Summary of a Recent
Judicial Development in
Bankruptcy

Debtors Allowed to Avoid Bank's Security
Interest in Machinery, Equipment, and Tools

Joshua T. Crain
National AgLaw Center Graduate Assistant

Summary of Decision

In In re Lund, No. 03-02022F, 2003 WL 21673545 (Bankr. N.D. Iowa, July 14, 2003), the United States Bankruptcy Court for the Northern District of Iowa held that debtors could avoid a bank's security interest in machinery, equipment, and tools related to farming under 11 U.S.C. § 522(f)(1)(B)(ii).

Background

Debtors Marlen and Karen Lund lived on a 120 acre farm in Iowa that they had farmed since 1964. See id. The debtors' last year of farming was 2001 when the bank cancelled the debtors' line of credit. See id. Both debtors worked the farm as well as off-farm jobs. See id. The debtors stated that their intention was to continue farming. See id. On May 22, 2003 the debtors filed a joint petition for bankruptcy. See id. The debtors claimed as exempt, specific machinery, equipment, and tools to which the bank objected. See id. The debtors sought to avoid the bank's interest in the machinery, equipment, and tools under Bankruptcy Code § 522(f)(1)(B)(ii). See id.

Analysis and Holdings

The court explained that a debtor may avoid a nonpurchase-money, nonpossessory security interest to the extent it impairs an exemption to which the debtor would otherwise be entitled. See id. It also explained that the debtors claimed an exemption under the Iowa Code that would be impaired by the bank's lien against the machinery, equipment, and tools. See id. The bank argued that the debtors were not engaged in farming and that they intended to sell the machinery, equipment, and tools upon avoidance of the bank's interest. See id.

The court explained that to determine whether a debtor was engaged in farming, the past, as well as future intent, must be considered. See id. The court explained that, when looking at the debtors' past, and considering their stated intent, they were engaged in farming. See id. Further, the court explained that the reason for the debtors not farming since 2001 was out of their control, since the bank had cancelled their needed line of credit. See id. Additionally, the court explained that the machinery, equipment, and tools were used in the farming operation. See id. The court held, therefore, that the debtors could avoid the bank's interest in the machinery, equipment, and tools under § 522(f)(1)(B)(ii). See id.

The case was decided on July 14, 2003; this summary was posted Oct. 25, 2004.