Chapter 16 - § 16.3 • SUBSTANTIVE VALIDITY OF CLAIMS

• Jurisdiction: Colorado

§ 16.3 • SUBSTANTIVE VALIDITY OF CLAIMS

§ 16.3.1—Classification Of Claims

The Code provides a different classification of claims than that under prior statutes (applicable only if the estate is insufficient to satisfy all demands). Under the Code, the classes or priorities are:

1) Property held by the decedent as fiduciary or trustee, including, by 2002 amendment, resulting trust property (C.R.S § 15-12-805(1)(a); see § 16.3.3);
2) Costs and expenses of administration;
3) Reasonable funeral and burial, interment, or cremation expenses;
4) Debts and taxes with preference under federal law;
5) Reasonable and necessary medical and hospital expenses of the last illness of the decedent (including compensation of persons attending him or her);
6) Debts and taxes having preference under state law;
7) The net amount of assistance paid to or for the decedent by the Department of Social Services; and
8) All other claims.

Under the 2002 amendment, the reasonable expenses of administering property and of investigating and determining trust fund status shall be paid "from such property as determined by the court." C.R.S. § 15-12-805(1)(a). Under a 2013 amendment, presently due and future child support is added as a priority claim under C.R.S. §§ 15-12-805(1)(g) and (h).

There is to be no preference as to any claim over any other claim in the same class, nor is there a preference of claims that are due over those that are not due. C.R.S. § 15-12-805. Claims are to be paid in order of their priority if the estate is insolvent. A personal representative may pay any just claim that has not been barred without requiring formal presentation, but if he or she pays a claimant before the running of the statute of nonclaim without requiring adequate security for refund or willfully makes payment so as to deprive another claimant of his or her priority, the personal representative incurs personal liability. C.R.S. § 15-12-807(2).

It should be noted that, as originally enacted, the exempt property and family allowances took priority over all claims. The Code was amended in 1991, however, to provide that claims for expenses of administration and funeral and burial expenses are superior to the allowances. C.R.S. § 15-11-402.

After the statute of nonclaim has run, the representative, after making provision for exempt property and family allowances, and for presented claims not yet allowed or disallowed or on appeal, and for unpresented claims for matters arising after death such as administration expenses, shall proceed to pay the allowed claims. The Code provides how a claimant may secure the aid of the court in requiring payment of the claim if assets are available for that purpose. C.R.S. § 15-12-807(1).

Two categories in the foregoing list of priorities regarding obligations arising during the lifetime of the decedent require comment. The first is debts and taxes having priority under federal law. The priority stated in the Code merely recognizes a federal law and the decisions under it that take effect regardless of anything that may be contained in a state statute. Since 1799, the federal statute has stated that anyone who pays a debt to another before he or she pays a debt to the United States will be liable to that extent from his or her own property. 31 U.S.C. §§ 191 and 192 (1958), Rev. Stats., §§ 3466 and 3467 (1875). Decisions construing this statute have held that the priority of the United States does not extend to such matters as administration expenses and funeral expenses since a person does not ordinarily incur a debt for funeral or administration expenses while still alive. These expenses merely are a charge against the personal representative and are not debts. The expenses of the decedent's last illness are the decedent's debts and subject to the government's priority. It has been held that the states may withdraw a portion of the decedent's property from the claims of creditors for the support of spouses and minor dependents. Eggleston v. United States, 25 F. Cas. 979 (C.C.D. Or. 1877); Estate of Carl, 94 N.E.2d 239 (Prob. Ct., Franklin, Ohio 1950). The priority has not been applied harshly when the representative is unaware of the claim of the United States.¹⁸ Since the priority exists regardless of the Code, its insertion in the Code merely recognizes an existing fact and warns the representative of something that is not commonly known. The priority for trust funds does not appear in the Uniform Probate Code. Its insertion in the Colorado version of the Code may be ineffective as to the United States if it constitutes a debt (which it normally would not). It has been held many times that state statutes of nonclaim and requirements for presentation of claims are ineffective as to the United States. 31 Am. Jur. 2d Extrs. & Admrs. § 281; Annot. 34 A.L.R.2d 1068.

