In re Neal, Bankruptcy No. 592-50153-12.
| Decision Date | 24 December 1992 |
| Docket Number | Bankruptcy No. 592-50153-12. |
| Citation | 148 BR 468 |
| Parties | In re Dan NEAL and Mary Neal, Debtors. |
| Court | U.S. Bankruptcy Court — Northern District of Texas |
Mike M. Calfin, Harding, Bass, Fargason, Booth & Calfin, Lubbock, TX, for debtors.
Nancy Koenig, Asst. U.S. Atty., U.S. Dept. of Justice, Lubbock, TX, for FmHA.
Walter O'Cheskey, Lubbock, TX, Chapter 12 Trustee.
The first question presented in this case is whether a nonpossessory, nonpurchase-money security interest was extinguished when the Debtors paid the debt it secured. The second question presented is whether a nonpossessory, nonpurchase-money security interest in farm equipment may be avoided by the Debtors under § 522(f)(2)(B) of the Bankruptcy Code1 where the security interest was created during the interim between the enactment date and the effective date of the Code.2 The Court concludes that the liens may be avoided.
On March 3, 1992 Dan and Mary Neal (the Debtors) filed a petition for relief under Chapter 12 of the Bankruptcy Code. The Debtors are farmers. The Debtors' Schedule of Exemptions claimed the following five items as exempt tools of the trade:
1968 John Deere 4020 Tractor 1972 John Deere 4020 Tractor 16' Gooseneck Trailer Shredder Cotton Trailer
The total personal property the Debtors claimed as exempt did not exceed the $60,000 personal property exemption allowed by the Texas Property Code. TEX.PROP. CODE ANN. § 42.001(a)(1) (Vernon Supp. 1992).
At the time they filed their petition, the Debtors owed the Farmers Home Administration (FmHA) $304,812.85 as a result of seven promissory notes they executed over 17 years, as indicated in the following table:
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03/16/744 49,100.00
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02/20/75 25,000.00
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05/10/79 75,000.00
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05/22/81 13,200.00
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04/23/85 25,000.00
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03/19/86 58,652.29 57,040.29 12,211.27 27,316.78
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05/01/86 58,900.00
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03/26/87 56,415.12
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04/27/87 25,000.00
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02/26/88 56,553.99 86,551.58 12,190.90 86,888.46
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04/27/89 58,948.00 93,147.00 12,707.00 92,405.00
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On February 20, 1975, the Debtors signed a security agreement granting the FmHA a nonpurchase-money, nonpossessory security interest in listed equipment including the five items claimed as exempt and at issue in this proceeding.
A May 10, 1979, security agreement granted the FmHA a security interest in the same equipment as did security agreements dated May 22, 1981, April 27, 1987 and April 17, 1989. The Debtors filed a motion to avoid the FmHA's security interest in the listed items of farm equipment.
The Debtors argued that, while the FmHA's initial security interest may have been created prior to enactment of the Bankruptcy Code, the payment of the debt it secured extinguished the security interest. The Debtors contended that the next security interest was created after the enactment of the Code; therefore, the lender acted with notice of the avoidance provisions of the Code and should be subject thereto.
The FmHA argued that the security interest in equipment was created before enactment of the Bankruptcy Code and continued ever since, because the Debtors remained indebted to the FmHA by virtue of other extensions of credit. FmHA contended its security interest may not be avoided (1) since Congress did not intend the Code to apply to liens created prior to the Code's enactment and (2) because such application would be unconstitutional. Additionally, the FmHA argued that even if its initial security interest was extinguished, the security interest created by the May 10, 1979 security agreement was created before the effective date of the Bankruptcy Code; therefore it is not subject to the Code's lien avoidance provisions. Finally, the FmHA argued that the lien avoidance provisions of § 522(f) do not include large, expensive items of farm machinery such as the items at issue here.
11 U.S.C. § 522(f) states in pertinent part:
TEX.PROP.CODE ANN. § 42.002(a) (Vernon Supp.1992) states in pertinent part:
On November 6, 1978, acting under the authority of the United States Constitution, art. I, § 8, cl. 4, Congress passed the Bankruptcy Reform Act of 1978 (now the Bankruptcy Code). As adopted, the Code was effective as to cases filed on or after October 1, 1979. The bankruptcy power conferred on Congress by the Constitution has been regularly construed to authorize the retrospective impairment of contractual obligations. Hanover Nat'l Bank v. Moyses, 186 U.S. 181, 188, 22 S.Ct. 857, 860, 46 L.Ed. 1113 (1902). Congress has been found to have rationally exercised this authority in the lien avoidance provisions of § 522(f)(2). United States v. Sec. Indus. Bank, 459 U.S. 70, 74, 103 S.Ct. 407, 410, 74 L.Ed.2d 235 (1982). As set out above, § 522(f)(2) permits individual debtors in bankruptcy proceedings to avoid liens on certain property.
In Owen v. Owen, ___ U.S. ___, 111 S.Ct. 1833, 114 L.Ed.2d 350 (1991), the United States Supreme Court announced the following rule to determine whether a lien may be avoided under § 522(f): "Ask not whether the lien impairs an exemption to which the debtor is in fact entitled, but whether it impairs an exemption to which he would have been entitled but for the lien itself." ___ U.S. at ___-___, 111 S.Ct. at 1836-37. Before determining the application of § 522(f), the court must first determine whether the Debtors would be entitled to an exemption for the farm equipment at issue.
Since the Debtors elected the Texas exemptions, the question becomes whether this farm equipment is exempt under § 42.002(a)(4) of the Texas Property Code. TEX. PROP.CODE ANN. § 42.002(a)(4). Under § 42.002(a)(4), items may be claimed as exempt if they are "tools . . . used in the trade or profession" of the debtor. In its In re Nash decision, 142 B.R. 148 (Bankr. N.D.Tex.1992), this court acknowledged that the test for determining whether an item qualifies as a tool of the trade of farming is whether the item is not only "fairly belonging to or usable in the trade" of farming but is also "peculiarly adapted to" farming. 142 B.R. at 152 (citing Meritz v. Palmer (In re Meritz), 266 F.2d 265, 268 (5th Cir.1959); Hrncirik v. Farmer's Nat'l Bank (In re Hrncirik), 138 Bankr. 835, 840 (Bankr.N.D.Tex.1992)). In Nash, this court found that tractors and other farm equipment — items such as those involved in this case — were in fact "tools of the trade" in the farming business. 142 B.R. at 152-153 (citing Cen. Nat'l Bank & Trust Co. v. Liming (In re Liming), 797 F.2d 895, 901 (10th Cir.1986)). Therefore, the court holds that the Debtor's farm equipment qualifies for exemption as tools of the trade under Texas law.
According to this court's decision in Nash and the authorities cited therein, the phrase "implements, professional books, or tools, of the trade of the debtor" contained in § 522(f)(2)(B) "takes on the character of the statute providing the exemptions, be it federal or state." 142 B.R. at 153. Therefore, since the items qualified for exemption under Texas law, they are within the purview of § 522(f)(2)(B). Additionally, this court determined in Nash that Owen should be applied retroactively. 142 B.R. at 151. Therefore if, under the facts of this case, the court determines that the liens in question were created at a time in which § 522(f) was intended by Congress to apply, then those liens may be avoided.
In United States v. Sec. Indus. Bank, supra, the United States Supreme Court held that Congress did not intend the lien avoidance provisions of § 522(f) to be applied...
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