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McInnis v. Phillips

United States District Court, E.D. North Carolina, Southern Division

June 23, 2017




         This cause comes before the Court on Sherrill S. Mclnnis' appeal of an order of the Bankruptcy Court for the Eastern District of North Carolina entered on July 8, 2016. [DE 1-1]. For the reasons discussed below, the decision of the bankruptcy court is affirmed.


         Appellees, Bradley and Susanna Phillips, are the debtors in the underlying bankruptcy action. The Phillipses are the owners of real property at 2136 Dr. Kerr Rd. in Ivanhoe, Sampson County, North Carolina; the Dr. Kerr Rd. property is their residence. On December 15, 2011, the Superior Court of New Hanover County entered judgment against the Phillipses and in favor of Sherrill Mclnnis and Philip Mclnnis in the amount of $176, 129.45, plus interest accruing at the rate of 8% from April 1, 2011, plus $14, 600 without interest and attorneys' fees and costs. [DE 3-1 at 84-86]. The judgment was transcribed to Sampson County in November 2012 and took position as a third priority lien on the Dr. Kerr Rd. property.[1]

         The Phillipses filed a voluntary petition for relief under Chapter 13 of the Bankruptcy Code in December 2012. Sherrill Mclnnis[2] filed a proof of claim in the Phillipses bankruptcy proceeding representing that the amount due on the judgment lien as of the date of filing of the bankruptcy petition was $248, 296.55. The Phillipses moved to avoid the judgment lien, requesting that the bankruptcy court hold that the Mclnnis judgment lien was fully unsecured under 11 U.S.C. § 506(a)(1), which would result in a finding that the judicial lien was void under 11 U.S.C. § 506(d). The Phillipses further argued that the judgment lien should be avoided as it impaired their homestead exemption allowed under N.C. Gen. Stat. § lC-1601(a)(1). See 11 U.S.C. § 522(f). Mclnnis objected to avoidance of the lien, and a hearing was held on March 20, 2013, Humrickhouse, J., presiding. Neither Mclnnis nor her counsel appeared at the hearing.

         According to the order of the bankruptcy court currently under review, Judge Humrickhouse at the 2013 hearing determined that the judgment lien is wholly avoidable under either § 506(d) or § 522(f) and directed counsel for the Phillipses to submit a proposed order granting the relief requested. An order of the bankruptcy court was entered on April 18, 2013, finding that the Mclnnis claim is fully unsecured and that the existence of the judgment lien on the real property impairs exemptions to which the Phillipses are entitled under § 522(b) and N.C. Gen. Stat. § lC-1601(a)(1). [DE 3-1 at 89-90]. The bankruptcy court ordered as follows:

1. The Judgment lien of Phillip [sic] K. Mclnnis, Jr. and Sherrill S. Mclnnis (the "Mclnnises") against the Debtors' home in Ivanhoe, North Carolina ... is avoided to the extent of $70, 000 pursuant to Section 522(f) of the Bankruptcy Code.
3. The Judgment lien of the Mclnnises is declared to be void and shall be removed of record upon the completion of the Chapter 13 Plan of the Debtors and entry of the discharge in this case pursuant to Section 506 of the Bankruptcy Code.
4. In the event the Debtors fail to complete their Chapter 13 Plan and receive their discharge, the Mclnnises' lien shall remain unaffected as to Section 506(a) and (d) of the Bankruptcy Code by this order.

Id. at 90. Neither party appealed this order.

         The case was voluntarily converted to a Chapter 7 proceeding in April 2014 and a trustee was appointed. After the conversion to Chapter 7, the Phillipses, "presumably acting under the assumption that the Avoidance Order was invalidated by the conversion of their case from Chapter 13 to Chapter 7, " filed a second motion to avoid the judgment lien. [DE 1-1 at 6]. Mclnnis objected to the second avoidance motion on several grounds and a hearing was held on March 16, 2016, Warren, J., presiding; counsel for Mclnnis and the Phillipses were present at the hearing.

         On July 8, 2016, Judge Warren entered an order granting the second avoidance motion and amending the 2013 avoidance order. Specifically, the bankruptcy court held that, as a matter of first impression, conversion of a case from Chapter 13 to Chapter 7 does not affect the validity of an order entered while the case was proceeding under Chapter 13, that the 2013 avoidance order remained a final order entitled to res judicata effect, and that the bankruptcy court in the exercise of its equitable authority could reconsider, modify, or vacate its prior orders so long as no intervening rights had become vested in reliance on the orders. [DE 1-1]. The bankruptcy court corrected the 2013 avoidance order to state that the debtors are entitled to $30, 000 each of residential exemption under § 522(b), as opposed to $35, 000 each as was stated in the 2013 order, which is totally impaired by the judgment lien; that the judgment lien against debtors' home in Ivanhoe is avoided in its entirety pursuant to § 522(f); and that the judgment lien shall be canceled of record by the filing in Sampson County of the 2013 avoidance order and the 2016 order currently under review unless the § 522 avoidance is vacated by a dismissal of the bankruptcy proceeding under 11 U.S.C. § 349(b)(1)(B). Id.

         Mclnnis noticed this appeal, citing in her brief the sole issue on appeal as whether a final order entered by the presiding judge over a Chapter 13 bankruptcy proceeding, which has not been timely appealed by any party with standing, may be later overruled, amended, or modified by another bankruptcy judge despite the policy behind the law-of-the-case doctrine.[3] [DE 20 at 3].


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