In re Vanhorn

Benjamin Vanhorn (debtor) applied for a loan from Upper Explorerland Regional Planning Commission (the commission) (creditor) to remodel his workspace, purchase a skid loader, and obtain additional working capital. The commission approved a loan for $60,000 on agreement that Vanhorn’s repayment obligation would be secured by a security interest in all of Vanhorn’s inventory and equipment plus a purchase-money security interest in the skid loader once acquired. Shortly after receiving the loan proceeds, Vanhorn purchased a skid loader for $41,5000. Vanhorn initially made loan payments to the commission as required by the loan agreement, but his checks started to bounce in March of 2018. The commission agreed to allow Vanhorn to temporarily make interest-only payments, which Vanhorn did for a time. However, Vanhorn stopped communicating with the commission in late 2019, and his March 2020 check for an interest-only payment bounced. Shortly thereafter, Vanhorn filed for Chapter 7 bankruptcy. At that time, the commission learned that Vanhorn had previously sold the skid loader to a third party without notifying the commission. In the bankruptcy proceeding, Vanhorn claimed that his tools were exempt from the bankruptcy estate and thus could not be used to satisfy obligations to creditors. The commission objected to Vanhorn’s claimed exemption, arguing that it had a lien on the tools, which were collateral for the loan, and that the lien could not be avoided via an exemption because the lien resulted from a purchase-money security interest. The bankruptcy court considered the commission’s objection.