Death creates an immediate freeze on a debtor’s obligations. Creditors who held enforceable claims against the living person must now navigate the probate system to collect what they’re owed. The process requires following specific procedures within strict timeframes. Missing a deadline or failing to check the right box can transform a valid debt into an uncollectible claim.
Secured creditors face particular challenges in this system. They hold liens on specific property that secure their debts. Texas law gives them options for how to proceed in probate. They can treat their claim as a general obligation of the estate to be paid from all available assets. Alternatively, they can limit their claim to only the collateral securing the debt. However, exercising this choice requires following precise statutory requirements.
Cessna Finance Corp. v. Morrison, 667 S.W.2d 580 (Tex. App.—Houston [1st Dist.] 1984, no writ), provides an opportunity to examine what happens when secured creditors fail to properly specify how they want their claims treated in probate proceedings.
Facts & Procedural History
Frank purchased an airplane in March of 1980. He executed a promissory note and conditional sales contract with the seller. The contract provided for deferred payment of $360,745.80 in eighty-four monthly installments of $4,187.45 each starting in April of 1980. The seller reserved a security interest in the aircraft. The seller assigned this security interest along with the contract and note to Cessna Finance Corporation.
In December of 1980, Frank died in Bolivia. The crash of the airplane apparently caused his death. Lucian was appointed administrator of Frank’s estate.
In March of 1981, Cessna filed a claim with the administrator for $213,888.55. This amount represented the balance due on the secured debt. The claim recited that it was secured by the conditional sales contract establishing a lien on the aircraft. The claim alleged on information and belief that the aircraft had been lost or destroyed in the crash.
In April of 1981, the administrator filed written objections to Cessna’s claim. The administrator pointed out that the claim failed to specify how Cessna desired the claim to be treated. Section 306(a) of the Texas Probate Code, which is now the Estates Code, required secured creditors to elect between two options. They could request that the claim be allowed and approved as a matured secured claim to be paid in due course of administration from general estate assets. Alternatively, they could request that the claim be allowed and approved as a preferred debt and lien against only the specific property securing the debt.
The administrator rejected Cessna’s claim in its entirety based on this defect. Cessna made no effort to amend or supplement its claim after receiving notice of the administrator’s objection.
Cessna instituted an action in probate court to recover the amount of its claim. Cessna filed a motion for summary judgment asserting entitlement to judgment as a matter of law under the terms of the note. The administrator responded that Cessna’s failure to specify an election under Section 306(a) meant the claim should be treated as a preferred debt and lien claim against only the specific property.
After a hearing, the probate court granted Cessna summary judgment for the full amount of its claim. However, the court directed that the claim be classified as a preferred debt and lien claim. Under Section 306(c) of the Texas Probate Code, this classification limited Cessna’s recovery to proceeds from the aircraft comprising the security for the debt.
The administrator then moved for summary judgment on a counterclaim for usury. The administrator argued the note’s fifteen percent interest rate violated Kansas usury law. The trial court granted summary judgment for the administrator on the usury counterclaim. The court awarded the administrator $98,276.64 in penalties plus $12,000 in attorney’s fees.
Cessna appealed both the classification of its claim and the judgment on the usury counterclaim.
Requirements for Presenting Secured Claims in Texas Probate
Section 298(a) of the Texas Probate Code establishes the general framework for presenting claims against estates. This is the same process that is now in the Estates Code.
Claims for money must be presented to the personal representative within six months after the original grant of letters. Claims not presented within this period are postponed until claims that were timely presented and properly allowed have been entirely paid.
However, Section 298(a) contains a specific provision for secured claims. The failure of a holder of a secured claim to present the claim within six months does not cause postponement. Instead, such claims are treated as claims “to be paid in accordance with subsequent provisions of this Code.”
Section 306 provides these subsequent provisions governing secured claims. Section 306(a) addresses specifications that must be included in secured claims. When a secured claim is presented, the claimant must specify—in addition to all other required matters—which of two treatments the claimant desires.
Under Section 306(a)(1), the claimant may request that the claim be allowed and approved as a matured secured claim to be paid in due course of administration. If the claim is allowed and approved under this option, it will be paid from the general assets of the estate like other debts.
Under Section 306(a)(2), the claimant may request that the claim be allowed and approved as a preferred debt and lien against the specific property securing the indebtedness. The claim will be paid according to the terms of the contract that secured the lien. The personal representative may pay such claims prior to maturity if doing so serves the best interest of the estate.
Section 306(b) addresses what happens when secured claims are not presented in time. If a secured claim is not presented within the time provided by law, it shall be treated as a claim to be paid under Section 306(a)(2). This means the claim becomes limited to the specific collateral.
Section 306(c) explains the effect of having a claim approved under Section 306(a)(2). Once an indebtedness has been allowed and approved as a preferred lien against property, no further claim may be made against other assets of the estate. The debt remains a preferred lien against the property securing it. The property remains security for the debt in any distribution or sale prior to final maturity and payment.
These provisions create a structured system for handling secured claims. Secured creditors must make an affirmative choice about how to proceed. The choice affects whether they can pursue general estate assets or must limit themselves to the collateral.
