## Facts

- Benjamin Vanhorn operated a construction business and sought financing from the Upper Explorerland Regional Planning Commission to remodel his workspace, purchase a skid loader, and obtain working capital.
- The commission approved a $60,000 loan conditioned on (1) a security interest in all of Vanhorn’s inventory and equipment and (2) a purchase-money security interest (PMSI) in the skid loader once acquired.
- Vanhorn received the loan proceeds on November 21, 2016. Shortly thereafter, he bought a skid loader for about $41,500 using the loan proceeds, and the commission perfected its PMSI in the skid loader.
- Vanhorn made payments for a period, but by March 2018 his payment checks began to be returned for insufficient funds.
- The commission agreed to temporary interest-only payments, and the parties extended that arrangement more than once.
- Without notifying the commission or remitting proceeds, Vanhorn sold the skid loader to a third party while the commission’s lien remained in place.
- By late 2019 Vanhorn stopped communicating with the commission. In March 2020, an interest-only payment check again bounced.
- Vanhorn filed a Chapter 7 petition on April 2, 2020. The commission then learned the skid loader had been sold.
- In his bankruptcy schedules, Vanhorn claimed an exemption in various tools as “tools of the trade” under Iowa Code § 627.6(11) (subject to the statutory dollar limit).
- The commission objected to the claimed tools exemption, asserting its lien could not be avoided because (in its view) the lien on the tools was purchase-money in nature.
- The commission also brought an adversary proceeding seeking to except the debt from discharge under 11 U.S.C. § 523(a)(6) based on the skid loader sale and moved for summary judgment.
- After an evidentiary hearing addressing both the exemption dispute and the summary-judgment motion, the court issued its written ruling.

## Issues

1. Whether the commission’s PMSI extended beyond the skid loader to the debtor’s other tools such that the commission’s lien on those tools could be treated as purchase-money collateral for purposes of the exemption/lien dispute.
2. Whether, on summary judgment, the debtor’s unauthorized sale of the skid loader established a “willful and malicious injury” under 11 U.S.C. § 523(a)(6), rendering the resulting debt nondischargeable as a matter of law.

## Decision

- The court held the commission’s PMSI was limited to the specific skid loader purchased with identifiable loan proceeds and did not convert the commission’s broader lien on “all inventory and equipment” into a PMSI as to the debtor’s other tools.
- The court rejected the commission’s effort to treat its lien on the debtor’s general tools as purchase-money based solely on broad collateral language; only collateral tied to purchase-money value qualifies as PMSI collateral.
- The court allowed the debtor’s Iowa tools-of-trade exemption as to tools not subject to a PMSI, subject to the statutory cap and supported by the valuation evidence presented.
- The court denied the commission’s motion for summary judgment on the § 523(a)(6) claim, concluding that material fact disputes remained regarding willfulness and malice, including the debtor’s state of mind in connection with the skid loader sale and disposition of proceeds.

## Legal Principles

- Under Iowa’s enactment of UCC § 9-103, a PMSI in goods exists only “to the extent” the goods are purchase-money collateral—i.e., tied to the price of the collateral or value given to enable the debtor to acquire rights in the collateral.
- A broadly drafted security agreement covering categories like “all inventory and equipment” does not, by itself, make the creditor purchase-money secured in everything within that category; PMSI status requires a traceable connection between the enabling value and the specific goods claimed as purchase-money collateral.
- Iowa Code § 627.6(11) permits a debtor (subject to the statute’s dollar limit) to exempt tools used in the debtor’s occupation; valuation determines whether the exemption exceeds the cap.
- For nondischargeability under 11 U.S.C. § 523(a)(6), “willful” requires an intent to cause injury (or knowledge the injury is substantially certain to occur), and “malicious” requires conduct targeted at the creditor in the sense required by circuit law; an intentional act that leads to injury is not enough.
- Summary judgment is inappropriate where the record permits competing inferences about intent, knowledge, and malice in the debtor’s disposition of secured collateral and related proceeds.

## Conclusion

In *In re Vanhorn*, the bankruptcy court treated the commission’s PMSI as limited to the skid loader bought with identifiable loan proceeds, leaving the creditor’s lien on other tools as non-purchase-money for purposes of the exemption dispute, and it denied summary judgment on the creditor’s § 523(a)(6) nondischargeability claim because the debtor’s willfulness and malice could not be resolved as a matter of law on the existing record.


In re Vanhorn, 628 B.R. 112 (2021)