DEALING WITH THE INSOLVENT ESTATE M. KEITH BRANYON Jackson Walker L.L.P.

Transcription

DEALING WITH THE INSOLVENT ESTATE
Or, How to Get Blood Out of a Turnip
M. KEITH BRANYON
Jackson Walker L.L.P.
301 Commerce Street, Suite 2400
Fort Worth, Texas 76102
Advanced Estate Planning and Probate Course
Dallas
June 5-7, 2002
San Antonio July 24-26, 2002
Houston August 14-16, 2002
Chapter 23
M. KEITH BRANYON
Jackson Walker L.L.P.
301 Commerce Street, Suite 2400
817/334-7235
Fax: 817/334-7290
BIOGRAPHICAL INFORMATION
EDUCATION
B.B.A. in Accounting, Baylor University
J.D., Baylor University School of Law
PROFESSIONAL ACTIVITIES
Partner – Jackson Walker, L.L.P., Fort Worth, Texas
Board Certified in Tax Law,
Texas Board of Legal Specialization
Board Certified in Estate Planning and Probate Law,
Chair, Advisory Commission for Estate Planning and Probate Law,
Certified Public Accountant
LAW RELATED PUBLICATIONS
Author/Speaker, National Business Institute, June 2-3, 1992
Planning Opportunities with Living Trusts in Texas
Author/Speaker, National Business Institute, February 11, 1994
Texas Probate: Beyond the Basics
Author/Speaker, State Bar of Texas, 20th Annual Advanced Estate Planning and Probate Course,
1996
The Slayer’s Rule Revisited
Author/Speaker, National Business Institute, July 15-16, 1999
How to Draft Wills and Trusts in Texas
Author/Speaker, State Bar of Texas, 24th Annual Advanced Estate Planning and Probate Course,
2000
Independent Administration from Start to Finish
Author/Speaker, National Business Institute, March 13, 2001
How to Draft Wills and Trusts in Texas; Basic Tax Considerations – What
You Need to Know in Order to Choose the Appropriate Plan
Author/Speaker, Legal Assistants Division, State Bar of Texas, September 5-8, 2001
What Do You Do With Four-Legged Beneficiaries?
Author/Speaker, National Business Institute, February 22, 2002
The Probate Process From Start to Finish in Texas
Author/Speaker, 2002 Legal Update for the Texas & Southwestern Cattle Raisers
Association, March 17, 2002
Wills and Estates
Dealing With the Insolvent Estate
Chapter 23
Table of Contents
I.
Preamble....................................................................................................................... 1
II.
Scope............................................................................................................................. 1
A. Purpose of Article..................................................................................................... 1
B. Housekeeping ........................................................................................................... 1
III.
Preliminary Matters..................................................................................................... 1
A. Initial Thoughts ........................................................................................................ 1
B. Bookmark................................................................................................................. 1
IV.
Beginning a Journey..................................................................................................... 2
A. Insolvent -True or False? .......................................................................................... 2
B. Standing to Bring Action .......................................................................................... 2
C. Enabling Statute?...................................................................................................... 2
V.
Death of Decedent ........................................................................................................ 3
VI.
Initiating Probate ......................................................................................................... 3
VII.
Bond.............................................................................................................................. 4
VIII.
Duties of Personal Representative ............................................................................... 5
IX.
Notices .......................................................................................................................... 5
A. Mandatory Notices ................................................................................................... 5
B. Permissive Notice ..................................................................................................... 6
1. Applies to IA and DA ................................................................................... 6
2. Ethical Considerations .................................................................................. 6
X.
Claims ........................................................................................................................... 6
A. Dependent Administration ........................................................................................ 6
B. Independent Administration ...................................................................................... 7
XI.
Action on Claims .......................................................................................................... 7
C. Objecting to Claims .................................................................................................. 8
XII.
Exempt Property and Allowances ............................................................................... 8
XIII.
Forcing Payment of Claims.......................................................................................... 9
XIV.
Closing the Estate....................................................................................................... 10
A. Dependent Administration ...................................................................................... 10
B. Independent Administration .................................................................................... 11
XV.
End of the Journey ..................................................................................................... 11
i
Appendices:
A. Notice to Creditors ................................................................................................. 12
B. Letter to Secured Creditor ....................................................................................... 14
C. Permissive Notice ................................................................................................... 15
D. Suggested Language – Final Account ..................................................................... 16
Chapter 23
Advanced Estate Planning and Probate Course
(2001). Despite those learned treatises, this
author was unable to find an article that dealt
specifically with an insolvent estate from a
creditor’s perspective. Therefore, this paper will
describe what a creditor should do, and what a
creditor can expect the PR to do, when an estate
is potentially insolvent. By examining this area
from a creditor’s viewpoint, it is believed that
the PR will also benefit by providing better
protection for limited estate assets and by
conducting more efficiently the administration
of the estate.
DEALING WITH THE INSOLVENT
ESTATE
Or, How to Get Blood Out of a Turnip
I.
Preamble
Whether the client is a creditor, a
beneficiary or the personal representative
(“PR”), debts in a solvent estate pose no
problem whatsoever. For obvious reasons, the
attention of the PR is focused on collecting the
property and paying the debts, without regard to
priority of claims or the order of payment. In
those situations, there will be no one to complain
since all creditors will get paid and there will be
something left for the beneficiaries.
B.
All references hereinafter to section
numbers refer to the TEXAS PROBATE CODE
(“CODE”) unless otherwise indicated.
