DEALING WITH THE INSOLVENT ESTATE M. KEITH BRANYON Jackson …images.jw.com/com/publications/132.pdf · 2003-02-28 · The Slayer’s Rule Revisited Author/Speaker, National Business

DEALING WITH THE INSOLVENT ESTATEOr, How to Get Blood Out of a Turnip

M. KEITH BRANYONJackson Walker L.L.P.

301 Commerce Street, Suite 2400Fort Worth, Texas 76102

Advanced Estate Planning and Probate CourseDallas June 5-7, 2002

San Antonio July 24-26, 2002Houston August 14-16, 2002

Chapter 23

M. KEITH BRANYONJackson Walker L.L.P.

301 Commerce Street, Suite 2400Fort Worth, Texas 76102

817/334-7235Fax: 817/334-7290

BIOGRAPHICAL INFORMATION

EDUCATION

B.B.A. in Accounting, Baylor UniversityJ.D., Baylor University School of Law

PROFESSIONAL ACTIVITIES

Partner – Jackson Walker, L.L.P., Fort Worth, TexasBoard Certified in Tax Law,

Texas Board of Legal SpecializationBoard Certified in Estate Planning and Probate Law,

Texas Board of Legal SpecializationChair, Advisory Commission for Estate Planning and Probate Law,

Texas Board of Legal SpecializationCertified Public Accountant

LAW RELATED PUBLICATIONS

Author/Speaker, National Business Institute, June 2-3, 1992Planning Opportunities with Living Trusts in Texas

Author/Speaker, National Business Institute, February 11, 1994Texas Probate: Beyond the Basics

Author/Speaker, State Bar of Texas, 20th Annual Advanced Estate Planning and Probate Course,1996The Slayer’s Rule Revisited

Author/Speaker, National Business Institute, July 15-16, 1999How to Draft Wills and Trusts in Texas

Author/Speaker, State Bar of Texas, 24th Annual Advanced Estate Planning and Probate Course,2000Independent Administration from Start to Finish

Author/Speaker, National Business Institute, March 13, 2001How to Draft Wills and Trusts in Texas; Basic Tax Considerations – WhatYou Need to Know in Order to Choose the Appropriate Plan

Author/Speaker, Legal Assistants Division, State Bar of Texas, September 5-8, 2001What Do You Do With Four-Legged Beneficiaries?

Author/Speaker, National Business Institute, February 22, 2002The Probate Process From Start to Finish in Texas

Author/Speaker, 2002 Legal Update for the Texas & Southwestern Cattle RaisersAssociation, March 17, 2002Wills and Estates

Dealing With the Insolvent Estate Chapter 23

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Table of Contents

I. Preamble....................................................................................................................... 1

II. Scope............................................................................................................................. 1A. Purpose of Article..................................................................................................... 1B. Housekeeping ........................................................................................................... 1

III. Preliminary Matters..................................................................................................... 1A. Initial Thoughts ........................................................................................................ 1B. Bookmark................................................................................................................. 1

IV. Beginning a Journey..................................................................................................... 2A. Insolvent -True or False? .......................................................................................... 2B. Standing to Bring Action .......................................................................................... 2C. Enabling Statute?...................................................................................................... 2

V. Death of Decedent ........................................................................................................ 3

VI. Initiating Probate ......................................................................................................... 3

VII. Bond.............................................................................................................................. 4

VIII. Duties of Personal Representative ............................................................................... 5

IX. Notices .......................................................................................................................... 5A. Mandatory Notices ................................................................................................... 5B. Permissive Notice ..................................................................................................... 6

1. Applies to IA and DA ................................................................................... 62. Ethical Considerations .................................................................................. 6

X. Claims ........................................................................................................................... 6A. Dependent Administration ........................................................................................ 6B. Independent Administration ...................................................................................... 7

XI. Action on Claims .......................................................................................................... 7A. Dependent Administration ........................................................................................ 7B. Independent Administration ...................................................................................... 8C. Objecting to Claims .................................................................................................. 8

XII. Exempt Property and Allowances ............................................................................... 8

XIII. Forcing Payment of Claims.......................................................................................... 9A. Dependent Administration ........................................................................................ 9B. Independent Administration ...................................................................................... 9

XIV. Closing the Estate ....................................................................................................... 10A. Dependent Administration ...................................................................................... 10B. Independent Administration .................................................................................... 11

XV. End of the Journey ..................................................................................................... 11

Appendices:A. Notice to Creditors ................................................................................................. 12B. Letter to Secured Creditor ....................................................................................... 14C. Permissive Notice ................................................................................................... 15D. Suggested Language – Final Account ..................................................................... 16


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DEALING WITH THE INSOLVENTESTATE

Or, How to Get Blood Out of a Turnip

I. Preamble

Whether the client is a creditor, abeneficiary or the personal representative(“PR”), debts in a solvent estate pose noproblem whatsoever. For obvious reasons, theattention of the PR is focused on collecting theproperty and paying the debts, without regard topriority of claims or the order of payment. Inthose situations, there will be no one to complainsince all creditors will get paid and there will besomething left for the beneficiaries.

