Article Courtesy of Michael Robson (Greenberg Traurig)
Upper Explorerland Regional Planning Commission v. Vanhorn (In re Vanhorn), 69 BCD 240, 2021 WL 741999 (Bankr. N.D. Iowa 2021)
Chief U.S. Bankruptcy Judge Thad J. Collins of the Northern District of Iowa (the “Court”) ruled that a business lender’s purchase-money security interest (“PMSI”) does not reach tools that an Iowa contractor claimed as exempt assets in his Chapter 7 case reasoning that there must be a clear nexus between the loan proceeds and the subject assets, rather than a broad sweeping right to all inventory of the debtor.
Benjamin Vanhorn (“Vanhorn”) operated American Home Services LLC, a construction business in northeast Iowa. In 2016, Vanhorn obtained a $60,000 loan from Upper Explorerland Regional Planning Commission (“Lender”) to remodel his workspace, purchase additional equipment, and fund additional working capital. As collateral for this loan, the Lender acquired a first-priority security interest in all of Vanhorn’s inventory and tools, obtained a PMSI in a skid loader (“Skid Loader”) that Vanhorn later bought for $41,500 with the loan proceeds, and required Vanhorn to deliver a personal guaranty. In 2018, Vanhorn became unable to make payments and entered into negotiations with the Lender, and the parties agreed that payments would be interest-only for a temporary period. The interest-only payment waiver was extended multiple times. However, the relationship between the parties continued to deteriorate, and in March 2020 Vanhorn became unable to make the interest-only payments.
In April 2020, Vanhorn filed for Chapter 7 relief, listing his tools as exempt assets under Iowa Code Ann. §627.6(11), which allows debtors engaged in professions other than farming to exempt up to $10,000 of their “tools of the trade” in a bankruptcy proceeding (the “Claim of Exempt Tools”). The Lender also learned that Vanhorn had sold the Skid Loader to a third party without informing the Lender. In July 2020, the Lender filed an objection to Vanhorn’s Claim of Exempt Tools, claiming Vanhorn cannot avoid the PMSI in the Skid Loader and general tools under Iowa law even if Vanhorn is entitled to a trade-tools exemption on the basis that Vanhorn then worked for a Wisconsin roofing company in Wisconsin rather than the self-owned construction company in Iowa. The Lender then filed an adversary complaint, followed by a summary judgment motion, seeking a determination that the $50,000 balance remaining on Vanhorn’s loan was not dischargeable because Vanhorn’s sale of the Skid Loader was “willful and malicious.”
Federal bankruptcy courts primarily look to state courts for purchase-money security interest guidance, as the federal code does not have a similar defined term. Under Iowa Code Ann. §554.9103(2)(a), a “security interest in goods is a purchase-money security interest . . . [in those goods] to the extent that the goods are purchase-money collateral with respect to that security interest.” Additionally, Iowa Code Ann. §554.9103(1)(b) provides that “purchase-money collateral” are goods that secure a purchase-money obligation incurred with respect to that collateral.
The Court ruled for Vanhorn, reasoning that the loan money was not used for the contemporaneous purchase of all existing tools owned by Vanhorn and as such these tools were not subject to the PMSI, despite the blanket security interest provided for under the loan agreement. The Court further discussed the differences in valuations of the tools based on the proposed valuations submitted by Vanhorn when applying for the loan against the actual appraisal conducted by the Lender following the initiation of the bankruptcy proceeding resulting in the actual values being much less than the $10,000 exemption limit. As to the Skid Loader, the Court concluded that the Lender had a PMSI in the Skid Loader. Additionally, the Court declined the Lender’s argument that its loan balance should be excepted from Vanhorn’s discharge and held that summary judgment was premature. 11 U.S. Code § 523(a)(6) excepts from discharge a debt “for willful and malicious injury by the debtor to another.” In this instance, the Lender failed to show that Vanhorn intended to cause injury, and that his conduct was specifically targeted at the Lender. The Court concluded that there were still questions as to whether Vanhorn had the requisite intent to cause the Lender financial harm because (1) Vanhorn testified that he believed he could sell the Skid Loader as necessary and continued making the interest-only payments following the sale up until the bankruptcy filing, and (2) Vanhorn struggled with mental health issues stemming from post-traumatic stress disorder from his time in the military and testified to the Court as to his deteriorating mental health during the period in which the Skid Loader was sold. Looking favorably upon Vanhorn’s defense, the Court denied the Lender’s motion for summary judgment and remanded these issues for further consideration.