When the estate is insolvent, things get
much more difficult. The term “insolvent” is
defined as “the inability to pay debts as they fall
due in the usual course of business.”
WEBSTER’S NEW COLLEGIATE DICTIONARY
(1980). As the attorney for a creditor, there is
clearly no point in pursuing the estate of a
Decedent if the fact that the Decedent had no
assets is known at the time of death. In Chapter
7 bankruptcy filings, the debtor’s attorney has
the option of declaring on the initial filing that
the debtor has no assets if that is the situation. It
would be most helpful if the same rules were
available in probate filings. However, it is the
extremely rare probate case where the creditor
knows at the time of a Decedent’s death that
there are no assets, or insufficient assets, in the
estate even though the PR will very often have
that information.
II.
Scope
A.
Purpose of Article
Housekeeping
III.
Preliminary Matters
A.
Initial Thoughts
One of the inquiries that a creditor must
make at the outset is the type of administration
which has been (or is being) requested –
dependent or independent. At the same time, the
attorney for the prospective PR must make the
same decision. The choice made will determine
which sections of the CODE must be followed by
both the PR and by the creditor. Even for the
experienced probate attorney, trying to
remember which sections of the CODE apply to
dependent v. independent administrations is
enough to make a lawyer’s head explode – not a
pretty sight! Which notices must be sent by the
administrator, which notices should be expected
by the creditor, what limitations periods apply
and when payment must be made are just a few
of the malpractice minefields found in the often
indecipherable, frequently repetitious CODE.
Many fine articles have been written and
discussed in recent years which have provided
great detail about the steps that a PR must take
regarding debts in an estate. See, e.g., C. Boone
Schwartzel (as supplemented and updated by
Mark B. Schreiber), Claims Procedures in
Probate and Guardianship, 25th Annual
B.
Bookmark
As a practice aide, this author has
devised a bookmark that is included with these
materials. The bookmark is intended to guide
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the practitioner, in logical and chronological
order, to the steps (and CODE sections) which
apply to creditors and debts in independent and
dependent administrations. It is hoped that this
bookmark can be placed in a desk copy of the
CODE as a stress reducer.
IV.
Beginning the Journey
A.
Insolvent – True or False?
that the PR has the necessary standing to bring
an action to void a transfer which the Decedent
made fraudulently prior to death. However, in
John Hancock Mutual Life Insurance Company
v. Morse, 132 Tex. 534, 124 S.W.2d 330 (Tex.
1939), the Supreme Court stated that “a
conveyance made in fraud of creditors passes
title to the vendee, and is defeasible only at the
instance of the creditors.” Since the title to the
property passes from the Decedent during his
lifetime, the Court reasoned that the property
cannot form part of the estate in the hands of the
administrator. Therefore, the administrator
cannot maintain an action for the recovery of the
property since he administers the property as it
existed at the time of death. Finally, the Court
said that the administrator would not have
standing to bring such an action unless there
were “an enabling statute” authorizing the
action.
If an estate is potentially insolvent, a
creditor must determine immediately if the
Decedent was TRULY insolvent or if the person
intentionally hid or transferred assets to dodge
the creditor. If there is evidence of the latter, the
creditor should investigate whether action
against the Estate should be taken under the
Uniform Fraudulent Transfer Act (“Act”).
TEX.BUS.& COM.CODE §24.001, et seq. In the
Act, a debtor is defined as “a person who is
liable on a claim.” Id. at §24.001(6). The word
“person” has several definitions including
“estate.” Id at §24.001(9). Therefore, a creditor
could bring an action under the Act for both predeath and post-death transfers if there is
evidence to show that either the Decedent or the
representative hid assets to avoid paying the
creditor.
C.
While it might seem that the Act is “an
enabling statute” as anticipated by the Supreme
Court in Morse, that interpretation does not
appear to be correct. In an unpublished opinion,
the Dallas Court of Appeals was faced with the
issue of whether an administrator could “undo” a
fraudulent transfer within the meaning of the Act
which was done by the Decedent prior to death.
Skelley v. Hayden, No. 05-99-00802-CV (Tex.
App. – Dallas 2001, n.w.h.) (not designated for
publication). The Dallas court cited the Morse
case for the proposition that neither the estate
nor the heirs could assert the fraudulent transfer
allegations because they were not “creditors.”
However, the case failed to address the fact that
“person” as defined by the Act includes the term
“estate.” Instead, the Dallas court simply said
that an “estate” was not a “creditor,” seemingly
in defiance of the definitions found in
§§24.002(4) and 24.002(9) of the Act.
Nevertheless, if Skelley is the law in Texas, it
would appear that the only party who can pursue
a pre-death fraudulent transfer is a pre-death
creditor and that the Act is not the “enabling
In the Act, a debtor is defined as
“insolvent” if the sum of his debts is greater than
all of his assets at a fair valuation. Id. at
24.003(a). To fall within the Act, a debtor must
have made a transfer, or incurred an obligation,
if the transfer was made (or if the obligation was
incurred) with actual intent to hinder, delay or
defraud the creditor. Unfortunately, before a
creditor can bring a successful action under the
Act, the creditor must first perfect its claim
against the estate in compliance with the CODE
in order to prove that it is entitled to payment
from the Decedent’s property.
B.
Enabling Statute?
Standing to Bring Action
Because the definition of “person” under
the Act includes the term “estate,” it may appear
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statute” that the Supreme Court predicted in
Morse.
will determine HOW the claim must be pursued
after the probate process has started.
