In re Vann

• Decision Date: 11 January 1995
• Docket Number: Civ. No. 94-1158-PFK.
• Citation: 177 BR 704
• Parties: In re Marcus Wayne VANN and Stephanie Joy Vann, Debtors.
• Court: U.S. District Court — District of Kansas

177 B.R. 704 (1995)

In re Marcus Wayne VANN and Stephanie Joy Vann, Debtors.

Civ. No. 94-1158-PFK.

United States District Court, D. Kansas.

January 11, 1995.

Donald B. Clark, Wichita, KS, for debtors.

Christopher O'Brien of Robbins, Tinker, Smith & Tinker, Wichita, KS, for appellee.

MEMORANDUM AND ORDER

PATRICK F. KELLY, Chief Judge.

This matter comes before the court on the appeal of the debtors, Marcus Wayne Vann and Stephanie Joy Vann (Vanns), from the bankruptcy court's order of April 11, 1994. In that order, the court denied the debtors' motion to avoid creditor Century Finance Company's lien on a 1980 Ford pickup truck, attached snow plow, and 16-foot trailer (hereinafter referred to collectively as equipment).

The Vanns executed a security agreement and note in November 1991 that granted Century Finance a nonpossessory lien on the equipment. The parties agreed the Vanns would retain possession of the collateral. The security interest was perfected properly.

After the debtors defaulted on payment, Century Finance instituted action in state court and obtained a judgment granting it possession of the equipment. On August 2, 1993, Century Finance took possession of the equipment without the Vanns' consent or voluntary relinquishment.

On August 11, the debtors filed for bankruptcy under Chapter 7. On October 25, 1993, pursuant to the Vanns' motion, the bankruptcy court converted the case to a Chapter 13 proceeding. The court subsequently granted the debtors' motion for turnover of the equipment¹ and denied their motion to avoid Century Finance's lien. The Vanns appeal the latter ruling. This court finds no hearing is necessary, see D.Kan. Rules 206(d), 702, 710(a)(7), and is ready to rule.

In an appeal taken from the bankruptcy court, the district court sits as an appellate court. See 28 U.S.C. § 1334(a). The district court may affirm, reverse, or modify the bankruptcy court's ruling or remand the case for further proceedings. Fed.R.Bankr.P. 8013 (1994 Supp.). The district court may not set aside the bankruptcy court's findings of fact unless they are clearly erroneous. Virginia Beach Fed. Sav. & Loan Ass'n v. Wood, 901 F.2d 849, 851 (10th Cir.1990); Branding Iron Motel, Inc. v. Sandlian Equity, Inc. (In re Branding Iron Motel), 798 F.2d 396, 399 (10th Cir.1986); see also Fed. R.Bankr.P. 8013 (1994 Supp.). The district court, however, reviews the bankruptcy court's legal determinations de novo. Wood, 901 F.2d at 851; Branding Iron Motel, 798 F.2d at 399-400. The bankruptcy court's construction and application of the Bankruptcy Code is a legal determination subject to de novo review. See Webb v. General Motors Acceptance Corp. (In re Hesser), 984 F.2d 345, 348 (10th Cir.1993).

The issue before this court concerns construction of 11 U.S.C. § 522(f), which 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 that such lien impairs an exemption to which the debtor would have been entitled under subsection (b) of this section, if such lien is—

. . . .

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

. . . .

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

See Owen v. Owen, 500 U.S. 305, 310-11, 111 S.Ct. 1833, 1836-37, 114 L.Ed.2d 350 (1991) ("To determine the application of § 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."). The parties do not dispute the equipment is a tool of the debtors' trade, a snow plowing and lawn care business. What is at issue is whether the Vanns' loss of possession prior to filing for bankruptcy and applying for lien avoidance affects their ability to claim this exemption.

