In re Neal

• Decision Date: 08 March 1992
• Docket Number: Bankruptcy No. 91-31295-C.
• Citation: 140 BR 634
• Parties: In re Ray W. NEAL, Debtor.
• Court: U.S. Bankruptcy Court — Western District of Texas

140 B.R. 634 (1992)

In re Ray W. NEAL, Debtor.

Bankruptcy No. 91-31295-C.

United States Bankruptcy Court, W.D. Texas, El Paso Division.

March 8, 1992.

Jerry Tanzy, El Paso, Tex., for debtor.

E.P. Bud Kirk, El Paso, Tex., for Sunwest Bank of El Paso.

ORDER ON MOTION OF RAY W. NEAL TO AVOID LIEN OF SUNWEST BANK OF EL PASO IMPAIRING DEBTOR'S EXEMPTIONS

LEIF M. CLARK, Bankruptcy Judge.

CAME ON for hearing the Motion of Ray W. Neal, Debtor, to Avoid Lien of Sunwest Bank of El Paso Impairing Debtor's Exemptions. Upon consideration thereof, the court finds and concludes that the Motion is well taken, and that the relief requested therein should be granted. The following Decision and Order constitutes the court's findings of fact and conclusions of law.

JURISDICTION

This court has jurisdiction of this matter pursuant to 28 U.S.C. §§ 157 and 1334. This matter is a core proceeding. 28 U.S.C. § 157(b); 11 U.S.C. § 522(f).

FACTUAL BACKGROUND

Ray Neal ("debtor") is the sole proprietor of Diversified Design Services, a computer-aided drafting and scanning service; for the past two years, he has worked out of his home, using sophisticated computer equipment and software to generate engineering drawings and schematics. The drawings produced by the Debtor could be produced by hand, but time limitations and industry standards necessitate the use of computer technology to remain competitive. Specifically, Debtor's clients require not only hard copies of the drawings, but a computer disk containing the information as well. Debtor would also be unable to generate drawings for clients quickly enough to compete using traditional drafting techniques.

In June 1991, Debtor borrowed approximately $10,060.30 from Sunwest Bank of El Paso. As security for the loan, Debtor gave Sunwest a security interest in various pieces of computer equipment used by the debtor in his business.¹ As of December 1991, Sunwest estimated the value of the collateral to be approximately $12,000.

Debtor filed for relief under Chapter 13 of the Bankruptcy Code on November 5, 1991. Subsequently, he filed this motion, seeking to avoid Sunwest's lien against the computer equipment under § 522(f)(2)(B), to the extent that it impairs an exemption to which he may be entitled. At the hearing, all parties agreed to stipulate that Sunwest's security interest is non-purchase money and non-possessory; the sole issue to be decided by the court is whether the computer equipment at issue qualifies as a "tool of the trade" for the avoidance purposes of § 522(f)(2)(B).

Sunwest Bank contends that the computer equipment at issue is not a "tool of the trade" within the plain meaning of those terms of federal law as contained in § 522(f)(2)(B). Sunwest urges the court to establish a narrow federal definition of the terms for purposes of lien avoidance, rather than relying on state law definitions developed under the rubric of broadly-construed exemption statutes. Sunwest also argues that the equipment is not of the "inconsequential value" contemplated by Congress in the enactment of § 522(f)(2). Finally, Sunwest argues that allowing the Debtor to avoid the lien on the computer equipment will severely limit, if not eliminate, the ability of sole proprietorships to obtain non-purchase money working capital financing.

Debtor argues that the equipment fits squarely within the definition of tools of the trade, as it has been applied under both federal and state exemption statutes and the lien avoidance statutes. Debtor further argues that, although the "inconsequential value" requirement is consistent with the purpose underlying subsection (f)(2)(A) (involving household goods), it is entirely inconsistent with the purpose underlying subsection (f)(2)(B), involving "books, implements, and tools, of the debtor's trade," and should not be applied so as to deprive Debtor of the tools essential to his fresh start.

ANALYSIS

A debtor who files for relief under the Bankruptcy Code must surrender all of his property for the benefit of his creditors; the property so surrendered comprises the bankruptcy estate. See 11 U.S.C. § 541; see also In re Lucas, 924 F.2d 597, 599 (6th Cir.1991). However, 11 U.S.C. § 522 provides debtors with several exemptions which may be used to prevent certain property from being distributed to unsecured creditors. See Augustine v. United States, 675 F.2d 582, 584 (3d Cir. 1982) (citing H.Rep. No. 595, 95th Cong., 1st Sess. 126 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 5963, 6087. The purpose of the exemption provisions is to secure the debtor's fresh start, so as to prevent his becoming "a public charge". See In re Taylor, 861 F.2d 550, 552 (9th Cir.1988) (citing H.Rep. No. 595, 95th Cong., 2d Sess. 126 (1977), reprinted in 1978 U.S.Code Cong. & Admin.News 5787, 6087.