V.
Should the creditor “sit around” and
wait for the heirs, or for the designated PR, to
file an application for probate? Absolutely not!
Section 76 of the CODE states that any
“interested person” can file an application for
probate. Section 3(r) of the CODE plainly holds
that a creditor is an “interested person,” so a
creditor can win the race to the courthouse by
being the first to file an action for probate.
Death of Decedent
The death of a decedent is clearly the
beginning point for a creditor to take action to
collect a claim. Even if a creditor is in the midst
of a collection action against a decedent prior to
death, or perhaps has even obtained a judgment
prior to the death of the debtor, the creditor must
“start over” pursuing the claim after the debtor
dies. A creditor who obtains a judgment prior to
the debtor’s death may not attempt to collect the
judgment (i.e., execution, garnishment) except
through the probate court. Mackey v. Lucey
Products Corp.,150 Tex. 188, 239 S.W.2d 607
(1951).
Death tolls the running of the statute of
limitations for twelve (12) months unless a PR
qualifies sooner. TEX. CIV. PRAC. & REM.
CODE §16.062 (Vernon 1997). However, even
though the creditor’s claim will be protected
from an expiring limitations period, assets can
disappear and the trail to them will grow cold
unless action is taken. If the creditor takes the
initiative, the creditor can choose the county of
filing for venue purposes and, by so doing, the
court which will have jurisdiction over the
action. Obviously, the creditor must be in
possession of information concerning the county
of death or of the location of decedent’s assets
in order to know where to file the suit, but it will
then be up to the heirs or beneficiaries to come
forward and show the court that the chosen
venue was incorrect.
Section 37 of the CODE provides a
reminder that all of a decedent’s property passes
to his heirs or beneficiaries at the INSTANT of
death, subject to the upcoming administration.
In other words, a creditor should realize at the
outset that the decedent’s interest in any assets
has already vested in the heirs and beneficiaries
before the body is cold, so the creditor should
discover as soon as possible the identity and
location of these heirs and beneficiaries since
they might be possible targets of a collection
action.
VI.
If the creditor files the application to
probate under §76, the creditor may not know all
of the facts of death required by §81 or §82. In
other words, the creditor may not know if
Decedent died testate or intestate or if Decedent
was ever divorced. For these reasons, the
creditor will be required to serve notice on the
family members and potential heirs and
beneficiaries of the decedent (§128) so that those
other persons who are “interested” in the estate
will come forward with the Last Will and
Testament and with proof of the facts of death.
Prior to sending the notice, the attorney for the
creditor should schedule a hearing so that the
notice of the filing can include notice of the
hearing date.
Initiating Probate
The term “claim,” as defined in Section
3(c) of the CODE, “includes liabilities of a
decedent which survive, including taxes,
whether arising in contract or in tort or
otherwise, funeral expenses, the expense of a
tombstone, expenses of administration, estate
and inheritance taxes, and debts due such
estates.” Needless to say, the creditor must
immediately determine if the debt falls within
the definition of “claim.” Generally, any debt
that was not barred by limitations can be
pursued against the estate of a decedent.
Whether the claim is liquidated or unliquidated,
secured or unsecured, “for money” or “other,”
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The court will generally require the
creditor to prove that the proper notice was
given at the time the creditor appears for the
hearing. If no beneficiaries or heirs appear at
the hearing, or if all of them are determined by
the court to be “unsuitable,” the creditor can be
appointed as the PR since a “creditor” is among
those who have a right to be appointed in §77 of
the CODE. However, the creditor might prefer to
avoid this honor since the office of PR would
obligate the creditor to serve not only itself but
also all of the other creditors and the
beneficiaries and/or heirs.
VII.
Appraisement and List of Claims is due ninety
(90) days from the date of qualification. From
the creditor’s perspective, many bad things can
happen in that 90-day period, and information
regarding the status of the estate will be scarce
during that time. In addition, most courts will
grant extensions of the Inventory filing date
upon timely request by the PR, making the
“blackout” period even longer.
While the PR can be required by the
court to post a bond at any time in an IA or in a
DA, only in an IA can the creditor request that
the heirs of a decedent post a bond to protect the
creditor’s claim. According to §148 of the
CODE, at any point after an IA is created, a
creditor can file pleadings with the court which
request that the heirs or beneficiaries be required
to post bond. All such heirs and beneficiaries
must be cited by personal service, and the
creditor would typically request that the bond be
equal to the lesser of the amount of the debt or
the value of the estate as shown on the
Inventory.
Bond
Except in the rare situation when the
creditor is going to serve as the PR, establishing
the amount of bond which the court will require
is the most important early battleground from
the creditor’s perspective. It is also the first
point at which a creditor’s chosen path will vary,
depending upon whether the PR is an
independent
administrator
or
executor
(collectively abbreviated as “IA”) or a
dependent
executor
or
administrator
(collectively abbreviated as “DA”).
This poses an obvious conflict. In order
for the court to know the value of the estate, the
Inventory must have already been prepared and
filed by the PR. Therefore, even though §148
gives the “green light” to the creditor
immediately following the qualification of the
PR, the creditor must nevertheless wait until an
Inventory is filed before it can request that the
ultimate distributee post bond to protect the
creditor. Since the due date for the Inventory
can be extended by the PR, §148 is not a very
potent weapon for the creditor.
