The Deceased Debtor OKelley.ppt · • So you’ve timely filed your claim again the estate – now...

© 2016 Lesser, Lutrey, Pasquesi & Howe LLP

Reaching Beyond the Grave:

The Deceased Debtor


So your debtor has died…• My condolences. Because things

probably just got a lot harder for you

• It’s time to familiarize yourself with the PROBATE ACT

• Get used to the idea that public policy now weighs strongly in favor of quickly and efficiently administering your debtor’s estate

• If you’re not careful, the debt you’re trying to collect on could be wiped out


OVERVIEW:

I. PROBATE (assets held in the decedent’s name)

A. Unsecured creditors in probate proceedings

B. Secured creditors in probate proceedings

II. NON-PROBATE (trusts, jointly owned, beneficiary designation)

A. Unsecured creditors recovering against non-probate assets (focus on TRUST assets)

B. Secured creditors recovering against non-probate assets (focus on TRUST assets)


PROBATE – WHAT IS IT?• A court proceeding to administer the decedent’s assets in accordance with:

– The Decedent’s Last Will and Testament (for “legatees”); or– The laws of intestacy in the Probate Act (for “heirs”).

• Probate proceedings govern probate assets only• Probate assets are generally assets held in the decedent’s name at death• Probate proceedings do not govern non-probate assets, such as trust

assets, jointly-held assets or assets payable by beneficiary designation

• Will is filed in court (755 ILCS 5/6-1)

• Petition to open estate is filed by proposed estate representative (755 ILCS 5/9-4; 755 ILCS 5/6-2)

• The estate representative (executor or administrator) is issued “Letters of Office” by the court to administer the decedent’s assets, including any claims against the estate brought by a creditor of the decedent


UNSECURED CREDITORS IN PROBATE

• It’s time to dust off your Probate Act (755 ILCS 5/1-1, et seq.), because your recovery depends upon strict compliance with its requirements

• Article 18—aptly titled “Claims Against Estates”—is now your Holy Bible (755 ILCS 5/18-1, et seq.)

– Fail to familiarize yourself with its requirements at your own peril

• Many requirements for creditors in the Probate Act are harsh, time-sensitive and unforgiving


UNSECURED CREDITORS IN PROBATE• It is imperative that you act to file a claim

against the estate in the probate proceedings as quickly as possible (see 755 ILCS 5/18-1)

• Claim forms are generally available circuit court websites

• Extremely simple format – often only a single sentence generally identifying claim and the amount owed (see 755 ILCS 5/18-2)

• Subject only to notice-pleading requirements, not the usual Illinois fact-pleading requirements


UNSECURED CREDITORS IN PROBATE• STATUTES OF LIMITATION are DANGEROUS

– Unknown creditors: 6 months after publication (755 ILCS 5/18-3; 5/18-12)

– Known creditors with actual notice: as little as 3 months after delivery of notice (755 ILCS 5/18-3(a))

– Known creditors given written notice of disallowance: as little as 2 months after receipt of notice (755 ILCS 5/18-11(b); 5/18-12(a)(2))

– Catch-all (including known creditors not given written notice): if not barred sooner, no later than 2 years from the date of decedent’s death 755 ILCS 5/18-15

• 2 year limitations period applies even if no estate is ever opened

• Failure to timely act means that your claim is barred, no matter how compelling the underlying facts



• CAUTION: Debts are often completely erasedin the administration of a typical estate



• Statutes of Limitation – known vs. unknowncreditors

– Estate representative will be publishing for unknown creditors, triggering 6 month limitations period (755 ILCS 5/18-3)

– Remember, your debtor is dead – the consideration is whether debt is known or unknown to estate representative, not decedent

– Known creditors include creditors who are “reasonably ascertainable” by the representative (755 ILCS 5/18-3)




• Initial burden is on the claimant to show no notice received

• Burden then transfers to estate representativeto demonstrate notice was delivered or that claimant was unknown (and therefore subject to shorter 6-month limitations period) (See id.)

