Probate: What if the Real Estate is Worth Less than the Mortgage?

These days, estates are often walking away from real property rather than paying the mortage.  They do this because lenders usually foreclose on real property nonjudically.  No deficiency is allowed to a lender after a nonjudicial foreclosure.  See RCW 61.24.100.  (On a semi-related note, this can leave “forgiveness of debt,” which is taxed as income to the estate).  In other words, the estate walks away from the property and the debt.  This is a great outcome for the estate, but not a guaranteed outcome because a savvy lender can file a creditor’s claim and simply enforce its rights under the promissory note (that is, assuming the lender knows about the estate – notice anyone?).

Here are the rules: There are known (or “reasonably ascertainable”) creditors and unknown creditors.  RCW 11.40.040.  A mortgage lender is most certainly a “known” creditor.  If an Executor fails to notify a known creditor – the creditor will have 2 years from the date of death to sue the decedent’s estate (or rather, the Executor/Personal Representative).  See RCW 11.40.051(1)(c).  If you notify a known creditor, he has the later of four months or thirty days from when notice was published.  (If the notice to creditors is published, unknown creditors have four months.)

So, a PR can: 1. pay the debt; or 2. not pay the debt; and A. send notice to the lender; or B. not send notice to the lender.  If notice is sent, the statute of limitations for a creditor’s claim is the later of four months from publication or thirty days from sending the notice. RCW 11.40.051.  If not, it is two years.

If the PR stops paying, the lender will issue a notice of default, and eventually start a foreclosure (it could take months, even a year or more depending on the lender).  If the lender is on the ball (or if you send notice to the lender and he reads it and responds), he will likely file a creditor’s claim.  Since lenders have the option of suing on the note or foreclosing, the savvy lender will rest on his creditor’s claim rather than foreclose, knowing he can get paid in full that way.

The conclusion is this:  If you’re the lender and your borrower stops paying, search the Washington Courts Case Name Search index to see if there’s an open estate.  If so, file a creditor’s claim.  If you’re the Executor/Personal Representative, stop paying the mortgage, and see what happens.

Nevermind the Mastros, Here’s Tom Hazelrigg III

Tom Hazelrigg working out in his Bellevue PenthouseThe story of Mike and Linda Mastro is like a movie:  real estate magnate turned debtor in bankruptcy, turned fugitive on the lam (*Mastro has not been indicted, so it may be a stretch to call him a fugitive).  And things are just heating up.  Jim Rigby, trustee in the Mastro bankruptcy, along with two other creditors are forcing Tom Hazelrigg III into involuntary bankruptcy.  Hazelrigg is pictured left working out in his Bellevue penthouse condo (this is the only Hazelrigg picture we know of).  Hazelrigg allegedly owes Mike Mastro – and now Jim Rigby – millions.  It gets better: Hazelrigg moved to New Mexico (or claims he did anyway), and is seeking to dismiss the Washington-based bankruptcy based on improper venue.  Hazelrigg’s objection is here.  He also claims that he is medically incapable of leaving New Mexico.  (There is no sworn affidavit or declaration accompanying the medical bills he attaches to the declaration in support of his objection).  TEP has experience chasing after Tom Hazelrigg and can say this:  Nobody is better at hiding assets – and himself – than Tom Hazelrigg III.  Nobody.

Withdrawing from a Probate; Attorneys Fees Lien

The question posed this morning on the Oregon Bar Association’s estate and probate listserv was this:

(1) Does anyone who’s had to withdraw on a Washington probate have pleadings for that purpose they can share?  Anything unusual I should be aware of?

(2) Is there some way I can attempt to protect my fees and costs, such as liening the case?

First, here are examples in a case, filed in Pierce County Washington. TEP just obtained these from the court’s website.  TEP is not affiliated with the case, so it takes no ownership/responsibility for their correctness. Withdrawal with Substitution here; Withdrawal without Substition here; Lien Claim here; another Lien claim here.

Second, the applicable rule is CR 71.  Pay particular attention to the service requirements and timelines in CR 71, and also in CR 5 and 6 (when mail service is made/had).

Third.  As for a lien for attorneys’ fees, see the links above.

This post will self destruct in 2 days.

Tax Foreclosures: Creditors Can Claim Surplus Tax Sale Proceeds, But it’s Tricky

King CountyCreditors read this:  Next week King County will be foreclosing hundreds of real property parcels, all at once.  The case is captioned In re Foreclosure of Real Property Tax Liens for Taxes Owed 2008 – 2011, King County Superior Court, Cause No. 11-2-19469-8 SEA.  Many of these parcels will sell for more than the tax owed, meaning there will be surplus funds.  There is opportunity here for judgment creditors to claim the surplus.  In doing so, don’t make the mistake that your lien automatically attaches to the surplus funds.  While this may be the case with nonjudicial foreclosures under RCW 61.24.080, where liens eliminated by the foreclosure attach to the surplus proceeds in the same order they once attached to the real property, IT IS NOT the case under the real property tax foreclosure statute, RCW 84.64.080.  This statute provides that the real property owner receives the surplus funds, and there is no provision for other lienholders.  See RCW 84.64.080 (stating, “the excess shall be refunded …, on application therefor, to the record owner of the property”).    A judgment creditor, regardless of how junior his judgment lien is, can get paid, and can even jump ahead of senior judgment lienors simply by being the first in time to serve a writ of garnishment on the County.  Timing is key.  The creditor must serve the writ after the tax sale (so the County will answer the writ stating that surplus funds exist, if any, and are owed to the property owner), but before the funds are paid to the debtor/real property owner, and of course, before a competing creditor serves his writ of garnishment on the County.