Alice in Tulsa-land: the Dobler Effect on Creditors of Revocable Trusts

• Publication year: 2004
• Author: By John A. Hartog & Bart Schenone

ALICE IN TULSA-LAND: THE DOBLER EFFECT ON CREDITORS OF REVOCABLE TRUSTS

By John A. Hartog^* & Bart Schenone^**

I. INTRODUCTION

The California Probate Code appears to establish a straightforward method for a creditor of a California decedent to protect its interest. Typical of other subject matters covered by the Probate Code, however, first impressions can be deceiving. The application of the Probate Code procedure is subject to federal constitutional considerations.¹ The U.S. Supreme Court has ruled that as a matter of due process creditors must be informed of probate proceedings "by mail or other means as certain to ensure actual notice."² Tulsa Professional Collection Services v. Pope ("Tulsa") holds further that a creditor is "entitled to notice" when the creditor is "reasonably ascertainable."³

Implementation of this rule can be accomplished with comparative success when the decedent's assets are subject to administration under Division 7 of the Probate Code, i.e. a "probate." A probate, however, may contain its own traps for the unwary creditor, as will be examined later.

Protection of the creditor becomes less clear if the decedent's beneficiaries utilize the summary administration procedures of Division 8 of the Probate Code. When small estates are collected,⁴ or when property is set aside to the surviving spouse,⁵ the creditor may be compelled to seek satisfaction from the recipients of the decedent's property. This condition may cause a creditor to be deprived of satisfaction if the distributee has dissipated the property.

A creditor's ability to collect against the assets of the decedent's revocable trust may be the least clear of these three avenues of decedent administration. This difficulty is compounded when one realizes the overwhelming preference for revocable trusts among propertied Californians.

Superseding all of these statutory protections is the one-year statute of limitation for enforcing any claim against a decedent provided by Code of Civil Procedure § 366.2 ("CCP § 366.2"). CCP § 366.2 provides that "an action may be commenced within one year of death and the limitations period that would have been applicable does not apply." In one phrase CCP § 366.2 shreds any other statute of limitations which may apply to enforcement of a debt. If a creditor doesn't sue a decedent's estate or successor in interest within one year, the creditor is without a remedy. The exceptions to the one-year limitation period are few and consistent with making a timely claim under the creditor's claim sections of the Probate Code. The other exception is contained within Family Code § 914, and applies only to "necessaries of life."

This article will briefly discuss some of the traps for the unwary creditor in a probate administration and in summary administration proceedings. This article will then focus on the existing framework concerning enforcement of creditor's claims in the administration of a revocable trust: what has become clear and gone clearly wrong for the creditor in the wake of the Dobler twins,⁶ and what suggestions are available to make after Dobler II.⁷ This article will not deal with claims of public entities.

II. CODE OF CIVIL PROCEDURE § 366.2

The deepest trap for the unwary creditor is the prospect that the creditor may lose its claim simply because no estate is probated until more than one year after the decedent's date of death. CCP § 366.2(a) provides that when a cause of action survives a decedent action on it must be commenced within one year after the decedent's date of death.⁸

A timely filed creditor's claim cannot revive a claim that is otherwise barred. A creditors' claim period that opens after the expiration of the one-year period afforded by CCP § 366.2 compels the personal representative to reject all claims that are by that statute time barred.⁹ There is no open-ended period for actions or claims under the present statutory scheme regarding decedents and their creditors.¹⁰ Any open-ended possibility is precluded by a combination of rules including the requirement that the action be filed within one year after the decedent's death,¹¹ the rule that failure to file a claim bars the claim and action,¹² and the late claim filing time limits.¹³

This rule extends to indirect actions.¹⁴ In Bradley v. Breen, supra,¹⁵ a victim of child molestation committed by a perpetrator who had since died sued defendants for aiding and abetting. Defendants cross-complained against the perpetrator's estate for indemnification. The Court of Appeal held that CCP § 366.2 applied to bar indemnity claims, even though defendants could not have filed such claims within the one-year limitation time.

