Memorandum of Decision Re: Constructive Trust Claims

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re JERRY and SUSAN HARRIS,                                         No. 587-06773M      Debtors. ___________________________/ SANDRA HARRIS EBSEN,      Plaintiff,    v.                                                                                  A.P. No. 890309 JERRY L. HARRIS, et al.,      Defendants. ______________________________/
Memorandum of Decision
     The complaint in this adversary proceeding seeks to impose trusts on estate real and personal property. Despite the unlikelihood that plaintiff will prevail, the complaint is sufficient to survive defendant's motion to dismiss pursant to FRCP 12(b)(6).      As to the real property in question, plaintiff is dead wrong in arguing that section 544(a)(3), which gives the bankruptcy estate the rights of a bona fide purchaser, is not applicable because the real property is excluded from the estate by section 541(d). As the court explained in Matter of Elin (D.N.J. 1982) 20 B.R. 1012, 1016:
       The fallacy of plaintiff's position lies in        a misreading of section 541. Three sections of the        Act must be read together -- Section 541, section        551, and section 544 .... Section 541(a)(4) provides        that as estate is compromised of "[a]ny interest in        property preserved for the benefit of or ordered        transferred to the estate under section ... 551".        Section 551 provides that "[a]ny transfer avoided        under section ... 544 ... is preserved for the benefit        of the estate but only with respect to property of the        estate". Thus, section 541, and section 551 which        is incorporated by reference, bring within the debtor's        estate property recoverable pursuant to section 544.        (Emphasis added).
     In this circuit, the notion that section 541 can be used to defeat the trustee's rights under section 544(a)(3) was scotched in In re Tleel (9th Cir.B.A.P.1987) 79 B.R. 883 aff'd 876 F.2d 769.      However, it is at least possible that plaintiff could prevail if she can show a prepetition cloud on title (In re Gurs (9th Cir. BAP 1983) 27 B.R. 163) or some physical condition of the property which would put a purchaser on notice of her claim (In re Galino (9th Cir.1985) 779 F.2d 546, 550). While plaintiff must show one of these to prevail in this action, her complaint is not fatally defective for failure to so plead. See 27 Fed.Proc.L.Ed., Pleadings & Motions, section 62:468.      Section 544 gives the bankruptcy estate a somewhat weaker argument as to the personal property, as the estate has only the rights of a judicial lien creditor, and not a good faith purchaser for value, as to personal property. Nonetheless, plaintiff faces an uphill battle in asserting her trust arguments even here, as the trusts would deprive other creditors of a source of repayment. Equitable relief will not be granted to a litigant, even if the facts might justify the relief, where such relief would be inequitable to other innocent parties. In re Foam Systems Co. (9th Cir. BAP 1988) 92 B.R. 406, 409. However, as noted above, the unlikelihood of obtaining the requested relief does not render the complaint subject to dismissal under Rule 12(b)(6).      For the foregoing reasons, the motion to dismiss will be denied. Counsel for plaintiff shall submit an appropriate form of order.
Dated: November 2, 1989                                                                                  _______________________                                                                                                                            Alan Jaroslovsky                                                                                                                            U.S. Bankruptcy