Bankruptcy and the Deceased Debtor: Rule 1016 in Practice.

• Author: Bartell, Laura B.

Sometimes debtors die. It is not surprising that, of the hundreds of thousands of consumer bankruptcy cases filed every year, (1) some are filed by individuals who do not survive to see the benefits of discharge. Indeed, a recent study of bankruptcy cases suggests that filings by older Americans have increased exponentially in the last twenty-five years, with one in seven consumer bankruptcy cases filed by someone 65 years old or older (2) and, in 3.3% of all cases filed, by someone above the age of 74. (3)

What happens to the bankruptcy case when the debtor (or one of two joint debtors) meets his or her end before the case does? Federal Rule of Bankruptcy Procedure 1016 provides that chapter 7 liquidation cases should continue and that cases under chapters 11, 12, and 13 either may be dismissed or proceed, depending on the circumstances:

Death or incompetency of the debtor shall not abate a liquidation case under chapter 7 of the Code. In such event the estate shall be administered and the case concluded in the same manner, so far as possible, as though the death or incompetency had not occurred. If a reorganization, family farmer's debt adjustment, or individual's debt adjustment case is pending under chapter 11, chapter 12, or chapter 13, the case may be dismissed; or if further administration is possible and in the best interest of the parties, the case may proceed and be concluded in the same manner, so far as possible, as though the death or incompetency had not occurred. (4) In this article, I look at what courts actually do in bankruptcy cases on the demise of a debtor. (5) As I anticipated, the data shows that chapter 7 cases almost invariably continue to be administered after the death of the debtor. Contrary to my expectations (and those of the advisory committee when Rule 1016 was originally drafted (6)), dismissal of cases filed under chapters 11, 12 and 13 is not the norm, and bankruptcy courts make every effort to allow these cases to continue, sometimes even discharging a deceased debtor. If a bankruptcy case continues after the death of the debtor, courts must confront certain issues that are not always easily addressed. This article highlights how those questions have been resolved.

1. STATUTES AND RULES

   The Bankruptcy Act of 1898 (7) directed that bankruptcy cases should proceed after the debtor's death. Section 8 of the Act provided: "SEC. 8. DEATH OR INSANITY OF BANKRUPTS.--a The death or insanity of a bankrupt shall not abate the proceedings, but the same shall be conducted and concluded in the same manner, so far as possible, as though he had not died or become insane...." (8) Consistent with the statutory guidance, the first Rules of Bankruptcy Procedure, prescribed under 28 U.S.C. [section] 2075, (9) mirrored the statutory provision. Rule 118, applicable to liquidation cases, provided as follows:

   Rule 118. Death or Insanity of Bankrupt

   The death of [sic] insanity of the bankrupt shall not abate a bankruptcy case. In such event the estate of the bankrupt shall be administered and the case concluded in the same manner, so far as possible, as though the death or insanity had not occurred. (10) With respect to Chapter XI cases, Rule 1146 provided:

   Rule 11-16. Death or Insanity of Debtor

   In the event of death or insanity of the debtor, a Chapter XI case may be dismissed, or if further administration is feasible and in the best interest of the parties, the estate may be administered and the case concluded in the same manner, so far as possible, as though the death or insanity had not occurred. (11) No rule existed concerning the death of a debtor in a Chapter XIII case, probably because there was no expectation that that such a case could survive the debtor's death.

   No provision comparable to Section 8 of the Bankruptcy Act was included in the Bankruptcy Code (12) that replaced the Act in 1978. The legislative history of the Code indicated that Congress may have thought the section was "unnecessary" (13) because of the bankruptcy court's in rem jurisdiction over property of the estate, but Congress failed to consider that only in a chapter 7 case does the deceased debtor's nonexempt property remain subject to the court's jurisdiction. Creditors of an individual debtor under chapter 11, 12, or 13 are satisfied not by liquidation of the debtor's property but by payments pursuant to a plan, generally derived from the debtor's future earnings.

