In re Walkington, Bankruptcy No. HG 83 1133
| Decision Date | 15 June 1984 |
| Docket Number | H 83 19.,Bankruptcy No. HG 83 1133,HK 83 2155,Adv. No. H 84 0008 |
| Citation | 42 BR 67 |
| Parties | In re Ronald D. WALKINGTON, Debtor. Ronald D. WALKINGTON, Plaintiff, v. PRODUCTION CREDIT ASSOCIATION, Defendant. In re John ANGLIN, Debtor. John ANGLIN, Plaintiff, v. HOUSEHOLD FINANCE CORPORATION, Defendant. |
| Court | U.S. Bankruptcy Court — Western District of Michigan |
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Roland F. Rhead, Lansing, Mich., for debtor/plaintiff Walkington.
Peter A. Teholiz, Lansing, Mich., for defendant Production Credit Ass'n.
Daryl J. Mumford, Battle Creek, Mich., for debtor/plaintiff Anglin.
Robert J. Moser, Kalamazoo, Mich., for defendant Household Finance Corp.
Novation of Loan and Security Agreements
Both cases presently before the Court for decision raise the same issues as to what constitutes a tool of the debtor's trade under § 522(f)(2)(B) and the applicability of the "spillover" exemption under § 522(d)(5) for the purpose of lien avoidance under the Bankruptcy Code.
In re Anglin: On April 29, 1980, John Anglin, debtor herein, procured a loan from Credithrift of America in the amount of $2,107.66 with a finance charge of $700.34. Various items of household goods and appliances as well as a Hammond organ and two speakers served as collateral for this loan. Approximately one year later, the debtor obtained a second loan from Credithrift of America in the amount of $2,520.26 with a finance charge of $729.90. This loan was used to purchase an automobile and to pay off the remainder of the prior loan. The identical list of collateral under the first loan, as well as a 1974 Pinto, served as security for the second loan. Subsequently, Credithrift of America assigned the 1981 loan document to Household Finance Corporation ("HFC"), defendant herein.
On August 23, 1983, Mr. Anglin filed a petition under Chapter 7 of the Bankruptcy Code. HFC filed a claim as a secured creditor in the amount of $1,065. Testimony at a hearing held on this matter on December 9, 1983, established the approximate value of the organ and speaker cabinet at $1,600. (Tr. at 6) The debtor claimed a $750 exemption in these items under § 522(d)(6) and a "spillover" exemption in the amount of $850 pursuant to § 522(d)(5). The household goods and appliances were claimed as exempt under § 522(d)(3) and likewise a "spillover" exemption in the amount of $1,400 was claimed on them. The debtor seeks to avoid the defendant's lien on the Hammond organ and speaker cabinet under § 522(f)(2)(B) as tools of his trade as a musician and the remaining collateral under § 522(f)(2)(A).
In re Walkington: The debtor, Ronald Walkington, ran a dairy operation of approximately 75 cows. Commencing in 1977, the debtor borrowed money from Production Credit Association of Lansing ("PCA"). The first security agreement between the parties dated April 15, 1977, described collateral securing the debt as "all livestock now owned or hereafter acquired by Debtor, and the young of all livestock." In the second security agreement dated December 22, 1980, "all livestock and poultry and their young . . ." served as collateral.1
On August 19, 1981, the parties entered into a "Basic Loan Agreement" covering all prior loans between the parties and replacing any earlier loan agreements. Subsequently, three "Supplemental Loan Agreements" were executed under the "Basic Loan Agreement," each such agreement wholly replacing the previous one.
On April 28, 1983, the debtor filed a petition under Chapter 11 of the Bankruptcy Code which was voluntarily converted to Chapter 7 on January 17, 1984. The same day the debtor filed an application to set aside PCA's lien as a tool of his trade under § 522(f)(2)(B) on 26 specific cattle in the amount of $6,100. The debtor claimed exemptions on these cattle under the "spillover" exemption of § 522(d)(5).2
In both of the above cases the creditors admit that their liens are nonpossessory and nonpurchase money. However, they contest whether their collateral can properly be labelled tools of the debtors' trade and whether the general exemption of § 522(d)(5) can be utilized for lien avoidance purposes. Additionally, PCA claims that it's lien predated the enactment and effective date of the Bankruptcy Code and therefore § 522(f) cannot apply. After considering oral argument and briefs submitted by the parties, the Court makes the following conclusions of law:
I. DID THE PARTIES IN THE WALKINGTON CASE INTEND TO CREATE A NEW LOAN AND NEW SECURITY INTEREST SUCH AS TO CONSTITUTE A NOVATION POST-ENACTMENT DATE OF THE BANKRUPTCY CODE PERMITTING THE APPLICATION OF 11 U.S.C. § 522(f)?
