By Kent Berk on June 5th, 2015 in
What are Creditor’s Claims in Arizona Probate? When an estate is administered in probate, the personal representative of the estate is held accountable to the beneficiaries and creditors. So, during the administration of the estate in Arizona, the personal representative has to address both creditor’s claims and the rights of beneficiaries.
Although the creditors are not named in the will, the rights of the creditors are vital to the proper distribution and settlement of an Arizona estate. The personal representative should be aware of how creditor’s claims are handled. Consulting an experienced Arizona probate attorney can help assess the situation to create a plan for dealing with creditor’s claims, and settling and closing the estate.
A portion of the Arizona Probate Code, ARS §§14-3801 through 3816, lays out the steps and rules involved when dealing with creditor’s claims in an Arizona probate. Depending upon the circumstances, the steps to resolve creditor’s claims can be confusing and complicated. This article provides a general overview and does not address all of the nuances involved in this part of Arizona probate administration.
Notice to the Creditors in Arizona Estates
The first step involves notifying the creditors of the appointment of the personal representative and giving other information. Any known creditors of the deceased must be notified directly in writing.
Under ARS §14-3801(A), the personal representative must give notice to creditors by publishing it “once a week for three successive weeks in a newspaper of general circulation in the county announcing the appointment” of the personal representative. The published notice must give the personal representative’s address and notify creditors to “present their claims within four months after the date of the first publication of the notice or be forever barred.”
According to ARS §14-3801(B), the personal representative must also “give written notice by mail or other delivery to all known creditors, notifying the creditors of the personal representative’s appointment.” The notice must advise all known creditors of the statutory deadline in which they must present their creditor’s claim and provide the address of the personal representative. Specifically, “the notice shall also notify all known creditors to present the creditor’s claim within four months after the published notice, if notice is given as provided in subsection A, or within sixty days after the mailing or other delivery of the notice, whichever is later, or be forever barred.”
If a creditor is given proper notice and does not present a claim by the applicable deadline, the creditor’s claim is forever barred.
The statue contains an important provision granting personal representatives reprieve from mistakes in the notification process: a shield from personal liability for failure to properly notify creditors. ARS §14-3801(c) states, “the personal representative is not liable to a creditor or to a successor of the decedent for giving or failing to give notice under this section.” This shield gives the personal representative the ability to follow the rules to the best of his or her ability without being held personally responsible for failing to give notice. The estate may still be held responsible for a debt that is not barred because notice was not given, but at least personal representatives know they are not.
Speaking to your trusted Arizona probate attorney can protect the rights of the estate and help resolve creditor’s claims.
Limitations on Claims
The law treats creditors’ claims as falling into one of two categories:
- Claims against the estate arising prior to the decedent’s death; and,
- Claims against the estate arising at or after the decedent’s death.
Whether the claim arises before or after the death of the decedent, a creditor has a limited amount of time to present a claim.
As to claims arising before the death, under ARS §14-3803(A):
All claims against a decedent’s estate that arose before the death of the decedent, including claims of the state and any of its political subdivisions, whether due or to become due, absolute or contingent, liquidated or unliquidated, founded on contract, tort or other legal basis, if not barred earlier by any other statute of limitations or nonclaim statute, are barred against the estate, the personal representative and the heirs and devisees of the decedent, unless presented within the earlier of either:
- Two years after the decedent’s death plus the time remaining in the period commenced by an actual or published notice pursuant to § 14-3801, subsection A or B.
- The time prescribed by § 14-3801, subsection B for creditors who are given actual notice and within the time prescribed in § 14-3801, subsection A for all creditors barred by publication.
Claims arising after the decedent’s death are usually contracts made with the personal representative of the estate. Under ARS §14-3803(C)(1), a claim based upon such a contract must be presented “within four months after performance by the personal representative is due.” Typically, the personal representative’s “performance” is payment to the creditor (such as a vendor or service provider). So, a creditor who has a claim based upon a contract with the personal representative must submit the claim within four months of when the personal representative was supposed to make payment or render other performance (e.g. transfer property) to the creditor.
Sometimes, claims arise after the death of the decedent other than based upon a contract with the personal representative. For those claims, under ARS §14-3803(C)(2), the creditor must present a claim within four months after it arises or “two years after the decedent’s death plus the time remaining in the period commenced by an actual or published notice pursuant to § 14-3801, subsection A or B,” whichever is later.
Again, conflicts between creditors and the estate’s personal representative can create confusion and will sometimes even lead to litigation. It may take a careful analysis to determine whether the creditor’s claim was timely presented or is otherwise proper.
Manner of Presentation of Claims
Whether the claim arose before or after the death of the decedent, a creditor must properly present a claim within the applicable deadline; otherwise the claim is barred. There are two ways for a creditor to present a claim, as described in ARS §14-3804.
First, the creditor “may deliver or mail to the personal representative a written statement of the claim indicating its basis, the name and address of the claimant and the amount claimed. The claim is deemed presented on receipt of the written statement of claim by the personal representative.” If the written notice of claim does not include a demand for payment or explain the basis of the claim, the claim may be subject to rejection.
