ORDER GRANTING DEBTORS’ MOTION FOR LIEN AVOIDANCE, IN PART, AND OVERRULING TRUSTEE’S OBJECTION TO DEBTORS’ CLAIM OF EXEMPTION, IN PART
GREGORY F. KISHEL, Bankruptcy Judge.
This Chapter 7 case came on before the Court for hearing on the Debtors’ motion for hen avoidance. The Debtors appeared personally and by their attorney, Perry A. Berg. Chapter 7 Trustee Mark C. Halverson appeared for the bankruptcy estate. Upon the moving and responsive documents, the record made at the hearing, and the post-hearing memoranda submitted by counsel, the Court makes the following order.
The Debtors filed a voluntary petition under Chapter 7 on January 10, 1994. They are engaged in farming in Waseca County, Minnesota. On their Schedule B, they in-
eluded entries for livestock
of a total value of $5,175.00, and farming equipment
of a total value of $6,395.00. On their Schedule D, for creditors holding secured claims, they included an entry for Vern and Irma Flitter, of Pemberton, Minnesota.
They stated the amount of those persons’ secured claim as $3,000.00 and identified the collateral as “MACHINERY” and “TRACTOR AND SKID LOADER.” On their Schedule C, the Debtors claimed exemptions for all of their livestock and farming equipment, citing Minn.Stat. § 550.37 subd. 5
as their authority.
On March 24, 1994, the Trustee of their bankruptcy estate filed a paper entitled “Notice and Objection to Claimed Exempt Property.” In it, he objected to the Debtors’ claim of exemption in,
inter alia,
their equipment and livestock, on the following ground:
The trustee’s preliminary investigation reveals that these items may be subject to an unperfected security interest voidable by the trustee, in which case the debtors cannot exempt the items that they recovered by the trustee and are subject to a voluntary transfer — as would be the case with the grant of a security agreement [sic].
Contrary to the requirements of Loc. R.BankR.P. (D.Minn.) 702 and 1202 and Local Form 1202, the Trustee did not give notice of a hearing on this objection. He has not yet done so.
On July 7, 1994, the Debtors filed the motion at bar. In its text, they averred that the elder Flitters claim a security interest against the Debtors’ livestock, machinery, equipment, and all crops, under color of a security agreement and accompanying UCC-1 financing statement filed on September 1, 1989. Asserting that the existence of this security interest impairs any allowable claim of exemption in those items to which they would entitled, they request that it be avoided pursuant to 11 U.S.C. § 522(f)(2)(B).
Though he is not a named party-respondent to this motion, the Trustee has filed an objection to it. He asserts that the Debtors’ hypothetical equity interest in the elder Flit-ters’ collateral is not subject to exemption in this case, and therefore cannot be recovered by the Debtors via a remedy that is dependent on exemptibility like § 522(f) is. He bases his argument on a sequence of four propositions:
1. The Debtors voluntarily granted the security interest to the elder Flitters.
2. The elder Flitters’ security interest is presently unperfeeted and hence is subject to avoidance or subordination at his instance pursuant to 11 U.S.C. § 544(a).
3. Were he to take his avoidance remedies, the Debtors could not use 11 U.S.C. § 522(g) to claim an exemption for the value in the collateral that he would have recovered.
4. Because in such an instance the Debtors would not be able to claim any recovered value as exempt, they should not be allowed to “prejudice” the estate’s avoidance powers by exercising their own remedy before he does.
As framed by the pleadings for this motion, then, the issue is an interesting one: as between a debtor’s right of lien avoidance under § 522(f)(2) and a trustee’s avoidance and recovery powers under 11 U.S.C. §§ 544, 550, and 551, which one trumps? There is very little published caselaw that addresses this question, even in passing.
Ultimately, the Trustee’s argument is flawed by its failure to recognize a nuance inherent in the very structure of § 522(g). He is correct in the first several premises of his argument: if the elder Flitters’ lien was not perfected as of the commencement of this ease, the Trustee could have exercised his strong-arm powers against the liens. Then, had he been successful, 11 U.S.C. § 551 would have preserved the Debtors’ original transfer for the benefit of the estate,
and 11 U.S.C. § 550(a)
would have enabled him to recover the full unencumbered ownership in the subject assets from the elder Flitters.
After that, however, it gets a bit more complicated than the Trustee acknowledges.
11 U.S.C. § 522(g) gives debtors a right to reclaim such recovered property back from the estate in certain cases.
Congress afforded this right to give debtors an enhanced benefit from statutory exemption rights. H.R.REP. No. 595, 95th Cong. 1st Sess. 362-363 (1977); S.REP. No. 989, 95th Cong., 2d Sess. 76-77 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5861-5863, 6317-6319. As the Trustee points out, § 522(g) imposes one significant limitation on this right, by negative implication: where in the first place a debtor voluntarily parted with the value that the trustee has recovered — as, for example, by a consensual grant of security interest — he cannot meet the requirement of § 522(g)(1)(A), and cannot use § 522(g)(1) as the basis for his claim of exemption. However, § 522(g)(2) opens the debtor’s right back out again, for the classes of assets that are subject to a debtor’s lien avoidance powers under § 522(f).
