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COA: Trial court can hear complaint stemming from bankruptcy proceedings

March 2, 2017

The Indiana Court of Appeals has instructed the Delaware Circuit Court to hear a case stemming from the sale of interests in a bankruptcy proceeding after determining that the trial court has jurisdiction over the complaint.

After Flannan Pilkington died in 2006, his wife, Karen, was named trustee of a trust her husband created by last will, which included his interest in five limited liability corporations that held real property. The trust also included a provision that read, “No creditor or my wife or any residual beneficiary shall have the right to invade this trust for purpose of satisfying the debts of my wife or any residual beneficiary.”

In 2009, Flannan Pilkington’s son, Michael, filed Chapter 7 bankruptcy and sold his interest in the LLCs to his stepmother for $20,000. In 2015, he filed a complaint against her alleging that she had breached her duties as trustee and that only his “entity interests,” not beneficiary interest, were sold to his stepmother.

Karen moved to dismiss the complaint in Delaware Circuit Court for lack of subject matter jurisdiction, arguing that the bankruptcy court’s order and quitclaim deeds divested her stepson of any interest he had in the LLCs and that his complaint stems from the bankruptcy court’s sale of his interest, issues that needed to be resolved in the bankruptcy court. The trial court granted the trustee’s motion and dismissed the case with prejudice.

On appeal in Michael R. Pilkington v. Karen A Pilkington, 18A02-1605-Pl-1086, Michael Pilkington challenged the dismissal of his complaint. Indiana Court of Appeals Senior Judge Randall Shepard agreed that the case centered on whether Michael Pilkington’s beneficiary interest was extinguished in the bankruptcy, but disagreed with Karen Pilkington’s assessment that only the bankruptcy court could decide that issue.

Under U.S. Bankruptcy Code 11 U.S.C. section 101-1330 (2010), “district courts do not have ‘exclusive jurisdiction of all civil proceedings arising under title 11 or arising in or related to cases under title 11.’” Thus, “the district courts and their bankruptcy units have exclusive jurisdiction only over ‘the bankruptcy petition itself,’” Shepard wrote.

Thus, because Michael Pilkington’s bankruptcy was concluded before he filed suit against his stepmother and because his complaint does not require the Delaware Circuit Court to determine penalties in connection with the bankruptcy process, Shepard wrote that the trial court did have jurisdiction to consider Pilkington’s complaint. The case was remanded for further proceedings on whether Michael Pilkington’s beneficiary interest in his father’s trust survived the bankruptcy.
 

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