In Collection Bureau of San Jose v. Rumsey (Rumsey)¹⁶ the decedent incurred last illness medical expenses exceeding $100,000. The creditor's assignee sued the surviving spouse on an open book account just shy of four years following the date of death. The Supreme Court held that the one-year limitations period applied because Probate Code §§ 13550 and 13554 expressly made CCP § 353 (the predecessor to CCP §366.2) applicable.¹⁷ The surviving spouse, as successor in interest, could assert the statute of limitation because the decedent could have asserted it. There was no independent, derivative liability on the successor in interest.

The only exception to the absolute bar of CCP § 366.2 is when equitable estoppel (or a specific statute¹⁸) applies.¹⁹ In Battuello²⁰ petitioner filed a complaint to establish an interest in property that

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he claimed his father had promised to give to him. The respondent demurred to the complaint on the grounds that it was barred by CCP § 366.2. The Court of Appeals reversed the judgment on grounds of equitable estoppel. During settlement negotiations the respondent convinced the petitioner not to file a timely suit by telling him that he would receive the property. By the time that the petitioner learned that respondent had made false promises, the statute of limitations had passed.²¹

III. CLAIMS IN PROBATE

A. Procedure

A "claim" means "demand for payment . . . whether due or not due, accrued or not accrued or contingent, and whether liquidated or unliquidated."²² "Claim" includes "liability of the decedent, whether arising in contract, tort, or otherwise," "liability for taxes" except for property taxes and assessments secured by real property liens, and liability for funeral expenses.²³ Every kind of debt is included.

Creditors are given notice by publication of the Notice of Administration²⁴ and by the personal representative providing notice to "reasonably ascertainable creditors" in the manner designated in Probate Code § 9052. The notice must be given within the later of (1) four months after the date letters are issued, or (2) thirty days after the personal representative first has knowledge of the claim.²⁵ The personal representative is under a duty to make "reasonably diligent efforts to identify reasonably ascertainable creditors."²⁶

A judgment creditor must file a claim.²⁷ A plaintiff or other party who has already sued the decedent in an action must also file a claim.²⁸ A creditor whose claim exceeds the value of the security must file a claim for the unsecured portion.²⁹ There are no exceptions other than for (1) secured creditors who intend to rely solely on the amount realized by foreclosure on the security,³⁰ and (2) creditors who intend to rely solely on the decedent's insurance coverage.³¹

A creditor's failure to file the claim as provided in Part 4 of the Probate Code will irretrievably bar the claim.³² A creditor must file before the expiration of the later of (1) four months after the date letters are issued, or (2) 60 days after the date the notice of administration is given to the creditor.³³ Probate Code § 9100 is explicit, however, in stating that it does not "extend or toll" or "revive" any other statute of limitations. If the cause of action for a claim already has expired, the creditor's claim procedure does not give it new life.³⁴

Nevertheless, a creditor has the opportunity to file a "late claim" after expiration of the time periods set forth in Probate Code § 9100.³⁵ The creditor must petition and obtain a finding that either (1) the personal representative failed to send proper notice under Probate Code § 9051 and the creditor has petitioned for relief within 60 days after the creditor has received actual knowledge of estate administration, or (2) the creditor had no knowledge of fact reasonably giving rise to the existence of a claim more than thirty days prior to the time for filing a claim under Probate Code § 9100 and the creditor has petitioned for relief within 60 days after the creditor has received actual knowledge of both the existence of facts reasonably giving rise to the claim and administration of the estate.

The statute prohibits, however, granting relief when the court has already ordered distribution. Probate Code § 9103 also grants the court discretion to condition the claim or deny the claim in circumstances where payment to general creditors has already been made and granting the claim would "cause or tend to cause unequal treatment among creditors." Probate Code § 9053 provides incentive for the personal representative to participate meaningfully in the creditor's claim process. Assume that the personal representative failed to notice the creditor in "bad faith" (e.g., threw the credit card bills away and gave no notice) and that the creditor had no knowledge of administration of the estate. Assume further that the creditor discovers the existence of the probate within sixteen months after the Letters were first issued. If the creditor files a petition within that 16-month period and duly serves the personal representative at least thirty days before the hearing, the personal representative is responsible to pay the claim even if the estate has already been distributed. The potential for personal liability usually provides the incentive to search...