If a written statement of claim is timely and properly submitted to the personal representative, but is disallowed by the personal representative, the creditor has the right to present the claim in court to have a judge decide whether the claim is valid and should be paid. The creditor has sixty days after the mailing of the notice of disallowance to file a lawsuit against the personal representative on the claim. In turn there are two ways to file a lawsuit on the claim following denial (1) the claimant can file a petition for allowance of claim in the pending probate matter in which the personal representative was appointed; or (2) the claimant can file a new action, a civil complaint, setting forth the claim.
Second, as an alternative to initially submitting a written statement of claim to the personal representative, the creditor may simply file a lawsuit (by either filing a petition for allowance or a new action) against the personal representative seeking the court’s determination of whether the claim is valid and should be paid by the estate.
If a lawsuit was already pending at the time of the decedent’s death, it is not necessary for the creditor to present the claim or start a new lawsuit.
Priority of Claims
Except in limited circumstances, payment must be made to creditors before payment to beneficiaries. One exception is the homestead allowance. Pursuant to ARS §14-2402(b), “the homestead allowance is exempt from and has priority over all claims against the estate, except expenses of administration.”
ARS §14-3805 outlines the order for prioritizing payment of creditors’ claims where the assets of the estate are insufficient to pay all creditors. They are:
- Costs and expenses of administration.
- Reasonable funeral expenses.
- Debts and taxes with preference under federal law.
- Reasonable and necessary medical and hospital expenses of the last illness of the decedent, including compensation of persons attending him.
- Debts and taxes with preference under the laws of this state.
- All other claims.
While this section is fairly straightforward, questions and disputes may arise. Also, the Arizona statutes include detailed instructions on the classes of creditor’s claims, such as secured and unsecured debts and liquidated or unliquidated claims. Please review those provisions with your probate attorney if you have any questions as to how to handle particular claims. Please review all of the statutes governing creditor’s claims, ARS §§14-3801 through 14-3816, and cases applying and interpreting those statutes for further information.
Individual Liability of the Personal Representative
Although the general rule states that the personal representative of the estate is shielded from individual liability, there are certain instances where the shield does not apply.
A personal representative who enters into a contract in such capacity solely obligates the estate and not the personal representative individually, unless the contract provides otherwise. So, where the personal representative wants to enter a contract for the benefit of the estate, it is generally a good idea for the personal representative to sign the contract as, “Jane Smith, Personal Representative of the Estate of John Smith.” Obviously, the personal representative should also carefully read the contract to ensure that it does not include any provision holding the representative individually/personally responsible.
As to claims other than those arising from a contract entered by the personal representative, ARS §14-3808(A) states, in part, “A personal representative is individually liable for obligations arising from ownership or control of the estate or for torts committed in the course of administration of the estate only if he is personally at fault.” So, for example, if the personal representative is driving a vehicle owned by the estate while delivering a television set that is also owned by the estate in order to sell it and causes a traffic accident, the estate and personal representative, individually, would probably be liable.
If the claim is asserted against the estate, the section states, “issues of liability as between the estate and the personal representative individually may be determined in a proceeding for accounting, surcharge or indemnification or other appropriate proceeding.”
Arizona Creditor’s Claims Involving Trusts
Some of the basic rules for giving notice to and presentation of claims for estates also apply to trusts in Arizona.
Under A.R.S. § 14-6103(A), “after the death of the settlor the trustee of a non testamentary trust may notify known creditors pursuant to section 14-3801, subsection B and may publish notice to creditors pursuant to section 14-3801, subsection A.” So, if the trust was established prior to the death of the person (not pursuant to his/her last will and testament), the trustee of the trust can, but is not required, to send and publish the same notices that a personal representative is required to issue. Like with personal representatives, “the trustee is not liable to a creditor or to any beneficiary of the trust for giving or failing to give notice under this section.” A.R.S. § 14-6103(D).
Like with claims against an estate, claims against a trust that arose before the person’s death, if not barred by the expiration of some other deadline, “are barred against the trust estate, the trustee and the beneficiaries of the trust, unless presented within the time prescribed in the written notice for creditors who are given actual notice [60 days], or within the time prescribed in the published notice for creditors who are given notice by publication [four months].” A.R.S. § 14-6103(B).
A creditor may present a claim against a trust by delivering or mailing a written statement of the claim which includes the same information required to present a claim against an estate. Alternatively, a creditor could file a lawsuit against the trustee.
If the trustee has already distributed the trust estate to the trust beneficiaries, the trustee is obligated to forward the claim to the beneficiaries who may be liable for the claim. Except in certain situations, if there is insufficient money or other assets left in a trust to pay a creditor’s claim, the beneficiaries who have received distributions from the trust are liable, up to the amounts that each received, for the creditor’s claim.
We are Here Help Deal with Arizona Creditor’s Claims and Other Issues
Creditors have rights against the estate or trust, but creditors must adhere to specific rules and deadlines or face the disallowance of their claims. For the personal representative or trustee, it is important to properly administer the estate and understand and comply with the rules governing creditor’s claims, both for the benefit of the estate/trust and creditors.
For more information on the process, limitations, and deadlines for dealing with creditor’s claims in Arizona probate or trust administration, or any other probate, trust or estate issues, please call us at 480.607.7900 or reach out to speak to one of our attorneys. We are here to help personal representatives and trustees in administering estates/trusts and creditor’s claims, and to represent creditors in the presentation and prosecution of claims against estates or trusts in Arizona.