In re Hollinsed,
54 B.R. 155, 156 (Bankr.W.D.Wis.1984);
In re Dipalma,
24 B.R. 385, 387-88 (Bankr.D.Mass.1982). For this source of secondary exemption rights, it is irrelevant
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ORDER GRANTING DEBTORS’ MOTION FOR LIEN AVOIDANCE, IN PART, AND OVERRULING TRUSTEE’S OBJECTION TO DEBTORS’ CLAIM OF EXEMPTION, IN PART
GREGORY F. KISHEL, Bankruptcy Judge.
This Chapter 7 case came on before the Court for hearing on the Debtors’ motion for hen avoidance. The Debtors appeared personally and by their attorney, Perry A. Berg. Chapter 7 Trustee Mark C. Halverson appeared for the bankruptcy estate. Upon the moving and responsive documents, the record made at the hearing, and the post-hearing memoranda submitted by counsel, the Court makes the following order.
The Debtors filed a voluntary petition under Chapter 7 on January 10, 1994. They are engaged in farming in Waseca County, Minnesota. On their Schedule B, they in-
eluded entries for livestock
of a total value of $5,175.00, and farming equipment
of a total value of $6,395.00. On their Schedule D, for creditors holding secured claims, they included an entry for Vern and Irma Flitter, of Pemberton, Minnesota.
They stated the amount of those persons’ secured claim as $3,000.00 and identified the collateral as “MACHINERY” and “TRACTOR AND SKID LOADER.” On their Schedule C, the Debtors claimed exemptions for all of their livestock and farming equipment, citing Minn.Stat. § 550.37 subd. 5
as their authority.
On March 24, 1994, the Trustee of their bankruptcy estate filed a paper entitled “Notice and Objection to Claimed Exempt Property.” In it, he objected to the Debtors’ claim of exemption in,
inter alia,
their equipment and livestock, on the following ground:
The trustee’s preliminary investigation reveals that these items may be subject to an unperfected security interest voidable by the trustee, in which case the debtors cannot exempt the items that they recovered by the trustee and are subject to a voluntary transfer — as would be the case with the grant of a security agreement [sic].
Contrary to the requirements of Loc. R.BankR.P. (D.Minn.) 702 and 1202 and Local Form 1202, the Trustee did not give notice of a hearing on this objection. He has not yet done so.
On July 7, 1994, the Debtors filed the motion at bar. In its text, they averred that the elder Flitters claim a security interest against the Debtors’ livestock, machinery, equipment, and all crops, under color of a security agreement and accompanying UCC-1 financing statement filed on September 1, 1989. Asserting that the existence of this security interest impairs any allowable claim of exemption in those items to which they would entitled, they request that it be avoided pursuant to 11 U.S.C. § 522(f)(2)(B).
Though he is not a named party-respondent to this motion, the Trustee has filed an objection to it. He asserts that the Debtors’ hypothetical equity interest in the elder Flit-ters’ collateral is not subject to exemption in this case, and therefore cannot be recovered by the Debtors via a remedy that is dependent on exemptibility like § 522(f) is. He bases his argument on a sequence of four propositions:
1. The Debtors voluntarily granted the security interest to the elder Flitters.
2. The elder Flitters’ security interest is presently unperfeeted and hence is subject to avoidance or subordination at his instance pursuant to 11 U.S.C. § 544(a).
3. Were he to take his avoidance remedies, the Debtors could not use 11 U.S.C. § 522(g) to claim an exemption for the value in the collateral that he would have recovered.
4. Because in such an instance the Debtors would not be able to claim any recovered value as exempt, they should not be allowed to “prejudice” the estate’s avoidance powers by exercising their own remedy before he does.
As framed by the pleadings for this motion, then, the issue is an interesting one: as between a debtor’s right of lien avoidance under § 522(f)(2) and a trustee’s avoidance and recovery powers under 11 U.S.C. §§ 544, 550, and 551, which one trumps? There is very little published caselaw that addresses this question, even in passing.
Ultimately, the Trustee’s argument is flawed by its failure to recognize a nuance inherent in the very structure of § 522(g). He is correct in the first several premises of his argument: if the elder Flitters’ lien was not perfected as of the commencement of this ease, the Trustee could have exercised his strong-arm powers against the liens. Then, had he been successful, 11 U.S.C. § 551 would have preserved the Debtors’ original transfer for the benefit of the estate,
and 11 U.S.C. § 550(a)
would have enabled him to recover the full unencumbered ownership in the subject assets from the elder Flitters.
After that, however, it gets a bit more complicated than the Trustee acknowledges.
