Billings, In re

• Decision Date: 27 January 1988
• Docket Number: No. 86-2279,86-2279
• Citation: 838 F.2d 405
• Parties: Bankr. L. Rep. P 72,181, 5 UCC Rep.Serv.2d 1259 In re Russell Fred BILLINGS and Julia Darlene Billings, Debtors. Russell Fred BILLINGS and Julia Darlene Billings, Appellants, v. AVCO COLORADO INDUSTRIAL BANK, Appellee.
• Court: U.S. Court of Appeals — Tenth Circuit

Page 405

838 F.2d 405

Bankr. L. Rep. P 72,181, 5 UCC Rep.Serv.2d 1259

In re Russell Fred BILLINGS and Julia Darlene Billings, Debtors Russell Fred BILLINGS and Julia Darlene Billings, Appellants, v. AVCO COLORADO INDUSTRIAL BANK, Appellee.

No. 86-2279.

United States Court of Appeals Tenth Circuit.

Jan. 27, 1988.

Edward I. Cohen, Denver, Colo., for appellants.

Richard D. Torpy of Torpy & Farrell, Englewood, Colo., for appellee.

Before LOGAN, SEYMOUR and ANDERSON, Circuit Judges.

LOGAN, Circuit Judge.

Russell Fred Billings and Julia Darlene Billings (debtors) appeal the order of the district court, 63 B.R. 717, affirming the bankruptcy court's denial of their motion pursuant to 11 U.S.C. Sec. 522(f) to avoid a lien held by Avco Colorado Industrial Bank (creditor), and affirming the bankruptcy court's denial of confirmation of debtors' Chapter 13 plan. The sole issue on appeal is whether the refinancing of a purchase money loan, by which the old note and security agreement were cancelled and replaced by a new note and security agreement, extinguished creditor's purchase money security interest in debtors' collateral, so that debtors may now avoid the lien and claim the collateral as exempt household goods. ¹

Debtors purchased furniture on credit from Factory Outlet Store, giving Factory a purchase money security interest in the furniture. Factory then assigned the obligation to creditor. Thereafter, at the request of debtors, who apparently were having trouble making the payments, creditor refinanced the obligation, reducing debtors' monthly installment payments from $105.50 to $58.00. The parties cancelled the old note and substituted therefor a new note and security agreement; this note extended the time for repayment and increased the interest rate. The back of the loan application stated that creditor would retain the purchase money security interest. Creditor took no additional collateral as security and loaned only an additional $9.67 to debtors. ²

Debtors made one payment under the new schedule and then filed for bankruptcy. They then moved, pursuant to 11 U.S.C. Sec. 522(f), to avoid creditor's lien on the furniture. Creditor objected to this avoidance, and to confirmation of the Chapter 13 plan, arguing that the goods were still secured by a purchase money security interest. After a hearing, the bankruptcy court found that debtors had not satisfied their burden of establishing that the parties intended the subsequent note to extinguish the original debt and purchase money security interest. The court rejected debtors' legal argument that refinancing automatically extinguishes a purchase money security interest. Accordingly, the court denied the motion to avoid the lien pursuant to Sec. 522(f) and denied confirmation of the debtors' plan. On appeal, the district court affirmed.

Section 522(f) of the Bankruptcy Code provides in part: "Notwithstanding any waiver of exemptions, the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled ... if such lien is ... a nonpossessory, nonpurchase-money security interest in any ... household furnishings [or] household goods...." 11 U.S.C. Sec. 552(f). Therefore, if the security interest held by creditor retains its status as a purchase money security interest despite the refinancing, then debtors may not avoid the security interest under Sec. 522(f).

The Bankruptcy Code does not define "purchase money security interest." For this definition, the courts have uniformly looked to the law of the state in which the security interest is created. See, e.g., Pristas v. Landaus of Plymouth, Inc., 742 F.2d 797, 800 (3d Cir.1984); In re Manuel (Roberts Furniture Co. v. Pierce ), 507 F.2d 990, 992-93 (5th Cir.1975). The Colorado Uniform Commercial Code defines "purchase money security interest" as follows:

"A security interest is a 'purchase money security interest' to the extent that it is:

(a) Taken or retained by the seller of the collateral to secure all or part of its price; or

(b) Taken by a person who by making advances or incurring an obligation gives value to enable the debtor to acquire rights in or the use of collateral if such value is in fact so used."

Colo.Rev.Stat. Sec. 4-9-107. This definition does not address the effect of refinancing on a purchase money security interest, and the Colorado state courts have not squarely faced the issue. In a different context, the Colorado Supreme Court has stated the general rule that: "the parties may, by giving a new note for an old one, thereby extinguish the original debt. Whether or not they do so depends upon various circumstances and their intent." Haley v. Austin, 74 Colo. 571, 223 P. 43, 45 (1924). From it we extrapolate the principle that under Colorado law the intent of the parties determines whether a refinanced debt will retain its purchase money character.