The fact that a decedent died with a Will
that waives bond does not necessarily mean that
the PR will automatically be relieved of the duty
to post a bond. Likewise, the fact that a
decedent died intestate does not always indicate
that the court will require a bond. Each case
must be determined on its own merit. Section
194.3 reminds practitioners that the court must
hear evidence before deciding on a bond. If the
creditor makes a good argument, the court can
require a bond solely to protect the creditors of
the estate. Even if no bond is initially required
by the Will or by the court (§195), the court can
later require a bond (§§203, 214) upon a demand
by an interested person (§204).
Section 148 also states that, if the
creditor is successful in forcing the
heirs/beneficiaries to post a bond, “such estate
shall thereafter be administered and settled
under the direction of the county court as other
estates are required to be settled.”
This
statement gives the impression that the IA will
thereafter be brought under the supervision of
the court as if the administration were
dependent.
The bond is of critical importance for
one primary reason. Whether the estate is an IA
or a DA, the PR is not required to file ANY
report with the court until the Inventory,
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After the bond has been posted, §148
states that the creditors have the choice of filing
suit against the bond for the amount of their debt
or bringing an action against those persons who
have
possession
of
estate
property.
Unfortunately, there is no case law construing
§148. The only case the author was able to
locate dealing with bonds by heirs was decided
in 1890 and it cited a predecessor statute.
Kauffman v. Wooters, 79 Tex 205, 13 S.W. 549
(1890) aff’d, 138 U.S. 285, 34 L.Ed. 962, 11
S.Ct. 298 (1891).
errors are made. Unfortunately for the IA,
mistakes in classification, which might allow a
creditor to be paid in error when a creditor with
higher priority is forgotten, can subject the IA to
personal liability.
Therefore, from the
standpoint of the attorney representing the PR,
knowing whether or not there are creditors of the
decedent whose claims might potentially exceed
the value of property in the estate might help
convince the practitioner to create a dependent
administration rather than an independent
administration.
VIII.
IX.
Duties of Personal Representative
Notices
For a DA, the CODE gives guidance as
to what is required regarding notices, claims and
payment of creditors. For an IA, there is often
confusion about what steps must be followed
since the IA is, by definition, supposedly free
from the burdens of court supervision. Section
146 should clear up confusion for the IA, but
that section requires more actions by the IA than
most practitioners would normally expect.
There are two basic types of notices that
must be made in any probate administration:
mandatory and permissive. If the PR fails to
give the proper notices, §297 of the CODE says
that the PR and the sureties on the bond, if any,
“shall be liable for any damage which any
person suffers by reason of such neglect, unless
it appears that such person had notice
otherwise.”
First, the IA is responsible to give all of
the notices required by §294 and §295. These
notices will be discussed below. In addition, the
IA may give the permissive notice under
§294(d). If any claims are filed in the estate, the
IA must “approve, classify, and pay, or reject,
the claims against the estate in the same order of
priority, classification, and proration prescribed
in this CODE.” CODE §146(a)(3). Finally, the
IA must set aside and deliver exempt property,
family allowances and homestead to those
persons who are entitled to them.
CODE
§146(a)(4).
A.
Mandatory Notices
1.
Within one month after receiving
Letters, the PR must publish a general notice to
creditors in a newspaper which is “printed in the
county where the Letters were issued.” An
example of the type of newspaper notice which
is required is shown as Appendix A at the end of
this paper. Once the notice has been published,
proof of publication must be filed with the Court
as required by §294(b).
2.
Section 295(a) requires that any secured
creditors be notified within two months after the
date Letters are issued. To qualify as a
“secured” creditor under §295, the debt must be
collateralized by a lien either on real property or
on personal property of the decedent. If the PR
does not know about secured creditors before the
two-month window has expired, §295 requires
that notice be sent to the secured creditor within
a reasonable time after the PR discovers the
debt. A copy of a notice that can be used for
Classifying claims and dealing with
exempt property are two tasks not normally
associated with an IA. Nevertheless, the IA
must follow exactly the same procedures with
regard to claims and allowances as a DA, except
the IA is not required to have the court review
any decisions made. This lack of court approval
can be both good and bad for the IA. With court
approval, the DA can escape personal liability if
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secured creditors is shown as Appendix B.
Again, after notice has been sent to and received
by the creditor, proof of same must be filed with
the court.
B.
adequate funds to pay creditors is breaching his
or her fiduciary duty. Some have argued that the
PR owes a fiduciary duty to the creditors,
although no Texas case has ever made such a
finding.
Permissive Notice
As the attorney for the PR, is it unethical
to assist the client/PR in dodging creditors
which may have legitimate claims? If the
answer is “yes,” is it also unethical for an
attorney to assist a client in transferring assets so
that a relative will be made eligible for Medicaid
benefits? Would the same line of reasoning
apply to attorneys who assist clients in
minimizing or eliminating taxes which might
otherwise be owed on business transactions or at
the death of the client? Arguably, sending
permissive notices pursuant to §294(d) merely
forces the creditor to follow the law. If the law
is followed, the creditor will be paid in the
course of the administration of the estate. It is
only the slothful creditor who will lose its right
to be paid.
1.
Applies to IA and DA. If the PR
chooses to do so, a separate notice can be mailed
to any and all unsecured creditors of the
decedent. CODE §294(d). This notice can be
used whether the administration is independent
or dependent. If a creditor receives such a
notice from a DA, the creditor should be aware
of the fact that the claims procedures outlined in
the CODE must be followed.
