United States District Court, N.D. Illinois, Eastern Division
In re Charles Edward Taylor, II, Debtor.
Charles Edward Taylor, II, Appellee. Patricia Caiarelli, Madeline Gauthier, and Charles A. Kimbrough, Appellants,
MEMORANDUM OPINION AND ORDER
ROBERT M. DOW, Jr., District Judge.
Appellants Patricia Caiarelli and her attorneys, Madeline Gauthier and Charles A. Kimbrough, appeal from a Contempt Order, Damages Order, and Judgment that the bankruptcy court entered against them in Caiarelli's adversary proceedings against Debtor Charles Edward Taylor, II. R. 1, Notice of Appeal. For the reasons discussed below, the bankruptcy court's orders and judgment are reversed.
The events leading up to this bankruptcy appeal date back to 2005, long before Debtor Charles Taylor filed his Chapter 11 petition in the bankruptcy court. It all began in September 2005 when William Taylor (Charles Taylor's brother and Caiarelli's ex-husband) drowned in a boating accident. In re Taylor, Nos. 63761-4-I, 63462-3-1-I (Wash.Ct.App. Dec. 20, 2010), at App. 2215, 2218. Although Charles Taylor was initially named as personal representative of the Estate, the probate court ended up removing him from that role and replacing him with Michael Longyear. Id. at App. 2219.
William's young son, Alexander Taylor,  was the primary beneficiary of William's will. See id. at App. 2216. At the time of his death, however, William had several non-probate assets, including a retirement account and several AIG policies. See id. at App. 2217-18. Taylor had been named as beneficiary of many of these non-probate assets, and, after William died, Taylor quickly disposed of them. See id. at App. 2217-19; see also Am. Resp. Debtor's Statement of Facts, Caiarelli v. Taylor, Adv. No. 12-01188 (Bankr. N.D.Ill. Mar. 12, 2013), at App. 2441-42 ¶¶ 23, 25, 27.
In March 2006, Caiarelli (Alexander's mother and legal guardian) filed a lawsuit against Taylor in Washington state court under the Washington Trust and Estate Dispute Resolution Act (TEDRA). See Verified Pet., In re Taylor, No. 06-4-02116-6 (Wash. Superior Ct., King Cnty. Mar. 20, 2006), at App. 275. In the TEDRA lawsuit, Caiarelli sought a declaration that Alexander, not Taylor, was entitled to William's non-probate and non-testamentary assets. See id. Attorneys Gauthier and Kimbrough represented Caiarelli in the TEDRA action. Joint Pretrial Statement, In re Taylor, No. 12-16471 (Bankr. N.D.Ill. June 10, 2013), at App. 538. A jury ultimately returned a verdict against Taylor, and a judgment was entered awarding the Estate $1, 422, 077 (the TEDRA Judgment). Id. ; see also J. Summ., In re Taylor, No. 06-4-02116-6 (Dec. 20, 2011), at App. 312.
After the trial, the probate court initially appointed Michael Longyear (the person who replaced Taylor as the personal representative of William's probate estate) as the sole person authorized to enforce the TEDRA Judgment. 3/19/13 Tr. at App. 735. But on April 3, 2012, Longyear assigned the TEDRA Judgment to Caiarelli. See Assignment of Judgment, In re Taylor, No. 06-4-02116-6 (Apr. 3, 2012), at App. 354-55. Unhappy with this turn of events, Taylor filed a motion in the probate court to void the assignment. Mot. Void Assignment, In re Taylor, No. 06-4-02116-6 (Apr. 13, 2012), at App. 363. But on April 23, 2012, before the probate court could resolve Taylor's motion, Taylor filed a Chapter 11 petition in the bankruptcy court. See Docket, In re Taylor, No. 12-16471, at App. 14-15.
