Summary of a Recent
Judicial Development in
Bankruptcy

Farmer-Debtors Not Allowed to Avoid
FSA Lien in Farming Equipment

Gaby R. Jabbour
National AgLaw Center Research Assistant

Summary of Decision

In In re Henke, 294 B.R. 105 (Bankr. D.N.D. 2003), the United States Bankruptcy Court for the District of North Dakota held that farmer-debtors could not avoid a lien held by the Farm Service Agency ("FSA") on certain farm equipment and machinery because the debtors failed to demonstrate that the property constituted "tools of the trade" pursuant to Bankruptcy Code § 522(f).

Background

The debtors filed a Chapter 7 bankruptcy petition on their cattle farm and trucking operation. See id. at 106. At the time of their bankruptcy filing, one of the debtors drove a truck for another company, and the other worked as a certified nursing assistant. See id. at 107. The debtors also owned several items of farm machinery and equipment in which the FSA held a perfected security interest. See id.

Arguments

The debtors argued that the FSA's secured claim in the equipment and machinery was a nonpossessory, nonpurchase money security interest and that the equipment and machinery were exempted from the debtors' bankruptcy estate as tools of the trade pursuant to Bankruptcy Code § 522(f). See id. at 108. The debtors also argued that the FSA's security interest should be avoided because its claim impaired the tools of the trade exemption they claimed in the equipment and machinery. See id. The FSA objected to the debtors' motion, arguing that they failed to include sufficient information for it to determine the extent, if any, to which the lien could be avoided and that all or a portion of the debtors' property should not be considered tools of the trade. See id. at 106.

Analysis and Holding

The court explained that Bankruptcy Code § 522(f) provides, in relevant part, that

Notwithstanding any waiver of exemptions but subject to paragraph (3), 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 . . . a nonpossessory, non-purchase money security interest in any . . . implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor.

Id. (quoting 11 U.S.C. § 522(f)(1)(B)(ii)).

The court also explained that the purpose of tools of the trade avoidance provision "is to afford a debtor a fresh start and to preserve the means to continue the business or profession in which he or she was engaged when the petition was filed." Id. The court further explained that to determine whether a debtor is a farmer under § 522(f), it was required to assess "the intensity of a debtor's past farming activities and the sincerity of his intentions to continue farming, as well as evidence that [the] debtor is legitimately engaged in a trade which currently and regularly used the specific implements or tools exempted and on which lien avoidance is sought." Id. (quoting In re LaFond, 791 F.2d 623 (8th Cir. 1986)). The court noted that it has adopted the LaFond test and that it has previously held that "tools necessary to the trade in which the debtor was engaged at the time of filing may still qualify as tools of the trade . . . even if the debtor is presently engaged in some other pursuit" as long as "the debtor has only temporarily ceased the vocation to which the tools belong and is sincere in his or her intent to shortly resume that vocation." Id. (citations omitted).

The court held that the FSA's lien was a nonpossessory, non-purchase money security interest because the FSA did not dispute the debtors' argument that the lien was a nonpossessory, non-purchase money security interest. See id. The court also held that the debtors could not avoid the FSA's lien in the farming equipment and machinery because the debtors failed to establish that the equipment and machinery constituted tools of the trade. See id. at 111. Noting that the debtors did not have "any reasonable prospect of returning to the farming business," the court added that a debtor's mere desire to return to farming was not sufficient to satisfy the LaFond test. See id.

The case was decided on May 9, 2003; this summary was posted Dec. 23, 2003.