The bankruptcy court found that the creditor's interest is possessory and that the express language of § 522(f) states lien avoidance is possible only for security interests that are nonpossessory. Citing Ferguson v. Central Nat'l Bank (In re Ferguson), 67 B.R. 246 (D.Kan.1986), the court reasoned that "once the creditor has reduced . . . the collateral to its possession, lien avoidance is no longer permitted." In re Vann, 166 B.R. 167, 168 (Bankr.D.Kan.1994). The bankruptcy court refused to consider legislative history to ascertain congressional intent or the statute's purpose, stating such consideration is proper only if the statute is ambiguous. See United States v. Ron Pair Enterprises, Inc., 489 U.S. 235, 242, 109 S.Ct. 1026, 1030-31, 103 L.Ed.2d 290 (1989); Ute Distribution Corp. v. United States, 938 F.2d 1157, 1162 (10th Cir.1991), cert. denied, ___ U.S. ___, 112 S.Ct. 2273, 119 L.Ed.2d 200 (1992). The court determined the language of § 522(f) unambiguously permits the debtor to avoid certain security interests, provided the debtor maintains possession of the collateral. The court rejected the cases the Vanns cited, Meadows v. Farmers & Merchants Nat'l Bank (In re Meadows), 75 B.R. 357 (W.D.Va. 1987), and In re Schultz, 101 B.R. 68 (Bankr. N.D.Iowa 1989), reasoning these "courts reached beyond the clear meaning of the statute to give collateral back to the debtor under the theory that somehow the purpose of the statute was to frustrate a secured creditor's rights to repossess the property." In re Vann, 166 B.R. at 169. The bankruptcy court maintained it was following the "overwhelming" majority position. See In re Ferguson, 67 B.R. 246; In re Sanders, 61 B.R. 381 (Bankr.D.Kan.1986); see also In re Shepler, 78 B.R. 217 (Bankr.W.D.Wis.1987). The court acknowledged Norton Bankruptcy Law and Practice 2d § 46:24 n. 12 (1994), states otherwise, but concluded Norton cited an equal number of cases for both positions. The court concluded by characterizing the Vanns' argument as bordering on frivolous.

The debtors contend the bankruptcy court's reliance on In re Ferguson is misplaced. Pursuant to 11 U.S.C. § 522(b), the Ferguson debtor attempted to recover and exempt household goods the creditor had repossessed prior to the debtor's bankruptcy filing. At the time the case was filed, § 522(b) permitted a debtor to select Bankruptcy Code exemptions unless state law prohibited the selection. K.S.A. § 60-2312 prohibited individual debtors from selecting federal exemptions pursuant to § 522(b)(1) and required such debtors to select Kansas statutory exemptions.² The pertinent Kansas exemption provided in relevant part:

Every person residing in this state shall have exempt from seizure and sale upon any attachment, execution or other process issued from any court in this state, the following articles of personal property:

(a) The furnishings, equipment and supplies, including food, fuel and clothing, for the person which is in the person\'s present possession and is reasonably necessary at the principal resident of the person for a period of one year.

K.S.A. § 60-2304 (1993 Supp.). The bankruptcy court concluded the debtor's "legal interest" constituted "constructive possession" and was sufficient to satisfy the "present possession" requirement of § 60-2304(a).

On appeal, Judge Saffels disagreed. The judge disputed, among other things, the bankruptcy court's reliance on United States v. Whiting Pools, Inc., 462 U.S. 198, 103 S.Ct. 2309, 76 L.Ed.2d 515 (1983). Judge Saffels discussed the policy and scope distinctions underlying an individual bankruptcy, such as the Chapter 7 filing in In re Ferguson, and a reorganization bankruptcy, such as the Chapter 11 filing in Whiting Pools. For example, with regard to a reorganization bankruptcy, "`Congress presumed that the assets of the debtor would be more valuable if used in a rehabilitated business than if "sold for scrap." . . . Thus, to facilitate the rehabilitation of the debtor's business, all of the debtor's property must be included in the reorganization estate.'" 67 B.R. at 252 (quoting Whiting Pools, 462 U.S. at 203, 103 S.Ct. at 2313).

This court finds the bankruptcy court's reliance upon In re Ferguson suspect. Ferguson and the case at bar construe different statutes; K.S.A. § 60-2304(a) and 11 U.S.C. § 522(f) do not employ identical language. Unlike 11 U.S.C. § 522(f), the Kansas statute explicitly requires household goods to be in the debtor's present possession. The terms "present possession" and "possessory security interest" do not necessarily have the same meaning. Even the Kansas equivalent of the federal tools of the trade exemption, K.S.A. § 60-2304(e) (1994 Supp.), does not explicitly require the tools of the debtor's trade to be in the debtor's present possession.

The bankruptcy court also cited In re Sanders and In re Shepler. The issue in Sanders concerned whether the creditor's lien on tools that had been repossessed was a nonpossessory or a possessory security interest. The Sanders court's research revealed two cases on point, McFarland v. Farmers Production Credit Ass'n (In re McFarland), 38 B.R. 370 (Bankr.N.D.Iowa 1983), aff'd, 38 B.R. 374 (N.D.Iowa 1984), and Wood v. Provident Fin. Co. (In re Wood), 13 B.R. 245 (Bankr.E.D.N.C.1981), in which the courts "held that the liens were nonpossessory because the creditor did not obtain possession by voluntary agreement." 61 B.R. at 383. Judge Pusateri rejected this reasoning, finding "the courts did not consider the standard security agreement provision giving creditors the right to take possession upon default." Id. The judge also repudiated the debtor's argument that a possessory security interest only exists if the creditor takes possession at the commencement of the transaction, such as with a pledge. Judge Pusateri concluded a security interest that had been nonpossessory could become possessory because "a creditor's right and duties with respect to collateral in its possession are the same whether the creditor had possession from the...