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socrateaser
socrateaser, Attorney
Category: Bankruptcy Law
Satisfied Customers: 33883
Experience:  Attorney and Real Estate Broker -- Retired (mostly)
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Hypothetical question: FACTS: May 1, 20X1: Three creditors

Customer Question

Hypothetical question:
FACTS:
May 1, 20X1: Three creditors file an involuntary chapter 7 against an individual debtor.
May 10, 20X1: Debtor files a response and challenges the petition on various grounds such as bona fide disputes, etc.
June 30, 20X1: Judge has court date scheduled to rule on whether to grant an order of relief for the three creditors.
June 28, 20X1: Debtor dies obviously before the June 30 hearing and before any order of relief is entered.

Question: Is the bankruptcy case dismissed? Is the estate created on the date the order of relief is entered?

The Code states that after the commencement date, if a debtor dies, the case may continue with a representative of the debtor (e.g., spouse) attending the 341 hearing. In this situation, the debtor dies before the order of relief is entered in an involuntary case. I believe the case is dismissed because there is no estate granted until the order of relief is entered given this is an involuntary (not voluntary) petition.

I cannot find any authority on it.

Thoughts?
Thank you.
Submitted: 10 months ago.
Category: Bankruptcy Law
Expert:  socrateaser replied 10 months ago.
FRBP 1016 provides:

  • Death or incompetency of the debtor shall not abate a liquidation case under chapter 7 of the Code. In such event the estate shall be administered and the case concluded in the same manner, so far as possible, as though the death or incompetency had not occurred. If a reorganization, family farmer's debt adjustment, or individual's debt adjustment case is pending under chapter 11, chapter 12, or chapter 13, the case may be dismissed; or if further administration is possible and in the best interest of the parties, the case may proceed and be concluded in the same manner, so far as possible, as though the death or incompetency had not occurred.

 

The Rule is clear that the debtor's death does not change anything, unless it is not possible to continue the case. In In re CR Stone Concrete Contractors, Inc., 462 BR 6, 24-28 (2011), the US Bankruptcy Court for the Eastern District of Massachusetts held that a bankruptcy action is not extinguished by the death of the debtor.

 

Substitution of the debtor by a representative is accomplished under FRCP 25. As the claim is not extinguished, if a representative of the debtor cannot be found to take over the case, the court can rule on the involuntary petition without the debtor or the representative, and either dismiss the action or enter an order of relief -- followed by the administration of the debtor's estate.

 

Please let me know if my answer is helpful, or if I can provide further clarification or assistance.

 

And, thanks for using justanswer.com!

Customer: replied 10 months ago.

Thank you for your response and the enclosed case.


 


However, the case dealt with the death within the bankruptcy.


 


Would you please clarify one point that is not addressed in your response. It pertains to the date in an involuntary 7, not a voluntary 7. If there is a death before the court issues an order for relief in an involuntary 7, isn't the bankruptcy dismissed because there is no individual alive at that time. I understand the continuation of the case once the order for relief is entered. But if the debtor is not alive at the time the order is entered, doesn't 1016 not apply?


 


I have looked and found nothing on this point.


 


Thank you.

Expert:  socrateaser replied 10 months ago.
The CR STone Concrete case law, in my opinion is quite clear. Once a party brings a dispute to the court, and the debtor has been appropriately served notice of a legal action pending, that person is subject to the personal and subject matter jurisdiction of the court, and the court can, pursuant to law and equity, resolve the dispute between the parties -- even if the defending party dies in the process.

The issue resolved in the CR Stone Concrete case, cited previously, is which types of claims are and are not extinguished by the debtor's death. It seems entirely clear to me that an involuntary bankruptcy petition is not extinguished, merely because the debtor dies after being served notice of the pendency of the action -- because were that true, then the CR Stone Concrete court would have simply determined that the entire case was dismissed, and there would have been no need for a detailed discussion of the various claims which can or cannot be dismissed by virtue of a debtor's death during the pendency of a bankruptcy action.

Were the petition filed but not served before the debtor died, then that would be a different matter -- because without service of notice of the action, the court cannot establish jurisdiction over the debtor. But, your facts state that the debtor is served notice of the involuntary petition. Assuming service meets the constitutional standards (reasonably calculated to provide notice and opportunity of a legal action pending and the opportunity to appear and defend), then the case can move forward pursuant to FRBP 1016 and FRCP 25.

I think you are attempting to distinguish between involuntary and voluntary bankruptcy proceedings in a manner that has no relevance to whether or not the court can proceed with the case. It wouldn't matter that the case was an "involuntary" bankruptcy action, or an "involuntary" civil rights action for race discrimination. The case is not dismissed merely because the defendant dies.

Hope this helps.

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