Speak promptly or forever lose your rights. Creditor claims are an intricate area of California probate law that fills chapters in legal treatises. Fail to comply with the nuanced rules and you lose your claim against a decedent’s estate even if liability is otherwise rock solid. But what is a creditor claim and when is it required?
A creditor claim is a demand for payment that must be filed with the probate court and served on the personal representative (e.g., executor) of a decedent’s estate within a specified timeframe. Presentment of a creditor claim (and its rejection) is required before a lawsuit may be filed against the decedent’s estate. Moreover, if there is no pending probate case in the Superior Court, the creditor may have to take the initiative by opening a probate proceeding so as to create a case within which to present a claim.
What is a “claim”?
Per the California Probate Code section 9000(a), a “claim” is “a demand for payment” that includes any (a) liability of the decedent (the person who has passed away) based on a contract, a tort, or otherwise; (b) liability for taxes incurred before the decedent’s death; and (c) liability of the estate for funeral expenses of the decedent.
Think of it this way: if a person who owes you or your business money dies, you may well have to timely file and present a creditor claim in a probate proceeding to preserve your rights.
California Judicial Council form DE-172 must be used for creditor claims. The claims must be adequately described on the form to be preserved.
What is not a “claim”?
The broad definition of “claim” excludes “a dispute regarding title of a decedent to specific property alleged to be in the decedent’s estate.” If you loaned your vintage Ford Mustang to a friend around the time he passed away, and the executor of your friend’s estate claims that the car belonged to your friend, the dispute involves “specific property” in the form of the car. Therefore, the dispute would not be subject to the creditor claims statute and you can sue the executor of your friend’s estate for the return of the vehicle without first filing a creditor claim.
As a general rule, if you are seeking the return of a specific piece of property obtained from you by the decedent during his or her lifetime then no creditor claim is required. But, if you are instead seeking a monetary judgment from the decedent’s estate to compensate you for some property or some wrong, then a creditor claim would be required.
Where it can get murky.
This distinction is not always so clear. For example, is cash that is wrongfully taken from you by a decedent considered “specific property”? What if the cash has been deposited into the decedent’s bank account and comingled with other funds? What if the cash was used to purchase a boat? Is the boat “specific property” that can have its ownership determined in a lawsuit without the need to first file a creditor claim?
The answer to the first question, i.e., whether cash is considered “specific property,” appears to be yes. In Sprague v. Walton (1904) 145 Cal. 228, a wife withdrew $3,800 from her husband’s account at Sacramento Bank in 1900. The husband died shortly thereafter and the wife died not long after her husband. The executors of the husband’s estate filed suit against Hattie Walton (the wife’s daughter) claiming that the husband’s estate was entitled to the cash. Walton defended on the basis that the withdrawal was a valid gift from husband to wife. The trial court disagreed and ordered Walton to repay the husband’s estate the $3,800. Walton appealed.
The appellate court reversed and remanded for a new trial to determine whether there was a valid gift from husband to wife. In remanding, the appellate court agreed with the trial court’s earlier conclusion that the husband’s executor’s failure to present and file a creditor claim was not a bar to recovery. The appellate court said no creditor claim was required to sue for the cash. “The right to sue an executor or administrator in cases like this without presentation of a claim against his decedent’s estate arises from the fact that the specific thing sued for is not a part of such decedent’s estate, and the action will lie whenever the thing demanded can be identified in specie as the property of another.” Sprague, supra, 145 Cal. at page 235.
The above-quoted language from Sprague makes common sense. Specific cash deposited into and held in a specific bank account should be treated no differently from other specific property, and therefore should not require a creditor claim. However, published case law supporting that proposition largely begins and ends with Sprague v. Walton, and even that is arguably dicta.
Since 1904, the only case citing to Sprague on this issue is Pay Less Drug Stores v. Bechdolt (1979) 92 Cal.App.3d 496. There, the plaintiff sought to rescind a real estate contract for alleged misrepresentations, deceit, and mistake and to recover the purchase price of the real estate against a decedent’s estate. Plaintiff conceded that it would not be entitled to compensatory damages from the estate because it had failed to first file a creditor claim before bringing suit. Instead, plaintiff argued that no creditor claim was required since it merely sought “to exchange one asset (land) for another (money) and the value of the estate will not thereby be diminished.” Id. at 499. According to plaintiff, the money it paid for the land constituted a separate fund and was readily traceable.
The Court of Appeal agreed and allowed the case to move forward even without a creditor claim. The Court concluded that title to cash, even if comingled with other money, could still be determined in an action without a creditor claim as long as “the money or property . . . can be traced into a particular fund or deposit, where it remains, though mingled with other money. . .” Pay Less Drug Stores, supra, 92 Cal.App.3d at page 502.
Whether the boat, purchased with cash wrongfully taken by a decedent, is “specific property,” for which no creditor claim is required, is a question for another day. The determination would likely depend upon the strength of the evidence that supports tracing a connection between the wrongfully taken cash and the boat.
Creditor claims can be a trap for the inexperienced and the penalty for failing to comply with the statute is severe. Even the first step in the process, i.e., determining whether a claim is required, can be confusing. Creditors should consult with counsel as soon as possible after learning of a California debtor’s death to evaluate the requirements. In unclear situations, counsel may advise the creditor to present a claim to preserve rights. If the time has already elapsed, the creditor may be able to obtain leave to file a late claim, or may be able to show that no claim is required because the creditor seeks specific property.
In later posts, we’ll turn to the process that governs creditor claims once they are filed in a probate case.
Historical endnote: Sacramento Bank (where Nancy Sprague of the Sprague v. Walton case withdrew funds from her husband’s bank account) was one the largest in Sacramento in 1923 with more than $16,000,000 on deposit at its main branch at 5th and J streets. The bank had plans to build an 18-story skyscraper on the corner of 7th and K streets, which at the time would have been the tallest building west of Chicago. While that building was never constructed, and Sacramento would have to wait until 1984 for its first 18-story building, Sacramento Bank later became Sacramento San Joaquin Bank, which changed its name to the United Bank and Trust Company of California, the precursor of modern-day Bank of America.