Willett, Michael W. v. Nat'l Capital Mgmt

In the
United States Court of Appeals
For the Seventh Circuit
No. 07-1850
IN RE:
M ICHAEL W. W ILLETT and K ARIN J. W ILLETT,
Debtors-Appellees,
A PPEAL OF:
N ATIONAL C APITAL M ANAGEMENT, LLC
Appeal from the United States District Court
for the Southern District of Indiana, Evansville Division.
No. 06 C 177—Richard L. Young, Judge.
A RGUED JANUARY 23, 2008—D ECIDED S EPTEMBER 12, 2008
Before M ANION, R OVNER, and E VANS, Circuit Judges.
M ANION, 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 judg-
ment creditor. The creditor appealed to the district court
arguing that the bankruptcy court had incorrectly valued
the property, resulting in the erroneous conclusion that
2 No. 07-1850
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
No. 07-1850 3
Willetts’ interest in the property was valued at $65,000 1 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 con-
firmed 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 trans-
ferred 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
1
There is a discrepancy in the record regarding whether the
Willetts’ subordinate, encumbered interest in the Evansville
property was valued at $65,000, or whether the property itself
had a fair market value of $65,000. For our analysis, we employ
the values used by the district court and those that have sup-
port in the record. However, we express no opinion on the
correct values that should be attributed to the Willetts’ interest
in the Evansville property upon filing their petition, or at any
later date. Our consideration here extends only to the legal
question of when those valuations should be made under the
bankruptcy code.
4 No. 07-1850
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
No. 07-1850 5
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. There-
fore, 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 con-
cluded 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.
6 No. 07-1850
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 peti-
tion 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 at-
tached 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 petition 2
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 com-
2
Section 541 does not expressly mention the filing of a joint
voluntary petition, but refers instead to “[t]he commencement
of a case under section 301 [or] 302 . . . .” 11 U.S.C. § 541(a). 11
U.S.C. § 301 allows for the filing of a voluntary petition, and 11
U.S.C. § 302 allows for the joint filing of a single petition
by spouses.
No. 07-1850 7
mencement 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 com-
mencement 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
3
Section 541(a)(7) refers to interests acquired by the “estate”
while § 541(a)(1) speaks of interests held by the “debtor.” The
code makes this distinction because different chapters of the
bankruptcy code treat property acquired after commencement
of the case differently. For example, not all property acquired by
a debtor becomes part of the estate in proceedings under
Chapter 7. See, e.g., DeLeon v. Comcar Industs., Inc., 321 F.3d 1289,
1291 (11th Cir. 2003) (noting that Chapter 13 allows for the
inclusion of after-acquired property in the bankruptcy estate
while Chapter 7 does not). However, section 541(a)(7) is ap-
plicable here because in Chapter 13 proceedings, after-acquired
property becomes part of the estate if acquired while the
estate is still open. See 11 U.S.C. § 1306(a)(1).
8 No. 07-1850
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 prop-
erty 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 re-
mainder 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 peti-
tion was filed. The court then noted that pursuant to
§ 1306(a)(1), the fee simple interest acquired in Decem-
ber 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] Property
as both property of the estate at the petition filing date
and after-acquired property.” It then attempted to dis-
cern the legislative intent behind the provisions by refer-
encing sources outside the bankruptcy code. Citing the
principle that the bankruptcy code’s purpose “is to grant
a fresh start to the honest but unfortunate debtor,”
No. 07-1850 9
Marrama v. Citizens Bank of Mass., 127 S. Ct. 1105, 1107
(2007) (quotation omitted), the district court concluded
that the “Debtors’ interest in the [Evansville] Property
should be valued as of bankruptcy petition filing date.”
The district court prematurely moved away from the
bankruptcy code. The statutes do not treat the Evansville
property as property of the estate at the time of filing, at
a later date, or at any time at all. While the bankruptcy
code does enable debtors to get a “fresh start,” the debtors
first have to comply with all of the provisions of
that comprehensive code. And a plain reading of the
applicable statutes does provide a “definitive answer to
the dispute in this case.” Section 541, in setting forth
what constitutes “property,” refers to the legal interest a
debtor has in property, not the property itself. 11 U.S.C.
