Memorandum of Decision Re: Constructive Trust

DO NOT PUBLISH This case disposition has no value as precedent and is not intended for publication. Any publication, either in print or electronically, is contrary to the intent and wishes of the court.
UNITED STATES BANKRUPTCY COURT
NORTHERN DISTRICT OF CALIFORNIA
In re ACCUPOST, INC.                                                                                   No. 98-13139      Debtor(s). ______________________________________/ JEFFRY G. LOCKE, Trustee,      Plaintiff(s),    v.                                                                                                           A.P. No. 99-1030 BEAR STATE ENTERPRISES, INC.,      Defendant(s). _______________________________________/
Memorandum
     Defendants in this adversary proceeding were successful plaintiffs in a state court action against the principals of debtor Accupost, Inc. The state court found that those principals had stolen a poster-making business from defendants and transferred it to Accupost. The state court imposed a constructive trust on all of Accupost's assets. As a result, all of Accupost's physical assets as well as a large amount of its cash were seized by defendants a few months before its Chapter 7 filing. In this adversary proceeding, the Chapter 7 trustee seeks avoidance of these transfers as a preference. Defendants have moved for summary judgment.      Constructive trusts are anathema to the bankruptcy process. In re Omergas Group, Inc., 16 F.3d 1443, 1452 (6th Cir.1994). This case is a perfect example of why this is so. The state court ruled:          Liabilities of Accupost. Plaintiffs [defendants in this case]are entitled          to the assets of Accupost but need not take control of Accupost. Plaintiffs          have expressly waived any interest in Accupost as an ongoing concern.          Consequently the liabilities of Accupost remain with the corporation.      The schedules of Accupost reveal numerous creditors who supplied Accupost with goods and services so that Accupost could earn the cash seized by defendants. Regardless of how much defendants may have been wronged, there is no equitable basis for making them whole at the expense of these innocent creditors.      Defendants are not correct in their assertion that any sort of collateral estoppel bars this action because the state court imposed a constructive trust on all of Accupost's assets. A constructive trust is a remedy, arising out of a debtor-creditor relationship. In re Golden Triangle Capital, Inc., 171 B.R. 79 (9th Cir. BAP 1994); In re Advent Management Corp., 178 B.R. 480, 486 (9th Cir.BAP 1995). It is entirely inchoate prior to its imposition. In re Markair, Inc., 172 B.R. 638, 642 (9th Cir.BAP 1994). As such, it is no less avoidable than any other remedy granted to a creditor by a state court.      If the state court had made detailed findings that specific items of property had been stolen from defendants, this court would certainly honor those findings as being dispositive as to whether Accupost had an interest in the property. Debtors have no legitimate interest in stolen property, and its recovery cannot be avoided as a preference.      However, the state court made no such specific findings. Instead, it imposed a constructive trust on all of Accupost's property, including property which may have been taken from defendants, property which Accupost may have already had, cash earned with the credit extended by creditors, and even property coming from sources which might have had nothing whatsoever to do with defendants. Because the state court made no such detailed findings, and failed to identify what assets of Accupost were wrongly taken from defendants, the prepetition imposition of a constructive trust does not establish as a matter of res judicata that all of the property seized was not property of the estate.      Stated another way, property stolen from defendants is not recoverable as a preference because there never was a transfer; the imposition of a constructive trust was merely a recognition of true ownership. However there was a transfer if, before imposition of the constructive trust, defendants had never been the actual owners of the property.      For the foregoing reasons, this court must hold a trial to determine which property seized by defendants was property of the estate and which had been stolen from defendants. Recovery of the latter will not be avoided, but transfers of the former will be avoided in order to do equity to the creditors of Accupost, who were not represented at the state court trial. Defendants' motion for summary judgment will accordingly be denied. Either side may submit an appropriate form of order.
Dated: July 25, 1999                                                                        ____________________________                                                                                                             Alan Jaroslovsky                                                                                                             United States Bankruptcy