Priority of Payment of Claims In New York Probate

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In Matter of Rosenblatt (Solomon), the New York Court of Appeals addressed the priority of payment of claims in New York probate, in a situation where a mortgage holder sought priority of payment for a mortgage taken out after decedent’s death based on a fraudulent deed.  Not surprisingly, the after-death mortgage based on fraud was not given priority over legitimate claims on decedent’s estate.

The Facts of Matter of Rosenblatt (Solomon)

Decedent died intestate in September 2000.  He was the sole owner of an unencumbered income-producing two-family residence in Queens.  The Court recites the underlying facts:

Decedent died intestate on September 28, 2000 as the sole owner of an unencumbered income producing two-family residence located in Elmhurst, Queens. A petition for letters of administration was filed by decedent’s nephew, George, falsely alleging that he was decedent’s sole distributee when, in fact, there were many others. George filed an affidavit of renunciation of letters in favor of a non-distributee Shaun, falsely identified as a “second cousin.” Unbeknownst at that time, George and Shaun had a written side-agreement. Pursuant to the side-agreement, Shaun utilized the letters of administration to first transfer the Elmhurst property by no-consideration deed to George on January 24, 2014. On the same day, George executed a second no-consideration deed conveying the property to Shaun’s company, D & A Development (“D & A”). In short order, D & A obtained two mortgages on the Elmhurst property totaling $400,000.00 which were consolidated by an agreement (“the Consolidated Mortgage”) with movant Funding Associates. D & A quickly defaulted on the consolidated mortgage prompting a foreclosure proceeding. This turn of events apparently caused George to find religion and he petitioned to vacate Shaun’s letters alleging, in essence, that he was duped into signing the fraudulent affidavit of renunciation prepared by Shaun’s attorney as well as the side-agreement entered into with Shaun, essentially revealing that their actions had defrauded decedent’s estate and its beneficiaries. By a decision dated January 18, 2018, the court granted the petition, vacated Shaun’s letters, and granted temporary letters of administration to the Public Administrator of Queens County.

Upon the petition of the Public Administrator, the two deeds were vacated.

The court determined that the consolidated mortgage was entirely invalid to the extent it was based on the first deed from Shaun to George obtained by false pretenses and void ab initio.

With respect to the second deed from George to D & A, the court determined that since the real property had vested in decedent’s distributees by operation of law at the time of death, it was therefore void with respect to the interests of all the other co-tenant/distributees who did not sign that deed.

George, however, was estopped from denying the transfer of his intestate share by the second deed. Consequently, the Consolidated Mortgage was held to be valid only to the extent that Funding Associates had “security up to the interest of the mortgagor,” which was equivalent to “that part of George’s share in the Elmhurst property that he conveyed to D & A Development.”

Finally, the court granted the Public Administrator summary judgment dismissing Funding Associates’ affirmative defense claiming it was a bona fide encumbrancer for value on the entirety of the Elmhurst property.

Upon the Public Administrator’s filing of this proceeding for judicial settlement of her account, Funding Associates filed objections and the court designated a referee to hear and report.

Funding Associates objected to the Public Administrator’s payments of funeral and administrative expenses, counsel fees, an HRA claim, debts, commissions and proposed distributions (Schedules C, C-1, D-2, I and J of the account) prior to payment of their claim seeking reimbursement for payoff of a tax lien as well as their claim for payment of the mortgage debt. Funding Associates alleged that both claims were superior to the interests of all other proposed payees, and that such payments were prohibited by a stipulation of the parties dated October 24, 2018 (“the stipulation”).

Funding Associates’ claim seeking reimbursement for payoff of the tax lien was settled during the trial. As to the remaining objections, the referee found that the Public Administrator was required to pay funeral and administrative expenses, counsel fees, claims, debts and commissions in the order of priority set forth by SCPA § 1811, before distribution of the net proceeds realized from the sale of the Elmhurst property to decedent’ distributees, namely, twenty-one nieces, nephews, grand-nieces and grand-nephews.

What Claims Get Paid First In New York Probate?

SCPA § 1811 addresses the payment of debts and funeral expenses of a New York probate estate.  Debts of a New York Estate are paid in the following order:

  1. Reasonable funeral expenses and expenses of administration;
  2. Debts entitled to preference under the laws of the United States and the state of New York;
  3. Taxes on property of the deceased assessed previous to death;
  4. Judgments;
  5. All recognizances, bonds, sealed instruments, notes, bills and unliquidated demands and accounts.

 

Under SCPA § 1811 top priority is given to payment of administrative expenses.  Here, these include the  “reasonable fee” of the Public Administrator’s counsel as well as statutory commissions.

Next to be paid are reasonable funeral expenses which are preferred to all other debts and claims and are paid out of “the first moneys received” by the fiduciary (SCPA § 1811 [1]).

The Public Administrator was then charged for paying Federal and New York State taxes.

The claim of a preferred creditor pursuant to New York State law is paid next.

Also, any claim by Funding Associates determined to be valid would then be paid. The remaining net proceeds are payable to decedent’s distributees who, by operation of law, became the owners of the Elmhurst property at the time of decedent’s death.

Does an Estate Creditor With a Mortgage Incurred After Decedent’s Death Based On a Fraudulent Deed Have Priority?

Of course not – but that did not stop Funding Associates from arguing that their claim for repayment of its mortgage in full should be satisfied prior to any other claims or estate administrative expenses from the New York probate.

The Court called Funding Association’s position “astonishing,” stating:

Notwithstanding the controlling statutes and case law establishing the priority for payment of claims by the fiduciary, Funding Associates continues to prosecute its contingent claim (Schedule D-4) with the astonishing argument that it must be paid prior to all the above mentioned expenses, commissions and claims.

Crucially, in this case, the undisputed facts established that decedent owned the Elmhurst property free of any mortgage debt at the time of her death. The consolidated mortgage was neither her debt nor a debt of her estate, nor did Funding Associates’ lien exist during decedent’s lifetime. Moreover, a judgment for non-payment of the mortgage debt was never docketed against the Elmhurst property prior to decedent’s death or thereafter. The mortgage debt at issue was owed by D & A Development and George, not the estate.

In addition, Funding Associates’ claim was based on a deed that the Court decided was “was procured by false pretenses and is void ab initio.” Longstanding precedent provides that any subsequent grantee or encumbrancer receives nothing thereby.

The New York Court found that the statutory priority of claims in probate was correctly set forth in the referee’s report pursuant to SCPA § 1811 – the payment of funeral and administrative expenses of decedent’s estate, counsel fees, taxes, commissions, and claims.