Pristas v. Landaus of Plymouth, Inc.

• Decision Date: 12 June 1984
• Docket Number: No. 83-3555,Nos. 83-3555,No. 83-3556,No. 83-3557,83-3555,83-3556,83-3557,s. 83-3555
• Citation: 742 F.2d 797
• Parties: Bankr. L. Rep. P 70,018, 39 UCC Rep.Serv. 1 In re John and Lois PRISTAS, Debtors, v. LANDAUS OF PLYMOUTH, INC. John and Lois Pristas, Appellants inIn re Laura SPRAGUE, Debtor, v. LANDAUS OF PLYMOUTH, INC. Laura Sprague, Appellant inIn re David D. TWARDOWSKI, Debtor, v. LANDAUS OF PLYMOUTH, INC. David D. Twardowski, Appellant into 83-3557. . Submitted Under Third Circuit Rule 12(6)
• Court: U.S. Court of Appeals — Third Circuit

Page 797

742 F.2d 797

Bankr. L. Rep. P 70,018, 39 UCC Rep.Serv. 1

In re John and Lois PRISTAS, Debtors, v. LANDAUS OF PLYMOUTH, INC.

John and Lois Pristas, Appellants in No. 83-3555.

In re Laura SPRAGUE, Debtor, v. LANDAUS OF PLYMOUTH, INC.

Laura Sprague, Appellant in No. 83-3556.

In re David D. TWARDOWSKI, Debtor, v. LANDAUS OF PLYMOUTH, INC.

David D. Twardowski, Appellant in No. 83-3557.

Nos. 83-3555 to 83-3557.

United States Court of Appeals, Third Circuit.

Submitted Under Third Circuit Rule 12(6)

June 12, 1984.

Decided Sept. 7, 1984.

As Amended Sept. 12, 1984.

F. Charles Petrillo, Legal Services of Northeastern Pa., Inc., Wilkes-Barre, Pa., for appellants.

Louis Shaffer, Shaffer & Chariton, Wilkes-Barre, Pa., for appellee.

Before WEIS and BECKER, Circuit Judges, and OLIVER, District Judge. ^*

OPINION OF THE COURT

WEIS, Circuit Judge.

The question here is whether a purchase-money security interest in consumer goods survives when the debt is consolidated with that incurred for subsequent purchases. The bankruptcy judge concluded that the "add on" of both collateral and debt did not eliminate the purchase-money character of the security interest in original purchases. He therefore declined to avoid a creditor's liens under section 522(f)(2) of the Bankruptcy Reform Act, 11 U.S.C. Sec. 522(f)(2) (1982). We agree and will affirm but do so by applying a state's statute rather than its decisional law.

The debtors sought to avoid a creditor's security interests in household goods that had been exempted from the bankruptcy estates. The bankruptcy judge refused to avoid the liens, and the district court affirmed.

These three consolidated cases present the identical legal issue. The facts in each do not differ materially and, in the interest of brevity, therefore, we will detail the factual background only in the Pristas case.

On July 26, 1979, Lois Pristas purchased a washer from creditor Landaus of Plymouth, Inc., at its store in Pennsylvania. She agreed to pay a total of $404, as detailed in a retail installment contract executed by the parties that same day.

The agreement gave the seller "a security interest in the aforesaid goods until the final payment is made." The contract also provided that Landaus could add "subsequent purchases made by the Purchaser, and the total of payments hereof shall reflect the added cost and finance charge of said goods subsequently purchased." Also included was a statement that "the goods purchased hereunder shall be security for payment of the subsequent purchase."

The purchase price of the washer remained partially unpaid on January 24, 1980 when Mrs. Pristas bought a rocker-recliner from Landaus for $185.20. That figure, which included finance charges, was added to the unpaid balance on the washer increasing the total obligation to $519.20. The monthly payments were increased from $17 to $20.

The agreement on this second purchase noted that seller acquired a security interest in the rocker. In addition, the form provided that the additional purchase supplemented the one made in July 1979, that the agreement entered into at that time was incorporated, and that the second "instrument shall be a part of said Security Agreement/Retail Installment Contract as if it had been executed simultaneously therewith."

When Mrs. Pristas later defaulted in payments, Landaus obtained a judgment and levied against her property. After filing a petition in bankruptcy, Mrs. Pristas sought to avoid the security lien under 11 U.S.C. Sec. 522(f)(2) to the extent it impaired her bankruptcy exemptions. ¹ She contended that once the washer secured not only its own price, but also that of the rocker, the creditor's interest in the washer was converted to a nonpurchase-money security interest avoidable under section 522(f)(2).

The bankruptcy judge concluded that the security interest created in July 1979 did not lose its purchase-money character when consolidated with the debt created in January 1980. 29 B.R. 711 (Bankr.M.D.Pa.1983). The judge held that the common law of Pennsylvania, as reflected in Page v. Wilson, 150 Pa.Super. 427, 28 A.2d 706 (1942), supplied a formula for apportioning the debtor's payments between the two purchases. Consequently, the point at which each debt was satisfied could be ascertained, and the purchase-money security interest in each item remained valid until that time. The purchase-money security interest, therefore, was not extinguished and would not be avoided by section 522(f)(2). The district court affirmed.