When the estate is insolvent, things getmuch more difficult. The term “insolvent” isdefined as “the inability to pay debts as they falldue in the usual course of business.”WEBSTER’S NEW COLLEGIATE DICTIONARY(1980). As the attorney for a creditor, there isclearly no point in pursuing the estate of aDecedent if the fact that the Decedent had noassets is known at the time of death. In Chapter7 bankruptcy filings, the debtor’s attorney hasthe option of declaring on the initial filing thatthe debtor has no assets if that is the situation. Itwould be most helpful if the same rules wereavailable in probate filings. However, it is theextremely rare probate case where the creditorknows at the time of a Decedent’s death thatthere are no assets, or insufficient assets, in theestate even though the PR will very often havethat information.

II. Scope

A. Purpose of Article

Many fine articles have been written anddiscussed in recent years which have providedgreat detail about the steps that a PR must takeregarding debts in an estate. See, e.g., C. BooneSchwartzel (as supplemented and updated byMark B. Schreiber), Claims Procedures inProbate and Guardianship, 25th Annual

Advanced Estate Planning and Probate Course(2001). Despite those learned treatises, thisauthor was unable to find an article that dealtspecifically with an insolvent estate from acreditor’s perspective. Therefore, this paper willdescribe what a creditor should do, and what acreditor can expect the PR to do, when an estateis potentially insolvent. By examining this areafrom a creditor’s viewpoint, it is believed thatthe PR will also benefit by providing betterprotection for limited estate assets and byconducting more efficiently the administrationof the estate.

B. Housekeeping

All references hereinafter to sectionnumbers refer to the TEXAS PROBATE CODE(“CODE”) unless otherwise indicated.

III. Preliminary Matters

A. Initial Thoughts

One of the inquiries that a creditor mustmake at the outset is the type of administrationwhich has been (or is being) requested –dependent or independent. At the same time, theattorney for the prospective PR must make thesame decision. The choice made will determinewhich sections of the CODE must be followed byboth the PR and by the creditor. Even for theexperienced probate attorney, trying toremember which sections of the CODE apply todependent v. independent administrations isenough to make a lawyer’s head explode – not apretty sight! Which notices must be sent by theadministrator, which notices should be expectedby the creditor, what limitations periods applyand when payment must be made are just a fewof the malpractice minefields found in the oftenindecipherable, frequently repetitious CODE.

B. Bookmark

As a practice aide, this author hasdevised a bookmark that is included with thesematerials. The bookmark is intended to guide


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the practitioner, in logical and chronologicalorder, to the steps (and CODE sections) whichapply to creditors and debts in independent anddependent administrations. It is hoped that thisbookmark can be placed in a desk copy of theCODE as a stress reducer.

IV. Beginning the Journey

A. Insolvent – True or False?

If an estate is potentially insolvent, acreditor must determine immediately if theDecedent was TRULY insolvent or if the personintentionally hid or transferred assets to dodgethe creditor. If there is evidence of the latter, thecreditor should investigate whether actionagainst the Estate should be taken under theUniform Fraudulent Transfer Act (“Act”).TEX.BUS.& COM.CODE §24.001, et seq. In theAct, a debtor is defined as “a person who isliable on a claim.” Id. at §24.001(6). The word“person” has several definitions including“estate.” Id at §24.001(9). Therefore, a creditorcould bring an action under the Act for both pre-death and post-death transfers if there isevidence to show that either the Decedent or therepresentative hid assets to avoid paying thecreditor.

In the Act, a debtor is defined as“insolvent” if the sum of his debts is greater thanall of his assets at a fair valuation. Id. at24.003(a). To fall within the Act, a debtor musthave made a transfer, or incurred an obligation,if the transfer was made (or if the obligation wasincurred) with actual intent to hinder, delay ordefraud the creditor. Unfortunately, before acreditor can bring a successful action under theAct, the creditor must first perfect its claimagainst the estate in compliance with the CODEin order to prove that it is entitled to paymentfrom the Decedent’s property.

B. Standing to Bring Action

Because the definition of “person” underthe Act includes the term “estate,” it may appear

that the PR has the necessary standing to bringan action to void a transfer which the Decedentmade fraudulently prior to death. However, inJohn Hancock Mutual Life Insurance Companyv. Morse, 132 Tex. 534, 124 S.W.2d 330 (Tex.1939), the Supreme Court stated that “aconveyance made in fraud of creditors passestitle to the vendee, and is defeasible only at theinstance of the creditors.” Since the title to theproperty passes from the Decedent during hislifetime, the Court reasoned that the propertycannot form part of the estate in the hands of theadministrator. Therefore, the administratorcannot maintain an action for the recovery of theproperty since he administers the property as itexisted at the time of death. Finally, the Courtsaid that the administrator would not havestanding to bring such an action unless therewere “an enabling statute” authorizing theaction.