In furtherance of the fresh start policy, Congress also provided debtors the ability to place certain of their property beyond the reach of secured creditors. See In re Taylor, 861 F.2d at 552. To the extent that a debtor is entitled to an exemption, be it under federal or state law, he may avoid certain liens in particular types of property. 11 U.S.C. § 522(f); see also In re Heape, 886 F.2d 280, 282 (10th Cir.1989); In re Patterson, 825 F.2d 1140, 1146 (7th Cir.1987); Augustine v. United States, 675 F.2d at 584. 11 U.S.C. § 522(f) provides in pertinent part:

(f) 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 to under subsection (b) of this section, if such lien is — . . .

(2) a nonpossessory, nonpurchase-money security interest in any —

(A) household furnishings, household goods, wearing apparel, appliances, books, animals, crops, musical instruments, or jewelry that are held primarily for the personal, family, or household use of the debtor or a dependent of the debtor;

(B) implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor . . .

11 U.S.C. § 522(f)(2)(A), (B). Thus, liens may only be avoided to the extent that they impair an exemption to which the debtor would be entitled under § 522(b). Under that section, a debtor may elect either the federal exemptions found in § 522(d), the federal exemptions as modified by the states, or state exemptions. See 11 U.S.C. § 522(b), (d); see also In re Taylor, 861 F.2d 550, 552 (9th Cir.1988) (reviewing exemptions available under § 522(b)).

Texas created its own classes of exempt property, an exemption scheme with a long pedigree. In re Leva, 96 B.R. 723, 733 n. 14 (Bankr.W.D.Tex.1989) (first exemption statutes enacted during the Republic, six years before Texas' admission into the Union). The Texas Property Code was amended most recently in 1991, to provide that personal property constituting "tools, equipment, books and apparatus, including boats and motor vehicles used in a trade or profession" may be claimed as exempt. Tex.Prop.Code Ann. § 42.002(a)(4) (West 1991). Families may now exempt up to $60,000, while single adults may exempt up to $30,000. Tex.Prop.Code Ann. § 42.001 (West 1991).

The Texas exemption for tools, equipment, books, and apparatus used in a trade or profession has been limited to those items that are peculiarly adapted to the trade or profession. See In re Weiss, 92 B.R. 677, 679 (Bankr.N.D.Tex.1988) (construing predecessor statute, § 42.002(3)(B)); see also In re Swift, 124 B.R. 475, 481 (Bankr.W.D.Tex.1991) (insurance agent not allowed to exempt typewriter). The exemption must be of items "fairly belonging to" the trade; those items which have a "merely general value and use" in a business are not included within the scope of the exemption. See In re Swift, 124 B.R. at 481 (citing Weiss, supra, and Meritz v. Palmer, 266 F.2d 265, 268 (5th Cir. 1959)); see also In re Leva, 96 B.R. at 739 (citing McMillan v. Dean, 174 S.W.2d 737, 739 (Tex.Civ.App. — Austin 1943, writ ref'd w.o.m.). Further, the only limitation on the value of the tools, equipment, books or apparatus is the general limitation found in § 42.001; there is no longer a requirement that tools of the trade be small hand or mechanical tools. See Tex.Prop.Code Ann. § 42.001 (West 1991); see also Meritz v. Palmer, 266 F.2d at 268-9; In re Hernandez, 131 B.R. 61, 5 T.B.C.R. 387 (Bankr. W.D.Tex.1991) (Monroe, B.J.).

The computer equipment in the case sub judice is well within the scope of the Texas exemption for tools of the trade; it belongs just as fairly to Debtor's trade today as would a T-square and drafting table forty years ago, and it is of considerably more than "merely general value" to the business. Indeed, Debtor testified that the equipment, both hardware and software, is designed specifically for computeraided drafting and that without the equipment, he would be unable to provide the work-product required by his clients. It is true that some pieces of the equipment are generic in nature (e.g., the IBM-compatible 386SX computer, with 1MB of RAM and a 40MB hard drive), but it is the system's use as a unit which renders the system itself, in essence, a tool of the debtor's trade. Take away the computer, for example, and the specialized software becomes nothing more than an otherwise useless "circular plate coated with ferromagnetic particles," Webster's New Universal Unabridged Dictionary, 2d ed. (Dorset & Baber 1983). Removing the computer itself from the otherwise specialized equipment would be like removing the engine from a tow truck. See Hernandez, supra. The court concludes that the Debtor is entitled to claim the system as exempt under the Texas statute.²

Having concluded that the Debtor is entitled to an exemption under § 522(b), the court now turns to § 522(f)(2)(B) to determine whether the Debtor is entitled to avoid Sunwest's lien on the equipment. While state law determines the availability of...