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#2157

IN THE UNITED STATES BANKRUPTCY COURT

FOR THE DISTRICT OF KANSAS





In Re:

STEVE GARY EWING, ANITA DIANE EWING,

DEBTOR(S)

NO. 94-41385-7

CHAPTER 7

ORDER ON DEBTORS' MOTION TO AVOID LIEN

This matter is before the Court on the debtors' motion to avoid creditor Commerce Bank & Trust's lien on certain items of personal property which they claim are exempt as tools of their trade. The debtors appear by counsel Eric W. Severson. Commerce Bank & Trust (Commerce) appears by counsel Theron L. Sims. The Court has reviewed the relevant pleadings and is now ready to rule.

FACTS

The debtors have been running a business in which they sell, rent, service, and repair vacuum cleaners. They also perform carpet cleaning themselves, using their rental vacuums to do so. The parties agree that the debtors are entitled to claim $15,000 worth of tools of their trade under K.S.A. 60-2304(e). The debtors have identified a number of items which they claim as tools of their trade, categorizing them as office equipment, repair tools, display equipment, repair parts, and carpet cleaning equipment. Commerce has a nonpossessory, nonpurchase-money security interest in all these items. Commerce concedes the items listed as repair tools are exempt, but questions the items listed in the other categories. The debtors conceded that certain items they used in their business were not exempt, and agreed Commerce should have stay relief to proceed against those items.

The following are the items still in dispute. Under the heading "Office Equipment," the debtors listed computers and printers, software, file cabinets, "Zon terminal and printers," cash drawers, telephones, answering machines, microfiche, office chairs, desk, fax machine, and supplies. At page 5 in his brief, the debtors' attorney indicates that the "Zon terminal and printers" are "credit card equipment." No evidence has been presented on this point. Under the heading "Display Equipment," they listed counters, signs, fixtures, demo tools, shelving and racks, and demonstrator, loaner, and rental vacuum cleaners. Under the heading "Carpet Cleaning Equipment," they listed commercial carpet cleaning machines, commercial upright vacuum cleaners, commercial tank vacuum with power head, compact canister vacuums, hand vacs, applicator, moisture detector, and chemicals. Under the heading "Repair Parts," they listed belts, roller brushes, plugs and bulbs, bearings, attachments, switches, brush inserts, fans, cords, motors and armatures, and a number of items described as: "Outer Bag Assy.," "Misc. RX Parts," "Misc. FQ Parts," "Misc. PN Parts," "Misc. KB Bags and Parts," "Misc. HU Bags and Parts," "Misc. EU Bags and Parts," "Misc. RY/DD Bags and Parts," "Misc. Hose Assy.," "Misc. Paper Bags," and "Misc. Odd Parts."

In an affidavit, the debtors have further explained how they use some of these items in their business. On the computer, they use software specifically designed for the vacuum industry, keeping track of their sales, service, rental, and warranty records. They also use a word processor for their business correspondence, and maintain many records on the computer, including bookkeeping, commercial bidding, telephone conversations, and daily notes. They use the fax machine to send specification sheets to commercial customers and to receive information needed to repair vacuums. They use the display equipment to operate a retail showroom, and use the vacuum cleaners listed as display equipment to demonstrate their features and allow customers to try out the machines. They assert that a substantial part of their business is carpet cleaning and the rental of carpet cleaning equipment. Finally, they state that to remain competitive in their market, they must have a minimal supply of repair parts and components available to quickly repair the many models of vacuums brought to them.

DISCUSSION AND CONCLUSIONS

K.S.A. 60-2304(e) provides that a state resident is entitled to exempt from attachment and execution:

The books, documents, furniture, instruments, tools, implements and equipment, the breeding stock, seed grain or growing plants stock, or the other tangible means of production regularly and reasonably necessary in carrying on the person's profession, trade, business or occupation in an aggregate value not to exceed $7,500.

11 U.S.C.A. §522(f)(1) permits a debtor to:

"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--

. . .

(B) a nonpossessory, nonpurchase-money security interest in any--

. . .

