Estate Planning Newsletter
Who Gets Paid in an Insolvent Estate?

March 8th, 2023  

In the case of the Estate of Clint Wallace vs. Newrez, LLC., the Court was asked to determine when real property encumbered by a deed of  trust is sold to satisfy claims against the estate, are the amounts due under the deed of trust to be paid before any surplus becomes available  for distribution to creditors in accordance with the Tennessee priority of claims statute (TCA § 30-2-317).

In the Wallace Estate, Mr. Wallace acquired property in December 2015, and at the time obtained a loan from Flagship Financial Group  (“Flagship”) in the amount of $143,750.00. The loan was evidenced by a promissory note and secured by a deed of trust.

In August 2018 Mr. Wallace died in an automobile accident, intestate, leaving two minor children. An estate was opened for Mr. Wallace,  notice to creditors was published, and the decedent’s mother filed a petition for specific property, year’s support allowance, and homestead  exception $5,000.00 for Mr. Wallace’s minor children.

In a procedurally complicated process, ultimately the probate court ruled that a public sale should be conducted in lieu of allowing Flagship  to foreclose. The property sold for $167,000.00. The principal due on the deed of trust plus accrued interest and other charges totaled  $151,455.00. Other disbursements and expenses were approved to be paid. Ultimately, a surplus of $9,396.00 remained after the  indebtedness of the deed of trust and other expenses were paid.

The estate filed a Notice of Insolvency, and proposed to distribute $105,047.00 to Flagship as a prorated share of net assets, to distribute  $4,700.00 to each of Mr. Wallace’s children, to distribute $43,000.00 to the estate’s attorney, to distribute $4,500.00 to the personal  representative, and to distribute $22,000.00 to a junior lien creditor.

Flagship appealed, claiming that its debt was due in full because of its deed of trust from the decedent prior to his death. The Court of  Appeals went through a detailed analysis of statutory interpretation provisions dealing with the Tennessee real estate priority statute (TCA §  66-26-105), the Tennessee insolvent estate statute (TCA §30-5-101 et. seq.), and the Tennessee priority on preference of claims statute (TCA  § 30-2-317). The Court of Appeals even went through an analysis of case law dealing with the different statutes.

Ultimately, the Court of Appeals ruled that the statutes regulating the distribution of insolvent estates were not intended to affect liens upon  which any part of the property of the estate. These rights continue as if there had been no death. The property in which the lien exits goes  into the estate encumbered with the lien debt. It is only funds that remain after the discharge of the lien that go into the fund for distribution  to other estate creditors.

My Recommendation: Personal representatives of estates need to be aware that preexisting deeds of trust (as well as security interests in  personal property of the decedent) take priority over unsecured creditors of the Estate. Although not addressed in the Estate of Clint Wallace case, these secured creditors claims would take priority over a spouse’s elective shared claims as well under TCA § 31-4-101 et seq.

Yours very truly,
William C. Bell, Jr., Attorney at Law