Source: s3://data.kl3m.ai/documents/govinfo/USCOURTS/USCOURTS-cand-5_05-cv-01281/USCOURTS-cand-5_05-cv-01281-2/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)

---

1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

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

2 The Court has determined that the instant motion is appropriate for disposition

without oral argument pursuant to Civil Local Rule 7-1(b). 

Case No. C 05-01281 JF

ORDER DENYING MOTION TO DISMISS

(JFEX1)

 **E-filed 1/26/06**

NOT FOR CITATION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. 

_______________________________________

UNITED STATES VOTING 

MACHINES, INC.,

 Appellant,

 v.

JUDITH POWELSON,

 Respondent.

Case Number C 05-01281 JF

ORDER1 DENYING MOTION TO

DISMISS2

[Docket No. 24]

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

Case 5:05-cv-01281-JF Document 24 Filed 01/26/06 Page 1 of 8
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3 The amount in dispute is now $84,653.18; the increase reflects accumulated

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

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

# CV 663.

5

In September, 2004, Malpass’s individual California Chapter 13 case was

dismissed. 

2

Case No. C 05-01281 JF

ORDER DENYING MOTION TO DISMISS

(JFEX1)

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.3

Several months after 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 Judith Powelson (“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.4 Additional named defendants were the trustee of USVM’s

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 approaching state court proceeding in Colorado. Powelson filed a

claim in the California 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 court.5

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

Case 5:05-cv-01281-JF Document 24 Filed 01/26/06 Page 2 of 8
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

3

Case No. C 05-01281 JF

ORDER DENYING MOTION TO DISMISS

(JFEX1)

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. 

The Bankruptcy Court also directed Wu to return to the Colorado state court the funds that she

obtained from that court. 

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

Colorado funds to the Colorado state court. The Colorado state court proceeding, in which

Powelson seeks to recover on the promissory note from Malpass, remains pending. 

On December 12, 2005, Powelson filed a motion to dismiss USVM’s notice of appeal as

moot. On December 29, 2005, USVM filed opposition. The Court was scheduled to hear oral

argument on January 13, 2006. On January 10, 2006, prior to oral argument, the parties filed a

stipulation to continue the hearing on Powelson’s motion to dismiss to February 17, 2006. 

However, the parties did not seek leave of the Court to continue the motion. 

Case 5:05-cv-01281-JF Document 24 Filed 01/26/06 Page 3 of 8
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

4

Case No. C 05-01281 JF

ORDER DENYING MOTION TO DISMISS

(JFEX1)

For the reasons set forth below, Powelson’s motion to dismiss will be denied.

II. DISCUSSION

Powelson argues that the issues on appeal are necessarily moot because USVM never

sought a stay of the portion of the Bankruptcy Court’s order directing Wu to return the Colorado

funds to the Colorado state courts, and that because Wu in fact returned the Colorado funds, there

no longer is an estate to administer. 

This Court has jurisdiction over the instant case under 28 U.S.C. § 1334(e). Section

1334(e) provides in pertinent part that, “The district court in which a case under title 11 is

commenced or is pending shall have exclusive jurisdiction of all the property, wherever located,

of the debtor as of the commencement of such case, and of property of the estate.” 28 U.S.C.A. 

§ 1334(e) (West Supp. 2005). 

There are two somewhat overlapping ways by which bankruptcy appeals may become

moot. Focus Media, Inc. v. Nat’l Broad. Co. (In re Focus Media, Inc.), 378 F.3d 916, 922 (9th

Cir. 2004). First, “an appeal will be dismissed as moot when events occur which prevent the []

court from granting an effective relief. . . .” Bennett v. Gemmill (In re Combined Metals

Reduction Co.), 557 F.2d 179, 187 (9th Cir. 1977); see Church of Scientology v. United States,

506 U.S. 9, 12 (1992) (holding that mootness applies when an event occurs while a case is

pending appeal that makes it impossible for the court to grant any effectual relief). For example,

when a trustee has already sold assets to a third party, a court may be powerless “to undo what

has already been done.” In re Focus Media, Inc., 378 F.3d at 922-23 (quoting In re Combined

Metals Reduction Co., 557 F.2d at 187). However, “[t]he party asserting mootness has a heavy

burden to establish that there is no effective relief remaining for a court to provide.” In re Focus

Media, Inc.), 378 F.3d at 923 (quoting Pintlar Corp. v. Fid. & Cas. Co. (In re Pintlar Corp.), 124

F.3d 1310, 1312 (9th Cir. 1997)). 