11 U.S.C. § 522(g) gives debtors a right to reclaim such recovered property back from the estate in certain cases.
Congress afforded this right to give debtors an enhanced benefit from statutory exemption rights. H.R.REP. No. 595, 95th Cong. 1st Sess. 362-363 (1977); S.REP. No. 989, 95th Cong., 2d Sess. 76-77 (1978), U.S.Code Cong. & Admin.News 1978, pp. 5787, 5861-5863, 6317-6319. As the Trustee points out, § 522(g) imposes one significant limitation on this right, by negative implication: where in the first place a debtor voluntarily parted with the value that the trustee has recovered — as, for example, by a consensual grant of security interest — he cannot meet the requirement of § 522(g)(1)(A), and cannot use § 522(g)(1) as the basis for his claim of exemption. However, § 522(g)(2) opens the debtor’s right back out again, for the classes of assets that are subject to a debtor’s lien avoidance powers under § 522(f).
In re Hollinsed,
54 B.R. 155, 156 (Bankr.W.D.Wis.1984);
In re Dipalma,
24 B.R. 385, 387-88 (Bankr.D.Mass.1982). For this source of secondary exemption rights, it is irrelevant
whether the original transfer was voluntary or involuntary.
Section 522(g)(2), then, is the authority that defeats the Trustee’s argument and trumps his avoidance remedies, to the extent of the Debtors’ lien avoidance remedy under § 522(f). As long as the Debtors have invoked their remedy first, 11 U.S.C. § 522(i) gives them the right to recover the assets that are subject to it, directly from the elder Flitters and free and clear of their lien.
The structuring of final relief on the Debtors’ motion, however, requires a little more refinement than they have given it. They have requested an order avoiding the elder Flitters’ lien against
all
of their collateral, including crops, farm-product inventory, and livestock.
They fail to recognize, however, that their power to unseat liens under § 522(f)(2) does not extend to all classes of assets that, in the absence of liens, they could shelter from the estate via exemption under § 522(b).
In re Thompson,
750 F.2d 628, 681 (8th Cir.1984). A debtor’s lien avoidance power under § 522(f)(2) lies against only the categories of assets that are identified in its enabling statute.
In re Psick,
61 B.R. 308, 313 (Bankr.D.Minn.1985). In the present case, those assets amount to “implements, ... or tools, of the trade of the debtor ...” 11 U.S.C. § 522(f)(2)(B). Though a debtor may avoid nonpossessory, nonpurchase-mon-ey security interests in “animals” and “crops,” he may do so only to the extent that such property is “held primarily
for the personal, family, or household use
of the debtor or a dependent of the debtor.” 11 U.S.C. § 522(f)(2)(A) (emphasis added). The Debtors here were and are livestock and crop farmers. As such, they held the fruits of that activity as business inventory, in the nature of capital assets, and lien avoidance under § 522(f)(2) cannot divest the elder Flitters’ liens against them.
In re Thompson,
750 F.2d at 630-31.
The remedy will lie against the balance of the assets in controversy here, the farm machinery and equipment that is properly allowed as exempt to the Debtors. Though technically the Trustee’s objection to the Debtors’ claim of exemption in those assets is not before the Court, there is no reason not to enter an order overruling it; the Trustee’s theory of objection is not meritorious as to those assets, and they should be vested in the Debtors, free and clear of the claims of either the elder Flitters or the estate, without further delay.
IT IS THEREFORE ORDERED:
I. That the Trustee’s objection to the Debtors’ claim of exemption in the following farm equipment and machinery:
J.D. 4020 Tractor
Plow 1/2
Field Cultivator
Hydramatic 1/2
Blower
Flail Spreader
Sprayer
Cultivator-4
Stalk Chopper
Chiesal Plow
JD Planter 8
Pressure Washer
Calf Stalls
Hog Sheds
Fence Panels
Hog Feeders (2)
Hog Feeder
Farrowing Crates
Hog Waterers
Hog Water Heater
Feeders Crates
Hog Carrier
Farrow Crates
Hog Feeders
Water er
Hog Feeder
Gates Crates
Huts
is overruled, and the Debtors shall henceforth hold that farm machinery and equipment free and clear of any claims of the bankruptcy estate.
2. That the lien that Vern and Irma Flit-ter held or asserted against the farm machinery and equipment described in Term 1 of this order as of the commencement of this ease is avoided pursuant to 11 U.S.C. § 522(f)(2)(B). Pursuant to 11 U.S.C. § 522(i), the Debtors shall hold that farm machinery and equipment free and clear of any claim or interest of Vern and Irma Flit-ter.
3. That the Debtors’ motion for hen avoidance is denied in all other respects.
4. That the hen impressed against certain funds pursuant to Term 2 of this Court’s order of July 27,1994, shall continue in force and effect. The according of relief under this order shall not prejudice the estate’s right, if any, to recover any and all livestock, crops, farm products and farm inventory that the Debtors had on hand as of the commencement of this case, and the proceeds thereof, against the claims of any party holding or asserting a security interest in them.
5.That, to advance the estate’s claim to the assets identified in Term 4 of this order, the Trustee shall file an adversary proceeding for appropriate rehef against Vern and Irma Flitter within 30 days of the date of this order.