FOR THE NORTHERN DISTRICT OF CALIFORNIA
MICHAEL and GERALDINE No. 1-82-01379
BERING STRAITS NATIVE CORP.,
v. A.P. No. 1-89-0131
EDWARD M. WALSH, Trustee, et al.,
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
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
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.
Bering's logic in bringing this action is simple. While its lien may have been avoidable
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.
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
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 _______________________