Memorandum of Decision Re: Assertion of Avoidability Against Claim

FOR THE NORTHERN DISTRICT OF CALIFORNIA In re MICHAEL and GERALDINE                                                                                  No. 1-82-01379 FERRANTE,      Debtors. ___________________________/ BERING STRAITS NATIVE CORP., et al.,      Plaintiffs,    v.                                                                                                                           A.P. No. 1-89-0131 EDWARD M. WALSH, Trustee, et al.,      Defendants. ______________________________/
Memorandum of Decision
     On September 13, 1982, plaintiff Bering Straits Native Corporation alleges that it obtained a judgment lien on the debtors' residence by recording an abstract of judgment. Thirty-nine days later, on October 22, 1982, the debtors filed their Chapter 11 petition.      During the Chapter 11 proceedings a trustee was appointed and his liquidating Chapter 11 plan was confirmed. Pursuant to that plan and a stipulation between Bering and the trustee, the debtors' residence was sold back to the debtors on September 4, 1984. Bering's lien attached to the proceeds of the sale.      According to the complaint, the trustee did not honor the stipulation. Without taking any action to avoid Bering's lien, the trustee distributed the proceeds of the sale to other creditors. On May 3, 1989, Bering made formal demand on the trustee, and upon learning what had happened filed this adversary proceeding against the estate, the trustee personally, and the trustee's bond.      Now before the court are motions to dismiss made by the bonding company and the estate. The court addresses each motion separately.
Bonding Company Motion

     The bonding company makes its motion to dismiss on the grounds that the four-year statute of limitations which it says is applicable has run. Without deciding if that is the proper limitations period, this motion must be denied because the bonding company started counting on the wrong date.      The bonding company alleges that the cause of action accrued when the property was sold on September 4, 1984. However, the complaint does not allege when the trustee breached the stipulation. The cause of action accrued when the stipulation was breached, not when the sale was consummated. For all the court knows, the funds could have been held properly until May of 1989. Having failed to demonstrate that four years have passed since the stipulation was breached, the bonding company is not entitled to a summary dismissal.
Estate Motion

     Bering's logic in bringing this action is simple. While its lien may have been avoidable as a preference, it was not void. Pursuant to section 546(a)(1) of the Bankruptcy Code, the trustee had only two years from the date of his appointment to avoid the lien. Having failed to do so, Bering's lien is now unassailable and it has been damaged by the trustee's failure to honor it.      While Bering's argument is certainly logical, it does not lead a court of equity to a very palatable result. Unless the court reaches the unlikely conclusion that the debtors were solvent a mere 39 days before their bankruptcy, ruling in Bering's favor gives it a complete windfall and rewards it for remaining silent for five years while the trustee's statute of limitations ran. The court would much rather avoid this result and instead deal with the trustee's breach of the stipulation by an appropriate sanction.      Fortunately, the law is not as simple as Bering urges. There is a long line of cases holding that the statute of limitations as to avoidance actions applies only to affirmative actions by the trustee to recover money or property from the transferee, and does not bar the trustee from asserting avoidability to defeat a claim of the transferee. See Matter of Mid Atlantic Fund, Inc. (Bkrtcy. S.D.N.Y.1986) 60 B.R. 604, 610, and cases therein cited. The court is convinced that Bering is entitled to the funds only to the extent it has an allowable secured claim, and that the estate may assert avoidablity as a defense notwithstanding section 546(a)(1).

     The above analyses do not necessarily mean that Bering loses. If it can show that its judgment lien was not in fact a preference, then it will prevail unless barred by an applicable statute of limitations. Since there is a possibility Bering can prevail, the motions to dismiss must be denied.      The court notes that one crucial fact has not been addressed by either side. Under California law as it existed in 1982, an abstract of judgment created no lien at all on homesteaded property, even as to any excess equity over and above the homestead amount. Swearington v. Byrne(1977) 67 Cal.App.3d 580, 584-85. Thus, if the debtors had recorded a declaration of homestead on the subject property prior to September 13, 1982, then Bering never had a lien and there is nothing to even avoid.      Counsel for Bering shall submit a form of order denying the motions to dismiss.
Dated: September 3, 1989                                                                                  _______________________                                                                                                                            Alan Jaroslovsky                                                                                                                            U.S. Bankruptcy