Additional named defendants were the trustee of USVM’s 3

bankruptcy estate and Mark Voting Systems, an entity that acquired the assets from the USVM

bankruptcy. The trustee of USVM’s bankruptcy estate agreed to relinquish the Colorado funds in

his possession to the Colorado state court and was dismissed from the state court litigation.

On February 24, 2003, Malpass filed another Chapter 13 petition in this district, which

filing automatically stayed the pending state court proceeding in Colorado. Powelson filed a

claim in the California bankruptcy case and sought relief from the automatic stay in order to

resume litigation in Colorado and to recover the funds in the possession of the Colorado state

Case 5:05-cv-01281-JF Document 68 Filed 12/06/07 Page 2 of 8
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In September, 2004, Malpass’s individual California Chapter 13 case was 4

dismissed. 

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Case No. C 05-01281 JF

ORDER AFFIRMING THE DECISION OF THE BANKRUPTCY COURT

(JFLC3)

court.

4

On October 28, 2003, one day before the hearing on Powelson’s motion for relief from the

automatic stay, Malpass filed a second corporate Chapter 7 bankruptcy case on behalf of USVM

in this district, disputing Powelson’s claim for the Colorado funds. On or about February 1, 2004,

Carol Wu (“Wu”), the trustee of USVM’s estate in the California Chapter 7 case, gained

possession of the Colorado funds previously in possession of the state court in Colorado. On or

about February 10, 2004, Powelson commenced litigation against Wu in this district, asserting

various rights in the funds. 

On January 6, 2005, United States Bankruptcy Judge Marilyn Morgan dismissed USVM’s

California Chapter 7 bankruptcy case pursuant to the Bankruptcy Code, 11 U.S.C. § 707(a). 

The Bankruptcy Court held that:

Based on a totality of the circumstances, the court concludes that

dismissal of USVM’s petition is appropriate. This is essentially a

two party dispute. . . . [T]he reasonable inference of the facts . . . is

that the Colorado chapter 7 trustee relinquished possession of the

funds to the state court because the funds either belong to Malpass

on his wage claim in USVM’s earlier bankruptcy case or should go

to Powelson in her state court suit on the note. In effect, the

Colorado trustee recognized that the funds were distributable to

Malpass but left to the state court the question of whether Malpass

or Powelson had the right to receive the funds under the note. 

Further, the continuation of this case simply delays the resolution of

the dispute between Malpass and Powelson and wastes precious

judicial resources by requiring this court to enter a dispute that is

already being litigated in Colorado. In light of these unique factual

circumstances, dismissal is appropriate. 

In re United States Voting Machines, Inc., C-03-56975 MM, slip op. a 4-5 (Bankr. N.D. Cal.

January 6, 2005) (“Bankruptcy Court Decision”) The Bankruptcy Court also directed Wu to

return to the Colorado state court the funds that she obtained from that court. Id. at 5.

On March 11, 2005, USVM moved for reconsideration of the dismissal, which was denied

on March 14, 2005. On March 30, 2005, USVM filed notice of the instant appeal. USVM did not

request a stay of the Bankruptcy Court’s order directing Wu to return the Colorado funds to the

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Case No. C 05-01281 JF

ORDER AFFIRMING THE DECISION OF THE BANKRUPTCY COURT

(JFLC3)

Colorado state court. As a result, on May 18, 2005, Wu returned the funds. The Colorado court

subsequently dispersed the funds to Powelson and another creditor. Respondent’s Brief at 8.

USVM filed its notice of appeal on March 30, 2005. Following briefing, which was

delayed pending the outcome of the Colorado case, the Court heard oral argument on November

30, 2007. 

II. LEGAL STANDARD

The District Court reviews the Bankruptcy Court's findings of fact for clear error and its

conclusions of law de novo. See In re Lazar, 83 F.3d 306, 308 (9th Cir.1996); see also Fed. R.

Bankr.P. 8013 (“Findings of fact ... shall not be set aside unless clearly erroneous, and due regard

shall be given to the opportunity of the bankruptcy court to judge the credibility of the

witnesses.”). “A finding of fact is clearly erroneous when after reviewing the evidence we are left

with the definite and firm conviction that a mistake has been committed.” In re Arnold and Baker

Farms, 177 B.R. 648, 653 (9th Cir.BAP1994).