• See Matter of Estate of Anderson, 246 Ill.App.3d 116 (4th Dist. 1993)




• Bottom line – don’t chance it

• Play it safe and file your claim against the estate within the 6 month limitations period for unknown creditors if at all possible



• What if I have a prior judgment against the decedent, but no judgment lien?

– Still stuck dealing with the claims process and limitations periods?

• Yes - did you timely file your claim against estate?– If not, too bad – you’re time barred and can’t enforce your judgment

against probate assets

• Possibly can enforce your judgment against non-probate assets such as trust assets, but circumstances have to be right (See Society of Lloyd’s v. Estate of McMurray, 274 F.3d 1133 (7th Cir. 2001))

• Safest course: File your claim against the estate within the six-month limitations period



• What if I have a claim against a decedent that’s not yet due?

• You should still timely file your claim against the estate

• Section 18-4 of the Probate Act:– “Claims not due. A claim against a decedent’s estate that is

not due may be filed and allowed and paid out of the estate as other claims but interest which has been included as part of the principal obligation, computed from the time of the allowance of the claim to the time when it would have become due, shall be deducted.” (755 ILCS 5/18-4)



• So you’ve timely filed your claim again the estate – now what?

• Estate representative may:– Allow the claim (success!) (755 ILCS 5/18-11)– Settle the claim (assuming you’re willing)

or– Challenge the claim (755 ILCS 5/18-5; 5/18-6)

• Ask for time to file a responsive pleading• Conduct discovery• Evidentiary hearing – possibly even a jury trial


UNSECURED CREDITORS IN PROBATE• Hearing on a challenged claim:

– Essentially a trial on your claim in the probate court– Barring unusual circumstances, the burden of proof falls

upon the claimant to demonstrate a right to recover (see, e.g., In re Likes’ Estate, 6 Ill.App.3d 976 (4th Dist. 1972)

– Watch out for the DEAD MAN’S ACT (!!) (735 ILCS 5/8-201)

• “[N]o adverse party or person directly interested in the action shall be allowed to testify on his or her own behalf to any conversation with the deceased person . . . or to any event which took place in the presence of the deceased . . . .”

– Cautionary tale: Estate of Walsh, 2012 IL App (2d) 110938 (2nd Dist. 2012)



• If you succeed, your claim will be allowed

• But you’re not done yet, because you still have to worry about….

CLASSIFICATION OF CLAIMS


UNSECURED CREDITORS IN PROBATE• Classification of estate claims are governed by

Section 18-10 of the Probate Act (755 ILCS 5/18-10)

• SEVEN CLASSES of claims against estate, ranging from first class to seventh class

• Classes are set forth in order of priority (755 ILCS 5/18-13)

– If estate is insolvent, higher priority claims must be satisfied in full before lower priority claims receive any satisfaction

– This may mean lower priority claims receive only pro ratasatisfaction from insufficient estate funds, or potentially no satisfaction at all (even though claim was allowed)


UNSECURED CREDITORS IN PROBATE• First class: Funeral, expenses of administration

(representative and attorneys’ fees, statutory custodial claims)

• Second class: Surviving spouse and/or child’s award (755 ILCS 5/15-1; 5/15-2)

• Third class: Debts due to the United States

• Fourth class: Money due to employees of the decedent

• Fifth class: Money and property received or held in trust which cannot be identified or traced

• Sixth class: Debts to the State of Illinois



SEVENTH CLASS: ALL OTHER CLAIMS

YOU ARE HERE



• What if no probate estate is opened?– Creditor can open a probate estate

• Creditor is an “interested person” as defined by the Probate Act (755 ILCS 5/1-2.11)

• Interested party is empowered to petition to open probate estate

• Petition for Administrator to Collect (755 ILCS 5/10-1, et seq.)

• Flush-out proper estate representative and push proceedings forward


UNSECURED CREDITORS IN PROBATE• What if no probate estate is opened?

