The Nebraska Bankruptcy Court has issued a new opinion that limits the ability of debtors to avoid non-purchase money liens in motor vehicles.  (A non-purchase money auto lien is created when a loan is given by a bank or finance company that is secured to a car title but the loan was not used to purchase the vehicle. Using a paid off car as collateral for a loan results in a non-purchase money lien.) In the case of In re Cardwell, the Court ruled that a debtor may not utilize the “Tool of the Trade” exemption of Nebraska statute 25-1556 to avoid such liens unless the vehicle is actually used in the debtor’s trade.

The statute provides that  a debtor may exempt “the debtor’s interest, not to exceed an aggregate fair market value of two thousand four hundred dollars, in implements, tools, or professional books or supplies held for use in the principal trade or business of such debtor or his or her family, which may include one motor vehicle used by the debtor in connection with his or her principal trade or business or to commute to and from his or her principal place of trade or business.”

In the Cardwell case, the debtors owned a 2006 Pontiac Montana worth $1,200 and a 1992 Ford F-150 pickup truck worth $800.  The paid vehicles were pledged to First State Bank for a loan with a balance of $24,466.  After the bankruptcy case was filed, their attorney filed a motion seeking to avoid the lien of the bank.

Bankruptcy Code Section 522(f) allows debtors to avoid a lien in property subject to a nonpurchase-money security in any implement, professional books, or tools of the trade of the debtor or the trade of a dependent of the debtor.  The problem in Cardwell is that neither debtor was self-employed and although they used the vehicles to commute to and from work, they did not use the vehicles to perform their jobs.  As the court noted, the vehicles were used solely for personal purposes and to commute to work.  Therefore, the Court ruled that the vehicles did not qualify as “tools of the trade” as is required under 522(f) to avoid liens.

This is a devastating ruling for debtors who have pledged their vehicle to acquire high interest rate Title Loans.  For decades, Nebraska bankruptcy attorneys have used this statute to return car titles, but now they will have to limit this procedure to cases where a debtor can show the vehicle is actually used in their trade.

Importantly, what the Court did not state is how much a debtor must use a vehicle in their job to enable them to avoid nonpurchase-money liens.  For example, paralegals in our law firm frequently use their vehicles to make trips to the Post Office or to file documents in the courthouse.  Is that enough use to invoke the avoidance power?  Nebraska bankruptcy attorneys will need to emphasize how a debtor utilizes their vehicle in their job to gain access to the lien avoidance power.

The Court made reference to 8th Circuit cases that will guide bankruptcy attorneys in future cases.   “Although Cleaver did not reach the ultimate issue of whether the vehicle in that case was in fact a tool of the trade, it did state “[t]he Eighth Circuit has adopted a test to determine whether a vehicle is a tool of the trade, and that is: ‘the reasonable necessity of the item to the debtor’s trade or business.’” 407 B.R. at 358 (citing Prod. Credit Assoc. of St. Cloud v. LaFond (In re LaFond), 791 F.2d 623, 627 (8th Cir. 1986) (quoting Seacord v. Commerce Bank of Blue Hills (In re Seacord), 7 B.R. 121 (Bankr. W.D. Mo. 1980)). In making that determination, a court should consider (1) the intensity of the debtor’s past business activities; (2) the sincerity of the debtor’s intention to continue the business; and (3) evidence that the debtor is “legitimately engaged in a trade which currently and regularly uses the specific implements or tools . . . on which lien avoidance is sought.” LaFond, 791 F.2d at 626 (citations omitted). A car that is used solely for commuting is not a tool of the trade. In re King, 451 B.R. 884, 887 (Bankr. N.D. Iowa 2011) (stating, “It is fairly well settled that a car used only for commuting purposes cannot be considered a tool of debtor’s trade.”) (citations omitted).”

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