In re Willett

• Decision Date: 12 September 2008
• Docket Number: No. 07-1850.,07-1850.
• Parties: In re Michael W. WILLETT and Karin J. Willett, Debtors-Appellees, Appeal of National Capital Management, LLC.
• Court: U.S. Court of Appeals — Seventh Circuit

544 F.3d 787

In re Michael W. WILLETT and Karin J. Willett, Debtors-Appellees Appeal of National Capital Management, LLC.

No. 07-1850.

United States Court of Appeals, Seventh Circuit.

Argued January 23, 2008.

Decided September 12, 2008.

Mark S. Samila, Kahn, Dees, Donovan & Kahn, Evansville, IN, Matthew J. McGowan (argued), Salter McGowan Sylvia & Leonard, Providence, RI, for Appellant.

R. Thomas Bodkin (argued), Andrew C. Ozete, Bamberger, Foreman, Oswald & Hahn, Evansville, IN, for Trustee-Appellee.

Andrew D. Thomas, Thomas, Dunlap & Nesmith, Evansville, IN, for Debtors-Appellees.

Before MANION, ROVNER, and EVANS, Circuit Judges.

MANION, Circuit Judge.

Michael and Karin Willett filed for relief under Chapter 13 of the bankruptcy code. During the pendency of their case, they successfully moved to avoid a lien on their residence held by a judgment creditor. The creditor appealed to the district court arguing that the bankruptcy court had incorrectly valued the property, resulting in the erroneous conclusion that the lien would impair a $15,000 exemption to which the Willetts were entitled under Indiana law. The district court affirmed the bankruptcy court. The creditor appeals making the same argument, and we reverse the district court.

I.

The facts material to our disposition of this appeal are undisputed. The Willetts purchased a 1995 Chrysler Sebring on August 12, 1998, financed through American Investment Bank ("AIB"). AIB repossessed the vehicle in February 2000 claiming that the Willetts failed to make their payments. The Willetts responded by filing a suit in the Vanderburgh County, Indiana Superior Court against AIB for wrongful repossession, and AIB counterclaimed for the remaining amount the Willetts owed for the car. On August 14, 2003, the jury returned a verdict in favor of AIB in the amount of $8,205. Under Indiana law, this judgment gave AIB a judgment lien on real estate owned by the Willetts. See Ind.Code § 34-55-9-2.

On January 29, 2004, the Willetts filed a joint petition for Chapter 13 bankruptcy relief. At the time they filed their petition, the Willetts held a remainder interest in their primary residence located in Evansville, Indiana. Their interest was encumbered by a life estate interest held by Karin Willett's mother, Wanda Garrison. The Willetts' interest in the property was valued at $65,000¹ and was subject to a $57,841.92 mortgage. As a miscellaneous provision of their petition, the Willetts moved "to avoid any lien asserted by the American Investors Bank with respect to a 1995 Sebring automobile." On March 25, 2004, the bankruptcy court entered an order in which it confirmed the Willetts' Trustee-approved proposed relief plan. The bankruptcy court also noted that AIB held a lien on the Willetts' Sebring and funds on deposit with the Vanderburgh County Clerk. It stated that this lien would "be avoided by separate motion."

The Willetts did not move to avoid AIB's lien until almost two years later on January 5, 2006. Two important developments occurred in the interim. First, AIB transferred its right, title, and interest in the lien on the Willetts' property to National Capital Management, LLC ("NCM"), the appellant herein. Second, by means of a quit-claim deed recorded on December 21, 2005, Wanda Garrison released her interest in the Evansville property, thereby granting the Willetts a fee simple interest. The value of the fee simple interest in December 2005 was determined to be $95,000. However, when the Willetts moved on January 5, 2006, to avoid the lien, they cited the earlier valuation of $65,000.

The basis for the Willetts' motion to avoid the lien was 11 U.S.C. § 522, entitled "Exemptions," which provides that "the debtor may avoid the fixing of a lien on an interest of the debtor in property to the extent that such lien impairs an exemption to which the debtor would have been entitled ... if such lien is ... a judicial lien...." 11 U.S.C. § 522(f)(1)(A). The bankruptcy code continues

a lien shall be considered to impair an exemption to the extent that the sum of—

(i) the lien;

(ii) all other liens on the property; and

(iii) the amount of the exemption that the debtor could claim if there were no liens on the property exceeds the value that the debtor's interest in the property would have in the absence of any liens.

11 U.S.C. § 522(f)(2)(A). Therefore, to avoid impairing the exemption, the remaining value had to exceed the amount of the exemption (in this case, $15,000) plus all liens on the property.