It has been held that claims of the state for income taxes are preferred claims (order not stated) and are not subject to classification or to the statute of nonclaim, but it would appear that other claims of the state are not so privileged unless expressly so provided by statute (see § 16.3.11). Estate of Randall, 441 P.2d 153 (Colo. 1968); State v. Barr, 409 P.2d 832 (Colo. 1965).

§ 16.3.2—Insolvent Estates

If the estate is insufficient to pay exempt property and family allowances and all claims in full, claims will be paid in the order of their priority as set forth in § 16.3.1. Where multi-state administration is involved, see § 9.9. As to suggested court procedure, see § 34.42.

§ 16.3.3—Trust Funds

A provision regarding trust funds held by the decedent has been part of our law for many years and the cause of much confusion, which will continue under the Code. The Uniform Probate Code has no special provision regarding trust funds, placing such claims among those of general creditors. Until 1957, our statute on the subject applied only to money received and not accounted for by executors, administrators, guardians and conservators, and trustees of express trusts, and it was so construed consistently. Chavez v. Gallup, 235 P. 345 (Colo. 1925); McClure v. County Comm'rs, 34 P. 763 (Colo. 1893); see Irwin v. Robinson, 355 P.2d 108 (Colo. 1960). It was held under the former statute that money held by an insurance agent and bonds held by a bailee for sale were not trust funds. California Ins. Co. v. Dudley, 195 P. 649 (Colo. 1921); McCutchen v. Osborne, 158 P. 136 (Colo. 1916). The substitution, in 1957, of the language now appearing in the Code has raised interesting issues. The language, as modified in 2002 and 2014, reads, "[t]he personal representative shall pay allowed claims against the estate of a decedent in the following order: (a) Property held by or in the possession of the deceased person as fiduciary or trustee of a trust, which shall include a resulting trust, as long as the reasonable expenses of administering such property and of investigating and determining such claim, as provided by section 15-10-602 [expenses in estate litigation], but subject to section 15-10-605, shall be paid from such property as determined by the court." C.R.S. § 15-12-805.

A fiduciary has been defined as a person holding the character of a trustee, or analogous to a trustee, with respect to the trust and confidence involved in the relationship and the scrupulous good faith and candor that are required. Restatement (Second) of the Law of Trusts § 2.b. The term includes attorneys, brokers, partners, and directors of corporations. The word is not confined to technical trustees. It appears that the purpose of the amendment was to broaden the types of relationships that give rise to such preferred claims, so the distinctions made in the cases under the prior statute may have limited application in the future. The problem is not clarified by the definition of "fiduciary" in the Code, which merely states that it includes personal representatives, guardians, and conservators, which would be true under any definition of the term, but makes no attempt to state what is excluded. C.R.S. § 15-10-201(16). The full effect of the 1957 change is yet to be determined. One case has dealt with the trust fund provision as it appears in the Code, but it does little to define its meaning. The decedent in this case had agreed to make a partial assignment of a contingent legal fee to which he was entitled, but failed to make the assignment. A claim was filed in his estate on the theory of an implied trust, and it was urged as a claim for a trust fund. The court classified it as a general claim. The supreme court held that a partial assignment of a chose in action does not create a fiduciary relationship but merely creates a debtor-creditor relationship. The trial court had held that the 1957 amendment did not really change the previous version of the statute and that the decisions under the prior statute were relevant. The supreme court declined to pass on this phase of the trial court's opinion, so it really did not pass on the effect of the change. One justice, in a specially concurring opinion, agreed with the trial court that only technical express trusts were covered by the amended statute. Further litigation will be required to determine the extent of the change. Fleming & Pattridge v. Singer, 450 P.2d 635 (Colo. 1969).

It has been held that when there is a claim on an agreement to hold stock that justifies the imposition of a constructive or resulting trust, the evidence must be clear and convincing, but this requirement has been changed by statute.¹⁹ It has been held that where there was a claim on an express trust for the proceeds of sale or real property and the decedent had made declarations against interest as to the land, the claim was allowable. Estate of Granberry, 498 P.2d 960. It has been held that if a number of persons are interested in the subject matter of a claim for trust funds, they all should be noticed into court in order to protect themselves. Denison v. Jerome, ...