III. DISCUSSION

On appeal, USVM argues that the Bankruptcy Court erred in finding that the Chapter 7

action should be dismissed “for cause” pursuant to Bankruptcy Code § 707(a). USVM argues

additionally that Powelson lacked standing to bring the motion to dismiss.

A. § 707(a): for “cause” 

Section 707(a) states:

(a) The court may dismiss a case under this chapter only after notice and a hearing and 

only for cause, including-

(1) unreasonable delay by the debtor that is prejudicial to creditors;

(2) nonpayment of any fees or charges required under chapter 123 of title 28; and

(3) failure of the debtor in a voluntary case to file, within fifteen days or such 

additional time as the court may allow after the filing of the petition commencing 

such case, the information required by paragraph (1) of section 521, but only on a 

motion by the United States trustee.

11 U.S.C. § 707(a).

The Bankruptcy Court relied upon In re Padilla, 222 F.3d 1184 (9th Cir. 2000) in

determining of whether to dismiss the bankruptcy action pursuant to § 707(a). “Padilla

prescribes a two-part inquiry: First, the court must consider whether the circumstances asserted to

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Padilla was superseded by statute enacted April 20, 2005. Pursuant to the Bankruptcy 5

Abuse Prevention and Consumer Protection Act (BAPCPA) which specifically lists a bad-faith

petition example of abuse as warranting dismissal of Chapter 7 case, the bankruptcy court may

now dismiss a case under the statute governing dismissal or conversion of Chapter 7 cases even

if the Bankruptcy Code provides another remedy for debtor’s “bad faith” acts. See In re

Mitchell, 357 B.R. 142, 154 n.11 (C.D.Cal. 2006) (“Before the enactment of the BAPCPA in

Neary v. Padilla (In re Padilla), the Ninth Circuit concluded that ‘bad faith as a general

proposition does not provide “cause” to dismiss a Chapter 7 petition under § 707(a)’ because

Chapter 7 did not specifically include a requirement of “good faith” as do Chapters 11 and 13. 

However in light of the addition of § 707(b)(3) to the Bankruptcy Code, a debtor’s bad faith now

clearly constitutes grounds for dismissal of a Chapter 7 case.”)

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Case No. C 05-01281 JF

ORDER AFFIRMING THE DECISION OF THE BANKRUPTCY COURT

(JFLC3)

constitute ‘cause’ are ‘contemplated by any specific Code provision applicable to Chapter 7

petitions.’ If the asserted ‘cause’ is contemplated by a specific Code provision, then it does not

constitute ‘cause’ under § 707(a). If, however, the asserted ‘cause’ is not contemplated by a

specific Code provision, then we must further consider whether the circumstances asserted

otherwise meet the criteria for ‘cause’ for discharge under § 707(a).” In re Sherman, 491 F.3d

948, 969 (9th Cir. 2007)(citations omitted). 

Powelson moved to dismiss the bankruptcy action as a “bad faith” claim pursuant to §

707(a). The Bankruptcy Court, citing Padilla, held that the action could not be dismissed for “bad

faith” under § 707(a), but that it could be dismissed for “cause.” 

5 The Bankruptcy Court

purposefully looked to the totality of circumstances, noting that bad faith was not irrelevant to its

analysis. 

 USVM argues on appeal that the circumstances relied upon by the Bankruptcy Court for it

dismissal order in this case were insufficient. USVM argues that its case is similar to In re

Sherman, 491 F.3d at 948. In Sherman, the party moving to dismiss a Chapter 7 action for

“cause” pursuant to § 707(a) alleged, inter alia, that (1) the opposing party had used the

bankruptcy proceeding as a refuge from another court’s judgment, and (2) the bankruptcy filing

was part of a “scorched earth policy” (transferring funds from one creditor to another to avoid

payment to a third creditor.). Id. at 969. The Ninth Circuit held that each of these allegations

were covered by other Bankruptcy Code provisions, namely 11 U.S.C. § 362 and 11 U.S.C. § 547,

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Case No. C 05-01281 JF

ORDER AFFIRMING THE DECISION OF THE BANKRUPTCY COURT

(JFLC3)

respectively, and therefore, under the reasoning of Padilla, could not be considered pursuant to §

707(a). In re Sherman, 491 F.3d at 971-72. 

Powelson argued in support of her motion to dismiss that Malpass’s Chapter 7 action was

for the “sole purpose of thwarting Ms. Powelson’s efforts to collect the funds from the court in

Colorado,” and resulted in the transfer of funds from the Colorado court to the bankruptcy court.