(ii) implements, professional books, or tools, of the trade of the debtor or the trade of a dependent of the debtor."(1)

"While state law governs the question of the debtors' exemption of their [specified property], federal law determines the availability of lien avoidance under §522(f). [Citations omitted]." Heape v. Citadel Bank (In re Heape), 886 F.2d 280, 282 (10th Cir. 1989). Nevertheless, the Court believes that when the exemption is claimed pursuant to state law, the reference in §522(f)(1) to "implements . . . or tools, of the trade" is to any items which qualify for a state-created "tool of trade" exemption like the one established by K.S.A. 60-2304(e), and not some separate federal tool of trade category that might exclude items covered by the state exemption or include items not covered by the state tool of trade exemption but by some other state exemption.

In Heape, the Circuit held that a lien on a livestock farmer's breeding stock that was exempt under K.S.A. 60-2304(e) could be avoided under §522(f)(1). 886 F.2d at 282-84. The court indicated it approved of a "use" test applied in In re Bulger, 91 B.R. 129, 131-32 (Bankr.M.D.Ala. 1988) and Walkington v. Production Credit Ass'n (In re Walkington), 42 B.R. 67, 72 (Bankr.W.D.Mich. 1984), which it said was "compatible" with Kansas law on tools of trade. 886 F.2d at 282. The Walkington court had said, "'[T]he description of an object as a "tool" necessarily implies a classification based upon that object's functional and utilitarian purpose in the hands of its owner or user.'" 42 B.R. at 71 or 72 (quoting Credithrift of Am., Inc., v. Dubrock (In re Dubrock), 5 B.R. 353, 355 (Bankr.W.D.Ky. 1980)). The Circuit concluded, "Breeding stock to the livestock farmer is the functional equivalent of the crop farmer's tractor--a means of producing physically distinct agricultural products." 886 F.2d at 283. This statement particularly convinces the Court it must return to the Kansas exemption for "tangible means of production" to determine which items qualify as a Kansas tool of trade so that the debtors may avoid the lien on them.

The Court believes another element implicit in the Kansas tool of trade exemption excludes some items that are otherwise regularly and reasonably necessary in carrying on a trade or business. The object claimed to be a "tangible means of production" must be necessary for and used in making or fabricating a product or providing services, but must itself not be or become the product or service, or a part of it. This facet distinguishes, for example, inventory from tools of trade. Items held for sale (inventory) are not tools of trade because they are the product rather than a tangible means of producing a product. Tools of trade are items kept and used to produce the goods or services which the person claiming the exemption sells.

With these guidelines in mind, the Court is ready to consider the items the debtors claim are their tools of trade. The Court believes most of the items listed as "Office Equipment" constitute "furniture," "instruments," "tools," "implements," or "equipment" under K.S.A. 60-2304(e). If the "Zon terminal and printers" are the equipment the Court typically sees used in retail stores to initiate and document credit card transactions, they would also qualify as tools of trade. If they are something else, the parties will need to provide more information about them. The Court is uncertain what the debtors mean by "supplies" and will need more information to be able to determine whether they qualify as tools of trade. Similarly, most of the items listed as "Display Equipment" constitute "furniture," "instruments," "tools," "implements," or "equipment" under the statute. The Court is uncertain, however, what the debtors mean by "fixtures" and will need more information about them. The Court believes all the items listed as "Carpet Cleaning Equipment" are exempt except for the "chemicals." Like inventory, the chemicals are not retained but are used up in the process of providing the carpet cleaning service, and so do not qualify as tools of the debtors' trade. Finally, the Court believes most of the items listed as "Repair Parts" constitute a kind of inventory which do not come within K.S.A. 60-2304(e). To the extent the parts are reasonably needed to maintain the vacuums and other carpet cleaning equipment which the debtors use when they are hired to clean carpets and which they rent out to others, the parts can be exempted. Since the debtors indicated they operate an extensive vacuum repair service, the Court assumes only a small portion of the listed parts are needed to maintain their own machines. The debtors will need to inform Commerce what parts they need to keep on hand for which of their vacuums, and then Commerce will have to indicate whether it wishes to dispute the need for any of those parts.