If a creditor receives such a notice from
an IA, the message to be conveyed to the
creditor is not so clear. There are numerous
authorities which stand for the proposition that
creditors are not required to file claims or
otherwise follow the procedures governing
claims, approval, etc., in an independent
administration. See, e.g., Bunting v. Pearson,
430 S.W.2d 470 (Tex. 1968). Nevertheless, if a
creditor receives one of these permissive notice
letters, the creditor MUST file a claim. As will
be shown below, the claim can be delivered
either to the PR or to the clerk, but the creditor
should follow the instructions in the letter.
Appendix C is a sample of a letter that can be
used for this permissive notice.
X.
Claims
A.
Dependent Administration
If a creditor is faced with a dependent
administration, the path which the creditor must
follow in order to be paid is set forth in §§309319 of the CODE. Assuming the DA sends the
notices required by §§294 and 295, the creditor
must act if it expects payment from the estate.
The procedure to be followed by a creditor in a
dependent administration has been discussed in
numerous other seminars and will not be
repeated here. A creditor who fails to file a
proper claim, or who fails to file a timely suit if
all or a portion of the claim is rejected by the
DA, will not be able to recover.
There has
2.
Ethical Considerations.
recently been a great deal of discussion in
probate circles over these permissive notices as
outlined in §294(d) of the CODE. The use of
these notices is not limited to situations where
the estate is insolvent; to the contrary, either an
IA or a DA may use these notices in any
administration even if there are sufficient funds
to pay all creditors. If the creditor fails to
“present a claim within four months after the
date of receipt of the notice,” the creditor’s
claim against the estate is barred.
Many
practitioners have argued that a PR who decides
to send these permissive notices when there are
The time limits for claims to be filed is
very confusing since there are so many different
rules.
For the unsuspecting creditor, the
following deadlines may apply. As the list
shows, there are many pitfalls awaiting the
6
uninformed
creditor
administration.
in
a
Chapter 23
dependent
the IA chooses to take no action on a claim filed
in the case; assuming that occurs, the creditor
will not know whether filing the claim has had
any effect on the applicable limitations periods.
1.
§298(a) - A creditor can file a claim at
any time before the estate is closed if limitations
is not a problem.
2.
§306(b) - A secured creditor has either
six months after letters are granted, or four
months after a §295 notice is received
(whichever is later) to specify whether it wants
to have its claim allowed as a “secured,
matured” claim or as a “preferred debt and lien”
claim. Failure to make a timely election results
in the claim being treated as the latter.
3.
§294(d) - An unsecured creditor who
receives a “permissive” notice under this section
is barred from collecting the debt unless a claim
is filed within four (4) months after receiving the
notice.
4.
§308 - A claim is presumed to be
“rejected” if it is not “allowed” within 30 days
after it has been presented to the DA or filed
with the clerk.
5.
§313 - Collecting a “rejected” claim is
barred unless the creditor files suit against the
DA within 90 days after rejection.
B.
If a limitations plea is a possible defense
for the IA, the creditor should take advantage of
§147 of the CODE by simply filing suit against
the IA and avoid any possible argument about
whether a claim was proper, whether a claim
was allowed or rejected, etc. Filing suit against
the IA will toll any applicable statues of
limitation, but the creditor must be aware that
§147 allows the IA to ignore the suit until six
months after Letters were granted. This would
presumably mean that the creditor could not take
a default judgment against the IA if the IA
chooses not to file an Original Answer within
the time prescribed on the personal citation
issued by the county clerk (the Monday
following the expiration of 10 days).
If the creditor elects to file a claim,
§294(d) gives no guidance as to what
documentation is required to constitute a proper
“claim.” To be safe, it would appear that the
creditor should comply with §§301 and 304 to
avoid a possible objection by the IA. However,
to avoid the potential bar to the claim outlined in
§294(d), the creditor should make certain to file
suit on the claim pursuant to §147 if the IA does
not act promptly and allow the claim.
Independent Administration
Unless a creditor receives the §294(d)
“permissive” notice from an IA, the creditor is
not required to file any type of claim with the
court or with the IA. It is well settled that the
claims procedures set forth in the CODE
generally do not apply to independent
administrations.
Bunting v. Pearson, 430
S.W.2d 470 (Tex. 1968). However, the creditor
might nevertheless choose to file a claim if the
statute of limitations is a potential problem. As
discussed in III above, the death of a debtor tolls
the statutes of limitation for a period of up to
twelve months unless the IA is appointed within
that time. Though §299 is generally believed
not to apply to IAs, it states that the statutes of
limitation are tolled by “filing a claim which is
legally allowed and approved.” Unfortunately,
the meaning of “legally allowed and approved”
is unknown. This becomes a BIG problem when
XI.
Action on Claims
A.
Dependent Administration
Once claims are filed, §§309-319
provides significant detail as to the procedure
the DA and the creditor must follow before the
claim will be converted into a debt which must
be paid. Once a claim moves to the “allowed”
category, the DA does not have the power to
classify it pursuant to §322. Section 312(d) of
the CODE gives that power to the court.
Thereafter, the DA can request court permission
to pay the “classified” claims in the order
prescribed by §320. Even if the court fails to
7
Chapter 23
take action on the “allowed” claim, the creditor
is protected; there is no reason thereafter to file
suit on the claim pursuant to §313 of the CODE.
B.
be challenged as being “premature” if the DA
files pleadings which contend that the claim had
not been properly rejected.
