Opinion
Cause No. 1:04-CV-33-TS.
August 27, 2004
MEMORANDUM OF DECISION AND ORDER
This matter is before the Court on the appeal of George Tupper Swaim III and Yhvonne Da Swaim (the "Debtors") from a bankruptcy court ruling that judicial liens could not be avoided under 11 U.S.C. § 522(f)(1). Jurisdiction is proper under 28 U.S.C. § 158(a).
The Debtors filed their Notice of Appeal on January 30, 2004. On February 18, 2004, the Debtors filed the Brief of Appellants. The Appellees have not filed a brief.
BACKGROUND
The facts in this case are not disputed.
The Debtors own, as tenants by the entireties, residential property having a current market value of $60,000, which is encumbered by a land contract on which the Debtors owe $82,666. American Acceptance Co., LLC, holds two judgment liens on the real estate in the amounts of $5,873.19 and $3,499.04. Capital One Services, Inc., holds a judgment lien in the amount of $4,392.10 and Midwest Hearing Services holds a judicial lien in the amount of $150.
On April 7, 2003, the Debtors filed their Voluntary Petition under Chapter 7 of the Bankruptcy Code, 11 U.S.C. § 101, et seq., in the United States Bankruptcy Court for the Northern District of Indiana, Fort Wayne Division. The Debtors contend that they did not claim an exemption for their residential real estate because they had no equity against which to assert the exemption.
Pursuant to 11 U.S.C. § 522(f)(1), the Debtors moved the bankruptcy court to avoid the four judicial liens held by American Acceptance, Capital One, and Midwest Hearing. No objection was filed to the Debtors' motions to avoid liens. In a Decision issued December 22, 2003, the bankruptcy court found that the Debtors failed to allege sufficient facts to state a cognizable claim for lien avoidance under the statute and denied their motions. The bankruptcy court held that the Debtors could not avoid any judicial lien alleged to impair an exemption unless the exemption had been claimed, and that the Debtors had not claimed an exemption in the real estate described in their motion. The bankruptcy court explained that exemptions in bankruptcy are not automatic and exist only as a result of the affirmative declaration of the debtor. Where a debtor has not claimed an exemption in the property subject to a judicial lien, there is nothing for § 522(f) to protect.
DISCUSSION
On appeal, the bankruptcy court's factual determinations are reviewed for clear error and legal conclusions are reviewed de novo. Village of San Jose v. McWilliams, 284 F.3d 785, 790 (7th Cir. 2002). The bankruptcy court interpreted 11 U.S.C. § 522(f)(1) to require debtors to actually claim an exemption in residential property in order to avoid a judicial lien on that property. The construction of the Bankruptcy Code is a question of law that is reviewed de novo. Id.
Section 522(b) of the Bankruptcy Code provides that certain property may be exempt from creditors' claims against the debtor. Debtors in Indiana are limited to the exemptions provided by state law. Ind. Code § 34-55-10-1. In Indiana, each debtor may exempt $7,500 for real estate or personal property constituting the personal or family residence. Ind. Code § 34-55-10-2. Exemptions must be affirmatively claimed by the debtor. See Fed.R.Bankr.P. 4003 (debtor shall list the property claimed as exempt under § 522); 11 U.S.C. § 522( l) (debtor shall file a list of property that the debtor claims as exempt under subsection (b)).
Exempt property is still subject to liens, such as mortgages and security interests. Judicial liens, however, may be avoided under § 522(f)(1)(A):
(1) Notwithstanding any waiver of exemptions . . ., 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 under subsection (b) of this section, if such lien is —
(A) a judicial lien.
