Published in the Oregon State Bar | Debtor-Creditor Newsletter

Sunriver Discussion
Those attending the Oregon Debtor-Creditor Section annual meeting at Sunriver in September of 2015 struggled with a question few had previously considered: Can a secured creditor inadvertently waive its security by asserting a claim against the probate estate of a deceased borrower? The somewhat surprising answer from the panel was, yes. Pursuant to ORS 115.065, a secured creditor could waive its security by presenting a claim to the personal representative of the probate estate.

The best CLE programs spark a continuing discussion. "What Debtor-Creditor Lawyers Need to Know About Probate Law," presented by Kay B. Abramowitz, the Honorable Robert Herndon, and Martha M. Hicks, initiated a conversation that spilled out into the hallway and continued for weeks after the presentation concluded. How could communicating with a personal representative, possibly via a simple letter, inadvertently result in the waiver of a creditor's security and the demotion of its claim to the lowly unsecured variety?

Although Oregon law is somewhat unclear, such communications likely do not constitute a waiver of the creditor's secured claim. The full scope of Oregon's probate statute, including advisory committee commentary from 1968, indicates that a secured creditor is not required to waive its security as a price of participating as a creditor of a probate estate. Because the language of the statute leaves ample room for confusion, the legislature should bring clarity, possibly with an amendment jointly advanced by the Debtor-Creditor, Estate Planning, and Administration Sections of the Oregon State Bar.

Making a Claim Against a Probate Estate
When a person dies, a probate estate may be created. Chapter 115 of Oregon Revised Statutes lays out a four-step process for making claims against a decedent's estate. First, the personal representative must give written notice to potential claimants pursuant to ORS 115.003(2). Second, claimants must present claims to the personal representative in the manner described in ORS 115.005 (and the sections that follow) within certain time limits. Third, the personal representative determines whether to allow or disallow each claim, as provided in ORS 115.135. Finally, if estate assets are insufficient to pay all expenses and claims in full, the personal representative pays allowed claims (and other expenses) pursuant to the priority scheme set forth in ORS l15.125. Further procedures for claims objections are described in ORS 115.145 et seq.

One probate statute, ORS 115.065(1), stood at the center of the Sunriver discussion. The statute simply states: "A claim on a debt due for which the creditor holds security may be presented as a claim on an unsecured debt due, or the creditor may elect to rely entirely on the security without presentation of the claim." This provision appears to give a secured creditor an option: (1) present your claim, but with the understanding that such a claim will then be treated as unsecured, or (2) pursue your remedies against the security (and only the security) outside the probate system. In other words, the statute can be read to require a secured creditor to either opt into the probate system, in which case the security will be waived but the right to a deficiency will be retained, or to opt out of the probate system by exercising its remedies in relation to its collateral and waiving any right to a deficiency against the probate estate.

Creditors' lawyers, perhaps unaware that such a consequential, binary election might exist, were not comforted to further learn that a simple letter could constitute a claim. For example, in Wilson v. Culbertson, 41 Or App 475 (1979), the court concluded that a creditor's letter to the decedent's business, not even to the personal representative, was sufficient to constitute a claim against the decedent's estate. With a flexible view of how a claim may be asserted, a secured creditor's letter could, it appeared, unintentionally waive collateral rights.

Although the first subsection of ORS 115.065 admittedly generates a degree of confusion, nothing in the remainder of ORS 115.065 or the entirety of Chapter 115 states or implies that a secured creditor waives its security by submitting a claim and participating in the probate claims process. To the contrary – it provides for the retention of collateral by a secured creditor that files a claim.

ORS 115.065(2) through (6) describe additional rules governing the presentation and treatment of secured claims in a decedent's estate. Significant for our purposes, ORS 115.065(5) envisions the secured creditor being regarded as a creditor of the estate while simultaneously retaining and executing on its security.

