## Facts

- In 1996, Jimmie and Valerie Beaty borrowed $92,000 from Four Oaks Bank & Trust Co. (Four Oaks) and granted Four Oaks a security interest in a “drill machine” consisting of a ten-wheeled truck (with its own engine) and a drill rig mounted on the truck (with its own separate engine).
- In 1997, the Beatys borrowed $13,466 from First-Citizens Bank & Trust Co. (First-Citizens) to purchase a replacement engine for the drill rig.
- The Beatys signed a security agreement granting First-Citizens a security interest in the replacement engine, and First-Citizens perfected its interest by filing financing statements with state authorities shortly after the loan.
- Jimmie Beaty installed the replacement engine on the drill rig; the installation did not damage the larger drill machine, and the engine could be removed without damage.
- In 1999, the Beatys filed for Chapter 13 bankruptcy and listed both Four Oaks and First-Citizens as creditors claiming an interest in the drill rig.
- The bankruptcy filing triggered the automatic stay. Without notice to First-Citizens, Four Oaks sought bankruptcy-court permission related to selling the drill machine.
- In January 2000, the bankruptcy court entered an order authorizing the Beatys to sell the entire drill machine (including the replacement engine) to a third party for $50,000 and directing that all sale proceeds be paid to Four Oaks.
- First-Citizens later sued Four Oaks in North Carolina state court, seeking to recover the amount of the Beatys’ unpaid debt on the replacement-engine loan, alleging First-Citizens held a superior (purchase-money) security interest in the engine and that Four Oaks wrongfully retained proceeds attributable to that engine.
- The trial court denied First-Citizens’ summary-judgment motion and granted summary judgment for Four Oaks; First-Citizens appealed.

## Issues

1. Whether First-Citizens’ state-court action seeking money based on the sale of the replacement engine was an impermissible collateral attack on the federal bankruptcy court’s order authorizing the sale and directing that all proceeds be paid to Four Oaks.
2. Whether the bankruptcy court’s order could be ignored or reworked in state court on the theory that First-Citizens did not receive notice of the bankruptcy proceeding that resulted in the order.
3. Whether First-Citizens’ perfected purchase-money security interest in the replacement engine allowed it to recover against Four Oaks in state court despite the bankruptcy court’s distribution directive.

## Decision

- The Court of Appeals affirmed summary judgment for Four Oaks.
- North Carolina courts were required to give full faith and credit to the federal bankruptcy court’s order.
- First-Citizens’ requested relief would require a state court to reach a result contrary to the bankruptcy court’s directive that all sale proceeds be paid to Four Oaks, so the action functioned as a collateral attack on the federal order.
- Because First-Citizens did not establish a basis to treat the bankruptcy order as void or otherwise subject to collateral attack in this separate action, the state court could not reallocate proceeds awarded by the bankruptcy court.
- Any challenge to the sale order or the distribution of proceeds had to be pursued in the bankruptcy court (or by direct review of that court’s order), not through a separate state-law proceeds suit.

## Legal Principles

- State courts must give full faith and credit to federal judgments and orders that finally determine rights within the federal court’s jurisdiction.
- A collateral attack seeks relief that would avoid, contradict, or impair the effect of a prior judgment in a proceeding not brought to set that judgment aside.
- A judgment entered by a court with jurisdiction is binding and generally cannot be collaterally attacked; relief must come by direct attack in the issuing court (or on appeal), unless the judgment is void (such as for lack of jurisdiction) or is subject to a recognized exception (such as extrinsic fraud that prevented a party from presenting its claim).
- When a bankruptcy court authorizes a sale of estate property and directs distribution of the proceeds, a later state-court action seeking to recover those same proceeds from the recipient is barred if it would require reassigning the distribution ordered by the bankruptcy court.
- Article 9 priority concepts do not permit a state court to award proceeds in a way that conflicts with a controlling bankruptcy-court order; the proper forum to address notice, sale authority, or distribution is the bankruptcy case itself.
- Summary judgment is appropriate when there is no genuine issue of material fact and the moving party is entitled to judgment as a matter of law.

## Conclusion

The Court of Appeals held that First-Citizens could not pursue a state-court claim to recover value or proceeds tied to the replacement engine because the bankruptcy court had authorized the sale of the entire drill machine and ordered that all sale proceeds be paid to Four Oaks; granting First-Citizens relief would contradict that federal order, and any remedy for lack of notice or an improper distribution had to be sought in the bankruptcy court through a direct challenge to the order.


First-Citizens Bank & Trust Co. v. Four Oaks Bank & Trust Co., 576 S.E.2d 722, 156 N.C. App. 378 (2003)