C. Enabling Statute?

While it might seem that the Act is “anenabling statute” as anticipated by the SupremeCourt in Morse, that interpretation does notappear to be correct. In an unpublished opinion,the Dallas Court of Appeals was faced with theissue of whether an administrator could “undo” afraudulent transfer within the meaning of the Actwhich 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 forpublication). The Dallas court cited the Morsecase for the proposition that neither the estatenor the heirs could assert the fraudulent transferallegations 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 saidthat an “estate” was not a “creditor,” seeminglyin defiance of the definitions found in§§24.002(4) and 24.002(9) of the Act.Nevertheless, if Skelley is the law in Texas, itwould appear that the only party who can pursuea pre-death fraudulent transfer is a pre-deathcreditor and that the Act is not the “enabling


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statute” that the Supreme Court predicted inMorse.

V. Death of Decedent

The death of a decedent is clearly thebeginning point for a creditor to take action tocollect a claim. Even if a creditor is in the midstof a collection action against a decedent prior todeath, or perhaps has even obtained a judgmentprior to the death of the debtor, the creditor must“start over” pursuing the claim after the debtordies. A creditor who obtains a judgment prior tothe debtor’s death may not attempt to collect thejudgment (i.e., execution, garnishment) exceptthrough the probate court. Mackey v. LuceyProducts Corp.,150 Tex. 188, 239 S.W.2d 607(1951).

Section 37 of the CODE provides areminder that all of a decedent’s property passesto his heirs or beneficiaries at the INSTANT ofdeath, subject to the upcoming administration.In other words, a creditor should realize at theoutset that the decedent’s interest in any assetshas already vested in the heirs and beneficiariesbefore the body is cold, so the creditor shoulddiscover as soon as possible the identity andlocation of these heirs and beneficiaries sincethey might be possible targets of a collectionaction.

VI. Initiating Probate

The term “claim,” as defined in Section3(c) of the CODE, “includes liabilities of adecedent which survive, including taxes,whether arising in contract or in tort orotherwise, funeral expenses, the expense of atombstone, expenses of administration, estateand inheritance taxes, and debts due suchestates.” Needless to say, the creditor mustimmediately determine if the debt falls withinthe definition of “claim.” Generally, any debtthat was not barred by limitations can bepursued against the estate of a decedent.Whether the claim is liquidated or unliquidated,secured or unsecured, “for money” or “other,”

will determine HOW the claim must be pursuedafter the probate process has started.

Should the creditor “sit around” andwait for the heirs, or for the designated PR, tofile an application for probate? Absolutely not!Section 76 of the CODE states that any“interested person” can file an application forprobate. Section 3(r) of the CODE plainly holdsthat a creditor is an “interested person,” so acreditor can win the race to the courthouse bybeing the first to file an action for probate.

Death tolls the running of the statute oflimitations for twelve (12) months unless a PRqualifies sooner. TEX. CIV. PRAC. & REM.CODE §16.062 (Vernon 1997). However, eventhough the creditor’s claim will be protectedfrom an expiring limitations period, assets candisappear and the trail to them will grow coldunless action is taken. If the creditor takes theinitiative, the creditor can choose the county offiling for venue purposes and, by so doing, thecourt which will have jurisdiction over theaction. Obviously, the creditor must be inpossession of information concerning the countyof death or of the location of decedent’s assetsin order to know where to file the suit, but it willthen be up to the heirs or beneficiaries to comeforward and show the court that the chosenvenue was incorrect.

If the creditor files the application toprobate under §76, the creditor may not know allof the facts of death required by §81 or §82. Inother words, the creditor may not know ifDecedent died testate or intestate or if Decedentwas ever divorced. For these reasons, thecreditor will be required to serve notice on thefamily members and potential heirs andbeneficiaries of the decedent (§128) so that thoseother persons who are “interested” in the estatewill come forward with the Last Will andTestament and with proof of the facts of death.Prior to sending the notice, the attorney for thecreditor should schedule a hearing so that thenotice of the filing can include notice of thehearing date.


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The court will generally require thecreditor to prove that the proper notice wasgiven at the time the creditor appears for thehearing. If no beneficiaries or heirs appear atthe hearing, or if all of them are determined bythe court to be “unsuitable,” the creditor can beappointed as the PR since a “creditor” is amongthose who have a right to be appointed in §77 ofthe CODE. However, the creditor might prefer toavoid this honor since the office of PR wouldobligate the creditor to serve not only itself butalso all of the other creditors and thebeneficiaries and/or heirs.

VII. Bond

Except in the rare situation when thecreditor is going to serve as the PR, establishingthe amount of bond which the court will requireis the most important early battleground fromthe creditor’s perspective. It is also the firstpoint at which a creditor’s chosen path will vary,depending upon whether the PR is anindependent administrator or executor(collectively abbreviated as “IA”) or adependent executor or administrator(collectively abbreviated as “DA”).

The fact that a decedent died with a Willthat waives bond does not necessarily mean thatthe PR will automatically be relieved of the dutyto post a bond. Likewise, the fact that adecedent died intestate does not always indicatethat the court will require a bond. Each casemust be determined on its own merit. Section194.3 reminds practitioners that the court musthear evidence before deciding on a bond. If thecreditor makes a good argument, the court canrequire a bond solely to protect the creditors ofthe estate. Even if no bond is initially requiredby the Will or by the court (§195), the court canlater require a bond (§§203, 214) upon a demandby an interested person (§204).