The greatest
difficulties with §302 are that (1) it does not
address how the objection affects the thirty-day
window during which the DA must act on the
claim, and (2) it does not address the ninety-day
window within which the creditor must file suit
as outlined in §313.
Independent Administration
For the IA, any claims which are filed
must be classified.
Likewise, any debts
established by a §147 suit against the IA must
likewise be classified. The IA must do this
classification without the supervision of, or
protection from, the court.
For a creditor in an IA, filing an
objection to a claim is even trickier. If the
creditor received the permissive notice under
§294(d), the creditor must be acutely aware of
the four-month period after which the claim
would be barred. Again, if the creditor is
concerned about the expiration of the closing of
the four-month window, the creditor should file
suit under §147.
Classification is never important unless
the estate is insolvent. For the creditor, care
must be taken to ascertain that its claim is
assigned to the proper §322 category. When the
estate’s assets are insufficient to pay all of the
classified debts, §321 (for the DA) and §146(a)
(for the IA) state the manner in which such debts
are paid.
C.
XII.
Exempt Property and Allowances
In the insolvent estate, both the IA and
the DA must set aside exempt property and the
homestead if there are applicable beneficiaries
(spouse or minor children) in the estate. These
procedures are described in §§270-293. Section
146 directs the IA to comply with these same
rules.
Objecting to Claims
Section 302 of the CODE implies that a
PR can object to the form of the claim or to the
insufficiency of exhibits or vouchers which
might be attached to the claim. Unfortunately,
few cases which have referenced §302 give
guidance to either the PR or to the creditor.
From the PR’s perspective, it may be difficult to
know whether the defect is one “of form” or not.
On the other hand, if there are no exhibits
attached to the claim, or if the exhibits do not
fully explain the amount allegedly owed, the PR
would be safe in filing an objection.
Nevertheless, it is difficult to see how filing an
objection would be a better choice than simply
rejecting the claim based upon whatever is
presented by the creditor.
For a creditor who faces the possibility
of not getting paid, the probate case must be
monitored closely to make certain that all estate
assets are listed on the Inventory and that all
potential recipients of the exempt property are
truly entitled to same.
In a dependent
administration, the creditor will actually find
more protection since every decision of the DA
must be approved by the court. While the
creditor can file a formal request with the clerk
pursuant to §33(j) to receive copies of all
documents filed in the probate, there is no
recourse for the creditor if the clerk ignores the
request.
The wise creditor will check
periodically with the clerk to verify the status of
the case.
The creditor who receives an objection
from a DA can simply re-file the claim and
attempt to correct the defects. To be safe, the
creditor in that situation could consider the claim
on which an objection was made to have been
rejected by the DA, and the creditor could then
file suit. In a worst-case scenario, the suit would
8
Chapter 23
In an independent administration, the
creditor generally will have no ability to know
what is happening in the case. The IA is not
required to file anything with the court to signify
that the homestead, exempt property or family
allowance has been delivered. However, the IA
similarly receives no protection from the court if
the decisions are made improvidently, and the
creditor retains the right to sue the IA or the
beneficiaries if the IA makes bad decisions
which cause the creditor’s claim to go unpaid.
XIII.
hammer. However, if 12 months have not
elapsed, the creditor whose claim has already
been classified for payment could get an
advance “peek” at the status of the estate.
Section 263 allows a beneficiary to get
his inheritance if he is willing to post a bond.
This is often called a “refunding” bond. Though
refunding bonds are seldom used, they may give
the creditor an additional pocket from which to
collect its claim. If a portion of an estate is
withdrawn pursuant to §§263, et seq., before a
classified creditor has been paid, the creditor can
file suit either on the bond (§268) or directly
against the beneficiary (§269).
Forcing Payment of Claims
Once debts are established either
through “allowed” claims followed by court
classification, or judgments followed by IA
classification, the creditor has a limited ability
“to get blood out of a turnip.” As could be
expected, the procedure varies according to the
type of administration.
A.
B.
Independent Administration.
Since §326 specifically references
claims which are “established by suit,” it could
be used by a creditor in an independent
administration. Alternatively, as stated in §3(r)
of the CODE, a creditor is an “interested person.”
Section 149A allows “an interested person” to
demand an accounting of the IA at any time after
the expiration of fifteen (15) months from the
date that the administration was created. The IA
must provide the accounting within sixty (60)
days from the date that the demand is received.
In addition to the remedy provided by §149A,
§149B allows an “interested person” to demand
both an accounting and a distribution of the
estate “at any time after the expiration of two
years from the date that an independent
administration was created.” Unless the IA can
show a continued need for administration, the
court shall order that the estate be distributed,
including that portion presumably owed to the
creditor.
Dependent Administration.
Section 326 of the CODE states that a
creditor holding an approved claim (a claim
either approved by the court or established by
suit) may petition the court for an order directing
the payment of the claim at any time after twelve
(12) months from the date on which letters are
issued. If there are no available liquid funds
with which to pay the claim, the court may order
that property of the estate be liquidated in order
to pay the claim.
