Billings v. Avco Colorado Industrial Bank

Russell Fred Billings and Julia Darlene Billings (debtors) purchased furniture on credit from Factory Outlet Store (Factory). Factory took a purchase-money security interest in the furniture. Factory assigned the Billingses’ payment obligation to Avco Colorado Industrial Bank (Avco) (creditor). The Billingses had trouble making their monthly payments. Accordingly, Avco agreed to refinance the Billingses’ payment obligation to reduce the Billingses’ monthly payments at a higher interest rate. The refinancing transaction consisted of canceling the old note and executing a new note and security agreement in its place. Avco did not take an interest in additional collateral and only loaned the Billingses an additional $9.67. The back of the loan application indicated that Avco would retain its purchase-money security interest. The Billingses made only one payment after refinancing before filing for Chapter 13 bankruptcy. The Billingses filed a motion seeking to avoid Avco’s lien on the furniture pursuant to the United States Bankruptcy Code. Avco objected and argued that it retained a purchase-money security interest in the furniture such that the Billingses could not avoid its interest. The bankruptcy court rejected the Billingses’ argument that refinancing automatically extinguished Avco’s purchase-money security interest, found insufficient evidence to conclude the parties intended for the new note to extinguish the original debt and purchase-money security interest, and denied the Billingses’ motion. The district court affirmed.