USVM argues that the Bankruptcy Court’s reliance upon the of “totality of circumstances” simply

is another way of saying “bad faith built on shifting funds around and avoiding another court’s

jurisdiction by filing bankruptcy proceedings.”

However, it is clear from the review of the instant case the Bankruptcy Court did look to

the totality of circumstances. While observing that bad faith was not irrelevant to its analysis, the

Bankruptcy Court correctly held that bad faith alone even if established was insufficient to support

dismissal. The Bankruptcy Court carefully considered all of the evidence, including the evidence

from Malpass’s individual Chapter 13 case, and reasonably concluded that the case before it

essentially was a two-party dispute as to whether Malpass or Powelson had the right to receive the

funds under the note. The Bankruptcy Court further found that continuation of the USVM’s

bankruptcy case would waste precious judicial resources because it would require it to involve

itself in a dispute already being fully litigated in Colorado. The Bankruptcy Court thus did not

abuse its discretion in granting Powelson’s motion to dismiss.

B. Standing

 Alternatively, USVM asserts that because Malpass, not USVM, owed a debt to Powelson,

the Bankruptcy Court erred when it found that Powelson had standing to bring the action to

dismiss USVM’s Chapter 7 bankruptcy action. A party has standing as a creditor to challenge a

bankruptcy action if:

[The party can] demonstrate that “(1) it has suffered an ‘injury in fact’ that is (a)

concrete and particularized and (b) actual or imminent, not conjectural or

hypothetical; (2) the injury is fairly traceable to the challenged action of the

defendant; and (3) it is likely, as opposed to merely speculative, that the injury will

be redressed by a favorable decision.” 

In re Sherman, 491 F.3d at 957.

The Bankruptcy Code's definition of "creditor" includes an "entity that has a claim

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Case No. C 05-01281 JF

ORDER AFFIRMING THE DECISION OF THE BANKRUPTCY COURT

(JFLC3)

against the debtor that arose at the time of or before the order for relief concerning

the debtor."11 U.S.C. § 101(10)(A). . . . 

(A) right to payment, whether or not such right is reduced to judgment, liquidated,

unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal,

equitable, secured, or unsecured; or 

(B) right to an equitable remedy for breach of performance if such breach gives rise

to a right to payment, whether or not such right to an equitable remedy is reduced

to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured,

or unsecured. 

In re Sherman, 491 F.3d at 958.

 Here, the Bankruptcy Court’s decision implies that Malpass is USVM when it says that

“[t]his is essentially a two party dispute.” Bankruptcy Court Decision, slip op. at 4. The

Bankruptcy Court based that determination on its reading of the decision both in Malpass’s

individual Chapter 13 case and in USVM’s Colorado Chapter 7 case. In fact, Malpass is the CEO

and 93% owner of a bankrupt non-functioning company. Malpass’s wage claim is the only claim

to the sole remaining asset of USVM, the $79,000. Most importantly, the note to Powelson was

secured by Malpass’s interest in USVM’s Colorado bankruptcy estate and other proceeds of

litigation. The Bankruptcy Court’s implied factual determination that Malpass’s debt to Powelson

makes Powelson a creditor of USVM in these circumstances thus is not clearly erroneous.

III. ORDER

 Good cause therefor appearing, IT IS HEREBY ORDERED that the order of the

Bankruptcy Court is AFFIRMED.

IT IS SO ORDERED. 

DATED: December 6, 2007

______________________

JEREMY FOGEL

United States District Court

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Case No. C 05-01281 JF

ORDER AFFIRMING THE DECISION OF THE BANKRUPTCY COURT

(JFLC3)

This Order has been served upon the following persons:

Mariam S. Marshall, mariam_m@pacbell.net, 

Philip J. Nicholsen, nicholsenlaw@yahoo.com, 

Starrett Paul, paul@starrettlaw.com, 

Richard Seim, mail@seimr.com, 

Nanette Dumas 

Office of the U.S. Trustee

280 S 1st St. #268

San Jose, CA 95113-0002

Marilyn Morgan

US Bankruptcy Court

280 Sourt First Street

Room 3035

San Jose, CA 95113

USBC Manager-San Jose

US Bankruptcy Court

280 South First Street

Room 3035

San Jose, CA 95113

Case 5:05-cv-01281-JF Document 68 Filed 12/06/07 Page 8 of 8