   The Federal Rules of Bankruptcy Procedure, (14) which were promulgated in the wake of the enactment of the Bankruptcy Code and replaced the former bankruptcy rules, included a new Rule 1016 that incorporated the substance of former Rules 118 and 11-16. (15) However, the new rule also expanded the scope of the former rule beyond chapter 7 liquidation cases and chapter 11 reorganization cases to include individual debt adjustment cases, (16) permitting dismissal on the debtor's death but allowing further administration of the case if "possible and in the best interest of the parties." Nevertheless, the Advisory Committee Note to Rule 1016 expressed the view that "[i]n a chapter 11 reorganization case or [a] chapter 13 individual's debt adjustment case, the likelihood is that the case will be dismissed." (17) Commentators on Rule 1016 have echoed this assessment. (18)

2. APPLYING THE RULE

   In this part, I look at how courts have applied (or ignored) Rule 1016 in cases under different chapters of the Bankruptcy Code when a debtor dies while the case is pending.

   1. CHAPTER 7

      Rule 1016 is clear on the effect of a debtor's death in a chapter 7 case--that death "shall not abate a liquidation case under chapter 7 of the Code ..., [but] the estate shall be administered and the case concluded in the same manner, so far as possible, as though the death ... had not occurred." In hundreds of chapter 7 cases for which I was able to view the dockets, the debtor (or one of two joint debtors) died during the pendency of the case. (19) I found only seventeen of those chapter 7 cases in which the bankruptcy court dismissed the case after the death of a debtor.

      In one case, the principal creditor of the debtor sought dismissal because it would maximize assets available to satisfy the creditor's claim. (20) The court granted dismissal but concluded that the dismissal was consistent with Rule 1016 because it allows a bankruptcy case to be administered and concluded "in the same manner, so far as possible" as if the death had not occurred, and that includes the operation of 11 U.S.C. [section] 707(a) (permitting dismissal of a chapter 7 case "for cause"). (21)

      In another case, a representative of a deceased chapter 13 debtor converted the case without court order to chapter 7 under Rule 1017(f)(3) (22) after the debtor's death. (23) Noting that the court had not been provided notification of the debtor's demise and the debtor's attorney had failed to obtain permission to permit the probate estate representative to act for the debtor, the court concluded that conversion of the case was improper under Rules 1016 and 1017(f), and the court dismissed the case under [section] 707(a). (24)

      In three cases filed in the Northern District of Ohio, the debtors died before the [section] 341 meeting of creditors, and in each case, the court concluded that Rule 1016 did not allow the court to disregard the requirement of [section] 343 of the Code that the debtor attend the meeting of creditors. (25) Another three cases were dismissed for the same reason (failure to attend [section] 341 meeting) when no objections to dismissal were filed. (26)

      In the other nine chapter 7 cases, the bankruptcy courts dismissed the cases under [section] 707(a) after the death of the debtors, finding cause for dismissal when there was a pending probate administration, without mentioning Rule 1016. (27) In five of those cases, the motions to dismiss were made on behalf of the deceased debtors, (28) and one was an involuntary case. (29) Most bankruptcy courts have explicitly rejected motions to dismiss under [section] 707(a), concluding that the dual administration of bankruptcy cases and probate estates does not establish "cause" for dismissal. (30)

      In each of the other chapter 7 cases in which the court mentioned that the debtor (or one of two joint debtors) had died before the case was closed, the court continued to administer the case, at least for some time after the death. (31) The legislative history of [section] 727 indicates that Congress intended that an individual who dies during the pendency of a chapter 7 case should be entitled to a discharge. (32)

   2. CHAPTER 11

      Rule 1016 expressly contemplates that a chapter 11 case of a deceased debtor "may be dismissed; or if further administration is possible and in the best interest of the parties, the case may proceed and be concluded in the same manner, so far as possible, as though the death ... had not occurred." (33) In light of the Advisory Committee Note to Rule 1016, (34) one might expect that in most chapter 11 cases the death of the debtor would lead to dismissal of the case. That in fact has not occurred.

      Chapter 11 cases of deceased debtors have been treated in one of three ways. Some indeed have been dismissed shortly after the death, (35) often on the request of the surviving debtor or the representative of the decedent, or with their consent. (36) Some have been converted to chapter 7, under which they continued. (37) One was converted to chapter 13, where it was subsequently dismissed for failure to make plan payments. (38) But the majority have continued to be administered as chapter 11 cases, (39) often without an explicit decision on whether it was appropriate to do so. (40)

      Continued administration was always permitted if it was sought by a representative of the debtor's estate and there was no objection by any party in interest. (41) It is also relevant that in almost all those cases, either the plan of reorganization had been...