In re Neely

• Decision Date: 30 September 2019
• Docket Number: Bankruptcy No. 18-81432
• Citation: 608 B.R. 806
• Parties: IN RE: Donna J. NEELY, Debtor.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

608 B.R. 806

IN RE: Donna J. NEELY, Debtor.

Bankruptcy No. 18-81432

United States Bankruptcy Court, N.D. Illinois, Western Division.

Signed September 30, 2019

Richard G. Larsen, Springer Larsen Greene, LLC, Wheaton, IL, for Debtor.

Lydia Meyer, Rockford, IL, pro se.

MEMORANDUM OPINION

Thomas M. Lynch, United States Bankruptcy Judge

Before the court is the objection of the Debtor, Donna Neely, to the unsecured claim asserted by four of her five adult children in this voluntarily converted chapter 11 case.¹ (ECF No. 35.) The Claimants are contingent beneficiaries of certain family trusts and limited partnerships in which Donna now serves as the principal. The siblings assert in this bankruptcy that Donna is indebted to them for breach of her fiduciary duties as trustee and as general partner. For the reasons discussed below, the Debtor's objection will be sustained in part and overruled in part.

JURISDICTION

The court has jurisdiction to decide this matter pursuant to 28 U.S.C. § 1334 and Internal Operating Procedure 15(a) of the United States District Court for the Northern District of Illinois. The disallowance of claims is a core proceeding pursuant to 28 U.S.C. § 157(b)(2)(A) over which the bankruptcy court has constitutional authority to enter final orders. See, e.g. , Stern v. Marshall , 564 U.S. 462, 499, 131 S.Ct. 2594, 180 L.Ed.2d 475 (2011) (stating that the question of court's authority "is whether the action at issue stems from the bankruptcy itself or would necessarily be resolved in the claims allowance process").

PROCEDURAL BACKGROUND

The Debtor filed her voluntary petition under chapter 13 on July 6, 2018. Before a plan of reorganization had been confirmed, the case was converted to chapter 11 on July 3, 2019. On behalf of the four Neely Claimants, their counsel filed a proof of claim on September 14, 2018 in the amount of $1,472,180.00 for "Breach of fiduciary duty to trust beneficiaries." (Claim 15-1.) They attached to the Proof of Claim a seven-page narrative summary ("Claimants' Summary") together with a 16-page document entitled "Third Amended Petition for Removal of Donna Neely as (1) Successor-Trustee of the Harry Neely Living Trust, and/or (2) As General Partner of the Neely Limited Partnership, and for Accountings as to Each, to Disqualify Kathy Neely-Lawson as Successor-Trustee and/or Successor-General Partner and for Other Legal and Injunctive Relief" (the "Amended Petition"). The latter document was filed in a lawsuit that was pending in the 16th Judicial Circuit (Kane County, Illinois) for three years before Donna filed her petition for relief. The siblings sued Donna and her non-claimant daughter, Kathleen Neely Lawson, for damages and equitable relief. Among other things, the plaintiffs asked the state court to remove Donna as successor-trustee of the Harry Neely Trust² and as the General Partner of the Neely Limited Partnership, disqualify Kathleen from the offices of successor-trustee or successor-General Partner, and request an accounting of trust and partnership funds. The Claimants contend that much discovery remains to be taken in that case.³

The Claimants' Amended Petition alleges Mark Neely to be "a contingent beneficiary pursuant to Paragraphs 5.3.4, 5.3.4.1, and 5.3.4.2" of the "Harry C. Neely Revocable Living Trust dated January 14, 1999, as amended." (Id. at 3.) It asserts that as trustee of the Harry Neely Trust, Donna breached her fiduciary duties owed to Mark and his siblings by (i) permitting Kathleen and her husband to live in an Elburn, Illinois, residence half-owned by the Harry Neely Trust rent free since 2013 (the "Elburn Residence"), (ii) transferring in 2016 a rental property located in McHenry County, Illinois (the "Alden Township Property") half-owned by the Harry Neely Trust to Kathleen's husband for no consideration, and (iii) dissipating funds in two bank accounts owned by the Harry Neely Trust. The Amended Petition further alleges that Donna, while acting for the Harry Neely Trust as General Partner of the Neely Limited Partnership, breached her fiduciary duty to Mark and his siblings by (i) dissipating funds in the Partnership's bank account which had at least $262,919 as of December 2015 and (ii) negotiating an agreement to sell a commercial property owned by the Partnership to a current tenant for a nominal price subject to a $340,000 "rent credit." Additionally, the Claimants allege that Mark has incurred $48,270 in attorneys' fees which he "intends to ask the court for reimbursement from trust assets." (Id. )

