This matter is before the Court on the debtors' Motion for Order Avoiding Lien on Exempt Property. The lien is claimed by the Bank of Williamsburg ("the Bank") on certain items of furniture.

The Bank has responded to the Motion. Both the debtors and the Bank have filed briefs. The issue to be decided herein is whether the debtors may avoid a lien of a creditor claiming a purchase money security interest, or in the alternative a consensual lien,

where the loan as originally written was unsecured and the debtors did not use the proceeds for the stated purpose. For the reasons set out below, this Court holds that the lien may be avoided.

The debtors herein filed their joint Chapter 7 petition in this Court on December 21, 1990. The debtors filed a Motion for Order Avoiding Lien on Exempt Property on August 23, 1991. Therein they contend that the Bank's lien impairs their interest in property of a kind described in 11 U.S.C. '522(f)(2)(A), (B) or (C) in which they are entitled to claim, and have claimed, an exemption. The property consists of two couches and chairs, a La-Z-Boy chair, four glass-top end tables, a twenty-seven inch television, a V.C.R., two standing lamps, a table and six chairs, a china cabinet, and a day bed and mattress.

The Bank filed copies of a credit application and promissory note executed by the debtors on February 10, 1989, in regard to a loan from the Bank in the principal amount of $6,521.55. The credit application states that the purpose of the loan is "to purchase furniture for home". The promissory note bears on its face the notation "This note is not further secured". According to its brief filed on September 20, 1991, the Bank admits that the original note was unsecured, and states that it renewed the note four times, the last time being August 6, 1990.

At the time of the August 6, 1990 renewal, the note was in the amount of $6,185.62, and the debtors signed a security agreement giving the Bank an interest in the property set out above. The Bank states that its loan officer believed that this property had originally been purchased with the loan funds. The Bank found out later, however, that the debtors did not use the funds to purchase the items in question.

The Bank had originally argued that it had a purchase money security interest ("PMSI") in the items because the credit application for the original loan stated that the purpose of the loan was "to purchase furniture". The Bank apparently operated under the assumption that it had a PMSI until it discovered that the debtors had not used the original loan funds to purchase the items. The Bank then took the position that "the security agreement" (presumably the one granted by the debtors on August 6, 1990) did not constitute a PMSI because the value given was not used to enable the debtor to obtain rights in the collateral pursuant to KRS 355.9-107.

A PMSI is a specific type of security interest. See KRS 355.9-107. Therefore, before determining whether the Bank had a PMSI, the Court determines whether it had any kind of security interest. Pursuant to KRS 355.9-203, a security interest is not enforceable against the debtor and does not attach unless the debtor has signed a security agreement which contains a description of the property, value has been given, and the debtor has rights in the collateral.

In this case, there is no evidence that the debtor signed a security agreement when the loan was made on February 10, 1989. In fact, the face of the promissory note contains the statement, "This note is not further secured", in the section denoted "Security".

Arguments advanced by the debtors concerning whether or not a PMSI survives the refinancing of a loan and whether a security interest can be a PMSI if the value given is not used to enable the debtor to obtain rights in the collateral are therefore irrelevant since there has been no evidence presented that a security interest of any kind was created at the time the loan was made.

The Bank then contends that even if it did not have a PMSI, it did have a consensual lien, obtained upon the fourth renewal of the note on August 6, 1990, which may not be avoided. The Bank bases its argument on KRS 427.010(4) which provides that a consensual lien may not be avoided to the extent of the balance due on the debt. The U.S. Supreme Court has recently held in Owen v. Owen, 111 S.Ct. 1833 (1991), that judicial liens can be eliminated under 11 U.S.C. '522(f), even though the state has defined the exempt property in such a way as specifically to exclude property encumbered by such liens.

The Supreme Court points out that to determine the application of '522(f) to the federal exemptions available under '522(d), bankruptcy courts do not ask whether the lien impairs an exemption to which the debtor is in fact entitled, but whether it impairs an exemption to which he would have been entitled but for the lien itself. At 1836-1837. Although Owen v. Owen deals specifically with a judicial lien ('522(f)(1)), there is nothing in the opinion to suggest that the Court's reasoning does not apply as well to non-possessory, non-purchase money liens on household goods, etc. ('522(f)(2)).

Applying this reasoning to the case at bar, the language of KRS 427.010(4) notwithstanding, the debtors may avoid the lien of the Bank of Williamsburg as a non-possessory, non-purchase money security interest which impairs their interest in property in which they claim an exemption pursuant to 11 U.S.C. '522(f). Their Motion for Order Avoiding Lien on Exempt Property should be SUSTAINED.

Entered this ____ day of November, 1991.




Copies to:

J.B. Johnson, Esq.

David Hoskins, Esq.