Klarchek Family Trust v. Costello (In re Klarchek)

• Decision Date: 10 April 2014
• Docket Number: Adversary No. 13ap01048.,Bankruptcy No. 10BK44866.
• Citation: 508 B.R. 386
• Parties: In re Richard J. KLARCHEK, Debtor. In re The Klarchek Family Trust, and Richard J. Mason, not individually but as chapter 7 trustee of the bankruptcy estate of Richard J. Klarchek, Respondent/Intervenor and Counterclaimant, v. John Costello, James Eliades and John Loguidice, not individually, but as trustees of the Klarchek Family Trust, Petitioners.
• Court: U.S. Bankruptcy Court — Northern District of Illinois

508 B.R. 386

In re Richard J. KLARCHEK, Debtor.In re The Klarchek Family Trust,andRichard J. Mason, not individually but as chapter 7 trustee of the bankruptcy estate of Richard J. Klarchek, Respondent/Intervenor and Counterclaimant,

v.John Costello, James Eliades and John Loguidice, not individually, but as trustees of the Klarchek Family Trust, Petitioners.

Bankruptcy No. 10BK44866.

Adversary No. 13ap01048.

United States Bankruptcy Court,

N.D. Illinois,

Eastern Division.

Signed April 10, 2014.

Richard J. Mason, P.C., Patricia K. Smoots, Esq., Paul Catanese, Esq., McGuireWoods, LLP, Chicago, IL, for Bankruptcy Trustee.

Harold Rosen, Esq., Wolin & Rosen, Ltd., Chicago, IL, for Defendants.

MEMORANDUM DECISION

TIMOTHY A. BARNES, Bankruptcy Judge.

The matters before the court are Richard J. Mason's (the “ Chapter 7 Trustee ”) Motion to Enforce the Automatic Stay as Against the Klarchek Family Trust (the “ Stay Enforcement Motion ”) and the Motion to Abstain or, Alternatively, Remand Proceeding (the “ Remand Motion ” and together with the Stay Enforcement Motion, the “ Motions ”) brought by John Costello, James Eliades and John Loguidice (the “ Petitioners ”), not individually but as trustees of the Klarchek Family Trust (the “ Trust ”). Each of the Motions relates to Circuit Court of Cook County Case No. 2013 CH 10658 (the “ Dissolution Proceeding ”), a postpetition action to dissolve the Trust brought without stay relief in the above-captioned proceedings and subsequently removed to this court. After review of the Motions and conducting several hearings on the matter, the court finds that, under the facts unique to this case, the commencement of the Dissolution Proceeding violated the automatic stay in this matter and the Dissolution Proceeding is, therefore, void as a matter of law. The Stay Enforcement Motion will, therefore, be granted. While the state court is the tribunal vested with the authority to dissolve the Trust and thus the best forum to hear questions regarding the propriety of dissolution, the request for abstention or remand is moot as the underlying proceeding is void. The Remand Motion must therefore be denied.

JURISDICTION

The federal district courts have “original and exclusive jurisdiction” of all cases under title 11 of the United States Code (the “ Bankruptcy Code ”). 28 U.S.C. § 1334(a). The federal district courts also have “original but not exclusive jurisdiction” of all civil proceedings arising under title 11 of the United States Code, or arising in or related to cases under title 11. 28 U.S.C. § 1334(b). District courts may, however, refer these cases to the bankruptcy judges for their districts. 28 U.S.C. § 157(a). In accordance with section 157(a), the District Court for the Northern District of Illinois has referred all of its bankruptcy cases to the Bankruptcy Court for the Northern District of Illinois. N.D. Ill. Internal Operating Procedure 15(a).

A bankruptcy judge to whom a case has been referred may enter final judgment on any core proceeding arising under the Bankruptcy Code or arising in a case under title 11. 28 U.S.C. § 157(b)(1). The automatic stay is a creation of federal statutory law, extant only in a bankruptcy case. As such, any motion seeking relief from, or redress regarding, the automatic stay, by definition arises under the Bankruptcy Code and is therefore a core proceeding within this court's statutory and constitutional authority. 28 U.S.C. § 157(b)(2)(A), (G); In re Suburban West Properties, LLC, 504 B.R. 477, 479 (Bankr.N.D.Ill.2013) (Barnes, J.). A motion for remand of a proceeding removed to the bankruptcy court is also a matter arising purely within the context of a bankruptcy case, seeFed. R. Bankr.P. 9027(d), and therefore is also a core proceeding within this court's statutory and constitutional authority. 28 U.S.C. § 157(b)(2)(A).

