Memorandum of Decision Re: Preferences

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re DONALD and SHARON LOWERY,                                       No. 1-88-01410      Debtors. ___________________________/ RAYMOND CAREY, Trustee,      Plaintiff,    v.                                                                                           A.P. No. 1-89-0252 NORMA SPENCER, Executrix of the Estate of Anthony Kryla,      Defendant. ______________________________/
Memorandum of Decision
     There are no disputed issues of fact in this matter. Defendant is a judgment creditor of the debtors. More than 90 days before the bankruptcy, she attempted to levy on a note secured by a deed of trust in which the debtors were the obligees. The sheriff was informed when he attempted to seize the note that it was lost, and so never took possession of it. However, the payments due from the obligor were seized. The complaint in this matter seeks to recover the payments seized within 90 days before bankruptcy as preferences and the payments made after bankruptcy as unauthorized postpetition transfers. It also seeks a declaration that the note is property of the bankruptcy estate, and that defendant has no interest in it. Solvency is not an issue; the case is accordingly ripe for summary adjudication.      Legal issues have arisen in this case because the procedure for levying on an account receivable or general intangible (Cal. Code of Civil Procedure sec. 700.170) was used in an attempt to levy on a note. If we were dealing with payments due under a contract obligation other than a note, then the date of the levy, and not the date of the seizure by the sheriff, would determine if the transfer to defendant was within the 90-day preference period. In re Momentum Computer Systems International, 66 B.R. 512, 515 (N.D.Cal.1986). However, C.C.P. section 700.170, which makes a levy effective upon notice to the account debtor, is by its own terms inapplicable if California law provides for another method of levy. Section 700.110 provides that levy on an instrument is made by taking possession of the instrument. Under California law, a note secured by a deed of trust is an instrument. In re Staff Mortgage & Inv. Corp., 625 F.2d 281, 283 (9th Cir.1980).      Under sections 547(e)(1) and (2) of the Bankruptcy Code, a transfer is not deemed made until the transferee obtains rights which cannot be overcome by a bona fide purchaser from the debtor; if the transferee never obtained such a perfected interest, the transfer is deemed made immediately before the commencement of the case. Since defendant here never obtained possession of the note, her rights in the payments were subject to being cut off by a good faith purchaser of the note up until the time she actually received the payments, which was within the preference period. Since she never perfected any interest in the note itself, its transfer is deemed to have occurred immediately before the bankruptcy, and hence within the preference period. Therefore, all of the payments she received within 90 days are recoverable by the trustee, and any interest she had in the note itself is avoidable. It further follows that defendant had no rights whatsoever in the postpetition payments.      Defendant's argument that the requirement of possession is not applicable because the note was lost is not availing. California Civil Code section 3415 gave defendant the right to compel the issuance of a replacement note, which she could have taken possession of. Perfection of her interest was therefore not, as 1she asserts, impossible.      For the foregoing reasons, summary judgment shall be granted in favor of plaintiff. Counsel for plaintiff shall submit an appropriate form of judgment, which counsel for defendant has approved as conforming to this decision.
Dated: July 1, 1990                                                                              _______________________                                                                                                                      Alan Jaroslovsky                                                                                                                      U.S. Bankruptcy Judge
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1. It may well be that the debtor lied to avoid levy, and the note is not really lost. Even if this is the case defendant cannot prevail, as the debtor's wrongdoing may not be imputed to the estate so as to bar exercise of the trustee's avoiding powers. Matter of Intern. Gold Bullion Exchange, Inc., 60 B.R. 261, 263 (Bkrtcy.S.D.Fla.1