McInnis v. Phillips (In re Phillips)

• Decision Date: 20 September 2017
• Docket Number: ADVERSARY PROCEEDING NO. 14–00125–8–DMW,CASE NO. 12–09022–8–DMW
• Citation: 573 B.R. 626
• Court: U.S. Bankruptcy Court — Eastern District of North Carolina
• Parties: IN RE: Bradley Morton PHILLIPS, Susanna G. Phillips, Debtors Sherrill S. McInnis, Plaintiff v. Bradley Morton Phillips, Susanna G. Phillips, Defendants

573 B.R. 626

IN RE: Bradley Morton PHILLIPS, Susanna G. Phillips, Debtors

Sherrill S. McInnis, Plaintiff

v.Bradley Morton Phillips, Susanna G. Phillips, Defendants

CASE NO. 12–09022–8–DMW

ADVERSARY PROCEEDING NO. 14–00125–8–DMW

United States Bankruptcy Court, E.D. North Carolina, Fayetteville Division.

Signed September 20, 2017

David Ennis, EnnisColeman, LLP, Wilmington, NC, for Plaintiff.

Christopher A. Chleborowicz, Chleborowicz Law Firm, PLLC, Dean R. Davis, Law Office of Dean R. Davis, Wilmington, NC, for Defendants.

MEMORANDUM OPINION AND ORDER DISMISSING ADVERSARY PROCEEDING

David M. Warren, United States Bankruptcy Judge

The matter before the court is the viability of Sherrill McInnis' Complaint/Motion in Adversary Proceeding and Objection to Discharge ("Complaint") filed by Sherrill S. McInnis("McInnis") on August 4, 2014 against Bradley Morton Phillips("B. Phillips") and Susanna G. Phillips(collectively "Phillips").In their Answer and Defenses ("Answer") filed on October 3, 2014, Phillips defend that the Complaint fails to state a claim upon which relief can be granted and should be dismissed pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure("Rule 12(b)(6)"), incorporated by Rule 7012(b) of the Federal Rules of Bankruptcy Procedure.The court conducted a hearing on May 17, 2017 in Raleigh, North Carolina.David Paul Ennis, Esq. appeared for McInnis, and Christopher A. Chleborowicz, Esq. and Dean R. Davis, Esq. appeared for Phillips.Based upon the pleadings and arguments of counsel, the court dismisses the Complaint for the reasons set forth herein.

I.PROCEDURAL HISTORY

A.Bankruptcy Case

Phillips filed a voluntary petition for relief under Chapter 13 of the United States Bankruptcy Code¹ on December 21, 2012, and Robert R. Browning("Chapter 13Trustee") was appointed as interim trustee to administer the case pursuant to § 1302.²Contemporaneously with the filing of their petition, Phillips filed a Proposed Chapter 13 Plan, and on July 24, 2013, Phillips filed a Proposed Chapter 13 Plan—Amended ("Plan").

On September 10, 2013, the Chapter 13Trustee filed an Objection to Confirmation and Motion to Dismiss, objecting to confirmation of the Plan and asserting that Phillips' debts exceeded the Chapter 13 debt limitations set forth in § 109(e).On October 7, 2013, McInnis filed a Motion to Dismiss or for Conversion of Chapter 13 Plan by Creditor Sherrill S. McInnis, requesting the court to deny confirmation of the Plan and to dismiss Phillips' Chapter 13 case or alternatively to convert the case to one under Chapter 7.

In response to the Chapter 13Trustee and to McInnis, on December 2, 2013, Phillips filed a Request to Convert to Chapter 11, requesting the court to convert their case to one under Chapter 11.At a hearing conducted on March 27, 2014, Phillips withdrew their request to convert to Chapter 11 and advised the court that they intended to convert voluntarily their case to one under Chapter 7.On April 29, 2014, Phillips filed a Notice of Conversion of Chapter 7, effectively converting the case to Chapter 7 pursuant to § 1307(a)andRule 1017(f)(3) of the Federal Rules of Bankruptcy Procedure.On April 30, 2014, the court appointed Walter L. Hinson, Esq.("Chapter 7Trustee") to administer the estate pursuant to § 704.

B.Adversary Proceeding

McInnis initiated this adversary proceeding when she filed the Complaint.The Complaint contains two specific claims for relief: dismissal of Phillips' Chapter 7 case pursuant to § 707(b)("§ 707 Claim") and avoidance of a transfer as fraudulent pursuant to § 548(a)(1)(A)("§ 548 Claim").³With respect to the § 548 Claim, the Complaint's prayer for relief requests the court to enter "a money judgment against the [Phillips] in the amount of at least twenty thousand dollars ($20,000) on the account of the avoidance of the Transfers pursuant to 11 U.S.C. §§ 547,548,550, and551... with such recovery being for the benefit of the [Phillips'] estate pursuant to 11 U.S.C. §§ 547,548,550, and551."

The Complaint's opening paragraph indicates that McInnis intended to object to Phillips' discharge pursuant to §§ 523and727.The Complaint does not contain a claim for relief under either of these statutory provisions; however, the Complaint's prayer for relief includes a request that the court deny Phillips a discharge of their debts to McInnis pursuant to §§ 523(a)(2)(A) and (a)(4)("§ 523 Claim").