11 U.S.C. § 522(f). The purpose of § 522(f) is to protect the value of the debtor's exemptions. In re Berryhill, 254 B.R. 242, 244 (Bankr. N.D. Ind. 2000). It is even permissible for debtors to avoid a judicial lien in property in which they have no equity. Id. (citing In re VanZant, 210 B.R. 1011, 1013 (Bankr. S.D. Ill. 1997)). However, debtors may not avoid judicial liens upon property without actually claiming an exemption in that property. Berryhill, 254 B.R. at 244. See also In re Wall, 127 B.R. 353, 356 (Bankr. E.D. Va. 1991) (holding that, in order to avoid a judicial lien under § 522(f), a debtor must properly set apart the subject property as exempt); In re Rosol, 114 B.R. 560, 562 (Bankr. N.D. Ill. 1989) (asserting that one requirement for lien avoidance under § 522(f) is the debtor's proper claim of an exemption as to the property); In re Johnson, 53 B.R. 919, 922 (Bankr. N.D. Ill. 1985) (same). In Wall the court found that "[i]n light of § 522(f)'s purpose to promote a fresh start . . . it does not make sense to allow a lien to be avoided on property that has not been claimed exempt." 127 B.R. at 355-56 (addressing fact that, on its face, § 522(f) might be construed not to require that the exemption actually be taken).
Indeed, the Debtors here argue that, on its face, § 522(f) does not require that they claim an exemption before they can avoid a lien that impairs the exemption. The Debtors focus on the "would have been entitled" language of the statute to support their interpretation and cite to Owen v. Owen, 500 U.S. 305, 311 (1991). The Debtors also argue that the cases holding that a lien can only be avoided if it impairs an exemption that was actually claimed were decided before congressional amendments to the Bankruptcy Code. The Debtors contend that the bankruptcy court's ruling runs afoul of the Bankruptcy Reform Act of 1994.
The Court does not find the Debtors' arguments persuasive. The Congressional history, cited by the Debtors in support of their argument that the Bankruptcy Reform Act was intended to preclude the result reached in this case, actually addresses whether the impairment of a debtor's exemption, for purposes of lien avoidance, can extend beyond the amount of the exemption. See H.R. Rep. No. 835, 103rd Cong., 2d Sess., at 52-54 (1994), reprinted in 1994 U.S.C.C.A.N. 3340, 3361-63. In fact, the Reform Act did not even add the "would have been entitled" language of § 522(f) on which the Debtor's rely. Rather, to clarify its intent regarding impairment, Congress enacted a formula for a court to apply in determining whether the judicial liens against a debtor's property "impair" an exemption. See 11 U.S.C. § 522(f)(2)(A). To apply the formula, the court must know "the amount of the exemption that the debtor could claim if there were no judicial lien on the property." Id. It makes sense that, before a court can determine the amount the debtor could claim absent a lien, the court must first know what amount the debtor has actually claimed.
The question answered by the Supreme Court in Owen v. Owen was whether a lien could be avoided under § 522(f) when a state had defined the exempt property in such a way as to specifically exclude property encumbered by judicial liens. The Court held that the "would have been entitled" language of § 522(f) meant would have been entitled, "but for the lien at issue." 500 U.S. at 311. Thus, when applying § 522(f) to exemptions, a court should ask first whether avoiding the lien would entitle the debtor to an exemption, and if it would, then avoid and recover the lien. Id. at 312 (holding that, even though Florida statute excluded certain liens from the scope of its homestead protection, this did not achieve a similar exclusion from the Bankruptcy's Code's lien avoidance provision, § 522(f)). The Court did not address whether the exemption had to be claimed and its holding does not change the fact that exemptions are not automatic.
The debtor in Owen actually claimed a homestead exemption on the residential property he had moved to avoid a judicial lien on pursuant to § 522(f).
Although the Debtors were not required to have equity in the exempt property to apply § 522(f), they were required to set the property apart as exempt. Because they failed to do this, the bankruptcy court properly denied their motions to avoid judicial liens. A lien cannot impair an exemption that has not been claimed.
CONCLUSION
For the foregoing reasons, the decision of the bankruptcy court is AFFIRMED.
SO ORDERED.