A Decedent’s Estate is not Eligible to be a Debtor Under the Bankruptcy Code

Howard Poon
St. John’s University School of Law
American Bankruptcy Institute Law Review Staff

Under section 109 of title 11 of the United States Code (the “Bankruptcy Code”), “only a person” may be a debtor.[1] A person is a party that has a “domicile, a place of business, or property in the United States.”[2] In In re Estate of Taplin, the bankruptcy court in the Eastern District of California held that a decedent’s estate may not be a debtor under Bankruptcy Code.[3] Moreover, a lawyer that files a bankruptcy petition on behalf of an estate may be subject to sanctions for filing a frivolous petition.[4] In 2010, Ernest Taplin inherited from his deceased father a home that was in the process of being foreclosed.[5] He asked his mother, Shirley Andrade, to handle all inheritance affairs.[6] Mrs. Andrade first desired to be assigned as Special Administrator to the estate by a California probate court, which would allow her to manage the estate for Ernest Taplin.[7] Upon being appointed Special Administrator on December 2011, Mrs. Andrade directed her hired counsel David Foyil to file a chapter 11 petition on behalf of the decedent’s estate to protect the home from foreclosure.[8] In his petition, Mr. Foyil alleged that the estate was (1) a corporation worth up to 50,000 dollars in assets and liabilities and (2) had a mortgagee and foreclosure agent as creditors.[9]  The bankruptcy court issued a sua sponte order to show cause.[10] The order required counsel to provide an explanation for why there was no violation of Rule 9011(b) when the petition alleged a decedent’s estate could declare chapter 11 bankruptcy.[11] Mr. Foyil’s response did not resolve the issue, as it did not answer the question of eligibility, but instead claimed state courts may authorize a chapter 11 filing regardless of what is in the Bankruptcy Code.[12] The bankruptcy court dismissed the chapter 11  case and sanctioned counsel and Mrs. Andrade.[13]

            According to the bankruptcy court, a decedent’s estate is not a “person” as defined under the Bankruptcy Code and therefore cannot be a debtor under section 109; “Notwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title.”.[14] The bankruptcy court held estates do not qualify as either persons or corporations; “‘person’ does not include an estate or a trust”.[15] The bankruptcy court further rejected the debtor’s contention that a state court may authorize a chapter 11 filing regardless of Bankruptcy Code provisions.[16] The US Supreme Court has authorized state courts to intervene in “probate exceptions” wherein federal courts must defer to state courts for three specific situations involving wills and estates.[17] Those situations do not apply to bankruptcy.[18] Thus, the court concluded that state courts cannot alter the bankruptcy eligibility proscribed by Congress.[19] Finding the trust was not eligible to be a debtor, the Court held that the filing of this petition by Mr. Fovil and Ms. Andrade violated Rule 9011(b).[20] Rule 9011 only permits petitions that are reasonable, whose legal contentions are nonfrivolous, filed for a proper purpose, and whose aforementioned contentions have evidentiary support.[21] The bankruptcy court denied the counsel’s possible defense under 9011(b)’s “reasonable inquiry analysis,” where counsel can avoid sanctions by showing the filing had been done following a reasonable inquiry under the circumstances.[22] The bankruptcy court highlighted Mr. Fovil’s experience with bankruptcy cases (over 2000) and his admission that he had done no research into whether estates could in fact declare bankruptcy.[23] Instead, this case was one that was of “improper purpose,” filed in order to “to cause unnecessary delay or needless increase in the cost of litigation.”[24] The filing was also deemed “legally frivolous” because Mr. Fovil claimed, without evidence, that the decedent’s estate could declare bankruptcy.[25] Because the filing was frivolous, the bankruptcy court sanctioned both counsel and Mrs. Andrade.[26]

            The estates of decedents are not eligible to file for bankruptcy.[27] The bankruptcy court noted that since November 2019, there have been seventeen bankruptcy cases involving decedent estates, which “[led] this [C]ourt to calculate the penalty to be paid into court with an eye to deterring others.”[28] Thus, someone that files or authorizes a bankruptcy by a decedent’s estate may be subject to sanctions by a court.[29]