Case Summary:
Chapter 7 debtors sought to avoid a lien on various items of farm equipment. The creditor asserted that it had a purchase-money security interest in one item, a skidsteer. The Debtors disputed the existence of a PMSI, argued that there had been a novation, and that their payments on the debt should be applied first to the skidsteer (such that the PMSI was paid, and the remaining obligation was a general security interest). The Bankruptcy Court found that the security agreement created a PMSI. The subsequent renewal of the loan did not constitute a novation, as the differences between the two notes were minimal, no additional funds were borrowed, and there was no indication that the original obligation was extinguished. Finally, under Wisconsin law regarding the application of payments, payments are applied first to obligations secured by purchase-money security interests only if “more than one obligation is secured.” Here, there was only one obligation, and payments would be applied to the whole debt (and the PMSI would be removed only after the entire debt has been satisfied). The motion to avoid the lien was denied as to the skidsteer.

Statute/Rule References:
11 U.S.C. § 522(f) -- Lien Avoidance
Wis. Stat. § 409.103 -- Purchase - Money Security Interest

Key Terms:
Lien Avoidance
Purchase - Money Security Interest