– Small Estate Affidavit (755 ILCS 5/25-1, et seq.)• Available for estates valued at $100,000 or less

– Affiant lists all known debts and swears:• “I understand that all valid claims against the decedent’s estate

must be paid by me from the decedent’s estate before any distribution is made to any heir or legatee.”

• There is no known unpaid claimant or contested claim against the decedent, except as stated [in the affidavit].”

• “By signing this affidavit, I agree to indemnify and hold harmless all creditors of the decedent’s estate . . . relying upon this affidavit who incur any loss because of reliance upon this affidavit [including attorneys’ fees and expenses of recovery].”

• Potential cause of action is against affiant if small estate affidavit is improperly used to drain estate assets without satisfying debt owed to creditor


SECURED CREDITORS IN PROBATE

• What if your interest is secured? What if you have a lien against a probate asset of the decedent?

• You’re in much better shape than an unsecured creditor, but you’re not entirely out of the woods



• There is some case law standing for the proposition that an decedent’s asset which is subject to a lien does not become an asset of the probate estate until the lien is discharged

– See Matter of Philp’s Estate, 114 Ill.Ap.3d 107 (1st Dist. 1983); see also Matter of Yealick’s Estate, 69 Ill.App.3d 353 (4th Dist. 1979)

– C.f. In re Estate of Funk, 221 Ill.2d 30 (2006): “. . . the fact that a claim is secured by a lien upon real or personal property gives the claimant no superior rights in the matter of classifying claims.”

• Note: The lienholder in Funk elected not to foreclose on the lien at issue


SECURED CREDITORS IN PROBATE• Generally, from a practical standpoint,

administering estate assets subject to lien will require that the lien be discharged and the lienholder satisfied



• BUT, a lienholder in probate estate isn’t bulletproof

• Probate courts have broad powers

• Example: 755 ILCS 5/20-6(b):– Probate court is empowered to: “[D]irect the sale or

mortgage of the property free of all mortgage, judgment or other liens . . .”

– Where it is “necessary for the proper administration of the estate”—such as where the estate is insolvent and cannot be administered with the lien in place, your lien could theoretically disappear



IN WHICH CASE…

YOU ARE HERE



• Also, if real estate is “specifically bequeathed” (that is, directed in the will to a specific recipient rather than distributed as part of the “residue” of the estate), watch out for Section 20-19 of the Probate Act

• 755 ILCS 5/20-19: Specifically bequeathed real estate passes to legatee “subject to the encumbrance,” with no right to have indebtedness paid from estate assets

– So lien survives, but now the property is in the hands of someone new…


NON-PROBATE ASSETS

• What about NON-PROBATE assets?– Trust assets– Jointly-owned assets– Assets passing by beneficiary designation

• Retirement accounts• Life insurance policies

• In many instances, the vast majority of a decedent’s assets will be non-probate in nature

– A primary purpose for a revocable trust, for instance, is to avoid probate (if properly funded)


UNSECURED CREDITORS: NON-PROBATE ASSETS

• Assets of a Decedent’s Trust

– Revocable vs. Irrevocable no longer a relevant distinction• Even a revocable trust is rendered irrevocable by virtue of the

decedent’s death (unless ZOMBIES!!!)

– Trust will almost certainly be subject to a spendthrift clauselimiting the rights of a creditor



• Methods of pursuing trust assets:

– Attack on the basis of a fraudulent transfer• Fraudulent Transfers Act (740 ILCS 160-1, et seq.)

– Attack on the basis that the trust is self-settled (see Rush University Medical Center v. Sessions, 2012 IL 112906 (2012))

– Attack based upon language of the trust requiring the trustee to pay debts of the decedent or the decedent’s estate(see Society of Lloyd’s v. Estate of McMurray, 274 F.3d 1133 (7th Cir. 2001))



• BUT FIRST, do you have:– A valid claim against the decedent’s estate; or– A valid judgment entered against the decedent before

death?