§ 541(a)(1) and (7). Imprecise use of the word “property”
may cause some confusion since it can be used to refer to
the interest held by a debtor, see, e.g., 11 U.S.C. §§ 522(a)(2)
and 541(a)(1), or the item (e.g., piece of real estate) in
which the debtor holds that interest. However, the focus
of the provisions referenced above is on “interests” held
by debtors and estates. The Willetts held a remainder
interest in the Evansville property when they filed their
petition, and they later acquired a full fee simple inter-
est while the estate was still open. The code provides
that these interest should have been valued at the time
each became part of the estate. Here, the debtors acquired
an increased interest in the same real estate which was
valued at $95,000 before the estate was closed.
The fact that the Willetts’ interest in the Evansville
property increased during the pendency of their case does
10 No. 07-1850
not present a situation outside the express scope of the
bankruptcy code. Courts are obliged to read statutory
provisions at issue in such a way as to avoid a conflict
between them if such a construction is possible and
reasonable. Precision Industs., Inc. v. Qualitech Steele SBQ,
LLC, 327 F.3d 537, 544 (7th Cir. 2003). This can be accom-
plished here because the portions of § 522 and § 541
addressing property held by debtors when they file their
petition are applicable to every petition filed. They allow
for identification of the estate’s property, as well as the
valuation of that property should the debtor elect to seek
an exemption. In cases where a debtor acquires
property after commencement of the action, the portions
of § 522, § 541, and § 1306 concerning after-acquired
property dictate what becomes property of the estate,
and how it is valued. This reading of the code avoids
rendering the after-acquired property provisions of § 522,
§ 541, and § 1306 meaningless. See United States v. Miscella-
neous Firearms, Explosives, Destructive Devices, and Ammuni-
tion, 376 F.3d 709, 712 (7th Cir. 2004) (noting that statu-
tory provisions should not be construed in a way that
renders other provisions of the same statute inconsistent,
meaningless, or superfluous).4
4
The district court cites to four bankruptcy cases stating that
the proper time to value property for a lien avoidance analysis
is the time the petition was filed. See In re Vokac, 273 B.R. 553,
556-57 (Bankr. N.D. Ill. 2002); In re Schmidt, 2000 WL 33950749,
* 1 (Bankr. C. D. Ill. 2000); In re VanZant, 210 B.R. 1011, 1014
(Bankr. S.D. Ill. 1997); and In re Girard, 98 B.R. 685, 688 (Bankr.
D. Vt. 1989). However, VanZant and Girard were filed under
(continued...)
No. 07-1850 11
Applying these principles to the matter before us, the
Willetts’ case remained governed by the provisions
covering property held by the debtors at the commence-
ment of their action until December 21, 2005. On that date,
their interest in the Evansville property, property belong-
ing to the estate under § 541, changed from a remainder
interest valued at $65,000, the fair market value when
they filed their petition, to a fee simple interest valued at
$95,000, the fair market value as of the date the property
became part of the estate. See 11 U.S.C. § 522(a)(2). The
bankruptcy code therefore provided all the guidance
necessary regarding Congress’s intent in handling situa-
tions like the one presented here, and there was no need
to look further. See Zedan v. Habash, 529 F.3d 398, 405 (7th
Cir. 2008) (noting that “as long as the statutory scheme
is coherent and consistent, there generally is no need for
a court to inquire beyond the plain language of the stat-
ute”). The district court’s conclusion that the Evansville
property should be valued based upon the interest
held by the Willetts when they filed their petition was
erroneous.5
4
(...continued)
Chapter 7. Therefore, § 1306(a)(1), important to our conclusion
here, was not applicable in those cases. See 11 U.S.C. § 103(i)
(“Chapter 13 of this title applies only in a case under such
chapter.”). Also, none of the cases dealt with a debtor who
acquired a different interest in the property at issue following
initiation of the case.
5
We decline to reach a number of issues raised by the Willetts
in their brief including the evidentiary basis for the $95,000
(continued...)
12 No. 07-1850
III.
When the Willetts moved to avoid NCM’s lien, their
interest in the Evansville property should have been
valued at the fair market value of their fee simple interest
at the time it was recorded on December 21, 2005. Ac-
cordingly, the district court is R EVERSED and the case is
R EMANDED for further proceedings consistent with this
opinion.
5
(...continued)
value, NCM’s failure to appeal the bankruptcy court’s confirma-
tion order, and whether NCM was entitled attorneys’ fees. In
addition to being irrelevant to the narrow statutory issue
considered by the district court and presented to us on appeal,
these arguments were not raised before the district court, and
may not be raised here for the first time. See Domka v.
Portage County, Wis., 523 F.3d 776, 783 n. 11 (7th Cir. 2008).
9-12-08