The bond is of critical importance forone primary reason. Whether the estate is an IAor a DA, the PR is not required to file ANYreport with the court until the Inventory,

Appraisement and List of Claims is due ninety(90) days from the date of qualification. Fromthe creditor’s perspective, many bad things canhappen in that 90-day period, and informationregarding the status of the estate will be scarceduring that time. In addition, most courts willgrant extensions of the Inventory filing dateupon timely request by the PR, making the“blackout” period even longer.

While the PR can be required by thecourt to post a bond at any time in an IA or in aDA, only in an IA can the creditor request thatthe heirs of a decedent post a bond to protect thecreditor’s claim. According to §148 of theCODE, at any point after an IA is created, acreditor can file pleadings with the court whichrequest that the heirs or beneficiaries be requiredto post bond. All such heirs and beneficiariesmust be cited by personal service, and thecreditor would typically request that the bond beequal to the lesser of the amount of the debt orthe value of the estate as shown on theInventory.

This poses an obvious conflict. In orderfor the court to know the value of the estate, theInventory must have already been prepared andfiled by the PR. Therefore, even though §148gives the “green light” to the creditorimmediately following the qualification of thePR, the creditor must nevertheless wait until anInventory is filed before it can request that theultimate distributee post bond to protect thecreditor. Since the due date for the Inventorycan be extended by the PR, §148 is not a verypotent weapon for the creditor.

Section 148 also states that, if thecreditor is successful in forcing theheirs/beneficiaries to post a bond, “such estateshall thereafter be administered and settledunder the direction of the county court as otherestates are required to be settled.” Thisstatement gives the impression that the IA willthereafter be brought under the supervision ofthe court as if the administration weredependent.


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After the bond has been posted, §148states that the creditors have the choice of filingsuit against the bond for the amount of their debtor bringing an action against those persons whohave possession of estate property.Unfortunately, there is no case law construing§148. The only case the author was able tolocate dealing with bonds by heirs was decidedin 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, 11S.Ct. 298 (1891).

VIII. Duties of Personal Representative

For a DA, the CODE gives guidance asto what is required regarding notices, claims andpayment of creditors. For an IA, there is oftenconfusion about what steps must be followedsince the IA is, by definition, supposedly freefrom the burdens of court supervision. Section146 should clear up confusion for the IA, butthat section requires more actions by the IA thanmost practitioners would normally expect.

First, the IA is responsible to give all ofthe notices required by §294 and §295. Thesenotices will be discussed below. In addition, theIA may give the permissive notice under§294(d). If any claims are filed in the estate, theIA must “approve, classify, and pay, or reject,the claims against the estate in the same order ofpriority, classification, and proration prescribedin this CODE.” CODE §146(a)(3). Finally, theIA must set aside and deliver exempt property,family allowances and homestead to thosepersons who are entitled to them. CODE§146(a)(4).

Classifying claims and dealing withexempt property are two tasks not normallyassociated with an IA. Nevertheless, the IAmust follow exactly the same procedures withregard to claims and allowances as a DA, exceptthe IA is not required to have the court reviewany decisions made. This lack of court approvalcan be both good and bad for the IA. With courtapproval, the DA can escape personal liability if

errors are made. Unfortunately for the IA,mistakes in classification, which might allow acreditor to be paid in error when a creditor withhigher priority is forgotten, can subject the IA topersonal liability. Therefore, from thestandpoint of the attorney representing the PR,knowing whether or not there are creditors of thedecedent whose claims might potentially exceedthe value of property in the estate might helpconvince the practitioner to create a dependentadministration rather than an independentadministration.

IX. Notices

There are two basic types of notices thatmust be made in any probate administration:mandatory and permissive. If the PR fails togive the proper notices, §297 of the CODE saysthat the PR and the sureties on the bond, if any,“shall be liable for any damage which anyperson suffers by reason of such neglect, unlessit appears that such person had noticeotherwise.”

A. Mandatory Notices

1. Within one month after receivingLetters, the PR must publish a general notice tocreditors in a newspaper which is “printed in thecounty where the Letters were issued.” Anexample of the type of newspaper notice whichis required is shown as Appendix A at the end ofthis paper. Once the notice has been published,proof of publication must be filed with the Courtas required by §294(b).

2. Section 295(a) requires that any securedcreditors be notified within two months after thedate Letters are issued. To qualify as a“secured” creditor under §295, the debt must becollateralized by a lien either on real property oron personal property of the decedent. If the PRdoes not know about secured creditors before thetwo-month window has expired, §295 requiresthat notice be sent to the secured creditor withina reasonable time after the PR discovers thedebt. A copy of a notice that can be used for


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secured creditors is shown as Appendix B.Again, after notice has been sent to and receivedby the creditor, proof of same must be filed withthe court.

