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In re Emerald Casino, Inc.

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

January 24, 2018

IN RE EMERALD CASINO, INC., Plaintiff, Debtor
v.
ESTATE OF KEVIN F. FLYNN, et al., Defendants. FRANCES GECKER, not individually but as Trustee for EMERALD CASINO, INC., Plaintiff,

          MEMORANDUM OPINION AND ORDER

          REBECCA R. PALLMEYER, UNITED STATES DISTRICT JUDGE

         This dispute relates to a money judgment the court previously entered against the Estate of Kevin Flynn, a former CEO of the now-bankrupt Emerald Casino, Inc. Frances Gecker, the Chapter 7 bankruptcy trustee, has moved to compel turnover of certain assets in satisfaction of the judgment. Susan Flynn, Kevin Flynn's surviving spouse, objects to the motion, arguing that the “probate exception” to federal subject matter jurisdiction precludes this court from deciding whether the assets must be turned over to the Trustee. As explained below, the court concludes that the probate exception does not apply here, and therefore overrules Ms. Flynn's jurisdictional objection. Because the Trustee has not shown that the assets are in fact the property of Kevin Flynn's estate, however, the Trustee's motion is denied as well.

         BACKGROUND

         The full history of this case is long and tortuous, and is available to the interested reader in the court's September 30, 2014 Memorandum Opinion and Order. See In re Emerald Casino, Inc., 530 B.R. 44 (N.D. Ill. 2014). The court recounts only the basic outline and relevant details of that history here.

         Kevin Flynn was an investor in, and later the CEO of, Emerald Casino, a company formed to operate a casino in Illinois. In 1999, Flynn and his associates successfully lobbied the Illinois legislature to amend the Illinois Riverboat Gambling Act, thereby making it possible for them to relocate their operating license from an unprofitable location on waterfront property near the Iowa border to the Village of Rosemont. The plan quickly ran into opposition from officials at the Illinois Gaming Board (IGB), who cited Emerald's managers for various regulatory violations and ultimately voted to revoke Emerald's license in January 2001. The following year, Emerald's creditors forced the company into a Chapter 7 bankruptcy proceeding. The action was converted to a Chapter 11 proceeding in September 2002, and back to a Chapter 7 proceeding in March 2008. See generally In re Emerald Casino, 530 B.R. 44 (N.D. Ill. 2014).

         As early as 2003, Emerald's creditors considered the possibility of filing derivative claims against Flynn and his fellow corporate officers based on their actions leading to the revocation of Emerald's license. Id. at 164. Section 11.2 of the Riverboat Gambling Act required that twenty percent of Emerald's shareholders be female or minority investors, and in 2006 a majority of these investors sued Flynn and others in federal court, alleging RICO violations and state law claims for fraud, breach of fiduciary duty, estoppel, and conspiracy. Id. at 165. The district court dismissed the RICO claims as barred by 18 U.S.C. § 1964(c) (which states that “no person may rely upon any conduct that would have been actionable as fraud in the purchase or sale of securities to establish a violation of section 1962”) and declined to exercise supplemental jurisdiction over the state law claims. See Payton v. Flynn, No. 06-cv-465, 2006 WL 3087075, at *7-9 (N.D. Ill. Oct. 26, 2006) (Grady, J.). In October 2007, many of the same plaintiffs filed suit in the Circuit Court of Cook County, this time alleging that Flynn and his co-defendants breached an Amended Shareholders Agreement requiring compliance with IGB rules, as well as claims for breach of fiduciary duty, estoppel, and conspiracy. In re Emerald Casino, 530 B.R. at 165. The plaintiffs assigned these claims to the Chapter 7 bankruptcy trustee (hereafter “Trustee”) in November 2008, and the Trustee removed the suit to the Bankruptcy Court a month later. Id. at 166. A multi-year dispute over the proper forum for the Trustee's breach of contract and breach of fiduciary duty claims followed.

         On January 9, 2009, while the Trustee's suit against Kevin Flynn was pending, LKQ Corporation[1] granted Flynn an “equity award” in the form of an option to purchase 60, 000 shares in the company. (Letter from Victor M. Casini to Richard L. Dees, [2] Sept. 13, 2013 (hereafter “Casini Letter”), Ex. B to Trustee's Mot. to Compel Turnover (hereafter “Turnover Mot.”) [583].) On June 3, 2009, Mr. Flynn signed a form titled “Beneficiary Designation” that named Susan K. Flynn as the primary beneficiary of his awards under LKQ's “1998 Equity Incentive Plan” in the event he died before “receiv[ing]” them. (Beneficiary Designation, Ex. G to Jurisdictional Obj. of Estate of Kevin Flynn (hereafter “Jurisdictional Obj.”) [599].) LKQ subsequently granted Mr. Flynn two additional equity awards: 1, 261 restricted share units (RSUs)[3] on May 12, 2011, and an additional 4, 078 RSUs on May 12, 2013. (Casini Letter.) Kevin Flynn died on August 12, 2013. In re Emerald Casino, 223 F.Supp.3d 740, 742 (N.D. Ill. 2016). His will was admitted to probate on August 26, 2013, and Judge James Riley of the Circuit Court of Cook County appointed Ms. Flynn as Executor of the estate. (Declaration of Susan Flynn (hereafter “Flynn Decl.”), at ¶ 4, Ex. A to Jurisdictional Obj.) The LKQ stock options and RSUs did not appear on the inventory of Kevin's estate that Susan submitted to the probate court on June 14, 2014. (Inventory, Ex. A to Flynn Decl.) These items do appear, however, on a 2013 federal tax return for the estate, where they are listed as “[p]ayable on death to Susan F. Flynn, the decedent's surviving spouse.” (United States Estate (and Generation-Skipping Transfer) Tax Return (Hereafter “Tax Return”), Ex. A to Turnover Mot.)[4]