Other circuits, applying the same Uniform Commercial Code (U.C.C.) provisions of other states, have considered directly the effect of refinancing on a purchase money security interest. These circuits have come to differing conclusions. Some hold that refinancing a purchase money loan by paying off the old loan and extending a new one automatically extinguishes the purchase money character of the original loan. See Dominion Bank of Cumberlands v. Nuckolls, 780 F.2d 408, 413 (4th Cir.1985); In re Matthews (Matthews v. Transamerica Financial Services ), 724 F.2d 798, 800 (9th Cir.1984) (per curiam); In re Manuel, 507 F.2d at 993. Others hold that the purchase money status of a loan may survive refinancing. See Pristas, 742 F.2d at 801-02; First National Bank & Trust Co. v. Daniel, 701 F.2d 141, 142 (11th Cir.1983) (per curiam). The Tenth Circuit has not ruled on this issue.

Courts holding that refinancing automatically extinguishes the purchase money character of an obligation create an easily applied, bright line rule. To reach this result, they have relied on one or both of two rationales. Some have reasoned that a purchase money security interest simply cannot exist when collateral secures more than its purchase price. See, e.g., In re Manuel, 507 F.2d at 993 ("the purchase money security interest cannot exceed the price of what is purchased in the transaction wherein the security interest is created, if the vendor is to be protected despite the absence of filing"); In re Norrell (W.S. Badcock Corp. v. Banks ), 426 F.Supp. 435, 436 (M.D.Ga.1977); In re Krulik (McLemore v. Simpson County Bank ), 6 B.R. 443, 445-47 (Bankr.M.D.Tenn.1980); In re Mulcahy (Mulcahy v. Indianapolis Morris Plan Corp.), 3 B.R. 454, 457 (Bankr.S.D.Ind.1980). Cf. Southtrust Bank of Alabama v. Borg-Warner Acceptance Corp., 760 F.2d 1240, 1242-43 (11th Cir.1985) (purchase money lender's exercise of after-acquired property and future advance clauses in security agreements transformed purchase money security interest into ordinary security interest). Other courts view the refinancing transaction as creating a new loan to pay off an "antecedent debt." The Official Commentary to the U.C.C. states that security interests for antecedent debts cannot be purchase money security interests:

"When a purchase money interest is claimed by a secured party who is not a seller, he must of course have given present consideration. This Section therefore provides that the purchase money party must be one who gives value 'by making advances or incurring an obligation:' the quoted language excludes from the purchase money category any security interest taken as security for or in satisfaction of a pre-existing claim or antecedent debt."

U.C.C. Sec. 9-107, Comment 2. Courts relying upon this approach include Matthews, 724 F.2d at 800-01; Nuckolls, 780 F.2d at 413; In re Faughn, 69 B.R. 18, 20-21 (Bankr.E.D.Mo.1986); and Rosen v. Associates Financial Services Co., 17 B.R. 436, 437 (D.S.C.1982). Some courts rely upon both rationales. See, e.g., In re Jones, 5 B.R. 655, 656-57 (Bankr.M.D.N.C.1980).

The problem with the first rationale--that the purchase money security interest cannot exist when collateral secures more than its purchase price--is that it ignores the precise wording of the Uniform Commercial Code. Section 9-107 of the U.C.C. provides that a security interest is a purchase money security interest "to the extent that" the loan enables the debtor to purchase new property. This language would be meaningless if an obligation could never be considered only partly a purchase money debt. See Pristas, 742 F.2d at 801; Geist v. Converse County Bank, 79 B.R. 939, 942 (D.Wyo.1987); In re Russell (Russell v. Associates Financial Services Co. of Oklahoma, Inc.), 29 B.R. 270, 273 (Bankr.W.D.Okla.1983); Stevens v. Associates Financial Services, 24 B.R. 536, 538 (Bankr.D.Colo.1982); In re Conn (Associates Finance v. Conn ), 16 B.R. 454, 456-57 (Bankr.W.D.Ky.1982); In re Linklater (Bond's Jewelers, Inc. v. Linklater ), 48 B.R. 916, 919 (Bankr.D.Nev.1985); McLaughlin, "Add On" Clauses in Equipment Purchase Money Financing: Too Much of a Good Thing, 49 Fordham L.Rev. 661, 691-92 (1981); Note, Preserving the Purchase Money Status of Refinanced or Commingled Purchase Money Debt, 35 Stan.L.Rev. 1133, 1151-53 (1983). See also In re Matthews, 724 F.2d at 800 n. 3 ("[w]e do not reach the debtors' alternate contention that collateral cannot secure more than its own value without destroying the purchase money security interest. The weight of authority appears to be against the debtors on this point."). As the Third Circuit recently stated:

"By overlooking that phrase ['to the extent'], the 'transformation' courts adopt an unduly narrow view of the purchase-money security device. Their reasoning is inconsistent with the Commercial Code, which gives favored treatment to those financing arrangements on the theory they are beneficial both to buyers and sellers.

By contrast, acceptance of...