Insolvent Estates and Related Issues

By Donald D. Vanarelli, Esq.

I. DEFINITION

An “insolvent estate” is defined by the New Jersey Rules of Court as an estate in which “the real and personal estate of the decedent is insufficient to pay debts.” R. 4:91-1(a).

II. PROCEDURAL ISSUES

Pursuant to R. 4:91-1,

At any time after nine months following the date of decedent’s death, the executor or administrator may commence an action in the Chancery Division, Probate Part, by a complaint stating that to the best of the executor or administrator’s knowledge and belief, the real and personal estate of the decedent is insufficient to pay debts.

The insolvency action is initiated by order to show cause. Notice must be given to creditors that have presented claims against the estate, and to “other interested persons.” R. 4:91-1(a), 4:91-2.

Along with the complaint, the executor/administrator must file:

(1) an account, in accordance with R. 4:87-3; and
(2) a list of the creditors (a) that have presented claims within the nine months following the decedent’s death; or (b) that the executor/administrator plans to allow, without requiring the submission of a formal claim. R. 4:91-1(b).

For each such creditor, the executor/administrator must list:

the amount of the claim
whether the claim is being allowed or rejected
whether the claim is entitled to priority (pursuant to statute)
the basis of the claim (judgment, book account, etc.)

Id.

Creditors and other interested parties may take exception to the account, or to any creditors’ claims. R.4:91-3.

The court “may” adjudge the estate insolvent, and determine the amount and priority for payment of each claim. R. 4:91-1(c). If exceptions are taken to the account or claims, the parties are permitted to elect to proceed in a plenary civil action on the exceptions. R. 4:91-4. Otherwise, the court in the insolvency action shall hear proofs and adjudicate the exceptions. R. 4:91-3.

III. PRIORITY OF CLAIMS; ABATEMENT

“Abatement” is defined in Black’s Law Dictionary as “a reduction, a decrease, or a diminution…”

Where property of the estate is insufficient to pay the debts and claims of the estate, the property of the estate shall abate, according to New Jersey statute. N.J.S.A. 3B:22-3. Where assets are insufficient to pay all claims, the claims and debts of the estate are to be paid in the following order:

Reasonable funeral expenses;
Costs and expenses of administration;
Debts for the reasonable value of services rendered to the decedent by the Office of the Public Guardian for Elderly Adults;
Debts and taxes with preference under federal law or the laws of this State;
Reasonable medical and hospital expenses of the last illness of the decedent, including compensation of persons attending him;
Judgments entered against the decedent according to the priorities of their entries respectively;
All other claims.

N.J.S.A. 3B:22-2. Within a class, no claim has preference over anotheR. Id.

When making distributions under a Last Will and Testament, N.J.S.A. 3B:23-14 provides that, if the testator has expressly provided an order of abatement, or if the decedent’s testamentary plan would be defeated by the statutory order of abatement set forth in N.J.S.A. 3B:23-12, then the shares of distributees abate in accordance with the testator’s intention.

Otherwise, the statutory order of abatement is followed, which provides that, except in connection with a surviving spouse’s elective share,

shares of distributees abate, without any preference or priority as between real and personal property, in the following order:

Property passing by intestacy;
Residuary devises;
General devises;
Specific devises; and
Abatement within each class- ification is in proportion to the amount of property each of the beneficiaries would have received if full distribution of the property had been made in accordance with the terms of the will.

N.J.S.A. 3B:23-12 (emphasis supplied).

IV. THE SURVIVING SPOUSE

When a potentially insolvent estate involves a decedent with a surviving spouse, related issues may arise for the survivoR.

A. Real Property Owned As Tenants By The Entirety

When a husband and wife own a home as tenants by the entirety, “[u]pon the death of either spouse, the surviving spouse shall be deemed to have owned the whole of all rights under the original instrument of purchase, conveyance, or transfer from its inception.” N.J.S.A. 46:3-17.5.

In some cases, when the married couple owns a home as tenants by the entirety, a creditor may have levied on the interest of one of the spouses. However, that creditor is deemed a tenant-in-common with the non-debtor spouse for the joint lives of the married couple and that creditor’s interest is subject to the non-debtor’s survivorship interest. Freda v. Commercial Trust Company of New Jersey, 118 N.J. 36, 45 (1990). See also Law of Mortgages, 29 N.J. Prac. §5.2 (2d ed. 2005). In other words, if of the decedent’s creditors had levied on (or mortgaged) the decedent’s interest in the marital home, that interest would have been automatically extinguished upon the decedent’s death, and the surviving spouse’s ownership of the home would not be subject to the claims of those creditors.

B. Property Owned As Tenants In Common

Issues also arise when real property is owned by a married couple as tenants in common.

Although not persuasive authority in New Jersey, a New Jersey practice guide directs that, “upon the death of a tenant in common, his or her interest in real property becomes part of his or her estate.” Real Property, Contracts for Purchase and Sale of Real Property, 21 N.J. Practice §27:15 (rev. 3d ed. 2007).

There is also support for this position in case law. See United States v. Craft, 535 U.S. 274, 279-80 (2002) (”the common law characterized tenants in common as each owning a separate fractional share in undivided property… Tenants in common … have the power to pass these shares to their heirs upon death…. The main difference between a joint tenancy and a tenancy in common is that a joint tenant also has a right of automatic inheritance known as “survivorship….”); Hubatka v. Maierhoffer, 81 N.J.L. 410 (E. & A. 1911) (If the two property holders “were tenants in common of the estate conveyed, … upon [one property holder’s] death her undivided interest in it passed to her daughter”).

It follows that, if a share of real property was owned by a married couple as tenants in common, the decedent spouse’s share would pass to the decedent’s estate on death (and would be subject to the claims of the decedent’s creditors).

C. Property Owned Solely By The Surviving Spouse

If an estate is deemed insolvent, and the creditors are unable to fully recover those debts from the decedent’s estate, the issue becomes whether the surviving spouse could be held liable for those debts.

In Jersey Shore Medical Center-Fitkin v. Baum, 84 N.J. 137 (1980), a hospital sued a widow and her late husband’s estate for the balance due on his medical bills. The husband’s estate was insolvent, no one sought letters of administration of the estate, and no one appeared to represent the estate in the lawsuit. The Supreme Court ruled that

[B]oth spouses are liable for necessary expenses incurred by either spouse in the course of the marriage. As long as the marriage subsists, the financial resources of both spouses should be available to pay a creditor who provides necessary goods and services to either spouse…. [A] judgment creditor must first seek satisfaction from the income and other property of the spouse who incurred the debt. If those resources are insufficient, the creditor may then seek satisfaction from the income and property of the other spouse.

Id. (emphasis supplied).

In other words, when one spouse has incurred a debt for “necessaries,” a creditor of that spouse may look to the other spouse for payment of the debt. New Jersey case law has defined “necessaries” for which a spouse may be held liable include: hospital and medical expenses, Jersey Shore Medical Center-Fitkin v. Baum, supra; and certain legal expenses, DuBois, Sheehan, Hamilton and DuBois v. DeLarm, 243 N.J. SupeR. 175 (App. Div. 1990); but not an automobile surcharge resulting from motor vehicle violations. Clark v. Clark, 324 N.J. SupeR. 587 (Ch. Div. 1999).

If the debts incurred were not for the decedent’s “necessaries,” case law supports the position that the surviving spouse cannot be held liable for those debts.