The Debtor objects to Claim 15-1. (ECF No. 13.) First, she argues that under the terms of the Harry Neely Trust, Mark and his siblings are contingent beneficiaries and as such she owes them no fiduciary duty. From these premises, Donna contends that the Claimants lack standing to bring a fiduciary duty claim against the bankruptcy estate. In the alternative, the Debtor challenges specific portions of the claim. First, she argues that neither the Harry Neely Trust nor the Neely Limited Partnership hold an interest in the Alden Township Property. The Debtor alleges that she and Harry Neely owned the property in joint tenancy while Harry lived and that it vested in her upon his death. Next, Donna argues that one of the disputed bank accounts was never a trust asset or funded from trust assets. As for the portion of the claim relating to the Elburn Residence, Donna argues that she received valuable consideration from Kathleen and her husband based on their maintaining and repairing the property while attempting to market it for sale. Regarding the claim for the sale agreement for the commercial property, she contends that there is no claim because there has been no sale.

Finally, she argues that there is no legal basis for the claim for attorneys' fees.

The Claimants filed a written response to the objection and on April 9, 2019, a trial was held on the issues at which the Debtor, Mark Neely, and Mark's attorney in the state court proceedings, Scott Larson, each testified. This decision takes consideration of the arguments made by counsel at trial and in their briefs, and is reached after careful consideration of the weight and substance of the testifying witnesses based upon the testimony and demeanor of the witnesses, the documents received into evidence⁴ and any reasonable inferences to be drawn therefrom, the stipulations of the parties and upon its consideration of the docket.

FINDINGS OF FACT⁵

The parties have stipulated that the Debtor is 87 years of age and the successor trustee of the Harry Neely Trust. (ECF No. 51.) Donna now lives in a senior-citizen facility. Mark Neely is one of Donna's adult children and a contingent beneficiary of the Harry Neely Trust. (Id. ) At trial the Debtor introduced without objection copies of what the parties agree to be the instruments forming the Harry Neely Trust (D's Ex. 1) and the Donna Neely Trust (D's Ex. 2) (collectively, the "Trust Documents"), as well as the documents that form the Neely Limited Partnership (D's Ex. 3). The Partnership Agreement and the initial set of instruments forming the two trusts are all dated January 14, 1999.⁶ The Claimants have not challenged the completeness or validity of these instruments.

The Harry Neely Trust. The Trust Documents acknowledge Mr. Neely's transfers to said trust of his one-half interest in a parcel of real estate in Blackberry, Illinois; 200 general partnership units in the Neely Limited Partnership; 4,800 limited partnership units in the Neely Limited Partnership; an account at LaSalle Street Securities; and certain unspecified personal effects. (D's Ex. 1, Schedule A.) The Trust Documents gave him the right to transfer other property to the trust at any time, but no evidence was presented that he in fact ever did so. The Trust Documents also gave Harry the right to withdraw any or all of the income or principal of the trust in his sole discretion during his lifetime. (Id. § 1.0.) It designates Harry as the original trustee of the trust. However, it is undisputed that Harry was not alive as of the petition date. The parties have not furnished the court with the exact date of his death, submitting instead without objection a court order dated August 28, 2013 which purports to "spread of record" Harry's death without stating exactly when that occurred. (D's Ex. 4.)

Donna automatically became trustee of the Harry Neely Trust upon his death.⁷ In that capacity she is entitled to "be compensated in a reasonable amount for any services rendered" as trustee. (D's Ex. 1 § 4.0.) Upon Harry's death, the trustee must first use trust assets to pay Harry's legal debts, expenses of administration, funeral expenses and taxes. Next, the documents provide for distribution to Donna of his personal effects, household goods, automobiles and all other tangible goods and chattels. The Trust Documents also provide for the formation of a "Marital Trust" to the extent necessary to ensure the payment of federal estate tax. Finally, the trust provides for a "By-Pass Trust." According to the undisputed testimony of Scott Larson, the issue of federal estate taxes proved to be inconsequential and a "Marital Trust" was not formed. Based on these uncontested provisions, the court concludes that only the real estate and non-tangible personal property that passed to the so-called "By-Pass Trust" upon Harry's death are now at issue.

With respect to the "By-Pass Trust," the Trust Documents provide that:

5.3.1 Until the termination of the Trust, the Trustee shall distribute all of the net income thereof to or for the benefit of my wife. If, in the judgment of the Trustee, my wife's resources known to the Trustee to be available to her are at any time insufficient for my wife's health care, support and maintenance, the Trustee may distribute to my wife so much of the Trust principal as the Trustee deems necessary for such purpose.

(D's Ex. 1.) They authorize Donna to make certain other draws on...