Creditor Disputes in Estate Administration

One of the primary responsibilities of the personal representative of an estate is settling all claims against the estate. Especially when insufficient funds are available to pay all creditors of the estate, creditor disputes can arise during estate administration. These disputes may require probate litigation to resolve.

The Minnesota legislature adopted the Uniform Probate Code, which includes complex rules that the personal representative and creditors must follow in processing claims against an estate. The law balances the interests of creditors who have claims against the estate and the goal of finalizing administration of an estate efficiently and within a reasonable amount of time. In part because of the limitations on making and processing claims, disputes between the estate and creditors can arise.

Creditor Claims in a Minnesota Estate

Claims against an estate include liabilities incurred by the decedent as well as liabilities arising after death, such as funeral expenses and costs of estate administration. The statutory provisions relating to claims do not apply to:

• Taxes
• Disputes or demands relating to the decedent's title to specific assets in the estate
• Tort claims
• Foreclosure of mechanic’s liens
• Wrongful death actions

All other claims are subject to the provisions of the law.

Process for Creditor Claims Against an Estate

The personal representative is required to identify potential creditors of the estate and notify those creditors. The estate also publishes notification of administration publicly to provide notice to other potential creditors.

Creditors are required to file a claim with an estate. If probate has not been filed, a creditor may file a Demand for Notice in the county where the debtor died. If probate has begun, the creditor can assert a claim by either:

• Delivering or mailing a written statement to the personal representative or the attorney for the estate, or
• Filing a claim with the court.

A creditor’s claim must be presented within a certain amount of time. Generally, the time limit is four months after the date of the notice to creditors was published. Creditors who were known and identified by the personal representative but were not provided with notice of probate may have up to a year from the date of death to file, unless a supplementary notice has been served on the creditor.

Priority of Payment, Allowance and Disallowance of Claims

The statute establishes the priority for payment of claims, which must be followed. When there are not sufficient funds in an estate to pay all claims, those with a lower priority can be disallowed by the personal representative. The priority for payment is:

• Expenses and costs of estate administration
• Funeral expenses
• Debts and taxes, with preference under federal law
• Medical, hospital, and nursing home expenses related to the decedent’s last illness
• Medical, hospital, and nursing home expenses of the decedent in the year preceding death
• State taxes and debts with preference under Minnesota law
• All other claims

Generally, there is no priority among claims within the same class of creditors, except for claims relating to medical and hospital expenses. There are a number of specific statutory provisions relating to payment of hospital and medical care that are fairly complex.

Within two months of receiving a claim, the personal representative may partially or fully disallow the claim by mailing notice to the claimant that the claim has been disallowed. If a creditor wants to contest the disallowance, the creditor must file a petition for allowance with the court or file a proceeding against the personal representative within two months, if the notice included a warning that the claim would be barred if not challenged within that time.

If a claim is not disallowed within two months by the personal representative, the claim will be considered to have been allowed, unless the personal representative subsequently files a petition with the court to disallow the claim. The personal representative or the claimant also may petition the court to allow a claim that was previously disallowed. The petition must be filed within two months of the original notice of whole or partial disallowance.

If a decedent’s debts are greater than the assets of the estate, creditors must be treated equally within each class in the order of priority. When estate assets are insufficient to pay all the debts, some claimants may receive all or partial payment, and some claimants may receive nothing from the estate.

Processing and payment of claims is an extremely important part of the duties of a personal representative. Under some circumstances, a personal representative may be personally liable if creditor claims are improperly handled.

Potential Creditor Disputes in an Estate

Based on the process and procedures, there are a number of different ways that a dispute with a creditor can arise during administration of an estate. In many instances, settling a creditor dispute will require a separate proceeding in probate court. Examples of the types of situations arising from a creditor dispute that involve probate litigation include:

• A creditor disputing whole or partial disallowance of a claim
• A creditor disputing the priority of payment
• A creditor whose claim is disallowed contesting allowance of other creditors’ claims
• A creditor petitioning the court to allow a claim after expiration of the time limits
• A petition by a personal representative asking the court to disallow or allow a claim
• An action seeking to hold a personal representative liable for improperly handling a claim

When creditor disputes arise during administration of an estate, both the creditor and the personal representative (estate) should be represented by counsel with experience in probate litigation. These cases involve specific court procedures and hearings before the probate judge, so having an attorney with experience litigating in probate court is the only way to ensure the best representation in the proceeding.

Minnesota Probate Court Litigation Involving Creditor Disputes

At the Dave Burns Law Office, a primary focus of my practice involves litigation in the probate courts in Minneapolis and St. Paul, including matters arising as the result of a creditor dispute during administration of an estate. If you have a contested estate matter that may require probate litigation, I welcome you to contact me at (612) 677-8351 or by emailing dave@daveburnslaw.com. I work with clients throughout the Twin Cities metro area and am available to meet with clients in both Minneapolis and St. Paul.