         Following Kevin Flynn's death, the Trustee substituted his estate as a defendant in the litigation before this court.[5] In re Emerald Casino, 223 F.Supp.3d at 742. In September 2014, the court dismissed the Trustee's fiduciary duty claims as barred by the statute of limitations, but found Flynn and several others severally liable for breach of contract damages totaling $272, 000, 000.00. In re Emerald Casino, 530 B.R. at 237-38. On January 12, 2016, the court entered a judgment for the Trustee against Flynn's estate in the amount of $45, 333, 333.33. (Judgment Order of Jan. 16, 2016 [401].) Both the Trustee and the defendants appealed that judgment, but the Seventh Circuit largely affirmed it. Because the Court of Appeals concluded that the “concurrent breach” doctrine applies, however, each defendant is now liable for the full amount of the judgment. See In re: Emerald Casino, Inc., 867 F.3d 743 (7th Cir. 2017). Thus, the Estate of Kevin Flynn faces a judgment of $219, 666, 666.66. (Judgment Order of Oct. 17, 2017 [635].)

         Kevin Flynn's estate turned out to be judgment proof-at least according to the Inventory and the First and Final Account that Susan Flynn filed with the probate court in June 2014. (See Inventory, Ex. A to Flynn Decl.; First and Final Account, Ex. B to Flynn Decl.) The Trustee suspects that certain of Mr. Flynn's assets might be located elsewhere, and has issued citations to discover assets to numerous individuals and institutions-including to Susan Flynn in both her individual capacity and as trustee of a trust. In re Emerald Casino, 223 F.Supp.3d at 744. One of the documents produced in response to these citations was the 2013 tax return for Flynn's estate, which listed the LKQ stock options and RSUs as“[p]ayable on death to Susan F. Flynn, the decedent's surviving spouse, ” and valued them at approximately $1.6 million. (Tax Return 10-11.) Another document produced in response to the citations was a letter from Victor M. Casini, Senior Vice President and General Counsel of LKQ Corporation, identifying the stock options and RSUs as “equity awards held by Kevin Flynn at the date of his death.” (Casini Letter.)

         On August 11, 2017, the Trustee filed a motion to compel Susan Flynn to turn over the LKQ stock options and RSUs or their cash equivalent. (Turnover Mot. 3.)[6] Approximately three weeks later, on September 1, 2017, Susan Flynn filed three petitions in the Circuit Court of Cook County, each of which asked for the Estate's attorney fees and costs to be paid, in part, from those same stock options and RSUs. (Pets. for Atty's Fees and Costs, Exs. I, J, K to Jurisdictional Obj.) On September 17, the Circuit Court directed Ms. Flynn to file an itemization of the fees and scheduled a hearing on the matter for the following month. (Order of Sept. 14, 2017, Ex. B to Trustee's Reply in Supp. of Turnover Mot [601].) The Trustee moved to stay the proceedings, and the Circuit Court re-set the hearing date for January 30, 2018. (Order of Nov. 29, 2017, Ex. E to Resp. to Status Report.) The Trustee's motion to compel turnover of the LKQ stock options and RSUs remains pending before this court.

         DISCUSSION

         I. Subject matter jurisdiction

         Ms. Flynn contends that this court lacks subject matter jurisdiction based on the probate exception to federal jurisdiction. That exception is rooted in the Judiciary Act of 1789, which sets limits on the equity jurisdiction it confers on the federal courts. See Marshall v. Marshall, 547 U.S. 293, 308 (2006). The Act “reserves to state probate courts the probate or annulment of a will and the administration of a decedent's estate, ” and “precludes federal courts from endeavoring to dispose of property that is in the custody of a state probate court.” Id. at 311-12. It does not, however, “bar federal courts from adjudicating matters outside those confines and otherwise within federal jurisdiction.” Id. at 312. As one recent case explains, “the rationale for the rule is that in situations where a state court controls the subject of a custody battle or the property in a decedent's estate, another court should not ‘be permitted to elbow its way into such a fight, ' particularly because state courts are assumed to have developed a core proficiency in probate and domestic relations matters.” Sykes v. Cook Co. Circuit Court Probate Division, 837 F.3d 736, 741 (7th Cir. 2016) (citation omitted). Because “the exception does not bar federal courts from exercising otherwise proper jurisdiction, ” however, the Seventh Circuit has advised that it “should be narrowly construed.” Id.

         This court has already addressed the probate exception's application in this case. See In re Emerald Casino, Inc., 223 F.Supp.3d at 745-51. As explained there, “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.” Id. at 746 (citing cases). The court therefore “has jurisdiction to oversee a search for the assets of [Mr. Flynn], which includes disputes about whether those assets are now in the hands of other persons or institutions.” ...


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