When a debtor dies or inherits, what can a creditor do to determine what is in the estate? | In Principle

One problem that can affect a creditor is the debtor’s death. Then a creditor seeking to recover a claim must in some way determine as soon as possible the value of the estate left by the deceased debtor, whether the claim is included in the estate, and who, from the group of potential heirs, and to what extent, will be responsible for the debtor’s obligations.

Sometimes a debtor inherits an estate that constitutes the only chance to satisfy a creditor. At that time, recovery of the claim depends on whether and to what extent the creditor will be able to “reach into” the estate inherited by the debtor. In other words, whether the creditor will be able to carry out enforcement against the assets forming part of the estate to which the debtor has inherited the title.

Today, estates inherited from decedents are increasingly valuable. Through succession, debtors can suddenly go from being insolvent to being millionaires, and their creditors have a chance to share the wealth. They may or may not be able to do so if they do not quickly and effectively become involved in the proceedings where it is decided whether the debtor will inherit anything, and if so, what and of what value.

Thus, from the perspective of a creditor (holding a claim against the decedent or the heir), one of the key moments for the outcome of the succession proceedings is the binding determination of the estate. That is what we would like to focus on in this article.

What is an estate?

First we will explain what an estate is under Polish law. In the simplest terms, an estate is the collection of all the rights (assets) and obligations (liabilities) left by a decedent.

The estate may include the decedent’s rights and obligations related to in rem property rights (e.g. ownership of real estate, cars, valuables, works of art, cooperative ownership of a residential unit, etc) or contractual rights (arising from contracts concluded by the decedent, e.g. the right to obtain rent under a lease).

If the value of the assets forming part of the estate is higher than the value of the liabilities of the estate to be inherited, the creditor’s chances for satisfaction of the claim against the decedent or the heirs obviously increase.

Therefore, it is important for the creditor to make a binding determination of what constitutes the debtor’s estate (and its value), or the estate that the debtor might inherit.

Methods of determining the estate

We can distinguish two groups of methods to determine the parts of an estate and their value. These are worth knowing, as the vast majority of these methods can be used by the decedent’s or heir’s creditors at the creditors’ own initiative.

The first group is legal and procedural methods (instruments arising under the regulations), discussed in detail later in this article:

• Private inventory (wykaz inwentarza, Civil Code Art. 1031¹–1032)
• Securing the estate by listing the movable property (Civil Procedure Code Art. 633–636² and 638⁴)
• Official inventory (spis inwentarza) upon a petition filed with the court (Civil Procedure Code Art. 637, 637¹ §§ 1, 2 and 4, and 638² §2)
• Official inventory upon petition filed directly with the bailiff (Civil Procedure Code Art. 637¹)
• Proceedings for disclosure of elements of the estate (Civil Procedure Code Art. 655–660).

The second group consists of operational methods or instruments used by the creditor to gain knowledge of the assets that may constitute part of the estate, including assets located abroad. These include:

• Support from a licensed detective agency (specialising in asset tracing)
• Business intelligence
• Professional analysis of the debtor’s legal and economic situation
• Forensic accounting (readers can learn more about the operational instruments for determining inherited assets in the interview here).

As may be seen, the legal and procedural methods are formal and institutional. They serve the purpose of reaching an authoritative decision (generally by the civil court) on what forms part of the estate, and what its value is.

The operational methods are of an “intelligence” nature, informal (but they must always be performed legally), and serve mainly to gather evidence that a creditor of the decedent or heir can use in succession proceedings to protect the creditor’s interests.

It pays to be proactive

In each case, the creditor should remember that:

• Under all legal and procedural instruments which the creditor has the power to activate, the creditor may present and apply for admission of evidence (to the court or the bailiff) from which the actual state of the estate can be determined.
• It is possible and sometimes advisable to use both operational and legal and procedural instruments at the same time. The operational instruments will enable identification of the elements of the estate, while the legal and procedural instruments will allow for quick and optimal use of this knowledge.
• Initiative by the creditor of the estate in proving the existence and value of assets, or the possible non-existence or actual value of liabilities, radically increases the odds of a fair determination of the estate.

Private inventory (wykaz inwentarza)

For a more detailed presentation of the legal and procedural instruments for determining the estate, we begin with the private inventory. The private inventory is a private document prepared by an heir, in which the heir should disclose with due care all known items belonging to the estate. It includes a list of the estate’s debts to be followed by heirs in paying the debts (Civil Code Art. 1031³ §1). It obligates the payment of debts included therein by the person entitled to succession who placed them there.

For creditors, the private inventory has an informative function, among others. From the private inventory, they can learn what assets form part of the estate and, as result, from which they can pursue satisfaction of their claims. Failure to take into account the debts listed in the private inventory will result in extending the liability for these debts to the heir’s assets (pursuant to Civil Code Art. 1032 §2). Any heir who accepts the succession under the benefit of an inventory may draw up such a document on their own (as may the legatee of a specific bequest or the executor of the will). If there are several heirs, preparation of a joint private inventory is acceptable. Also, the private inventory is binding to some extent on other beneficiaries not involved in drawing it up. The payer of the debts of the estate cannot plead ignorance of another private inventory prepared by another beneficiary (Civil Code Art. 1031³ §1 in conjunction with Art. 1032 §2).