On appeal, Mrs. Pristas contends that the bankruptcy judge erred in implying a payment allocation formula when the agreement between the parties contained no such provision. She argues that, once collateral secures not only its own price but other purchases, the creditor holds only an avoidable nonpurchase-money security interest.

Section 522 of the Bankruptcy Reform Act of 1978, 11 U.S.C. Sec. 522, allows a debtor to withhold certain property from the bankruptcy estate. "The exemptions were designed to permit individual debtors to retain exempt property so that they will be able to enjoy a 'fresh start' after bankruptcy." United States v. Security Industrial Bank, 459 U.S. 70, 72 n. 1, 103 S.Ct. 407, 409 n. 1, 74 L.Ed.2d 235 (1982). In addition, section 522(f)(2) permits a debtor to set aside a lien on exempt property if the incumbrance is "a nonpossessory, nonpurchase-money security interest" in certain specified property, such as household goods, wearing apparel, and appliances. 11 U.S.C. Sec. 522(f)(2). ²

The parties do not dispute that the articles in question here are among those listed in section 522(f)(2)(A), (B), and (C). Nor does the creditor advance any contention that its interest was other than "nonpossessory", that is, that the debtor had possession of the property rather than it being held by creditor as collateral. The contested issue is whether a purchase-money security interest in goods continues to be effective when the installment payment agreement is consolidated with that for a later purchased item.

The Bankruptcy Act does not define "purchase-money security interest." Therefore, we look to state law. See In re Manuel, 507 F.2d 990, 992 (5th Cir.1975). The Pennsylvania Uniform Commercial Code reads: "[A] security interest is a 'purchase money security interest' to the extent that it is: (a) taken or retained by the seller of the collateral to secure all or part of its price; or (b) taken by a person who by making advances or incurring an obligation gives value to enable the debtor to acquire rights in or the use of collateral if such value is in fact so used." 13 PA.CONS.STAT.ANN. Sec. 9107 (Purdon Pamph.1984). In sum, a purchase-money security interest exists if the collateral is the item purchased and it secures its own price.

"Price," for purposes of an installment sales contract, is not defined in the Commercial Code. However, we have little difficulty in concluding that "price" includes not only the actual cost of the goods but also financing charges and sales tax. That interpretation of the statute is but a recognition of the realities of the market place in today's credit-oriented society. It is consistent with the Code's policy to "simplify, clarify and modernize the law governing commercial transactions," as well as "[t]o permit the continued expansion of commercial practices through custom, usage, and agreement of the parties." 13 PA.CONS.STAT.ANN. Sec. 1102(b)(1), (2). Indeed, the same result would be reached under pre-Code law. See Bucyrus-Erie Co. v. Casey, 61 F.2d 473 (3d Cir.1932).

When Mrs. Pristas purchased the additional item in January 1980, Landaus combined the amounts owed on both purchases into a single debt, and increased the single monthly payments. The "add on" agreement, however, did not specify any method of payment application or balance reduction. Therefore, the purchaser would not know from the text of the document how payments would be credited and when individual purchases would be fully paid.

In the absence of a statutory or contractual provision, the creditor could have applied the payments to either item or to both in varying proportions. If the amounts received were applied to both purchases, the security interest in each item would linger longer than if payments were credited solely to either one.

The debtor's grievance in this case is that Landaus' security arrangement allowed goods actually paid for to remain subject to the creditor's security interest. The bankruptcy judge found the installment contract permissible because under Pennsylvania case law, in the absence of designation by the debtor, the creditor is free to apply the payments as he wishes or "in the way most beneficial to the creditor, that is, to the debt least secured." 29 B.R. at 713 (quoting Page v. Wilson, 150 Pa.Super. at 433, 28 A.2d at 709).

The issue presented here has been addressed by a number of bankruptcy courts with varying results. Some have adopted the "transformation rule," which holds that if an item of collateral purports to secure not only its own purchase price but also that of other items, the security interest that existed before the "add on" procedures is transformed into nonpurchase-money status. Those courts reason that because the item secures more than its own price, there is no longer a "pure" purchase-money security interest and consequently that lien disappears. See In re Manuel, 507 F.2d 990 (5th Cir.1975); In re Norrell, 426 F.Supp. 435 (D.C.Ga.1977); In re Krulick, 6 B.R. 443 (Bankr.M.D.Tenn.1980); In re Scott, 5 B.R. 37 (Bankr.M.D.Pa.1980); In re Mulcahy, 3 B.R. 454 (Bankr.S.D.Ind.1980).

Other courts have differed, holding that a security interest can have a "dual status" and that the presence of a nonpurchase-money security interest does not destroy the purchase-money aspect. This rationale is derived from the language of the Uniform Commercial Code Sec. 9-107, which states that...