• If you don’t have one or both of those things, you’re likely out of luck and can’t recover against the assets of the decedent’s trust

– Even a valid judgment entered against the decedent before death may—or likely will—leave you without recourse against the decedent’s trust unless circumstances line up perfectly (see Society of Lloyd’s v. Estate of McMurray, 274 F.3d 1133 (7th Cir. 2001))



• Underlying basis to pursue trust asset: CLAIM AGAINST ESTATE

– Means that you have to actually succeed on your claim in the probate proceedings

– Also means that you have to be mindful of the shortened statutes of limitations in the Probate Act, even though you’re ultimately pursuing non-probate assets

• Best example of this method: Rush University Medical Center v. Sessions, 2012 IL 112906 (2012)

– Claimant succeeded in probate on claim against estate– Court allowed claimant to recover on probate claim against

assets of decedent’s self-settled trust, a non-probate asset



• Underlying basis to pursue trust asset: PRIOR JUDGMENT AGAINST DECEDENT

• Under the right circumstances, even if you miss the shortened limitations period for claims against estates, you may still be able to pursue recovery from a decedent’s trust on a prior judgment entered against the decedent



• Best example of this method: Society of Lloyd’s v. Estate of McMurray, 274 F.3d 1133 (7th Cir. 2001)

– Plaintiff had pre-death judgment against decedent which was subject to7-year SOL for foreign-money judgments

– After decedent’s death, plaintiff failed to file claim against decedent’s estate within 2 years of decedent’s death

– Plaintiff then belatedly sought to enforce judgment against assets of decedent’s trust

– Trust contained provision requiring payment from the Trust for the decedent’s “legally enforceable debts”

– Trustee argued judgment was not “legally enforceable” because no claim against the estate was timely filed within 2 years of death

– Appellate court ruled 2 year limitations period in Probate Act was inapplicable because trust assets were non-probate assets

– Recovery possible against Trust – Unclear if recovery would have been possible without specific trust

language regarding payment of the decedent’s debts



• Means of attacking the trust: THE LANGUAGE OF THE TRUST INSTRUMENT

– First and foremost, check the language of the governing instrument for the trust from which you’re seeking to recover

– Many trust instruments compel the trustee to pay debts and obligations of the decedent’s probate estate to the extent that the assets of the probate estate are insufficient

• If you have an unsatisfied claim against the decedent’s estate, this language may compel the trustee of the trust to satisfy the debt from the Trust

– It’s also possible that the trust may simply direct payment from the trust for the decedent’s debts

• This was the case in Lloyd’s, and it provided the basis for recovery



• Means of attacking the trust: FRAUDULENT TRANSFER

– Full analysis of law governing fraudulent transfers is beyond the scope of this presentation

– Look to Uniform Fraudulent Transfer Act (740 ILCS 160/1, et seq.)

– Section 5 of the UFTA, in particular, identifies transfers which constitute fraudulent transfers which are subject to challenge (See 740 ILCS 160/5)

– Generally, the short version: was the transfer to the trust for the purpose of avoiding a personal obligation?



• Means of attacking the trust: SELF-SETTLED TRUST

– “Traditional law is that if a settlor creates a trust for the settlor’s own benefit and inserts a spendthrift clause, the clause is void as to the then-existing and future creditors, and creditors can reach the settlor’s interest under the trust.” Rush University Medical Center v. Sessions, 2012 IL 112906 (2012)

– Intent to defraud creditors is not necessary (Id.)

• Again, look to Rush v. Sessions– Sets forth self-settled trust analysis– Clarifies that common law re self-settled trusts still valid and not

superseded by UFTA– Recovery permitted from self-settled trust after settlor’s death


SECURED CREDITORS: NON-PROBATE ASSETS

• Lien on real estate in trust or jointly-owned real property

• Again, see Section 20-19 of the Probate Act:– Where real estate subject to an encumbrance passes by

specific direction in a trust, or where it passes by joint tenancy with right of survivorship, recipient takes it subject to the encumbrance (see 755 ILCS 5/20-19)


Thank you.

The Deceased Debtor OKelley.ppt · • So you’ve timely filed your claim again the estate – now...

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