Appeal from the United States District Court for the Southern District of Indiana, Evansville Division. No. 06 C 177-Richard L. Young, Judge.
The opinion of the court was delivered by: Manion, Circuit Judge
Before MANION, ROVNER, and EVANS, Circuit Judges.
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.
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'*fn1 interest in the property was valued at $65,000 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-
(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 ...