B. Permissive Notice

1. Applies to IA and DA. If the PRchooses to do so, a separate notice can be mailedto any and all unsecured creditors of thedecedent. CODE §294(d). This notice can beused whether the administration is independentor dependent. If a creditor receives such anotice from a DA, the creditor should be awareof the fact that the claims procedures outlined inthe CODE must be followed.

If a creditor receives such a notice froman IA, the message to be conveyed to thecreditor is not so clear. There are numerousauthorities which stand for the proposition thatcreditors are not required to file claims orotherwise follow the procedures governingclaims, approval, etc., in an independentadministration. See, e.g., Bunting v. Pearson,430 S.W.2d 470 (Tex. 1968). Nevertheless, if acreditor receives one of these permissive noticeletters, the creditor MUST file a claim. As willbe shown below, the claim can be deliveredeither to the PR or to the clerk, but the creditorshould follow the instructions in the letter.Appendix C is a sample of a letter that can beused for this permissive notice.

2. Ethical Considerations. There hasrecently been a great deal of discussion inprobate circles over these permissive notices asoutlined in §294(d) of the CODE. The use ofthese notices is not limited to situations wherethe estate is insolvent; to the contrary, either anIA or a DA may use these notices in anyadministration even if there are sufficient fundsto pay all creditors. If the creditor fails to“present a claim within four months after thedate of receipt of the notice,” the creditor’sclaim against the estate is barred. Manypractitioners have argued that a PR who decidesto send these permissive notices when there are

adequate funds to pay creditors is breaching hisor her fiduciary duty. Some have argued that thePR owes a fiduciary duty to the creditors,although no Texas case has ever made such afinding.

As the attorney for the PR, is it unethicalto assist the client/PR in dodging creditorswhich may have legitimate claims? If theanswer is “yes,” is it also unethical for anattorney to assist a client in transferring assets sothat a relative will be made eligible for Medicaidbenefits? Would the same line of reasoningapply to attorneys who assist clients inminimizing or eliminating taxes which mightotherwise be owed on business transactions or atthe death of the client? Arguably, sendingpermissive notices pursuant to §294(d) merelyforces the creditor to follow the law. If the lawis followed, the creditor will be paid in thecourse of the administration of the estate. It isonly the slothful creditor who will lose its rightto be paid.

X. Claims

A. Dependent Administration

If a creditor is faced with a dependentadministration, the path which the creditor mustfollow in order to be paid is set forth in §§309-319 of the CODE. Assuming the DA sends thenotices required by §§294 and 295, the creditormust act if it expects payment from the estate.The procedure to be followed by a creditor in adependent administration has been discussed innumerous other seminars and will not berepeated here. A creditor who fails to file aproper claim, or who fails to file a timely suit ifall or a portion of the claim is rejected by theDA, will not be able to recover.

The time limits for claims to be filed isvery confusing since there are so many differentrules. For the unsuspecting creditor, thefollowing deadlines may apply. As the listshows, there are many pitfalls awaiting the


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uninformed creditor in a dependentadministration.

1. §298(a) - A creditor can file a claim atany time before the estate is closed if limitationsis not a problem.2. §306(b) - A secured creditor has eithersix months after letters are granted, or fourmonths after a §295 notice is received(whichever is later) to specify whether it wantsto have its claim allowed as a “secured,matured” claim or as a “preferred debt and lien”claim. Failure to make a timely election resultsin the claim being treated as the latter.3. §294(d) - An unsecured creditor whoreceives a “permissive” notice under this sectionis barred from collecting the debt unless a claimis filed within four (4) months after receiving thenotice.4. §308 - A claim is presumed to be“rejected” if it is not “allowed” within 30 daysafter it has been presented to the DA or filedwith the clerk.5. §313 - Collecting a “rejected” claim isbarred unless the creditor files suit against theDA within 90 days after rejection.

B. Independent Administration

Unless a creditor receives the §294(d)“permissive” notice from an IA, the creditor isnot required to file any type of claim with thecourt or with the IA. It is well settled that theclaims procedures set forth in the CODEgenerally do not apply to independentadministrations. Bunting v. Pearson, 430S.W.2d 470 (Tex. 1968). However, the creditormight nevertheless choose to file a claim if thestatute of limitations is a potential problem. Asdiscussed in III above, the death of a debtor tollsthe statutes of limitation for a period of up totwelve months unless the IA is appointed withinthat time. Though §299 is generally believednot to apply to IAs, it states that the statutes oflimitation are tolled by “filing a claim which islegally allowed and approved.” Unfortunately,the meaning of “legally allowed and approved”is unknown. This becomes a BIG problem when

the IA chooses to take no action on a claim filedin the case; assuming that occurs, the creditorwill not know whether filing the claim has hadany effect on the applicable limitations periods.

If a limitations plea is a possible defensefor the IA, the creditor should take advantage of§147 of the CODE by simply filing suit againstthe IA and avoid any possible argument aboutwhether a claim was proper, whether a claimwas allowed or rejected, etc. Filing suit againstthe IA will toll any applicable statues oflimitation, but the creditor must be aware that§147 allows the IA to ignore the suit until sixmonths after Letters were granted. This wouldpresumably mean that the creditor could not takea default judgment against the IA if the IAchooses not to file an Original Answer withinthe time prescribed on the personal citationissued by the county clerk (the Mondayfollowing the expiration of 10 days).

