Opinion
319373.
Decided May 26, 2004.
Avrum J. Rosen, Esq., Huntington, NY, (for petitioner).
This is a proceeding by the two co-executors who are the parents of the decedent and alleged creditors of the estate in the amount of $450,000 for advice and direction (SCPA 2107) as to the disposition of the decedent's residence, which is sole asset of the estate.
The residence, located in Upper Brookville, New York, is alleged to have a value of approximately $1.8 million but is encumbered with liens totaling approximately $1.7 million.
The decedent was survived by a spouse, Mark Kaufman, and several children. While Mr. Kaufman continued to live in the decedent's residence, it is alleged that he failed to make mortgage payments or properly maintain the residence and eventually abandoned it. As a result, two mortgage foreclosure proceedings were commenced and are presently pending. It is estimated that the sum of $50,000 will be required to place the residence in a marketable condition. In addition, the petitioners allege that they have attempted to secure financing to cure the mortgage defaults without success.
The petitioners believe their only viable option is to seek the protection afforded under the Bankruptcy Code by filing for Chapter 11 relief which will effect a "stay of the foreclosure proceedings, cure the default and reinstate the first mortgage." The petitioners also believe that they have certain defenses to one of the mortgages and "have tentative workouts with the other mortgagees" (Petition par. 12).
However, the courts have uniformly held that the Bankruptcy Code definition of a "person" and "debtor" qualified to file for bankruptcy excludes a decedent's insolvent estate ( Matter of Whiteside, 64 B.R. 99, 102; Matter of Hiller, 240 F Supp 504; Matter of Brown, 16 B.R. 128). The main reason cited by these courts in denying a decedent's estate access to bankruptcy courts is that they would be interfering with the authority and jurisdiction of the probate courts of the various states ( Matter of Walters, 113 B.R. 602). There is accordingly no power or jurisdiction under the Bankruptcy Code to administer decedents' estates ( Matter of Brown, 16 B.R. 128).
To resolve this dilemma, the petitioners propose to transfer the realty, subject to the liens, to a corporation organized and solely owned by them in order to qualify as a "person" or "debtor" entitled to file for bankruptcy. In exchange for the transfer, the petitioners propose to give the estate a "non-recourse promissory note and mortgage in the sum of $600,000 secured by the real property" (Petition, par. 10). The sum of $600,000 has been selected as the estimated equity to be realized on any sale.
The case law excluding an estate from filing for bankruptcy appears to be based primarily on the conclusion that it was not the legislative intent behind the Bankruptcy Code to permit the bankruptcy courts to interfere with the administration of decedents' estates. The granting of the petitioners' request, however, appears to be distinguishable from such holdings. Here, a bankruptcy proceeding may be the only hope of salvaging any equity in the realty and it does not represent a case of the bankruptcy courts infringing on the jurisdiction of this court. A bankruptcy petition has in fact been allowed in the context of a decedent's estate. In Matter of Bunch ( 249 B.R. 667) the representative of the estate had placed a mortgage on estate realty but was nevertheless permitted to petition in bankruptcy, the court holding that since he was the sole heir and had petitioned individually, the petition would be allowed. The court notes that all of the lienors and the surviving spouse, who is the sole beneficiary under the decedent's will, have been cited and no one has appeared in opposition.
With regard to the proposal to exchange the realty solely for a promissory note and mortgage, EPTL 11-1.1(b)(5)(B) authorizes a fiduciary to sell any estate property "on such terms as in the opinion of the fiduciary would be most advantageous to those interested therein." In the exercise of that discretion the co-executors have concluded that the only prudent means of salvaging whatever equity remains in the realty is a sale as proposed. There being no objection to the proposed transfer the relief is granted on condition that the co-executors file an agreement to the effect that they will be personally liable for any equity realized from the sale, for which they will remain accountable to this court following the termination of any bankruptcy proceedings.
Submit order.