Cite as: 78 B.R. 217
In
re Jerry R. Shepler, Grace E. Shepler, Debtors
Bankruptcy Case No. 86-02661-7
United States Bankruptcy Court
W.D. Wisconsin, Eau Claire Division
August 20, 1987
Alan D. Moeller, Black River Falls, Wis., for debtors.
Daniel R. Freund, Eau Claire, Wis., for The Bank of Holmen.
Thomas S. Utschig, United States Bankruptcy Judge.
MEMORANDUM OPINION, FINDINGS OF FACT,
AND CONCLUSIONS OF LAW
Jerry Shepler (debtor) by Alan D. Moeller, has filed a motion to avoid liens on certain
office equipment, including an IBM computer, pursuant to 11 U.S.C. � 522(f) and
Bankruptcy Rule 4003(d). The Bank of Holmen (Bank) appears by Daniel R. Freund and objects
to the motion. Telephonic hearings were held in this matter on February 10, 1987, and
April 29, 1987. The issue of whether the Bank has a nonpossessory security interest in
property that can be avoided has been submitted to the Court for determination through
briefs.
The debtor borrowed $3,000 from the Bank and executed a note with respect to such
obligation on November 27, 1985. The note was renewed on February 10, 1986, and again on
May 23, 1986. The debtor granted the Bank a security interest in an IBM computer and other
office furnishings as collateral for the loan. The Bank filed a financing statement in
Jackson County on December 3, 1985, in an attempt to perfect its security interest in the
collateral. The Bank did not file a financing statement with the Secretary of State for
the State of Wisconsin. The debtor became delinquent on his obligation to the Bank. On
September 24, 1986, the Bank filed a replevin complaint, and on October 21, 1986, default
judgment was entered in favor of the Bank. The Bank took lawful possession of the
collateral on October 24, 1986.
The debtor filed a petition for relief under Chapter 7 of the Bankruptcy Code on
October 27, 1986. On October 29, 1986, the Bank filed a notice of application for
abandonment of the subject property. A hearing on abandonment was held on December 15,
1986. At the hearing the debtor withdrew his objection to the abandonment apparently due
to an agreement that the Bank would not use the abandonment as a defense to a lien
avoidance motion, and an order of abandonment was entered on December 19, 1986. The debtor
filed a motion to avoid the Bank's lien on the subject property pursuant to 11 U.S.C. �
522(f) on December 30, 1986.
Initially it appears that the debtor did not relinquish, waive, or otherwise release
any rights to the subject property with respect to this lien avoidance motion by allowing
the order of abandonment to be entered. This is due to the fact that the parties entered
into a specific agreement to this effect prior to the order of abandonment being entered.
The single and narrow issue now presented is whether the debtor is precluded from
avoiding liens on property that has been replevied prior to the filing of the bankruptcy
petition and which is in the possession of the secured party.
Initially, the debtor contends that he could have avoided the transfer of the property
to the Bank by exercising the avoidance provision of � 522(h) of the Bankruptcy Code. The
debtor, however, has not filed a motion or initiated an adversary proceeding to avoid the
transfer of property to the Bank. See, Bankruptcy Rule 7001. It is questionable
whether the debtor could prevai1 in a � 522(h) action. Regardless, the court will not
speculate as to the result of a proceeding that the debtor did not commence.
The debtor attempts to use the lien avoidance provision contained within � 522(f)(2)
of the Bankruptcy Code. This section provides:
(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 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; (emphasis added)
The debtor carries the burden of proving that the lien may be avoided. In
re Sherwood, 79 B.R. 399, 400 (Bankr. W.D. Wis. 1986). "[T]he debtor must bear
the burden of persuasion on all elements necessary to avoid a lien under section
522(f)." In re Weinbrenner, 53 B.R. 571 (Bankr. W.D. Wis. 1985).
The issue presented is whether the Bank's security interest is nonpossessory so that
the debtor may utilize the lien avoidance provision of � 522(f) to avoid the security
interest of the Bank. The Bank contends that it is in possession of the property subject
to its security interest and, hence, the security interest is not
"nonpossessory."
The difficulty in this case arises from the lack of a definition of the term
"nonpossessory security interest." Under the Uniform Commercial Code and the law
of secured transactions in the State of Wisconsin possession may serve both as a method by
which a security interest attaches and as a method by which a security interest is
perfected. A security interest in goods and equipment attaches when all of the
following events have occurred:
a. 1. the collateral is in the possession
of the secured party pursuant to agreement or
2. the debtor has
signed a security agreement which contains a description of the collateral.
b. value has been given, and
c. the debtor has rights in the collateral.
Wisconsin Statutes � 409.203.
A security interest in property like the subject collateral can be perfected by:
1. filing a financing statement in the proper
place, or
2. the secured party taking possession of the
collateral.
Wisconsin Statutes � 409.302.