If the creditor elects to file a claim,§294(d) gives no guidance as to whatdocumentation is required to constitute a proper“claim.” To be safe, it would appear that thecreditor should comply with §§301 and 304 toavoid 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 filesuit on the claim pursuant to §147 if the IA doesnot act promptly and allow the claim.

XI. Action on Claims

A. Dependent Administration

Once claims are filed, §§309-319provides significant detail as to the procedurethe DA and the creditor must follow before theclaim will be converted into a debt which mustbe paid. Once a claim moves to the “allowed”category, the DA does not have the power toclassify it pursuant to §322. Section 312(d) ofthe CODE gives that power to the court.Thereafter, the DA can request court permissionto pay the “classified” claims in the orderprescribed by §320. Even if the court fails to


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take action on the “allowed” claim, the creditoris protected; there is no reason thereafter to filesuit on the claim pursuant to §313 of the CODE.

B. Independent Administration

For the IA, any claims which are filedmust be classified. Likewise, any debtsestablished by a §147 suit against the IA mustlikewise be classified. The IA must do thisclassification without the supervision of, orprotection from, the court.

Classification is never important unlessthe estate is insolvent. For the creditor, caremust be taken to ascertain that its claim isassigned to the proper §322 category. When theestate’s assets are insufficient to pay all of theclassified debts, §321 (for the DA) and §146(a)(for the IA) state the manner in which such debtsare paid.

C. Objecting to Claims

Section 302 of the CODE implies that aPR can object to the form of the claim or to theinsufficiency of exhibits or vouchers whichmight be attached to the claim. Unfortunately,few cases which have referenced §302 giveguidance to either the PR or to the creditor.From the PR’s perspective, it may be difficult toknow whether the defect is one “of form” or not.On the other hand, if there are no exhibitsattached to the claim, or if the exhibits do notfully explain the amount allegedly owed, the PRwould be safe in filing an objection.Nevertheless, it is difficult to see how filing anobjection would be a better choice than simplyrejecting the claim based upon whatever ispresented by the creditor.

The creditor who receives an objectionfrom a DA can simply re-file the claim andattempt to correct the defects. To be safe, thecreditor in that situation could consider the claimon which an objection was made to have beenrejected by the DA, and the creditor could thenfile suit. In a worst-case scenario, the suit would

be challenged as being “premature” if the DAfiles pleadings which contend that the claim hadnot been properly rejected. The greatestdifficulties with §302 are that (1) it does notaddress how the objection affects the thirty-daywindow during which the DA must act on theclaim, and (2) it does not address the ninety-daywindow within which the creditor must file suitas outlined in §313.

For a creditor in an IA, filing anobjection to a claim is even trickier. If thecreditor received the permissive notice under§294(d), the creditor must be acutely aware ofthe four-month period after which the claimwould be barred. Again, if the creditor isconcerned about the expiration of the closing ofthe four-month window, the creditor should filesuit under §147.

XII. Exempt Property and Allowances

In the insolvent estate, both the IA andthe DA must set aside exempt property and thehomestead if there are applicable beneficiaries(spouse or minor children) in the estate. Theseprocedures are described in §§270-293. Section146 directs the IA to comply with these samerules.

For a creditor who faces the possibilityof not getting paid, the probate case must bemonitored closely to make certain that all estateassets are listed on the Inventory and that allpotential recipients of the exempt property aretruly entitled to same. In a dependentadministration, the creditor will actually findmore protection since every decision of the DAmust be approved by the court. While thecreditor can file a formal request with the clerkpursuant to §33(j) to receive copies of alldocuments filed in the probate, there is norecourse for the creditor if the clerk ignores therequest. The wise creditor will checkperiodically with the clerk to verify the status ofthe case.


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In an independent administration, thecreditor generally will have no ability to knowwhat is happening in the case. The IA is notrequired to file anything with the court to signifythat the homestead, exempt property or familyallowance has been delivered. However, the IAsimilarly receives no protection from the court ifthe decisions are made improvidently, and thecreditor retains the right to sue the IA or thebeneficiaries if the IA makes bad decisionswhich cause the creditor’s claim to go unpaid.

XIII. Forcing Payment of Claims

Once debts are established eitherthrough “allowed” claims followed by courtclassification, or judgments followed by IAclassification, the creditor has a limited ability“to get blood out of a turnip.” As could beexpected, the procedure varies according to thetype of administration.

A. Dependent Administration.

Section 326 of the CODE states that acreditor holding an approved claim (a claimeither approved by the court or established bysuit) may petition the court for an order directingthe payment of the claim at any time after twelve(12) months from the date on which letters areissued. If there are no available liquid fundswith which to pay the claim, the court may orderthat property of the estate be liquidated in orderto pay the claim.

