Insolvent Estates and Legal Malpractice

Handling Insolvent Estates can Lead to Liability

If you represent administrators and executors in settling decedent’s estates, you will at some time encounter an insolvent estate. Insolvent estates are simply those in which the assets are insufficient to pay all proper charges and claims in full. When handled properly, insolvent estates can be just as productive for your firm as solvent estates. However, a mismanaged insolvent estate will create liability for you, your firm, and your client.

The Myth of Attorneys’ Fees and Priority

Most attorneys take it for granted that the Probate, Estates and Fiduciaries Code prioritizes payment of attorney’s’ fees and other typical costs such as the decedent’s funeral, burial, and grave marker. This, however, is only partially correct. In fact, 20 Pa.C.S.A.. § 3392 (Classification and Order of Payment) establishes priority for payments only as to general creditors of the estate.

Don’t Pay Yourself with a Creditor’s Money

Before you engage the representative of an insolvent estate, be sure to ascertain the nature of the assets and the classification of the estate’s creditors. Estate attorneys too often rely on 20 Pa.C.S.A. § 3392 and incorrectly advise their client to make payments and distributions without first determining whether the source assets secure the claims of specific creditors.

If you make distributions or payments from the estate using a creditor’s collateral, you are exposing yourself and your client to liability for the amounts of the improper payments and distributions.

20 Pa.C.S.A. § 3392 of the PEF Code determines only the relative rights of unsecured creditors.^[1]  Section 3392 does not affect the ultimate priority of secured claims, such as mortgage liens and judgment liens properly recorded before the decedent’s death, which have first priority in an estate’s distribution.^[2]  The preferences created by the Commonwealth’s intestate laws in favor of funeral expenses, etc., “have never been permitted to postpone record liens, even though personalty may be lacking for the payment of such preferences.”^[3]

In Estate of Landis, the Superior Court held that the creditor bank’s secured claim to the decedent’s real estate gave the bank priority over all unsecured claims to the proceeds from the sale thereof.^[4]  The bank’s priority extended to those categories itemized in Section 3392, including estate administration expenses.

[1] In re Estate of Landis, 85 A.3d 506, 513 (Pa. Super. Ct. 2014).

[2] Estate of Landis, 85 A.3d at 513.

[3] Id. (citation omitted).

[4] Id. at 514.

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