The parties have cited certain cases, and Commerce asserts certain arguments, which the Court feels should be addressed. Citing In re Neal, 140 B.R. 634 (Bankr.W.D.Tex. 1992), Commerce contends the debtors' computer is not exempt because they merely use it for their convenience and for promoting their business rather than to generate a saleable product, as the debtor did in that case. The debtors cite the case because it held a computer was exempt. Neal provides little guidance in this case, however, because the court was applying a Texas exemption law which limited tools of trade to those items "peculiarly adapted" or "fairly belonging" to the pertinent trade and excluded items of merely general value and use in a business. 140 B.R. at 637. The same is true of In re Swift, 124 B.R. 475, 480-81 (Bankr.W.D.Tex. 1991), also cited by Commerce. Kansas law does not restrict tools of trade in this way. Commerce relies on In re Reed, 18 B.R. 1009, 1010-11 (Bankr.W.D.Ky. 1982), where the DuBrock court later held a fork lift and trailers used by a metal fabricator to lift and carry sheet metal were not tools of his trade because they were "collateral to the principal undertaking . . . to mold, shape, fasten and fit metals to their intended form and use." "Lifting and carrying things," the court continued, "could be done by others, under contract, or by alternative mechanical or vehicular means." 18 B.R. at 1011. Thus, the court appears to have recognized that the debtor could not perform his trade without some way to lift and carry sheet metal, yet concluded the items he used for those purposes were not tools of his trade. The court suggested that to decide whether an item was a tool of trade, the court must ask, "Is the item claimed to be exempt reasonably necessary both in kind and in quality for the workman to perform his chosen craft in an efficient and competent manner?" 18 B.R. at 1010. The court then explained:

The "in kind" test would disqualify an item if alternative means or devices could perform the same job functions equally well. The "quality" test would reject the new limousine if the old subcompact would do

The "efficient and competent" test would inject market-place considerations. It would allow any given item to be considered in light of such factors as customary usage in the trade, replacement and maintenance costs, the technological state of the art, comparative productivity and projected profitability.

18 B.R. at 1010.

The Court is not aware of any Kansas case suggesting the Kansas exemption is so limited; instead, it extends to any items that belong to the debtor, and are necessary and personally used to carry on his trade or business. See Heape, 886 F.2d at 282-83 (citing and quoting from Reeves & Co. v. Bascue, 76 Kan. 333, 91 P. 77, 77 (1907)). Furthermore, it is significant that in Heape, the Tenth Circuit relied on DuBrock, but did not mention in its discussion the DuBrock court's later decision in Reed. The court in In re Quidley, 39 B.R. 362, 367 (Bankr.E.D.Va. 1984), also relied on by Commerce, followed the Reed court's reasoning, so this Court declines to rely on it.

For these reasons, the Court concludes that most of the items claimed by the debtors are exempt under K.S.A. 60-2304(e). Commerce's lien on those items will be avoided. However, as indicated, the Court will need more information to be able to determine whether the "Zon terminal and printers, the "supplies," and the "fixtures" are exempt. The chemicals are not exempt, and only those repair parts necessary to maintain the debtors' own equipment are exempt.

The parties are directed to inform the Court within thirty days whether they have succeeded in resolving the questions left undecided in this order or will require further court proceedings.

IT IS SO ORDERED.

Dated at Topeka, Kansas, this 28th day of July, 1995.













__________________________________

JAMES A. PUSATERI

CHIEF BANKRUPTCY JUDGE

1. 1The Bankruptcy Reform Act of 1994 amended much of §522(f), but made no changes that affect the issue before the Court in this case. See P.L. 103-394, §§303, 304(d), and 310, 1994 U.S.C.C.A.N. (108 Stat.) 4106 at 4132, 4133, and 4137-38. Since the amendments have no effect, the quotation uses the new identifying labels for the parts of the subsection even though the new version does not apply to this case. See P.L. 103-394, §702, 1994 U.S.C.C.A.N. (108 Stat.) 4150.

 

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