Alternatively, the creditor should be
aware of §§262-269 of the CODE. Section 262
allows “anyone entitled to a portion of the
estate” to file a complaint with the court to cause
the DA “to render under oath an exhibit of the
condition of the estate.” Presumably, if a
creditor’s claim has either been allowed or
established by suit (and classified by the court),
the creditor would be included in the group
“entitled to a portion of the estate.” Section 262
would not be utilized if more than 12 months
had elapsed from the date that letters had been
granted since §326 gives a creditor more of a
In most situations, the creditor will
know long before the expiration of twelve
months whether the claim is high enough on the
priority list to merit payment from the estate. If
there simply are not enough assets to pay the
claim, continuing to pursue the claim would be
pointless. Nevertheless, if the PR was required
by the court to post a bond, and if the PR
9
Chapter 23
handled the estate improperly and such errors
prevented the creditor from collecting the claim,
suit should be filed against the PR. If the
creditor can get a judgment, the judgment can be
collected against the bond. Section 218 states
that creditors can collect against the bond until it
is exhausted.
sent to creditors and the date on which the
certified mail “green card” was received by said
creditor. Any such chart should also calendar
the date on which the creditor had to file the
claim, whether the creditor did in fact file a
claim, and what action was taken by the DA on
said claim.
XIV.
For those creditors who failed to file any
type of claim, the claims would be barred and
the money which would otherwise have been
paid to those creditors would be available for
distribution to the heirs and/or beneficiaries. If a
claim was filed but the DA elected to object to
said claim pursuant to §302, the DA may prefer
to have the court make a finding on whether the
objection was properly made or whether the
creditor in fact failed to file a proper claim.
Closing the Estate
For a creditor which can endure to the
end of a probate administration, the final word
on whether money is available will be disclosed
in the final documents which the PR is required
to file. Closing a dependent administration is
somewhat more time-consuming than closing an
independent administration.
A.
Dependent Administration.
Attached as Appendix D is some
suggested language which should be included in
both the Account for Final Settlement (“Final
Account”) and in the Order Approving Account
for Final Settlement. By so doing, the DA will
perhaps be safe in making the final distributions
to the heirs, knowing that the creditor will not
later be able to complain.
When a DA decides (or is forced) to
close an estate, he is required to file a final
accounting (§404). That section and §405
require the DA to list, among other things, the
debts that have been paid and those that remain.
If there are not enough funds to pay the creditor,
the final account amounts to nothing more than a
tombstone for the claim.
For obvious reasons, if creditors failed
to file any notice, or failed to file a proper
notice, the DA must decide whether to send
copies of the Final Account to those creditors.
Section 294(d) does not require the DA to send
the Final Account to the creditors, and sending a
copy of it will only serve to give those creditors
one last shot at the estate by reminding them of
their negligence. Since there is no statutory or
court guidance on how the “permissive notice”
creditors are made to disappear, the approach
suggested on Appendix D should work,
assuming the court is willing to sign the Order.
Appendix D assumes that none of the §294(d)
creditors filed a proper claim. Obviously, any
creditors who filed a proper claim would not be
included with those whose claims are barred.
After the final account has been
approved, the creditor may need to take one last
shot at the DA. If the creditor’s claim reached
the classification stage but the DA fails to pay,
the creditor can file a complaint against the DA
with the court pursuant to §414. Section 414
allows the creditor, as additional damages, 10%
of the amount not paid per month from the DA
from the date of demand until the date of
payment. This penalty is assessed against the
DA and not against the Estate.
If a DA is attempting to close an estate
in which the permissive notice under §294(d)
was sent, the author believes that some
recognition of those notices, and whether
potential creditors’ claims were barred, should
be made to the court. A prudent DA will
carefully keep a chart of all permissive notices
10
B.
Chapter 23
Independent Administration.
is faced both with limited assets AND a
deceased debtor, there are many land mines
which must be avoided in order to satisfy a predeath obligation.
An experienced probate
lawyer will normally be more familiar with the
rules regarding claims from the Estate’s
perspective than from the creditor’s perspective,
so it is hoped that this paper and the enclosed
bookmark will help the attorney to serve both
clients with equal vigor.
Typically, no court filing is required to
close an independent administration. There are
two exceptions to that general rule. If the IA
was required by the court to post a bond, it is
necessary to file a closing affidavit pursuant to
§151 in order to gain a release for the surety on
the bond. The §151 affidavit is required to list
all debts which have been paid and any debts
that remain, but no court action is required so
the creditor does not have the opportunity to
appear at a hearing and to contest the wording of
the affidavit. Only if the IA seeks a release
pursuant to the procedure outlined in §§149D-G
will the creditor perhaps have another day to
complain.
The issue of permissive notice under
§294(d)
will
also
affect
independent
administrations.
However, since the IA
normally does not have the option of seeking
absolution from the court before making
distribution to the heirs or beneficiaries, there
will seldom be an opportunity to “officially” bar
the derelict creditors. On the other hand, if the
IA seeks the relief allowed by §§149D-G, the IA
could conceivably include the “bar” language
shown in Appendix D.
Notwithstanding the notion of a formal
closing of an independent administration, a
creditor is not required to participate in the
probate process in any manner whatsoever.
Since §37 states that property of a decedent
passes to heirs at law (and beneficiaries under a
Will) subject to the debts of the decedent.
Therefore, unless limitations is a problem, the
creditor can proceed at any time either against
the IA or against the heirs/beneficiaries on the
debt.
XV.
End of the Journey
Texas is not a creditor-friendly state.
Even without a deceased debtor in the equation,
successfully collecting a debt is a tough
proposition. When the attorney for the creditor
11
Chapter 23
APPENDIX A
NOTICE TO CREDITORS
Notice is hereby given that original Letters Testamentary for the Estate of [DECEDENT],
Deceased, were issued on [DATE], in Docket No. [CAUSE NO.], pending in Probate Court No.