A creditor may object to the findings of a private inventory, in particular, the valuation of the elements of the estate prepared by the beneficiary. More specifically, the creditor may request taking an official inventory (Civil Procedure Code Art. 637–637¹; we write about the official inventory in detail below). A creditor may also file a claim against the beneficiary for payment of a debt exceeding the positive value included in the list. For this purpose, the creditor should apply to admit evidence demonstrating that the beneficiary deceitfully omitted from the private inventory items belonging to the estate or objects of the specific bequest, or deceitfully included non-existent debts in the private inventory (Civil Code Art. 1031 §2, second sentence).

Securing the estate by listing its movable assets

It is also possible to determine the estate by securing succession through a listing of the movable property. Succession is secured when it is substantiated that, for any reason, the things or property rights that were possessed or owned by the decedent at the time of opening the estate are likely to be affected, especially by being removed, damaged, destroyed or otherwise disposed of in an unjustified manner (Civil Procedure Code Art. 634). A petition may be filed by, among others, a creditor who has written proof of claims against the decedent (Art. 635 §2). We believe that legal arguments exist for a creditor in possession of a written proof of claims against an heir also to take the initiative of securing the estate.

The creditor’s petition to secure the estate should identify the decedent and precisely specify the object requiring security (sometimes a general description of the estate is sufficient, while an itemisation of the decedent’s movable property may be done at the stage of enforcement of the relief).

Among other things, the listing of movable property should lead to:

• Itemisation of the various movables in the estate and demonstration of their estimated value
• Appointment of a supervisor and designation of the parts of the estate to be supervised.

Enforcement of the injunction securing the estate, or modification of a security measure, is the responsibility of the bailiff (Art. 638² §1). As part of the supervision, the court may give instructions to the bailiff, provide directions, or require certain action to be taken, aimed at ensuring the effectiveness of the enforcement proceedings. There is no obstacle to the court issuing such instructions at the request of the creditor.

Official inventory (spis inwentarza)

The most important legal and procedural instrument for determining the estate is the official inventory. Here, suffice it to say that the official inventory takes precedence over a private inventory. The purpose of the official inventory is to determine:

• The elements of the decedent’s estate, and thus the estate and the items disposed of by the decedent by way of specific bequests
• The value of the elements of the estate
• The location of elements of the estate.

Among other things, the petition to take an official inventory may be filed by a creditor in possession of proof of claims against the decedent (Civil Procedure Code Art. 637 §1). And in this case, we believe that legal arguments exist for vesting the initiative to request taking an official inventory also with a creditor in possession of written proof of claims against an heir. If a creditor requests taking an inventory, the probate court will issue a decision on the petition after hearing the heir, unless a hearing is not possible. The proceedings for an inventory may be conducted simultaneously with proceedings for securing the estate.

There are two procedural modes for taking an official inventory: the general (judicial) mode and the special (extrajudicial, bailiff) mode. The general (judicial) mode consists of:

• Exploratory phase, covering the period from filing of a petition initiating the proceeding until the probate court issues a decision on taking an inventory
• Issuance of an order on taking an inventory
• Immediate announcement of the issuance of the order on taking an inventory
• After the decision becomes legally final, issuance of an enforcement clause for the order
• Execution phase—execution proceedings for taking an inventory conducted by the bailiff.

The special mode of taking an inventory (out of court) works as follows:

• A petition to take an inventory is submitted directly to the bailiff competent to enforce the probate court order to take an inventory (Civil Procedure Code Art. 637¹ §1).
• After filing a petition meeting all prerequisites for initiating the proceeding before the court, the bailiff immediately proceeds to take an inventory and notify the probate court thereof.
• After receiving the bailiff’s notice and a copy of the filed petition, the probate court issues an order on taking an inventory.

Proceedings for disclosure of inherited items

What if, after the inventory has been taken, there is a doubt as to whether all the items forming part of the estate and the specific bequests have been included in the official inventory, or whether the debts of the estate included in the official inventory exist? Then, among others, at the request of a creditor of the estate (or in our opinion, also a creditor of an heir) who substantiates that the positive amount of the estate disclosed in the inventory is not sufficient to satisfy the debts of the estate, the probate court may order the heir to submit:

• A statement that they have not concealed or removed any inherited item, or listed any non-existent debts in the inventory
• A list of inherited items not disclosed in the inventory, if known to them, stating the location where movable property is kept and documents relating to in rem rights, as well as explaining the legal basis for these rights
• Assurance that the statement or list submitted is correct and complete.

After the order granting in whole or in part the application for disclosure of the inherited items becomes legally final, at the request of anyone entitled to file a petition the court will:

• Summon the heir to perform the obligation imposed on them within the prescribed time limit, with an instruction that the heir may submit a statement to the court record, and
• Schedule a hearing at least two weeks after the end of the time limit set, to which all participants in the case will be summoned.

If the heir submits a statement or itemisation before the hearing, the court will notify the participants, but will not cancel the hearing date.

At the hearing, the heir obliged to disclose inherited items will make certain assertions, and the participants in the proceeding may ask them additional questions. A creditor may present evidence concerning facts about which the heir is questioned.

If the heir fails to fulfil their obligations or refuses to answer questions, the court will apply coercive measures in accordance with the regulations on enforcement of non-monetary relief:

• A fine with the possibility of conversion to detention
• Injunctive relief securing the petitioner’s claim
• An order to pay money to the creditor (Civil Procedure Code Art. 1050¹).

It should be apparent that inheritance proceedings can be vitally important for creditors of the decedent or heirs. Sometimes this may be decisive for satisfaction of the claim. Therefore, creditors should not ignore these proceedings or take a passive approach.

Jan Ciećwierz, adwokat, Adam Studziński, adwokat, Dispute Resolution & Arbitration practice, Wardyński & Partners