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In re Pristas

September 7, 1984

IN RE JOHN AND LOIS PRISTAS, DEBTORS
v.
LANDAUS OF PLYMOUTH, INC. JOHN AND LOIS PRISTAS, APPELLANTS IN NO. 83-3555; IN RE LAURA SPRAGUE, DEBTOR V. LANDAUS OF PLYMOUTH, INC. LAURA SPRAGUE, APPELLANT IN NO. 83-3556; IN RE DAVID D. TWARDOWSKI, DEBTOR V. LANDAUS OF PLYMOUTH, INC. DAVID D. TWARDOWSKI, APPELLANT IN NO. 83-3557



APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE MIDDLE DISTRICT OF PENNSYLVANIA

Author: Weis

Before: WEIS and BECKER, Circuit Judges, and OLIVER, District Judge.*fn*

Opinion OF THE COURT

WEIS, Circuit Judge.

The question here is whether a purchase-money security interest in consumer goods survives when the debt is consolidated with that incurred for subsequent purchases. The bankruptcy judge concluded that the "add on" of both collateral and debt did not eliminate the purchase-money character of the security interest in original purchases. He therefore declined to avoid a creditor's liens under section 522(f)(2) of the Bankruptcy Reform Act, 11 U.S.C. § 522(f)(2) (1982). We agree and will affirm but do so by applying a state's statute rather than its decisional law.

The debtors sought to avoid a creditor's security interests in household goods that had been exempted from the bankruptcy estates. The bankruptcy judge refused to avoid the liens, and the district court affirmed.

These three consolidated cases present the identical legal issue. The facts in each do not differ materially and, in the interest of brevity, therefore, we will detail the factual background only in the Pristas case.

On July 26, 1979, Lois Pristas purchased a washer from creditor Landaus of Plymouth, Inc., at its store in Pennsylvania. She agreed to pay a total of $404, as detailed in a retail installment contract executed by the parties that same day.

The agreement gave the seller "a security interest in the aforesaid goods until the final payment is made." The contract also provided that Landaus could add "subsequent purchases made by the Purchaser, and the total of payments hereof shall reflect the added cost and finance charge of said goods subsequently purchased." Also included was a statement that "the goods purchased hereunder shall be security for payment of the subsequent purchase."

The purchase price of the washer remained partially unpaid on January 24, 1980 when Mrs. Pristas bought a rocker-recliner from Landaus for $185.20. That figure, which included finance charges, was added to the unpaid balance on the washer increasing the total obligation to $519.20. The monthly payments were increased from $17 to $20.

The agreement on this second purchase noted that seller acquired a security interest in the rocker. In addition, the form provided that the additional purchase supplemented the one made in July 1979, that the agreement entered into at that time was incorporated, and that the second "instrument shall be a part of said Security Agreement/Retail Installment Contract as if it had been executed simultaneously therewith."

When Mrs. Pristas later defaulted in payments, Landaus obtained a judgment and levied against her property. After filing a petition in bankruptcy, Mrs. Pristas sought to avoid the security lien under 11 U.S.C. § 522(f)(2) to the extent it impaired her bankruptcy exemptions.*fn1 She contended that once the washer secured not only its own price, but also that of the rocker, the creditor's interest in the washer was converted to a nonpurchase-money security interest avoidable under section 522(f)(2).

The bankruptcy judge concluded that the security interest created in July 1979 did not lose its purchase-money character when consolidated with the debt created in January 1980. 29 Bankr. 711 (Bankr. M.D. Pa. 1983). The judge held that the common law of Pennsylvania, as reflected in Page v. Wilson, 150 Pa. Super. 427, 28 A.2d 706 (1942), supplied a formula for apportioning the debtor's payments between the two purchases. Consequently, the point at which each debt was satisfied could be ascertained, and the purchase-money security interest in each item remained valid until that time. The purchase-money security interest, therefore, was not extinguished and would not be avoided by section 522(f)(2). The district court affirmed.

On appeal, Mrs. Pristas contends that the bankruptcy court erred in implying a payment allocation formula when the agreement between the parties contained no such provision. She argues that, once collateral secures not only its own price but other purchases, the ...


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