Second, an appeal may become equitably moot when appellants “failed and neglected

Case 5:05-cv-01281-JF Document 24 Filed 01/26/06 Page 4 of 8
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

5

Case No. C 05-01281 JF

ORDER DENYING MOTION TO DISMISS

(JFEX1)

diligently to pursue their available remedies to obtain a stay of the objectionable orders of the

Bankruptcy Court and have permitted such a comprehensive change of circumstances to occur as

to render it inequitable for th[e] court to consider the merits of the appeal.” Trone v. Roberts

Farms, Inc. (In re Roberts Farms, Inc.), 652 F.2d 793, 795, 798 (9th Cir. 1981) (concluding that

dismissal for mootness was appropriate because “[a]ppellants did not at any time apply to the

bankruptcy judge for a stay . . . .”); see Valley Nat’l Bank of Ariz. v. Trustee, 609 F.2d 1274,

1283 (9th Cir. 1979) (finding that failure to seek stays coupled with a substantial change of

circumstances justified dismissal of the appeal for lack of equity). For instance, in S.S. Retail

Stores Corp. v. Ekstrom (In re S.S. Retail Stores Corp.), 216 F.3d 882, 885 (9th Cir. 2000), the

Ninth Circuit held that it would be inequitable to force a law firm to disgorge fees awarded in

bankruptcy court when the appealing trustee failed to seek a stay and the firm had continued to

represent the debtor pursuant to the court’s orders.

In sum, an appeal is moot if events have occurred that make it either impossible or

inequitable for the court to fashion effective relief. Official Comm. of Unsecured Creditors v.

Henry Mayo Newhall Mem’l Hosp. (In re Henry Mayo Newhall Mem’l Hosp.), 282 B.R. 444, 450

(B.A.P. 9th Cir. 2002). Fashioning effective relief in the instant case would not be impossible. 

In re Roberts Farm, Inc., the court affirmed a dismissal for mootness of an appeal from an order

confirming a plan of reorganization, because the plan had been “so far implemented that it [was]

impossible to fashion effective relief for all concerned[.]” 652 F.2d at 797. Here, in contrast,

only a single transaction has been carried out. Fashioning effective judicial relief would hardly

require “putting Humpty Dumpty together again.” Baker & Drake, Inc. v. Pub. Serv. Comm’n of

Nevada (In re Baker & Drake, Inc.), 35 F.3d 1348, 1352 (9th Cir. 1994). To make possible the

relief USVM seeks, this Court only would have to return the Colorado funds to Wu, the USVM

Case 5:05-cv-01281-JF Document 24 Filed 01/26/06 Page 5 of 8
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

6

Case No. C 05-01281 JF

ORDER DENYING MOTION TO DISMISS

(JFEX1)

bankruptcy trustee. Because such a remedy would be within the Court’s authority, effective

relief is available to USVM. Accordingly, the instant appeal is not moot under the first type of

mootness. See Spirtos v. Moreno (In re Spirtos), 992 F.2d 1004, 1007 (9th Cir.1993) (holding

appeal not moot when court could order debtor to return to the estate post-confirmation

distributions of pension plan assets).

Neither is this Court persuaded that it should dismiss USVM’s appeal as equitably moot. 

As noted previously a court may dismiss an appeal on the ground of mootness is “when an

appellant [has] neglected to obtain a stay pending appeal and the rights of third parties have

intervened.” In re Spirtos, 992 F.2d at 1006. “The classic example of mootness in the

bankruptcy context is a case in which the debtor has failed to seek a stay of foreclosure and the

debtor’s property has been sold. The transfer to a third party precludes meaningful relief.” In re

Baker & Drake, Inc., 35 F.3d at 1351; see also In re Combined Metals Reduction Co., 557 F.2d

at 189 (dismissing as moot appeals from orders approving and confirming sales and leases made

to third parties not before the court). This case does not present such a situation because there

are no third parties affected by the appeal. 

It is USVM’s obligation to pursue with diligence all available remedies to obtain a stay of

execution of the objectionable order. See Valley Nat’l Bank of Ariz., 609 F.2d at 1283. 

However, its failure to do so has not created a situation in which it would be inequitable to

reverse the decision of the Bankruptcy Court. See id. An order compelling the Colorado state

court to return the Colorado funds would require only that the Colorado state court disgorge

money it received to Wu, USVM’s bankruptcy trustee; money that would then be distributed

pursuant to this Court’s final decree. See In re S.S. Retail Stores Corp., 216 F.3d at 884. 

Accordingly, the instant appeal is not moot based on equitable mootness.

Case 5:05-cv-01281-JF Document 24 Filed 01/26/06 Page 6 of 8
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

7

Case No. C 05-01281 JF

ORDER DENYING MOTION TO DISMISS

(JFEX1)

III. ORDER

Good cause therefore appearing IT IS HEREBY ORDERED that the motion to dismiss is

DENIED. 

DATED: January 25, 2006 

 

JEREMY FOGEL

United States District Judge

Case 5:05-cv-01281-JF Document 24 Filed 01/26/06 Page 7 of 8
1

2

3

4

5

6

7

8

9

10

11

12

13

14

15

16

17

18

19

20

21

22

23

24

25

26

27

28

8

Case No. C 05-01281 JF

ORDER DENYING MOTION TO DISMISS

(JFEX1)

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 24 Filed 01/26/06 Page 8 of 8