The Phillips filed a Chapter 13 bankruptcy and successfully avoided the judgment lien held by McInnis. The Order allowing the avoidance provided that:
3. The Judgment lien of the McInnises 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 McInnises’ lien shall remain unaffected as to Section 506(a) and (d) of the Bankruptcy Code by this order. (“Provision C”).
The Phillips later converted to Chapter 7 and filed a second Motion to Avoid Judgment Lien and McInnis objected, arguing that res judicata precluded such avoidance as the original order required that the Phillips complete their Chapter 13 plan.
Analyzing the claim preclusion argument the bankruptcy court found the following requirements:
1) the prior judgment was final and on the merits and rendered by a court of competent jurisdiction in accordance with the requirements of due process;
2) the parties are identical, or in privity, in the two actions; and
3) the claims in the second matter are based upon the same cause of action involved in the earlier proceeding.
As the parties and the causes of action are identical in the two Motions to Avoid Judgment Lien, the bankruptcy court turned to whether the prior order was a final judgment on the merits. As 11 U.S.C. § 348(f)(1)(B) provides that “valuations of property and of allowed secured claims in the chapter 13 case shall apply only in a case converted to a case under chapter 11 or 12, but not in a case converted to a case under chapter 7 . . . “, the bankruptcy court had previously assumed that previous valuations in Chapter 13 were invalidated and so too was the Order Avoiding Judgment lien. Looking at this further, however, the bankruptcy court found that the restriction on revaluation of property by § 348(f) following conversion “more appropriately to modifications of secured claims … than to avoidances of liens….” As such, the original Order was binding and re-litigation barred by res judicata, but only, as specified in the Order, as to § 506(a) and (d). Since avoidance under § 522(f) is not included in Provision C, the second Motion to Avoid Judgment Lien could be granted on that basis.
It is important to note that the Form Order avoiding judgment liens in the M.D.N.C. provides that:
ORDERED that this Order is to be of no force and effect outside of this Chapter 13 bankruptcy proceeding unless, and until, the Debtor obtains a discharge in this case following the completion of all payments under the Debtor’s Chapter 13 plan. A copy of the Order of Discharge is to accompany any recordation of this Order;
Accordingly, Middle District conversions would require a second Motion to Avoid Judgment lien and presents the same issue. There does not seem to be a posted standard form order for the W.D.N.C., so this would remain an open question there.
To best preserve all parties rights, perhaps the standard orders in all districts should also provide that:
ORDERED that this Order shall have no preclusive affect on any party should the Debtor convert this case to another chapter and subsequently seek avoidance of the Judgment Lien at such time.
For a copy of the opinion, please see: