Beyond the emotional impact of losing a customer due to tragic circumstances, lenders need to be aware of certain steps that need to be taken upon the death of an individual borrower or guarantor.
Among the pitfalls that can result in a major problem with recovery of a loan in Massachusetts is the surprisingly short statute of limitations that commences to run upon the death of an individual borrower or guarantor. Pursuant to Massachusetts G. L. c. 190B § 3-803:
“a personal representative shall not be held to answer to an action by a creditor of the deceased unless such action is commenced within 1 year after the date of death of the deceased and unless, before the expiration of such period, the process in such action has been served by delivery in hand upon such personal representative or service thereof accepted by him or a notice stating the name of the estate, the name and address of the creditor, the amount of the claim and the court in which the action has been brought has been filed with the register.”
What this means is that a claim against a deceased obligor may not be started after the anniversary of the decedent’s death has passed. In other words, a creditor has only one year after the date of death to bring a claim against the estate of the deceased. Note that this statute of limitations relates only to unsecured claims; to the extent the creditor’s claim is secured by a mortgage, security interest or other collateral, the right to pursue the collateral (but not the individual for any unsecured deficiency) does not cease after the passage of one year.
Given this short statute of limitations, what things should a lender be aware of and what should a lender include in its loan documents to protect itself? First and foremost, a lender should make sure that death of either an individual borrower or guarantor is listed among the events of default in the loan documents. In the absence of a default provision based on death, if the loan remains performing for the year following the death of an obligor, a lender may have no recourse against the estate of that obligor in the event of a later default, even if it was the financial condition of the obligor which supported the underwriting for the loan in whole or in part.
Secondly, timing is crucial. Sometimes a will is not probated or an estate is not opened after the death of a person. If no estate has been opened, a lender may be faced with a more difficult task than simply filing a law suit as the one-year deadline approaches. A lender may be forced to file a creditor’s petition to start a probate of the deceased’s estate and seek to have a special personal representative appointed in order to be able to bring suit naming the special personal representative as defendant and then serving him or her. This takes time and therefore the issue of a claim against a decedent’s estate cannot be “put on hold” by the lender until the eve of the expiration of the limitations period. Also complicating the timing issue, a lender must not only commence suit, but also must serve the personal representative of the estate in hand before the limitations period has lapsed. This too takes time. Alternatively, a Notice of the pending civil action must be filed in the Probate Court in the decedent’s estate prior to the deadline. (We usually try to both serve the personal representative and file the Notice with the Probate Court.)
While the statute of limitations may be waived by a personal representative, if the estate is not insolvent, “with the consent of all successors whose interests would be affected” (G. L. c. 190B §3-802) vague assurances by a personal representative “not to worry” are not legally sufficient to forestall the bar of the statute of limitations period if it is allowed to expire. In some instances, asserting a claim early can result in the estate agreeing to further guaranty the obligations of the decedent or will permit counsel to structure other protections for the lender even in the absence of commencing a law suit.
One final note on timing for asserting claims against an estate. The sooner a claim is asserted the better. If a personal representative is not aware of a lender’s claim and believes the estate is sufficient to pay all of its obligations, absent notice to the contrary, after 6 months the representative can start to pay off creditors’ claims out of assets from the estate. If a claim is later brought by a lender, even if within the limitations period, this could result in a depleted estate having insufficient assets to repay the obligations owed. See G. L. c. 190B §3-807. Typically, after a respectful period of time, the lender will need to approach the borrower (typically comprised of the remaining family members of the deceased obligor) to discuss how to handle the event of default caused by the death of the obligor. If the passing of assets by the deceased to a spouse or another family member follows a clear path, then we would ordinarily accept a substitute guaranty from the so-called “devisee” or surviving family member. If the inheritance process is unclear or disputed, we would then recommend that the lender accept a temporary substitute guaranty from the estate of the deceased until the lender can do the underwriting on the new obligor once the estate has been settled. The key to this process is to ensure that the substitute guaranty is executed well before the timing issues mentioned above start to create pressure and complications.
The death of a borrower or guarantor usually creates difficult practical and substantive hurdles to recovery of a debt. The sooner the lender consults with counsel about the intricacies of the process of obtaining a substitute guarantor or bringing a claim against the estate of the deceased, the greater the likelihood of a positive outcome.
This communication is for informational purposes only and should not be construed as legal advice on any specific facts or circumstances.