The Rule 12(b)(6) defense set forth in Phillips' Answer was noted upon the court's docket as a Motion to Dismiss Adversary Proceeding ("Motion to Dismiss"); however, Phillips did not request a hearing on the Motion to Dismiss, and the court did not autonomously set one.In the Motion to Dismiss, Phillips asserted generally that the Complaint should be dismissed for failure to state a claim upon which relief can be granted and specifically that the § 548 Claim should be dismissed for lack of standing ("Standing Defense").

On August 28, 2015, the court entered an Order Holding Proceeding in Abeyance, which ordered that this adversary proceeding be suspended until a final resolution by either of the following: (1) litigation between McInnis and Phillips ("State Court Action")⁴ that was pending in the New Hanover County Superior Court("State Court") at the time of Phillips' bankruptcy petition; or (2) a related adversary proceeding initiated by the Chapter 7Trustee.The State Court Action is more fully described infra and included a counterclaim similar to the § 548 Claim but based upon state law.

At a Status Conference conducted on August 15, 2016, the parties advised the court that McInnis dismissed an appeal in the State Court Action, making the matter fully adjudicated; therefore, the court could move forward to resolve McInnis' claims in this adversary proceeding.Phillips contended, and McInnis disagreed, that final resolution of a counterclaim within the State Court Action had a res judicata effect upon the § 548 Claim("Res Judicata Defense").

On August 19, 2016, the court entered a Scheduling Order for Submission of Memoranda of Law which directed the parties to file memoranda in support of their respective positions on the Res Judicata Defense.After reviewing the memoranda and applicable law, the court determined that it should first assess the previously asserted Standing Defense, because if Phillips prevail on the Standing Defense, then resolution of the Res Judicata Defense becomes unnecessary.On March 8, 2017, the court entered an Order Scheduling Hearing on [Phillips']Motion to Dismiss which scheduled a hearing on the Motion to Dismiss as set forth in the Answer, as well as the newly asserted Res Judicata Defense.

II.RULE 12(b)(6) STANDARD OF CONSIDERATION

Rule 12(b)(6) provides a defense to a claim for a relief for "failure to state a claim upon which relief can be granted."Fed. R. Civ. P. 12(b)(6);Fed. R. Bankr. P. 7012(b). A Rule 12(b)(6)request to dismiss"challenges the legal sufficiency of a complaint, considered with the assumption that the facts alleged are true"Francis v. Giacomelli , 588 F.3d 186, 192(4th Cir.2009)(citingJordan v. Alt. Res. Corp. , 458 F.3d 332, 338(4th Cir.2006);E. Shores Mkts., Inc. v. J.D. Assocs. Ltd. P'Ship , 213 F.3d 175, 180(4th Cir.2000) )."In considering a motion to dismiss, the court should accept as true all well-pleaded allegations and should view the complaint in a light most favorable to the plaintiff."Mylan Laboratories, Inc. v. Matkari , 7 F.3d 1130, 1134(4th Cir.1993).

When considering a Rule 12(b)(6) motion to dismiss, a court"must consider the complaint in its entirety, as well as other sources courts ordinarily examine when ruling on Rule 12(b)(6) motions to dismiss, in particular, documents incorporated into the complaint by reference, and matters of which a court may take judicial notice."Tellabs, Inc. v. Makor Issues & Rights, Ltd. , 551 U.S. 308, 322, 127 S.Ct. 2499, 2509, 168 L.Ed.2d 179(2007).The Federal Rules of Evidence provide that "[t]he court may judicially notice a fact that is not subject to reasonable dispute because it: (1) is generally known within the trial court's territorial jurisdiction; or (2) can be accurately and readily determined from sources whose accuracy cannot reasonably be questioned."Fed. R. Evid. 201(b).

III.FACTUAL BACKGROUND AND ALLEGATIONS

This adversary proceeding culminates a lengthy Hatfield–McCoy type of feud between the parties that has spanned many years and been the subject of numerous court proceedings; however, for purposes of the Motion to Dismiss, the court may only consider the factual allegations contained within the pages of the Complaint, including incorporated documents, and facts derived from the records of Phillips' bankruptcy case and the State Court Action of which the court may take judicial notice.

A.Allegations in the Complaint⁵

1.Phillips' Indebtedness to McInnis

In 2005, Pages Creek Marine Services, Inc.("Pages Creek") entered into an agreement to purchase from McInnis and Philip K. McInnis, Jr.("P. McInnis")⁶ all of the stock of Francis–Kilmer Corporation, and Pages Creek executed a promissory note ("Note") in favor of McInnis and P. McInnis in the original principal amount of $337,500.00.Phillips, who were the principals of Pages Creek, guaranteed payment by Pages Creek under the terms of the Note.The Note was secured by security interest in the common stock of Francis–Kilmer Corporation, plus all of the business's inventory, furnishings, tools, fixtures, and equipment.

In 2008, Pages Creek entered into a commercial lease agreement ("Lease") with McInnis and P. McInnis, as trustees of the McInnis Family Living Trust, for the lease of real property in New Hanover County used as Pages Creek's business premises.Phillips guaranteed Pages Creek's performance under the Lease.

Pages Creek defaulted in its obligations under the Note and the Lease.On December 15, 2011, the State Court entered an Order ("Judgment") whic...