Alternatively, the creditor should beaware of §§262-269 of the CODE. Section 262allows “anyone entitled to a portion of theestate” to file a complaint with the court to causethe DA “to render under oath an exhibit of thecondition of the estate.” Presumably, if acreditor’s claim has either been allowed orestablished by suit (and classified by the court),the creditor would be included in the group“entitled to a portion of the estate.” Section 262would not be utilized if more than 12 monthshad elapsed from the date that letters had beengranted since §326 gives a creditor more of a

hammer. However, if 12 months have notelapsed, the creditor whose claim has alreadybeen classified for payment could get anadvance “peek” at the status of the estate.

Section 263 allows a beneficiary to gethis inheritance if he is willing to post a bond.This is often called a “refunding” bond. Thoughrefunding bonds are seldom used, they may givethe creditor an additional pocket from which tocollect its claim. If a portion of an estate iswithdrawn pursuant to §§263, et seq., before aclassified creditor has been paid, the creditor canfile suit either on the bond (§268) or directlyagainst the beneficiary (§269).

B. Independent Administration.

Since §326 specifically referencesclaims which are “established by suit,” it couldbe used by a creditor in an independentadministration. Alternatively, as stated in §3(r)of the CODE, a creditor is an “interested person.”Section 149A allows “an interested person” todemand an accounting of the IA at any time afterthe expiration of fifteen (15) months from thedate that the administration was created. The IAmust 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 demandboth an accounting and a distribution of theestate “at any time after the expiration of twoyears from the date that an independentadministration was created.” Unless the IA canshow a continued need for administration, thecourt shall order that the estate be distributed,including that portion presumably owed to thecreditor.

In most situations, the creditor willknow long before the expiration of twelvemonths whether the claim is high enough on thepriority list to merit payment from the estate. Ifthere simply are not enough assets to pay theclaim, continuing to pursue the claim would bepointless. Nevertheless, if the PR was requiredby the court to post a bond, and if the PR


10

handled the estate improperly and such errorsprevented the creditor from collecting the claim,suit should be filed against the PR. If thecreditor can get a judgment, the judgment can becollected against the bond. Section 218 statesthat creditors can collect against the bond until itis exhausted.

XIV. Closing the Estate

For a creditor which can endure to theend of a probate administration, the final wordon whether money is available will be disclosedin the final documents which the PR is requiredto file. Closing a dependent administration issomewhat more time-consuming than closing anindependent administration.

A. Dependent Administration.

When a DA decides (or is forced) toclose an estate, he is required to file a finalaccounting (§404). That section and §405require the DA to list, among other things, thedebts 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 atombstone for the claim.

After the final account has beenapproved, the creditor may need to take one lastshot at the DA. If the creditor’s claim reachedthe classification stage but the DA fails to pay,the creditor can file a complaint against the DAwith the court pursuant to §414. Section 414allows the creditor, as additional damages, 10%of the amount not paid per month from the DAfrom the date of demand until the date ofpayment. This penalty is assessed against theDA and not against the Estate.

If a DA is attempting to close an estatein which the permissive notice under §294(d)was sent, the author believes that somerecognition of those notices, and whetherpotential creditors’ claims were barred, shouldbe made to the court. A prudent DA willcarefully keep a chart of all permissive notices

sent to creditors and the date on which thecertified mail “green card” was received by saidcreditor. Any such chart should also calendarthe date on which the creditor had to file theclaim, whether the creditor did in fact file aclaim, and what action was taken by the DA onsaid claim.

For those creditors who failed to file anytype of claim, the claims would be barred andthe money which would otherwise have beenpaid to those creditors would be available fordistribution to the heirs and/or beneficiaries. If aclaim was filed but the DA elected to object tosaid claim pursuant to §302, the DA may preferto have the court make a finding on whether theobjection was properly made or whether thecreditor in fact failed to file a proper claim.

Attached as Appendix D is somesuggested language which should be included inboth the Account for Final Settlement (“FinalAccount”) and in the Order Approving Accountfor Final Settlement. By so doing, the DA willperhaps be safe in making the final distributionsto the heirs, knowing that the creditor will notlater be able to complain.

For obvious reasons, if creditors failedto file any notice, or failed to file a propernotice, the DA must decide whether to sendcopies of the Final Account to those creditors.Section 294(d) does not require the DA to sendthe Final Account to the creditors, and sending acopy of it will only serve to give those creditorsone last shot at the estate by reminding them oftheir negligence. Since there is no statutory orcourt guidance on how the “permissive notice”creditors are made to disappear, the approachsuggested 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, anycreditors who filed a proper claim would not beincluded with those whose claims are barred.


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B. Independent Administration.

Typically, no court filing is required toclose an independent administration. There aretwo exceptions to that general rule. If the IAwas required by the court to post a bond, it isnecessary to file a closing affidavit pursuant to§151 in order to gain a release for the surety onthe bond. The §151 affidavit is required to listall debts which have been paid and any debtsthat remain, but no court action is required sothe creditor does not have the opportunity toappear at a hearing and to contest the wording ofthe affidavit. Only if the IA seeks a releasepursuant to the procedure outlined in §§149D-Gwill the creditor perhaps have another day tocomplain.