Three days after Taylor's bankruptcy filing, the Washington state probate judge, Judge James Rogers, sent a letter to Caiarelli and Taylor (and their lawyers) acknowledging the bankruptcy filing and the resulting automatic stay. See Judge Rogers Letter (Apr. 26, 2012), at App. 555-56. Noting that the letter was not a court order, Judge Rogers listed several matters that he believed would be addressed by court order if the case were to resume after the bankruptcy case's completion. Id. at App. 555. On the assignment issue, he wrote:
I had anticipated requiring all parties... to appear before Commissioner Velategui before proceeding further on the assignment.... It appears to me that several steps were skipped at the time of the assignment. A contract assignment is not the same as an assignment between [the] Estate and a guardian, and where a trust has an interest. As you know, there are multiple statutory overlays. An assignment may be properly done but certain issues must be addressed. If the stay is lifted, that matter would be addressed to the Commissioner, who is aware of the case.
Id. at App. 556 (emphasis in original).
In the bankruptcy court, Caiarelli was actively involved in Taylor's case. She attended Taylor's meeting of creditors in Chicago; filed proofs of claim as the assignee of the TEDRA Judgment; and objected to the approval of Taylor's disclosure statement and First Amended Plan of Reorganization. See Joint Pretrial Statement at App. 538-39; R. 69-1, Appellee's Exh. 1, Claim 1-4; Objection to Plan, In re Taylor, No. 12-16471, at App. 2625. Caiarelli was also represented by counsel at the hearing on December 20, 2012, when the bankruptcy court ruled that it would confirm Taylor's plan. Joint Pretrial Statement at App. 539; Confirmation Order, In re Taylor, No. 12-16471 (Dec. 20, 2012), at App. 558-59. Taylor served a copy of the confirmation order on Caiarelli, but Caiarelli did not appeal the confirmation order. Joint Pretrial Statement at App. 540; Notice of Confirmation Order, In re Taylor, No. 12-16471 (Jan. 3, 2013), at App. 599, 602.
Meanwhile, back on July 31, 2012 (before the bankruptcy court had confirmed Taylor's plan), Caiarelli had initiated adversary proceedings against Taylor under 11 U.S.C. § 523(c)(1), arguing that the TEDRA Judgment was not dischargeable under the Bankruptcy Code. Adversary Compl., Caiarelli, Adv. No. 12-01188 (July 31, 2012), at App. 1980. In response, Taylor moved to dismiss the adversary proceedings, arguing that Caiarelli lacked standing to enforce the TEDRA Judgment. Mot. Dismiss, Caiarelli, Adv. No. 12-01188 (Sept. 11, 2012), at App. 2013, 2019. To address this standing issue, Caiarelli filed a "motion to ratify" the assignment in the probate court on March 13, 2013. Ratification Mot., In re Taylor, No. 06-4-02116-6 (Mar. 13, 2013), at App. 147. Gauthier filed a declaration in support of that motion, explaining that she filed the motion "on advice of bankruptcy counsel in Chicago, so that she would have standing to maintain the bankruptcy adversary proceeding." Gauthier Decl., In re Taylor, No. 06-4-02116-6 (Mar. 28, 2013), at App. 765 ¶ 9.
Caiarelli's plan backfired. In further support of his dismissal motion, Taylor submitted Caiarelli's motion to ratify and Judge Rogers's letter to the bankruptcy court as proof that Caiarelli did not have standing as a creditor. See Reply Supp. Mot. Strike, Exhs. 1, 2, Caiarelli, Adv. No. 12-01188 (Mar. 18, 2013), at App. 2518-19, 2527, 2537. Taylor also argued that Caiarelli's motion to ratify violated the discharge and plan injunctions. See id. at 2518-19. The bankruptcy court agreed.
At the hearing on the motion to dismiss, the bankruptcy court ultimately held that Caiarelli did not have standing to enforce the TEDRA Judgment against Taylor, so the court dismissed Caiarelli's adversary complaint. Dismissal Order, Caiarelli, Adv. No. 12-01188 (Mar. 20, 2013), at App. 750. The court acknowledged that Judge Rogers's letter was not an order and had no legal effect. But the bankruptcy court nevertheless found that the letter was relevant because it ...