PCA asserts that it's security interest in Mr. Walkington's dairy cows predates the enactment date of the Bankruptcy Code such that § 522(f) is inapplicable as to its collateral pursuant to the Supreme Court decision in U.S. v. Security Industrial Bank, 459 U.S. 70, 103 S.Ct. 407, 74 L.Ed.2d 235 (1982). This Court has previously addressed this issue. In In re Hitts, 21 B.R. 158 (Bankr.W.D.Mich.1982), the parties entered into a series of refinancing of prior loan agreements commencing in March, 1974, with a new security agreement being signed for each new loan. This Court focused on the intention of the parties to create a new debt and a new security interest which superseded earlier agreements to find that the final agreement, entered into subsequent to the effective date of the Code, constituted a novation and therefore § 522(f) was applicable.
The "Basic Loan Agreement" executed between Mr. Walkington and PCA on August 19, 1981, clearly created a new loan agreement superseding all prior loans. Section 2.0 of that agreement provides:
Unless otherwise agreed in writing: this Agreement covers all loan applications, loans, and indebtedness pending or outstanding between the parties at the date hereof . . . and it amends and replaces any earlier loan agreements outstanding between the parties so that no further reference to any such earlier agreement is necessary. . . .
Further, the Court finds that the security agreement dated December 22, 1980, superseded the previous security agreement executed prior to enactment of the Bankruptcy Code. The security agreement dated December 22, 1980, secures This security agreement does not make reference to any prior security agreement nor state that it's merely an extension or renewal of a preexisting agreement. The list of collateral is more inclusive than that in the previous security agreement and as its predecessor covers all livestock and their young. A new financing statement was filed by PCA at the Ionia County Register of Deeds on January 8, 1981, to perfect its December, 1980, security interest. To the extent that there is any ambiguity as to the survival of previous security agreements, the Court notes it is a fundamental principle of construction that documents are construed against their drafter.3 Here all documents are standard, printed forms supplied by PCA. Clearly, in the absence of bankruptcy, PCA would seek enforcement of the 1980 security agreement rather than the 1977 security agreement.4 Indeed, when the debtor became delinquent in his payment under supplemental loans pursuant to the "Basic Loan Agreement," PCA commenced an action in the Circuit Court for the County of Ionia to foreclose on collateral under the 1980 agreement, no mention being made of the 1977 agreement.
The case of In re Cook, 19 B.R. 942 (Bankr.D.Colo.1982), cited by PCA is inapposite. In that case the parties entered into a loan and security agreement with a future advance clause on July 24, 1979. Subsequently, additional funds were extended after the effective date of the Code. The Court found that this additional loan, however characterized, did not change the date of the creditor's security interest. The Court stressed that no new security interest was procured after the effective date of the Bankruptcy Code5 but rather the 1979 agreement continued by the explicit terms of the parties subsequent loan agreement.
Since the "Basic Loan Agreement" and the 1980 security agreement constitute a novation6 of the parties prior agreements after the effective date of the Bankruptcy Code, the lien avoidance provisions of the Code are clearly applicable in this case.
II. ARE THE ITEMS OF COLLATERAL IN WHICH THE DEBTORS ATTEMPT TO AVOID LIENS TOOLS OF THEIR RESPECTIVE TRADES?
The secured creditors in both the Anglin and Walkington cases have raised an issue concerning the definition and scope of the phrase "tools of the trade of the debtor" as it is used in § 522(f)(2)(B). Neither the Code nor the legislative history defines this phrase. It is the view of this Court that Congress intended it to have a common sense interpretation on a case-by-case basis with the key inquiry focusing on the necessity of an item to the individual debtor's particular business or employment.
John Anglin is a musician who has been playing at parties, wedding receptions and other social gatherings for the past 20 years. (Tr. at 3, 7) In the last six month period he has averaged playing as a musician twice a week. (Tr. at 7) On all such occasions he uses a Hammond organ and Leslie Tone Cabinet which is an external type of speaker necessary for his organ to produce sound. (Tr. at 7, 8) During the past five years Mr. Anglin has had various other jobs and is currently employed as a salesman for Midwest Business Exchange averaging roughly 25-30 hours per week in this capacity. (Tr. at 3, 7) He has testified that two-thirds of his earnings derive from his musical pursuits and...
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