The issue of permissive notice under§294(d) will also affect independentadministrations. However, since the IAnormally does not have the option of seekingabsolution from the court before makingdistribution to the heirs or beneficiaries, therewill seldom be an opportunity to “officially” barthe derelict creditors. On the other hand, if theIA seeks the relief allowed by §§149D-G, the IAcould conceivably include the “bar” languageshown in Appendix D.

Notwithstanding the notion of a formalclosing of an independent administration, acreditor is not required to participate in theprobate process in any manner whatsoever.Since §37 states that property of a decedentpasses to heirs at law (and beneficiaries under aWill) subject to the debts of the decedent.Therefore, unless limitations is a problem, thecreditor can proceed at any time either againstthe IA or against the heirs/beneficiaries on thedebt.

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 toughproposition. When the attorney for the creditor

is faced both with limited assets AND adeceased debtor, there are many land mineswhich must be avoided in order to satisfy a pre-death obligation. An experienced probatelawyer will normally be more familiar with therules regarding claims from the Estate’sperspective than from the creditor’s perspective,so it is hoped that this paper and the enclosedbookmark will help the attorney to serve bothclients with equal vigor.


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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 topresent them within the time and in the manner prescribed by law. All persons having claims shouldaddress them in care of the representative at the address stated above.

DATED the ________ day of _______________, _______.

JACKSON WALKER L.L.P.301 Commerce St., Suite 2400Fort Worth, Texas 76102

By:M. Keith Branyon

ATTORNEYS FOR THE EXECUTOR


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PUBLISHER'S AFFIDAVIT

I solemnly swear that the above notice was published once in the [NAME OF NEWSPAPER], anewspaper printed in [CITY], [COUNTY] County, Texas, and of general circulation in said county, asprovided in the Texas Probate Code for the service of citation or notice by publication, and the date thatthe issue of said newspaper bore in which said notice was published was [DATE]. A copy of the notice aspublished, clipped from the newspaper, is attached hereto.

Publisher

SWORN TO AND SUBSCRIBED BEFORE ME by , this day of_________________, ____, to certify which witness my hand and seal of office.

Notary Public, State of Texas


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ATTORNEYS & COUNSELORS

301 Commerce, Suite 2400

Fort Worth, Texas 76102

(817) 334-7200, Fax (817) 334-7290

www.jw.com

APPENDIX B

[Date]

CERTIFIED MAIL #[NUMBER]RETURN RECEIPT REQUESTED

[SECURED CREDITOR][ADDRESS]

Re: No. [CAUSE NO.], Estate of [DECEDENT], DeceasedSocial Security No. [NUMBER]

Dear Sir or Madam:

Please be advised that [EXECUTOR] has been appointed as Independent Executor of thereferenced 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 ofdecedent, [SPOUSE], whose social security number is [NUMBER]. Please consider this your formalnotice under Section 295 of the Texas Probate Code. Also, please forward to me copies of the promissorynote, any security agreements executed by the decedent and/or [SPOUSE], a statement declaring thebalance 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 BranyonMKB:dmEnclosurescc: [EXECUTOR]

M. KEITH BRANYONBoard Certified – Tax LawEstate Planning and Probate LawTexas Board of Legal SpecializationCertified Public AccountantDirect Dial: (817) 334.7235E-Mail: [email protected]


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ATTORNEYS & COUNSELORS

301 Commerce, Suite 2400

Fort Worth, Texas 76102

(817) 334-7200, Fax (817) 334-7290

www.jw.com

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 ProbateCourt No. [NUMBER], [COUNTY] County, Texas.

All persons having claims against the Estate of [DECEDENT] which is currently beingadministered 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, Texas76102, 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] CountyClerk, [ADDRESS], within four (4) months after the date of the receipt of this Notice or the claim isbarred.

____________________________________[EXECUTOR], Independent Executorof the Estate of [DECEDENT], Deceased

M. KEITH BRANYONBoard Certified – Tax LawEstate Planning and Probate LawTexas Board of Legal SpecializationCertified Public AccountantDirect Dial: (817) 334.7235E-Mail: [email protected]


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APPENDIX D

Suggested Language for Account for Final Settlement:

“13. OTHER FACTS NECESSARY FOR A FULL UNDERSTANDING OF THE CONDITIONOF 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 noticespursuant to §294(d) of the Texas Probate Code. None of such creditors properlyqualified its claim as required by the Probate Code. Consequently, all of such claims arebarred 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 showsthat proper notice was given to all of the Estate’s creditors and that all of such creditorsfailed 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 creditorsshown on Exhibit “B” attached to the Account for Final Settlement are barred for allpurposes and that none of said creditors shall have any further claims against this Estate.”

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Documents

DEALING WITH THE INSOLVENT ESTATE M. KEITH BRANYON Jackson …images.jw.com/com/publications/132.pdf · 2003-02-28 · The Slayer’s Rule Revisited Author/Speaker, National Business