PROCEDURAL HISTORY

In considering the Motions, the court has considered the arguments of the parties at the November 13, 2013, January 8, 2014 and January 14, 2014 hearings on the Motions, and has reviewed and considered the following filed documents in the main case and adversary proceeding:

(1) Notice of Removal of Civil Action [Adv. Dkt. No. 1];

(2) The Remand Motion [Adv. Dkt. No. 11];

(3) Trustee's Response in Opposition to Motion to Abstain or, Alternatively, Remand Proceeding [Adv. Dkt. No. 14];

(4) Reply in Support of Motion to Abstain or, Alternatively, Remand Proceeding [Adv. Dkt. No. 17];

(5) The Stay Enforcement Motion [Dkt. No. 620];

(6) Order Setting Briefing Schedule and Hearing Date on Motion for Abstention and Motion to Enforce Automatic Stay Against Klarchek Family Trust [Dkt. No. 623]; ¹ (7) Response to Trustee's Motion to Enforce the Automatic Stay as Against the Klarchek Family Trust [Dkt. No. 629]; and

(8) Reply in Support of Trustee's Motion to Enforce the Automatic Stay as Against the Klarchek Family Trust [Dkt. No. 633].

The court has also taken into consideration any and all exhibits submitted in conjunction with the foregoing. Though these items do not constitute an exhaustive list of the filings in the above-captioned bankruptcy case and adversary proceeding, the court has taken judicial notice of the contents of the dockets in these matters. See Levine v. Egidi, No. 93C188, 1993 WL 69146, at *2 (N.D.Ill. Mar. 8, 1993); Inskeep v. Grosso ( In re Fin. Partners ), 116 B.R. 629, 635 (Bankr.N.D.Ill.1989) (Sonderby, J.) (authorizing a bankruptcy court to take judicial notice of its own docket). In so doing, the court also takes judicial notice of the docket in the Dissolution Proceeding, properly now part of this court's docket on removal.

BACKGROUND

On or about October 6, 2010, Richard J. Klarchek (the “ Debtor ”), voluntarily commenced a case under chapter 11 of the Bankruptcy Code. As chairman, president and CEO of Chicago-based Capital First Realty Inc., the Debtor's prepetition business was focused on the real estate industry, in part by holding a portfolio of manufactured-housing parks. The Debtor's business was, prior to 2007, by many accounts successful, permitting the Debtor, among other things, to afford enough financial backing to Loyola University Chicago to have its new library named after him. But as with many real estate endeavors, the Debtor's business took a turn for the worse with the 2007 industry-wide collapse. That, in turn, had a clear effect in the Debtor's personal fortunes. In his bankruptcy schedules, the Debtor indicated that at the time of commencing his bankruptcy case in 2010, he possessed over $19 million in assets, but had at the same time nearly $53 million in claims against him.

But it is not the Debtor's business, per se, that is the topic of the disputes presently before the court. It is instead the Debtor's relationship to the family trust—the Trust—that he created in 2001 that focuses our inquiry.

Nearly two years after the bankruptcy case was commenced, it was converted to one under chapter 7 of the Bankruptcy Code.² The Chapter 7 Trustee thereafter appointed set about investigating the Debtor's prepetition transactions with his businesses, his family and, at issue here, the Trust. On April 5, 2013, the Chapter 7 Trustee sought and shortly thereafter received permission of the court to conduct an examination of the Trust pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure (the “ Bankruptcy Rules ” and individually, Rule ––––).

On April 22, 2013, however, less than 24 hours before this court approved the Rule 2004 examination, the Petitioners commenced the Dissolution Proceeding by filing a “Petition of John Costello, James Eliades and John Loguidice to Dissolve the Klarchek Family Trust” (the “ Petition ”) in the Circuit Court of Cook County. In exhibits to the Petition, the Petitioners set forth nearly $13.5 million in estimated claims known to have been asserted against the Trust, the largest of which—$11 million—was set forth in the name of the Chapter 7 Trustee. The exhibitsmade clear that the amounts contained therein were not admissions. On the other hand, the Chapter 7 Trustee's subsequent answer and counterclaims in the Dissolution Proceedings assert that the estate's claims are potentially greater than that. These filings allege that the estate is owed both the unpaid portion of $11 million in notes owed by the Trust to the Debtor as well as the unpaid portion of $7.8 million in annual annuity payments owed to the Debtor under a sale agreement. That sale agreement was used by the Debtor to partially fund the Trust, transferring assets of an estimated value of over $72 million.

Despite that fact that the Petitioners had full knowledge of the existence of this bankruptcy case and the Chapter 7 Trustee's investigation, the Petitioners did not seek relief from the automatic stay to bring the Petition, and have not since sought to have the stay annulled.

The Petitioners would have this court believe that the timing of the commencement of the Dissolution Proceeding is mere coincidence, that the Dissolution Proceeding is simply the logical next step in winding up a trust that has ceased to fulfill its purpose. But the timing and contents of the Petition belie that assertion.

As noted above, though the Trust had at that point been in existence for more than 12 years, the Petition was filed less than one day before this court heard and approved the Chapter 7 Trustee's Rule 2004 examination request. Yet no mention of the Chapter 7 Trustee's investigation and the pending Rule 2004 examination request was made to the state court in the Petition. Further, while the schedule attached to the Petition demonstrates that the estate's claim is, by an order of magnitude, the largest claim against the Trust, other than being set forth on the schedule, neither the existence of the bankruptcy case or the Chapter 7 Trustee's investigation is disclosed to the state court. The Petition does, however, clearly anticipate both, seeking permission of...