Both parties appear to agree that the subject property was purchased for the debtor's
business and constitutes office furnishings and equipment. Therefore, the proper place to
file a financing statement in order to perfect a security interest in the collateral would
have been with the Secretary of State for the State of Wisconsin. Wisconsin Statutes �
409.401(l)(c). The financing statement that the Bank filed in Jackson County did not serve
to perfect its security interest in the property. However, the Bank did have a valid
security interest that attached at the time the security agreement was executed and the
loan was extended. Wisconsin Statutes � 409.201. When the Bank legally took possession of
the collateral upon the default of the debtor the Bank perfected its security interest in
the property. Raleigh Industries of America, Inc. v. Tassome, 141 Cal. Rptr. 641,
22 U.C.C. Rep. Serv. 1235, 1241 (Cal. Ct. App. 1977). Thus, the Bank held a perfected
security interest in the collateral prior to the filing of the bankruptcy petition. The
court would note that the Bank took possession of the property in accordance with the laws
of the State of Wisconsin. See, Wisconsin Statutes �� 409.503 and 425.203.
The debtor maintains that the Bank only holds a nonpossessory security interest in the
property even though the property is in the possession of the Bank. The debtor argues that
a "nonpossessory security interest" within the meaning of � 522(f) of the
Bankruptcy Code applies to all security interests except those that "attach"
through "possession of the collateral by the secured party pursuant to
agreement." See, Wisconsin Statutes � 409.203. The debtor contends that the
possessory nature of a security interest for the purposes of � 522(f) of the Bankruptcy
Code is determined at the time of "attachment." The debtor argues that a
subsequent possession of property by a secured party does not alter the original
nonpossessory nature of a security interest so as to prevent a debtor from avoiding a
lien.
The debtor implicitly argues that one of the purposes of � 522(f) is to enable debtors
to make a meaningful fresh start by allowing them to retain possession of certain tools
that are necessary to carry on a trade or business. The debtor further would argue that
the Bankruptcy Code excepts nonpossessory security interests from this lien avoidance
provision for the reason that if a debtor has voluntarily transferred possession of
property to another party it is unlikely that such property is necessary for the debtor's
trade or profession. The reasoning behind this exception for nonpossessory security
interests from lien avoidance would not be applicable in a situation where a secured party
has taken possession of collateral without the affirmative voluntary assent of the debtor
just prior to the filing of a bankruptcy petition. Hence, the debtor argues that
"nonpossessory" as used in � 522(f) of the Bankruptcy Code is intended to
exclude only that property which a debtor has voluntarily relinquished to a creditor as
security for an obligation.
The debtor cites the cases of In re Wood, 13 B.R. 245 (Bankr. E.D. N.C. 1981)
and In re McFarland, 38 B.R. 370 (Bankr. N.D. Iowa 1983) in support of his
position. These cases hold that it is the original nature of a security interest at the
time it attaches that determines whether it is a "nonpossessory" security
interest within the meaning of � 522(f). They hold that the taking possession of
collateral by a secured party upon the default of a debtor is not "pursuant to
voluntary agreement" and does not serve to constitute a possessory security interest
that would preclude the application of the lien avoidance provision of � 522(f) of the
Bankruptcy Code.
The Bank, of course, disagrees with the debtor's contentions. The Bank argues that when
a party with a security interest in property also has possession of such property, then
the security interest is possessory and not subject to the lien avoidance provision of �
522(f). The Bank further argues that when it took possession of the property subject to
its security interest upon the default of the debtor it was pursuant to agreement. The
Bank contends that it is implicit in a security agreement, unless otherwise specified,
that upon default by a debtor a secured party may proceed to obtain possession of the
property securing the obligation. See Wisconsin Statutes �� 409.503 and 425.205.
The debtor knew at the time he entered into the security agreement that should he default
under his loan obligation the Bank could exercise its legal rights to seek recovery from
the property securing the obligation. The debtor voluntarily entered into the security
agreement because he wished to induce the Bank to extend a loan to him. The Bank extended
a loan to the debtor in reliance upon the security agreement entered into between the
debtor and the Bank which granted the Bank a security interest in the subject property.
The Bank cites the case of In re Sanders, 61 B.R. 381 (Bankr. D. Kan. 1986) in
support of its position. The court in Sanders held that when a Bank took possession
of collateral upon the default of a debtor, it obtained a possessory security interest in
the collateral. "The Bank's nonpossessory security interest became a possessory
security interest when the Bank took possession of the collateral." In re Sanders,
61 B.R. 381, 384 (Bankr. D. Kan. 1986). The Sanders court explicitly rejected the
reasoning in McFarland and Wood on which the debtor places reliance. The
court noted the standard provision implicit in a security agreement giving a creditor the
right to take possession of collateral upon default.
This court is in accord with the reasoning in Sanders. The debtor voluntarily
entered into a security agreement with the Bank wherein the debtor granted the Bank a
security interest in the subject property in exchange for a loan by the Bank. Implicit in
this agreement was the Bank's right to lawfully take possession of the collateral upon the
default of the debtor. The debtor did in fact default on his loan obligation. The Bank
brought an action of replevin in state court and a judgment of replevin was entered in
favor of the Bank. The Bank then lawfully took possession of the collateral. The Bank has
a possessory security interest in the collateral.
It is the conclusion of the court that the Bank's "security interest is
possessory" and the motion of the debtor to avoid the Bank's lien should accordingly
be denied.
This opinion shall constitute findings of fact and conclusions of law in accordance
with Bankruptcy Rule 7052. |
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