In re Phillips, 553 B.R. 536

Background

Debtors Bradley M. Phillips and Susanna G. Phillips filed Chapter 13 on Dec. 21, 2012, converted to Chapter 7 on Apr. 29, 2014. They own a residence in Sampson County, NC.
Three encumbrances on the property as of the petition date: a first mortgage to JPMorgan Chase (~$153,873), a second deed to BB&T (~$6,798), and a state-court judgment lien held by Sherrill S. Mclnnis (judgment claim ~ $248,296).
In March 2013 (while in Chapter 13) the court held a hearing on Debtors’ First Avoidance Motion and entered an Avoidance Order that purported to avoid the Mclnnis judgment lien under both 11 U.S.C. § 522(f) and § 506(d); the drafted order contained drafting errors (incorrect exemption amounts and ambiguous conditioning language).
After conversion to Chapter 7, Debtors filed a Second Avoidance Motion in Jan. 2016 seeking avoidance under § 522(f). Mclnnis objected, raising (1) violation of an abeyance order (abandoned), (2) res judicata/collateral estoppel because the Avoidance Order was final and conditioned on Chapter 13 completion, and (3) laches.
The court reviewed the 2013 record, concluded the earlier order was inaccurately worded, exercised equitable power to amend it (correct exemption amounts and state that the judicial lien is avoided in its entirety under § 522(f)), and held the amended Avoidance Order is a final, enforceable order that bars relitigation by res judicata; it granted the Second Avoidance Motion only to incorporate the prior § 522(f) avoidance.

Issues

Issue	Debtors' Argument	Mclnnis' Argument	Held
Whether a § 522(f) avoidance order entered in Chapter 13 remains binding after conversion to Chapter 7	Order avoiding lien under § 522(f) should remain effective; petition-date valuations apply	Conversion and § 348(f)(1)(B) nullify Chapter 13 valuations/orders so Debtors must re-litigate	Court held conversion does not defeat a § 522(f) avoidance order; the Avoidance Order (as amended) is final and bars relitigation (res judicata)
Whether the Avoidance Order was conditioned on completion of the Chapter 13 plan/discharge	§ 522(f) avoidance stands independent of discharge; no such condition was imposed	The order’s Provision C conditions avoidance on completing Chapter 13, so relief is ineffective after conversion	Court held Provision C only conditioned the § 506(d) relief; the § 522(f) avoidance was not conditioned on plan completion and remains effective
Whether § 348(f)(1)(B) prohibits applying Chapter 13 valuations/avoidance to converted Chapter 7 cases	§ 348(f)(1)(B) governs valuations under § 506(a)/plan modifications, not § 522(f) lien avoidance tied to petition-date values	§ 348(f)(1)(B) was intended to negate Chapter 13 valuations upon conversion and so invalidates prior avoidance	Court held § 348(f)(1)(B) does not automatically negate § 522(f) avoidance; § 522 uses petition-date values and prior § 522(f) determinations can have res judicata effect
Whether the court may amend its prior Avoidance Order to correct drafting errors	Court may correct/modifiy its own order under § 105(a) and Rule 60(b)/9024 where no intervening vested rights exist	(Implicit) such amendments cannot expand relief beyond what was adjudicated	Court exercised equitable authority to amend and clarify the Avoidance Order (correct exemptions and state full avoidance under § 522(f))

Key Cases Cited

Osborne v. Dominion Bank, N.A. 156 B.R. 188 (Bankr. W.D. Va.) (motion to avoid lien under § 522(f) is a core proceeding)
Varat Enters., Inc. v. Nelson, Mullins, Riley & Scarborough 81 F.3d 1310 (4th Cir.) (elements and effect of claim preclusion/res judicata)
Turshen v. Chapman 823 F.2d 836 (4th Cir.) (res judicata principles apply to bankruptcy court decisions)
Dewsnup v. Timm 502 U.S. 410 (Sup. Ct.) (limitations on using § 506(d) in Chapter 7 to strip liens)
Meyer v. Lenox (In re Lenox) 902 F.2d 737 (9th Cir.) (bankruptcy court equitable power to reconsider or modify orders)
Salanoa (In re Salanoa) 263 B.R. 120 (Bankr. S.D. Cal.) (petition date is the operative date for § 522(f) valuations)