## Facts

- Russell Fred Billings and Julia Darlene Billings (debtors) purchased household furniture on credit from Factory Outlet Store (Factory).
- Factory took a purchase-money security interest (PMSI) in the furniture and assigned the Billingses’ payment obligation and security interest to Avco Colorado Industrial Bank (Avco).
- The Billingses had difficulty making the required monthly payments on the original obligation.
- Avco agreed to refinance the obligation to reduce the Billingses’ monthly payments, but at a higher interest rate and over a longer repayment period.
- The refinancing was done by canceling the old note and executing a new note and a new security agreement covering the same furniture.
- Avco took no additional collateral and advanced only $9.67 in new money as part of the refinancing.
- The back of the loan application stated that Avco would retain its purchase-money security interest.
- The Billingses made one payment on the refinanced note and then filed for Chapter 13 bankruptcy.
- In the bankruptcy case, the Billingses moved to avoid Avco’s lien on the furniture under 11 U.S.C. § 522(f), arguing that the refinancing converted the PMSI into a nonpossessory, nonpurchase-money security interest in exempt household goods.
- Avco objected, asserting that its lien remained a PMSI and therefore could not be avoided under § 522(f).
- The bankruptcy court rejected the argument that refinancing automatically ends purchase-money status, found insufficient evidence that the parties intended to extinguish the original purchase-money debt and security interest, and denied the motion. The district court affirmed.

## Issues

1. Under Colorado law, does refinancing a purchase-money obligation—by canceling the old note and substituting a new note and security agreement—automatically extinguish the creditor’s PMSI in the original collateral?
2. If the creditor retains a PMSI in the household furniture, may the debtors avoid the lien under 11 U.S.C. § 522(f) as a nonpossessory, nonpurchase-money security interest?

## Decision

- The Tenth Circuit affirmed the district court’s judgment, which affirmed the bankruptcy court’s order.
- The court held that refinancing, by itself, does not automatically terminate or convert a PMSI under Colorado law.
- The bankruptcy court’s finding that the debtors failed to prove an intent to extinguish the original purchase-money obligation and PMSI was not clearly erroneous.
- Because Avco’s lien retained its purchase-money character, it was not avoidable under 11 U.S.C. § 522(f).
- As a result, the bankruptcy court properly denied the lien-avoidance motion and the Chapter 13 plan confirmation that depended on avoiding the lien.

## Legal Principles

- A debtor may avoid a lien under 11 U.S.C. § 522(f) only to the extent the lien is a nonpossessory, nonpurchase-money security interest in certain exempt personal property, including household goods and furnishings.
- Whether a security interest is “purchase-money” is generally determined by state commercial law (here, Colorado’s UCC).
- Refinancing or renewing a purchase-money obligation does not, without more, automatically destroy purchase-money status; courts look to what the transaction did to the purchase-money relationship and whether the parties meant to replace and extinguish the original purchase-money debt.
- When the creditor takes no new collateral, advances only a minimal additional amount, and the documents indicate an intent to retain the PMSI, those facts support continued purchase-money status after refinancing.
- The debtor seeking § 522(f) avoidance bears the burden of showing the lien is not purchase-money, including showing that a later refinancing ended the PMSI.
- Appellate review accepts bankruptcy court fact findings unless clearly erroneous.

## Conclusion

The Tenth Circuit held that Avco’s refinancing of the Billingses’ furniture debt—canceling the old note and issuing a new note and security agreement—did not automatically eliminate Avco’s purchase-money security interest under Colorado law, and the Billingses failed to show the parties intended to extinguish the original purchase-money obligation; therefore, Avco’s lien on household goods was not avoidable under 11 U.S.C. § 522(f), and the denial of lien avoidance and plan confirmation was affirmed.


Billings v. Avco Colorado Industrial Bank, 838 F.2d 405 (1988)