Probate collections—managing for the "two-minute drill": Part 4: the big play: opportunity valuation and settlement strategy

RMA Journal, The, July-August, 2004 by Horace A. Lowe

Systems and strategies are offered that lenders can use for an estate that is not solvent but has some net asset value and against which there may be multiple claims. The author discusses the particulars of the example case to illustrate both opportunity evaluation and settlement strategy.

Imagine a good football game. Right after the final two-minute warning, the coach of one team trots over to the opposing coach, puts his arm around his shoulder, and says, "Hey look, you know, we really don't have any kinda game plan for this two-minute drill stuff, so how 'bout you guys not use any of your, ah ... fancy stuff when you get the ball. Sorta help us out a little. Know what I mean?"

"Oh, well, yeah, no problem, buddy," says the other coach.

Right. That ain't gonna happen.

A collector asking the estate's lawyer if the estate is solvent is pretty much the same kind of thing: no game plan for the two-minute drill. That's exactly what happened on one of the larger claims in the example case introduced in Part 1 of this series. The conversation went something like this:

"Is the estate solvent?" the collector asked the estate's lawyer.

"No," the lawyer replied truthfully.

"Oh, okay. Well, we'd really like to see if we can reach a settlement," said the collector.

"Well, sure," says the lawyer. I'll get back to you on that." It never happened.

Collecting in probate is almost always a challenge for creditors, largely because of the lack of uniformity in probate laws discussed in Part 2 of this series. Not having a game plan is a pretty sure recipe for failure.

In many cases the estate will be not only solvent but quite large, with the heirs receiving large inheritances. In those cases, there is little concern about looking out for the heirs; creditors usually will be paid 100% of their claims, assuming they have timely and properly presented claims and have been diligent to overcome any disallowance.

Collecting from insolvent estates offers an even greater challenge because of the estate personal representative's desire to preserve as much estate residual as possible for distribution to heirs. However, because these estates represent the overwhelming majority of lost collection opportunities, it is imperative that creditors and collectors of unsecured claims sharpen their operations to minimize loss. For insolvent estates this requires sound opportunity evaluation and early settlement strategies.

Post-presentation Practices

"Yeah, baby!! We got our claim in on time, so we're in the playoffs! We're gonna get the money!" Calm down. This is the two-minute drill. You've still got lots of work to do.

As mentioned in Part 2, several important thinks start to happen following the period for presenting claims. First, the personal representative narrows down the list of potential claimants to those who have presented in a timely way. Second, the estate's lawyer starts the process of deciding who makes it to the second round--that is, which claims will or will not be allowed. Third, where appropriate, the process of settlement negotiation begins.

Accordingly, following claim presentation, the collector should proactively take steps to 1) avoid disallowance, 2) obtain available information, and 3) plan for the big play--favorable settlement. The collector should at some point soon after the presentation of claims write the estate's lawyer regarding the following, at minimum:

* Inquire as to the substantive adequacy of the claim presentation and offer to provide any additional information, documentation, or certification.

* Request that the inventory and a list of claims be provided as soon as they are available.

* Inform the estate's lawyer that the collector will be ready to discuss settlement within a certain time following receipt of the available information.

These minimal steps will help shield the collector from a frivolous disallowance, let the estate's lawyer know that the collector is on top of his game, and enhance the timely receipt of the information necessary to pursue settlement.

The Claim Priority System

The first key to opportunity evaluation and settlement strategy is to understand claim-priority classification under the applicable state probate law. This is necessary in order to take into account expenses and claims that must be paid prior to payment of unsecured claims. Table 1 sets forth the priorities under Colorado law, which is fairly typical, although some statutes include other types of claims as a higher priority such as those for a decedent's child-support obligation.

Priority items 1, 3, 5, 7, and 8 should bc included in the list of claims, along with any claims (as opposed to taxes incidental to the estate or the decedent's last personal taxes) of the state or federal governments. Administrative expenses (legal, accounting, personal representative fees, court fees, appraisal fees, and other administrative costs) can only be estimated, as they will be largely future costs--thedegree of which will depend on the complexity of the estate, which can be determined from the inventory. Also, if there are any claims by governmental entities, such as liens for past-due taxes, these should be included in the list of claims as well. These are the only claims worth thinking about in evaluating the opportunity.