The importance of assigning a correct value to the Willetts' interest in the Evansville property becomes clear once the amounts relevant under § 522 are totaled. NCM held a lien in the amount of $8,205, and the only other relevant lien was the mortgage on their residence for $57,841.92. The Willetts were entitled under Indiana law to claim a homestead exemption, and at the time they filed their petition that exemption stood at $7,500 each. See Ind. Code § 34-55-10-2(b)(1) (1999). Having filed their petition jointly, the Willetts were each entitled to claim the homestead exemption, for a total of $15,000. See id. The exemptions plus the liens total $81,046.92. If the valuation is set at $65,000, the liens and the exemptions exceed it by $16,046.92. Under that formula, NCM's lien would therefore impair the Willetts' homestead exemption under § 522(f)(2)(A) entitling the Willetts to avoid that lien under § 522(f)(1)(A). However, if the property valuation is set at $95,000, the value exceeds the liens plus the Willetts' exemptions by $13,953.08. Therefore, if the higher valuation is used, NCM's lien does not impair the Willetts' exemption, and they may not avoid it under § 522.

On September 27, 2006, the bankruptcy court granted the Willetts' motion to avoid NCM's lien. The court listed the value of the Evansville property at $65,000, and concluded that NCM's lien impairs the exemption. NCM appealed the bankruptcy court's decision to the district court. The district court concluded that the relevant provisions of the bankruptcy code did not lead to a clear conclusion regarding valuation of the Evansville property. It therefore sought to discern the legislative intent behind those provisions from sources outside the statute. As a result of this analysis, the district court affirmed the bankruptcy court. NCM appeals.

II.

We are presented with the narrow question of when a bankruptcy court should value a Chapter 13 debtor's interest in real property for the purposes of a motion to avoid a lien made pursuant to 11 U.S.C. § 522. As seen from the facts above, we consider this question in the specific context of debtors who had a limited interest in the real property in question when they filed their petition for relief, and then obtained a greater interest in the property (here, a fee simple interest in the whole) while the estate was still open and prior to filing the motion to avoid the lien related to the automobile that had attached to the real estate. Because the appeal turns on construction of the bankruptcy code, it presents a question of law which we review de novo. Vill. of San Jose v. McWilliams, 284 F.3d 785, 790 (7th Cir.2002). We begin with 11 U.S.C. § 541, which sets forth the fundamental principle that when debtors file a joint voluntary petition² like the one filed by the Willetts, an estate in bankruptcy is created. 11 U.S.C. § 541(a). Section 541 continues by listing the properties that comprise that estate. 11 U.S.C. § 541(a)(1)-(7). The first type of property listed, and the only one discussed by the district court, is "all legal or equitable interests of the debtor in property at the commencement of the case." 11 U.S.C. § 541(a)(1). However, § 541 also lists "[a]ny interest in property that the estate acquires after the commencement of the case." 11 U.S.C. § 541(a)(7).³

The bankruptcy code gives additional treatment to the subject of property acquired by debtors after the commencement of a Chapter 13 case, providing, "[p]roperty of the estate includes, in addition to the property specified in section 541 of this title ... all property ... that the debtor acquires after the commencement of the case but before the case is closed...." 11 U.S.C. § 1306(a)(1). See In re Drew, 325 B.R. 765, 770 (Bankr. N.D.Ill.2005) ("Thus, property that a Chapter 13 debtor acquires post-petition ... becomes property of the estate pursuant to § 1306, in contrast to the post-petition acquisitions that do not become part of a Chapter 7 or Chapter 11 estate."). Finally, § 522, the section under which the Willetts moved to avoid NCM's lien, sets forth how to value property, and when that valuation should take place. It states, "`value' means fair market value as of the date of the filing of the petition or, with respect to property that becomes property of the estate after such date, as of the date such property becomes property of the estate." 11 U.S.C. 522(a)(2).

After reviewing all of these provisions except § 541(a)(7), the district court found that there was no definitive answer determining when the Evansville property should be valued. First, it noted that under § 541(a)(1), the remainder interest held by the Willetts when they filed their petition was property of the estate. Under § 522(a)(2), that estate property would be valued at $65,000, the fair market value of their remainder interest when the petition was filed. The court then noted that pursuant to § 1306(a)(1), the fee simple interest acquired in December 2005 would be considered property of the estate even though it was acquired after commencement of the Willetts' case. Under to the second part of § 522(a)(2), the fee simple would be valued at $95,000, its fair market value as of the date it became part of the estate. The court concluded that these provisions did not provide a clear answer to the valuation question, stating that "[a] plain reading of the statutes treats the [Evansville]...