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In re Emerald Casino, Inc.

United States District Court, N.D. Illinois, Eastern Division

December 2, 2016

IN RE EMERALD CASINO, INC., Plaintiff-Debtor
v.
DONALD F. FLYNN, KEVIN F. FLYNN, KEVIN LARSON, JOHN P. McMAHON, JOSEPH F. McQUAID, WALTER HANLEY, and PEER PEDERSEN, Defendants. FRANCES GECKER, not individually but solely as trustee for the bankruptcy estate of Emerald Casino, Inc., Plaintiff, Bankr. Adv. No. 08 A 00972

         Chapter 7

          MEMORANDUM OPINION AND ORDER

          REBECCA R. PALLMEYER United States District Judge

         Kevin Flynn was one of several investors in the Emerald Casino, a business formed to operate a land-based casino in Illinois. The casino plan ran into regulatory difficulty, however, and the Illinois Gaming Board stripped Emerald of its license to operate. Emerald filed bankruptcy and Frances Gecker, the bankruptcy trustee (hereinafter “the Trustee”), sued Flynn and others, alleging that their conduct led to the loss of the license. In September 2014, this court found Kevin Flynn and others liable, and after settlement efforts failed, the court entered judgment earlier this year.

         Kevin Flynn died during the pendency of the action. The Trustee now seeks to execute on the substantial judgment she won against him. To that end, the Trustee has issued citations to discover assets in the hands of Kevin Flynn's widow, Susan Flynn-in Susan's personal capacity, in her capacity as executor of her late husband's estate, and in her capacity as trustee of a trust formed by her husband before his death. Susan Flynn and the estate itself have moved to quash these citations. For the reasons explained here, the court denies the motions and lifts the stay it imposed on the citation proceedings. As further explained, however, the Trustee's victory on this motion may be a Pyrrhic one, as the court concludes that the Illinois probate court has exclusive jurisdiction to distribute any assets found to be part of Kevin Flynn's estate.

         FACTS

         This case began as an adversary proceeding in 2008 arising from the bankruptcy of the Emerald Casino. The facts and procedural history are long and complicated, detailed in full in the court's September 30, 2014 opinion. In re Emerald Casino, Inc., 530 B.R. 44 (N.D. Ill. 2014). Kevin Flynn, one of several defendants, died on August 12, 2013, and his estate was substituted as Defendant in the still-pending case against him. (Mem. in Supp. of the Estate of Kevin F. Flynn's Mot. to Dismiss Suppl. Proceedings for Lack of Jurisdiction [hereinafter “Estate Br.”] [478], at 2.) After settlement efforts with certain other defendants concluded, the court entered judgment in the amount of $45, 333, 333.33 against Kevin's estate and in favor of Plaintiff Francis Gecker as Chapter 7 trustee for the bankruptcy estate of the casino. (J. Order, Jan. 12, 2016 [401].) The Trustee now seeks to enforce that judgment.

         Kevin[1] was a wealthy businessman in his lifetime, but his estate is reportedly all but worthless. The Trustee believes that some of Kevin's assets may now be in the hands of other persons or institutions subject to citation proceedings. (Trustee's Combined Obj. to Estate of Kevin F. Flynn's & Susan Flynn's Mots. to Dismiss Suppl. Proceedings [hereinafter “Trustee Br.”] [492], at 2-3.) Accordingly, she has issued citations to eighteen individuals and institutions to discover assets, including to Susan individually [473-10], in her capacity as executor of Kevin's estate [473-2], and in her capacity as the trustee of a trust [473-4].

         The trust in question, referred to by the parties as the Appointive Trust, was funded (at least in part)[2] at Kevin's death by the operation of his will and several other trust instruments. (See Mem. of Susan Flynn, Joining Mot. to Dismiss Suppl. Proceedings for Lack of Jurisdiction [hereinafter “Susan's Br.”] [483-1], at 2-3.) The funding stream begins with the Kevin F. Flynn June, 1992 Non-Exempt Trust (the “1992 Trust”), which Kevin's father created in 1992, naming Kevin as the beneficiary. (Id. at 2.) The 1992 Trust contains what is known as a “spendthrift” provision, which generally shields trust assets from claims of a beneficiary's creditors.[3] (Trust Agrmnt. ¶ 8, Ex. C to Estate Br. [483-5].) It also contains an appointment provision that allowed Kevin, by his will, to direct the trust assets to the benefit of any person or entity other than his estate or his creditors. (Id. at ¶ 2(d).)

         By his will, Kevin exercised that power of appointment in favor of another trust, the Kevin F. Flynn 1995 Trust (the “1995 Trust”). (Will of Kevin F. Flynn, Ex. D to Estate Br. [483-6], at 2.) Kevin was the trustee of the 1995 trust, which was presumably created in 1995 but is governed now by an amended trust instrument executed by Kevin in 2010. (Restatement of the Kevin F. Flynn 1995 Trust, Ex. E to Estate Br. [hereinafter “1995 Trust Restmnt.”] [483-7].) The 1995 Trust, under the 2010 amended trust instrument, anticipates the transfer of 1992 Trust assets in the event of Kevin's death. (Id. at ¶ 5.) The 2010 trust instrument requires the trustee of the 1995 Trust to transfer any property received from the 1992 Trust to yet another trust-the Appointive Trust (id. at ¶ 5)-to be created in the event of Kevin's death under terms laid out in the 2010 trust instrument. (Id. at ¶ 12.) Susan contends that the Appointive Trust is also subject to a spendthrift provision (Susan's Br. 4 (citing 1995 Trust Restmnt. at ¶ 20)), but the provision does not specifically appear in the terms governing the Appointive Trust (1995 Trust Restmnt. at ¶ 12), and its applicability to the Appointive Trust may be in dispute. The court does not resolve at this stage whether the term applies to the Appointive Trust, or whether the Appointive Trust may regardless be a spendthrift trust by operation of Illinois law, see 735 ILCS 5/2-1403.