[NUMBER] of [COUNTY] County, Texas, to:
[EXECUTOR]
[ADDRESS]
All persons having claims against this estate which is currently being administered are required to
present them within the time and in the manner prescribed by law. All persons having claims should
address them in care of the representative at the address stated above.
DATED the ________ day of _______________, _______.
JACKSON WALKER L.L.P.
301 Commerce St., Suite 2400
By:
M. Keith Branyon
ATTORNEYS FOR THE EXECUTOR
12
Chapter 23
PUBLISHER'S AFFIDAVIT
I solemnly swear that the above notice was published once in the [NAME OF NEWSPAPER], a
newspaper printed in [CITY], [COUNTY] County, Texas, and of general circulation in said county, as
provided in the Texas Probate Code for the service of citation or notice by publication, and the date that
the issue of said newspaper bore in which said notice was published was [DATE]. A copy of the notice as
published, clipped from the newspaper, is attached hereto.
Publisher
SWORN TO AND SUBSCRIBED BEFORE ME by
_________________, ____, to certify which witness my hand and seal of office.
Notary Public, State of Texas
13
, this
day of
Chapter 23
ATTORNEYS & COUNSELORS
301 Commerce, Suite 2400
(817) 334-7200, Fax (817) 334-7290
www.jw.com
M. KEITH BRANYON
Board Certified – Tax Law
Estate Planning and Probate Law
Direct Dial: (817) 334.7235
E-Mail: [email protected]
APPENDIX B
[Date]
CERTIFIED MAIL #[NUMBER]
RETURN RECEIPT REQUESTED
[SECURED CREDITOR]
[ADDRESS]
Re:
No. [CAUSE NO.], Estate of [DECEDENT], Deceased
Social Security No. [NUMBER]
Dear Sir or Madam:
Please be advised that [EXECUTOR] has been appointed as Independent Executor of the
referenced Estate. I have enclosed a copy of letters testamentary for your file.
It has come to our attention that the decedent may have been indebted to you at the time of death.
You may also find that one of the obligors on the note, or the principal obligor, is the surviving spouse of
decedent, [SPOUSE], whose social security number is [NUMBER]. Please consider this your formal
notice under Section 295 of the Texas Probate Code. Also, please forward to me copies of the promissory
note, any security agreements executed by the decedent and/or [SPOUSE], a statement declaring the
balance as of decedent’s date of death [DATE] and information concerning whether the note is “current.”
I have enclosed a return envelope for your convenience. Thank you for your cooperation.
Sincerely yours,
M. Keith Branyon
MKB:dm
Enclosures
cc:
[EXECUTOR]
14
Chapter 23
ATTORNEYS & COUNSELORS
301 Commerce, Suite 2400
(817) 334-7200, Fax (817) 334-7290
www.jw.com
M. KEITH BRANYON
Board Certified – Tax Law
Estate Planning and Probate Law
Direct Dial: (817) 334.7235
E-Mail: [email protected]
APPENDIX C
[Date]
CERTIFIED MAIL #
RETURN RECEIPT REQUESTED
[CREDITOR]
[ADDRESS]
Re:
[DECEDENT’S NAME]
Account No. [NUMBER]
Dear Sir or Madam:
Notice is hereby given that original Letters Testamentary for the Estate of [DECEDENT],
Deceased, were issued to [EXECUTOR] on [DATE] under Cause No. [NUMBER] pending in Probate
Court No. [NUMBER], [COUNTY] County, Texas.
All persons having claims against the Estate of [DECEDENT] which is currently being
administered are required to present their claim as required by the Texas Probate Code to [EXECUTOR]
in care of [his/her] attorney, M. Keith Branyon, 301 Commerce Street, Suite 2400, Fort Worth, Texas
76102, within four (4) months after the date of the receipt of this Notice or the claim is barred.
Please be advised that claims may also be presented by depositing same with [COUNTY] County
Clerk, [ADDRESS], within four (4) months after the date of the receipt of this Notice or the claim is
barred.
____________________________________
[EXECUTOR], Independent Executor
of the Estate of [DECEDENT], Deceased
15
Chapter 23
APPENDIX D
Suggested Language for Account for Final Settlement:
“13. OTHER FACTS NECESSARY FOR A FULL UNDERSTANDING OF THE CONDITION
OF THE ESTATE:
(a)
As of the date decedent died, there were numerous creditors of the Estate.
Attached hereto as Exhibit “B” is a list of all of the creditors which were sent notices
pursuant to §294(d) of the Texas Probate Code. None of such creditors properly
qualified its claim as required by the Probate Code. Consequently, all of such claims are
barred pursuant to §294(d).
Suggested language for Order Approving Account of Final Settlement:
[INCLUDE AS A FINDING]
“That the list of claims attached as Exhibit “B” to the Account for Final Settlement shows
that proper notice was given to all of the Estate’s creditors and that all of such creditors
failed to comply with the claim procedure in the Texas Probate Code and are, therefore,
barred pursuant to §294(d) of said Probate Code.”
[include in ORDERED section]
“It is, therefore, ORDERED, ADJUDGED and DECREED that the claims of all creditors
shown on Exhibit “B” attached to the Account for Final Settlement are barred for all
purposes and that none of said creditors shall have any further claims against this Estate.”
16
3142234v1

DEALING WITH THE INSOLVENT ESTATE M. KEITH BRANYON Jackson Walker L.L.P.

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