Bankruptcy Court Defers to Probate Court After Debtor Dies

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By Daniel Gill

July 29 — What happens if a Chapter 7 debtor dies while a complaint against him to find a debt nondischargeable is still pending? A Texas bankruptcy judge declined to answer the question, handing the matter off to a probate court instead ( Hinze v. Watkins (In re Hinze), 2016 BL 238259, Bankr. S.D. Tex., No. CASE NO. 10-80637-G3-7, 7/25/16 ).

Judge Letitia Z. Paul of the U.S. Bankruptcy Court for the Southern District of Texas decided July 25 to abstain from hearing a pending complaint to determine nondischargeability of a debt against a deceased debtor pursuant to 28 U.S.C. §1334(c)(1). “A probate court is best situated to address the question of whether the probate estate remains liable for the debt,” she said.

Charles Watkins, the plaintiff in the case, told Bloomberg BNA on July 28 that the decision was “ludicrous” and “makes no sense.” However, an attorney familiar with the intersection of bankruptcy and probate law told Bloomberg BNA that a reading “between the lines” suggests that under these circumstances the court's deferral was supported because the case was probably “not worthy” of the court's time.

Claims Against Each Other

Keith R. Hinze originally filed a Chapter 7 case on Oct. 29, 2010. In Chapter 7 bankruptcy, a debtor's nonexempt assets are liquidated by a trustee, and the proceeds are distributed to creditors. Subject to certain exceptions, the debtor is awarded a discharge, effectively wiping out those debts not subject to an exception.

Bankruptcy Code Section 523(a) allows creditors to file suit to have their individual debts declared to be non-dischargeable. According to the court's docket, Charles K. Watkins filed a complaint on Feb. 11, 2011, seeking to have his claim declared non-dischargeable pursuant to Bankruptcy Code Section 523(a), on the grounds that the debtor defrauded the plaintiff regarding the sale of a boat.

That lawsuit, called an adversary proceeding in bankruptcy court, was dismissed on March 31, 2011, for failure of the plaintiff creditor to pay the filing fee required for commencing the action, according to an order filed in the case.

The debtor received his discharge shortly thereafter, on May 3, 2011, and the Chapter 7 case was closed on the same date.

The debtor subsequently moved to reopen the bankruptcy case, which motion was granted on Sept. 27, 2011, in order to file a complaint against Watkins for the creditor's alleged violation of the discharge injunction, Bankruptcy Code Section 524, because Watkins apparently continued to pursue his claims against the debtor in the state court, according to the complaint filed by the debtor.

On the same day that the debtor filed this complaint, Oct. 7, 2011, Watkins filed another complaint objecting to the dischargeability of his debt.

On Oct. 11, 2012, the court consolidated the two adversary proceedings, the court said, and set the matter for trial. The court continued the trial several times, “in light of Hinze's declining medical condition,” the court said.

Death and Dismissal

After learning through news media that the debtor had died, on Feb. 4, 2016, the court set a status conference in the pending adversary proceedings. At the status conference, the debtor's widow appeared and agreed to the dismissal of the debtor's lawsuit against Watkins, the court said. The court entered an order dismissing the consolidated adversary proceeding.

However, Watkins did not wish to dismiss his action to have his claim determined to be excepted from the discharge, and he moved the court to modify its order of dismissal. That motion led to the court's decision discussed here.

Watkins told Bloomberg BNA that although his claim was for only around $2,300, there was a lot of animosity between him, the debtor and the debtor's wife. “You bet I went after him out of spite and revenge,” Watkins said.

Deferring to Probate Court

The court noted that Bankruptcy Rule 1016 provides that on the death of a Chapter 7 debtor, “the estate shall be administered, and the case concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.”

The court said that so far as it could tell, this was the first time a court was considering the effect of the death of a debtor on a pending adversary proceeding for excepting a debt from the discharge.

In support of its decision to abstain from hearing the dischargeability complaint in favor of the probate court, the court said, “A probate court is best situated to address the question of whether the probate estate remains liable for the debt. Any beneficiaries of the probate estate, which may include Layton [the debtor's widow], would be in a position to assert in the probate court that the debt was discharged, and to present whatever evidence and argument would support such a determination by the probate court.”

The court did not discuss whether bankruptcy courts have exclusive jurisdiction to determine discharge exceptions based on fraud.

At least one attorney not involved in the case agreed that the court's decision made sense. “The bankruptcy court saw a case with little to no assets, an exemption issue that would be determined in probate court, and a widow no longer within the jurisdiction of the bankruptcy court... Against that backdrop, the bankruptcy court decided that the probate court would be the most appropriate venue for resolution of this dispute,” Ellen Kaufman Wolf told Bloomberg BNA in an e-mail on July 27.

Wolf is the founder of Wolf Group LA, a business law firm in Los Angeles including trusts and estate litigation. She is an author and teacher, including recent and upcoming bar association seminar presentations on “Collecting from the Dead.”

“The probate courts have very specific remedies and procedures for determining and resolving post mortem debtor-creditor matters, with many policies in the balance that are more family and succession-oriented than are the bankruptcy policies. Bankruptcy policies are purposed for creditor equality in situations where a debtor needs a ‘fresh start,'” Wolf said. “Obviously, probate court policies have a different purpose.”

Watkins was represented by Frederick F. Hoelke, Boerne, Texas.

To contact the reporter on this story: Daniel Gill in Washington at dgill@bna.com

To contact the editor responsible for this story: Jay Horowitz at jhorowitz@bna.com

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