         The Estate and Susan have jointly requested that all of the citations be dismissed pursuant to Federal Rule of Civil Procedure 12(b)(1) because the probate exception deprives the court of jurisdiction. (Estate Br. 1-2; Susan's Br. 1.) As more fully explained below, the court concludes that its jurisdiction to enforce its own judgments extends to the discovery of assets to add to the estate, but the probate exception will likely prevent it from awarding any discovered assets to any particular creditor, including the Trustee.

         DISCUSSION

         I. The Probate Exception Does Not Bar Citations

         The court generally has broad power to execute its judgments. Star Ins. Co. v. Risk Mktg. Grp., 561 F.3d 656, 662 (7th Cir. 2009). Unless a federal statute governs the particular circumstances, collection proceedings in federal court are governed by state law. Fed R. Civ. P. 69(b). Under Illinois law, the court may “inquire as to whether third parties hold assets of the judgment debtor.” Dexia Credit Local v. Rogan, 629 F.3d 612, 624 (7th Cir. 2010). Ordinarily, the court may also order a third party to turn over assets to the creditor if those assets do, in fact, belong to the judgment debtor. Id. (collecting Illinois cases).

         Susan and the Estate argue that the probate exception to federal jurisdiction limits this court's power in this case. The probate exception arises from a limitation on the equity jurisdiction conferred on federal courts by the Judiciary Act of 1789. Marshall v. Marshall, 547 U.S. 293, 308 (2006). Specifically, the Judiciary Act authorized federal courts to exercise only the jurisdiction enjoyed by the contemporary English Court of Chancery, which did not extend to probate matters. Id. In an older case endeavoring to clarify the exception, the Supreme Court explained that federal courts have no jurisdiction to probate a will, to administer an estate, or to “disturb or affect the possession of property in the custody of a state court.” Markham v. Allen, 326 U.S. 490, 494 (1946). Federal courts could, however, hear cases by claimants “against a decedent's estate ‘to establish their claims' so long as the federal court does not interfere with the probate proceedings or assume general jurisdiction of the probate or control of the property in the custody of the state court.” Id. (quoting Waterman v. Canal-La. Bank & Tr. Co., 215 U.S. 33, 43 (1909)). After Markham, some circuits expansively read the exception to prohibit claims that might “interfere with” probate proceedings generally, regardless of whether those claims actually interfered with property in custody of the state court. Marshall, 547 U.S. at 311.

         In Marshall v. Marshall, the Court reigned in expansive interpretations of the probate exception. Vickie Lynn Marshall (known to the world as Anna Nicole Smith) sued the son of her deceased husband in federal court, alleging that the son had tortiously interfered with a testamentary gift to her. Id. at 300-01. Vickie Marshall initiated the suit while her husband's estate was still pending in the state probate court. Id. The district court entered judgment in her favor, but the Ninth Circuit vacated the judgment, holding that the tortious interference claim raised “questions which would ordinarily be decided by a probate court, ” and therefore interfered with the probate proceeding in violation of the probate exception. Id. at 304.

         The Supreme Court overturned that decision, concluding that the probate exception did not defeat federal jurisdiction over the tortious interference claim. Id. at 305. Clarifying the Markham holding, the Court explained that the probate exception does not proscribe generalized “interference with” state court proceedings; instead, the exception deprives a federal court of jurisdiction only where federal jurisdiction would “disturb or affect the possession of property in the custody of the state court.” Id. at 311-12. Because Vickie Marshall's claim sought a judgment against the son, and did not specifically seek property in the custody of the state court, the exception did not apply. Id. at 312.

         Cases decided since Marshall suggest that claims that would add assets to an estate, but do not reallocate those assets among claimants or creditors, do not disturb a state probate court's possession of property. In Gustafson v. ZumBrunnen, the representative of an estate brought a suit in federal court against several holders of a joint bank account containing $50, 000 which the representative claimed belonged to the estate. 546 F.3d 398, 400 (7th Cir. 2008). The district court dismissed the case for lack of complete diversity between the parties, and the Seventh Circuit affirmed, but paused to note that the case was not barred by the probate exception. Id . at 400-01. Although the suit was “ultimately based on the will, ” the court observed, it would “just add assets to the decedent's estate; it would not reallocate the estate's assets among contending claimants or otherwise interfere with the probate court's control over and administration of the estate.” Id. at 400. The First Circuit reached the same conclusion in Jimenez v. Rodriguez-Pagan, 597 F.3d 18, 24 (1st Cir. 2010). In Jimenez, the representative of an estate sued in federal court to recover a 20% share of profits on the sale of a building which the decedent had an option to purchase. Id. at 22. On appeal from dismissal for lack of diversity jurisdiction, the First Circuit held that the claim did not interfere with property in ...


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