When a Claim is Considered Properly Presented
Cessna argued that its claim was timely presented because it was filed within the six-month period required by Section 298(a). Cessna contended the court exceeded its authority in classifying the claim as a preferred debt and lien. Cessna argued that because its claim stated “on information and belief” that the collateral was “lost or destroyed,” the claim adequately reflected an election to have the claim allowed as a matured secured claim payable from general estate assets.
The administrator argued that Section 306(a)’s requirements are mandatory. A secured claim is not timely “presented” within the meaning of Section 306(a) unless the claimant specifies the desired election. The statute requires this specification “in addition to all other matters required to be specified.” Without an affirmative election, the claim fails to satisfy presentment requirements even if filed within six months.
The Court of Appeals agreed with the administrator’s interpretation. The court held that provisions requiring specifications of claims against estates are mandatory. A secured claim is not timely presented unless the claimant specifies an election either to have the claim allowed and approved as a matured secured claim or as a preferred debt and lien against the specific property.
The court found persuasive the administrator’s construction that secured creditors must make an affirmative election within the six-month period following the grant of letters. Without such election, Section 306(b) requires the claim to be treated as a preferred debt and lien against the specific security.
The court examined Cessna’s actual claim to determine whether it reflected the required election. The claim recited that it was secured by the conditional sales contract establishing a lien on the aircraft. The claim alleged on information and belief that the aircraft had been lost or destroyed. However, the claim failed to request or otherwise indicate an election for treatment other than as a lien against the specific property.
The administrator timely filed objections to the claim as required by Section 302 of the Texas Probate Code. These objections specifically pointed out the failure to make the required election. Despite receiving these objections, Cessna made no effort to amend or supplement the claim to indicate the required election.
Cessna asserted in its brief that it did not receive notice of the administrator’s objection. However, Cessna conceded on oral argument that specific notice of such filing was not required. Cessna was legally on notice of the objection once it was filed.
The Court’s Application of Section 306(b)
The court held that because Cessna did not make an affirmative election as required by Section 306(a), its secured claim was not timely presented within the meaning of Section 306(b). When Cessna failed to amend its claim in response to the administrator’s objections, the probate court was authorized to treat the claim as a preferred debt and lien against the specific property as provided by Section 306(b).
Cessna argued that even assuming it failed to make the required election, its claim should be treated as a matured secured claim to be paid in due course of administration rather than as a preferred debt against specific property. Cessna cited Dallas Joint-Stock Land Bank v. Maxey, 112 S.W.2d 305 (Tex. Civ. App.—Dallas 1937, no writ), in support of this position.
In Maxey, a mortgagee made no election under the statute. The probate court classified the claim as a class 3 claim. The mortgagee contended that unpaid allowances existed in favor of the widow and minor children that had priority over administration costs. Therefore, the mortgagee argued, the personal representative could not properly charge general administration expenses against the security for the debt.
The Dallas Court of Civil Appeals overruled this contention. The court concluded that because the claimant had not made an election in accordance with the statute, the claimant was not entitled to the statute’s protection. The court held that administration expenses bearing a priority classification could be paid from proceeds of the mortgaged property.
Cessna contended that Maxey suggested that when a secured claimant makes no election under Section 306, the claim should be considered a matured secured claim to be paid in due course of administration. The Court of Appeals disagreed with this reading of Maxey.
The court noted that in Maxey, the secured property was sold by the administrator to the mortgagee for the amount of the secured claim plus interest. The dispute concerned whether the administrator’s fees and attorney’s fees could properly be charged against funds from the sale. The Maxey court held such fees were proper charges against sales proceeds. Because the claimant had not made the statutory election, it could not claim the protection afforded to claimants who do make the election.
Under the facts in Maxey, the court never needed to determine whether a secured claimant’s failure to make a Section 306(a) election within the time for presentment entitles the probate court to treat the claim as a preferred debt and lien against specific property under Section 306(b). The Maxey court did not reference Section 306(b)’s provisions at all.
The record showed that Cessna was given opportunity to amend its defective claim. Within the six-month period, Cessna could have presented a corrected claim in compliance with the statute. However, Cessna did not heed the administrator’s objection. Cessna took no action to correct its defective claim.
Under these circumstances, the Court of Appeals held the probate court acted within its discretion in finding that Cessna had failed to make the required election. The court properly classified Cessna’s claim as a preferred debt and lien against the security under Section 306(a)(2).
The Takeaway
This case is the best example of the foot fault creditors can make when it comes to Texas probate cases. Texas probate law imposes strict requirements on secured creditors who file claims against estates. Section 306(a) of the Texas Probate Code requires secured creditors to affirmatively specify whether they want their claims treated as matured secured claims payable from general estate assets or as preferred debts and liens limited to specific collateral. Filing a claim within the six-month period does not suffice if the claim fails to make this required election. When administrators file objections pointing out the missing election, secured creditors must amend their claims to cure the defect. Failure to do so authorizes probate courts to classify the claim as a preferred debt and lien, which limits recovery to proceeds from the collateral and bars any claim against other estate assets.
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