ORS 115.065(5) states:
If the creditor does not surrender the security, the payment shall be on the basis of:

a) If the creditor exhausts [forecloses on] the security before receiving payment, unless precluded by other law, the amount allowed, less the amount realized on exhausting the security; or

b) If the creditor does not exhaust the security before receiving payment or does not have the right to exhaust the security, the amount allowed, less the value of the security determined by agreement or as the court may order.

Furthermore, ORS 115.065(5) appears to describe a third option in addition to the two options set forth in ORS 115.065(1). This third option permits a secured creditor to formally assert a claim against the decedent's estate while retaining and executing on its security. The creditor's net (deficiency) claim is reached by deducting the amount realized on the security or the agreed amount of the security from the full allowed claim.

The Case Law
Only two Oregon cases cite ORS 115.065: Heiller v. Nelson (In re Heiller), 127 Or App 189 (1994) and Meissner v. Murphy, 58 Or App 174 (1982). Neither case contradicts the concept of a third option and neither supports the conclusion that a secured creditor waives its security by filing a claim with the decedent's estate. In Meissner, the plaintiff filed suit against the personal representative of a decedent's estate without first filing a claim against the estate as required by ORS 115.325. The Court of Appeals found that "by exercising the remedies reserved under her security before filing a claim, plaintiff elected to rely solely on her security and, therefore, she is not entitled to recover a deficiency judgment." Meissner, 58 Or App at 178.

In Heiller, a judgment creditor was confused by ORS 115.065(1) and filed with the circuit court a "Petition to Determine Priority of Claim" in which the creditor "contends he is a secured creditor and is entitled to have the property conveyed in satisfaction or partial satisfaction of the debt, or would be entitled to the proceeds of the sale. . . ." Heiller, 127 Or App at 193 n.1. The personal representative argued that by filing the petition, the judgment creditor had waived his security under ORS 115.065(1). The Court of Appeals disagreed, but did not directly address the personal representative's contention that the secured claim was waived. "We do not understand ORS 115.065 to create a trap for unwary judgment lien creditors. The petition reiterates that petitioner intended to rely on his security interest and sought conveyance of the secured property in satisfaction of the debt." Id. at 193-94.

While the decision in Heiller is protective of the secured creditor's rights, the case underscores the confusion embedded in ORS 115.065(1). What if the judgment creditor had not so clearly stated his intention to rely on his security interest? Would he have waived his security?

Another potential source of interpretive help is the Oregon Uniform Trust Code ("UTC"), ORS 130.390. The UTC mirrors ORS 115.065, but applies where a decedent used a revocable trust as a will substitute and no probate case is opened. Unfortunately, there are no Oregon decisions citing the UTC.

The Advisory Committee
History holds the answers to many questions, and this inquiry is no exception. The 1968 Advisory Committee report on what became of the 1969 Probate Code speaks directly to the section that became ORS 115.065:              

Advisory Committee Comment—Section 146 follows the general wording of section 3-511, Uniform Probate Code. It expresses the option of the creditor to either file a claim as a nonsecured debt, with surrender of his security, or rely on his security without presentation of a claim. On the other hand, if the creditor files a claim but retains his security, he is entitled to the value of the claim less the amount already realized on the security or less the agreed value of the security upon which the value of the security has not been realized.

Advisory Committee on Probate Law Revision, Preliminary Draft Proposed Oregon Probate Code (1968), Article V, Part 1 (emphasis added).

Conclusion
With the Advisory Committee report, there is strong historical support for the argument that a secured creditor may file a claim and simultaneously retain its security.

In addition, ORS 115.065(1) provides secured creditors with two options. These options are permissive. First, the creditor may elect to surrender its security to be administered by the personal representative. The cost of that election is the creditor's claim will be treated as unsecured along with general creditors of the estate. The personal representative has the countervailing authority to return the collateral to the creditor. ORS 115.065(6).

The second option permits the creditor to execute on its collateral separate from the estate process. The price of this option is waiver of any deficiency claim that may result.

As stated in Heiller, ORS 115.065 should not serve as a trap for the unwary secured creditor. However, through a simple clarifying statutory amendment, any confusion caused by the statute could be put to rest.