In re Hansen, Bankruptcy No. 87-01450S
| Decision Date | 01 April 1988 |
| Docket Number | Bankruptcy No. 87-01450S,Contested No. 71345. |
| Parties | In re Marian HANSEN dba Farmer, Debtor. |
| Court | U.S. Bankruptcy Court — Northern District of Iowa |
Donald H. Molstad, Sioux City, Iowa, for debtor.
Wilford L. Forker, Sioux City, Iowa, trustee.
Martin McLaughlin Asst. U.S. Atty., Sioux City, Iowa.
MEMORANDUM AND ORDER Re: Avoidance of Liens
The matter before the Court is Marian Hansen's (Debtor) Motion to Avoid the Farmers Home Administration's (FmHA) Liens on certain property claimed exempt pursuant to Iowa Code § 627.6(12) (1987). The Court, having reviewed the evidence and arguments of counsel, now makes the following Findings of Fact, Conclusions of Law, and Orders pursuant to Fed.R. Bankr.P. 7052. This matter is a core proceeding under 28 U.S.C. § 157(b)(2)(B) and (O).
The Debtor filed a petition for relief under Chapter 7 on June 24, 1987. The Debtor is a farmer. The Debtor seeks to avoid the FmHA's lien in the following property:
The parties agree that the FmHA had a valid pre-enactment lien in all items of pre-1978 machinery except as those noted. The Debtor and the FmHA have executed a number of notes and security agreements. The nature of the pertinent notes are summarized as follows:
Date Pymts Int. Face Amount Disposition Borrower
4/28/1978 8 8% $ 4,500 Consolidated Earland/Marian
3/28/1979 6 8½% $ 11,100 Consolidated
6/29/1983 8 7¼% $ 13,052.05 Consolidation Marian
of 4/28/78 &
3/28/79 loans
9/11/1985 9 7¼% $ 14,620.94 Rescheduling Marian
of the 6/29/83
note
4/01/1977 7 5% $ 5,300.00 Rescheduled Earland/Marian
6/29/1983 8 3% $ 3,671.26 Rescheduling Marian
of 4/1/77 loan
9/11/1985 8 3% $ 3,855.25 Rescheduling Marian
of 6/29/83 loan
The note dated June 29, 1983 is marked consolidation and it indicates that it consolidated the April 28, 1978 and the March 28, 1979 loans. The June 29, 1983 operating loan contains the following language:
If "Consolidation and subsequent loan," "Consolidation," Rescheduling," or "Reamortization" is indicated in the "Action Requiring Note" block above, this note is given to consolidate, reschedule or reamortize, but not in satisfaction of the unpaid principal and interest on the following described note(s) or assumption agreements(s) (new terms): (emphasis added)
The June 29, 1983 EM loan also contains the same language and indicates that it is a rescheduling of a loan of April 1, 1977.
The parties stipulated that the Debtor financed and acquired the John Deere tractor through the State Savings Bank of Sloan (Bank) in the spring of 1979. On March 28, 1979, the Debtor signed a promissory note to the FmHA incurring an obligation to repay the FmHA $11,100. The Debtor then applied part of the loan proceeds to pay off the indebtedness with the Bank. The parties stipulate that the security interest of the Bank was not assigned to the FmHA as a part of this transaction.
The Debtor contends pursuant to Iowa Code § 554.9107 the FmHA is not a purchase money security interest holder and the lien on the John Deere tractor can be avoided under 11 U.S.C. § 522(f) since it constitutes a non-possessory, non-purchase money security interest in an exempt asset. The FmHA, however, contends that pursuant to Iowa Code § 554.9107 that it is a purchase money security interest holder because "but for the fact that the Debtor had applied for a FmHA loan which was being processed at the time the Debtor sought and obtained the financing from the Bank to purchase the John Deere tractor, the Debtor would not have obtained the funds from the Bank." The Debtor rebuts the FmHA's argument by asserting that the $11,100 promissory note represents a refinancing of an existing obligation between the Debtor and the FmHA and that the proceeds were simply applied to pay off the loan with the Bank.
Section 522(f)(2)(A) of the Bankruptcy Code provides in pertinent 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 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 . . . tools of the trade of the debtor . . .
Therefore, if the security interest held by a creditor is a purchase money security interest it is not avoidable under § 522(f)(2).
The Bankruptcy Code does not define "purchase money security interest," therefore, the Bankruptcy Court must apply state law in determining whether or not a purchase money security interest exists. Once the status of the security interest is determined, federal law dictates whether or not the interest will be enforceable in bankruptcy. See, Lewis v. Manufacturers Nat'l. Bank, 364 U.S. 603, 81 S.Ct. 347, 5 L.Ed.2d 373 (1961). (State law determines status of creditors claims; Bankruptcy court then applies federal bankruptcy law to determine which claims may be avoided); Pristas v. Landaus Plymouth, 742 F.2d 797, 800 (3d Cir.1984); Geist v. Converse County Bank, 79 B.R. 939 (D.Wyo.1987); In re Billings, 63 B.R. 717 (D.Col.1986) aff'd In re Billings, 838 F.2d 405, 3 Bankr. L.Rep. (CCH) ¶ 72,181 (10th Cir. January 27, 1988); Matter of Franklin, 75 B.R. 268 (Bankr.M.D.Ga.1986).
Iowa Code § 554.9107 defines a purchase money security interest:
The Official Comment to § 9107(b) indicates that a purchase money security interest arises when a party other than a seller gives present consideration enabling the buyer to acquire the item.
FmHA claims that it falls under the § 554.9107(b) definition of a purchase money security interest holder because of the "reasonable assumption" that the Bank made the loan to the Debtor with the expectation of "quick repayment" and therefore the FmHA gave value before the Debtor acquired...
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