The following is Part 3 of our 4-Part series on Probate Funding by Steven D. Schroeder, Esq., General Counsel/Sr. Vice President at Inheritance Funding Company, Inc. since 2004. You can find Parts 1 & 2 here and here.
Probate Assignments are Adequately Regulated in California
In California, it is the exclusive jurisdiction of the Probate Court to determine entitlement for distribution, Cal. Probate Code §§11700-11705. Probate Courts may also apply equitable principles in fashioning remedies and granting relief in proceedings otherwise within its jurisdiction. Estate of Kraus (2010) 184 Cal. App 4th 103, 114, 108 Cal. Rptr. 3d 760, 768. Thus, even without a specific statute addressing assignments, Probate Courts in California, as well as other jurisdictions, have conducted oversight over the propriety of Assignments in Probate. See In Re: Michels’s Estate 63 P. 2d 333, 334 (Cal. Dist. Ct. App. 1936).
For decades, the California Legislature has also regulated Assignments or Transfers by a beneficiary of an estate, see Cal. Probate Code §11604 (formerly Cal. Probate Code §1021.1). The validity of those statutes was well established. Estate of Boyd (1979) 98 Cal. App. 3d 125, 159 Cal. Rptr. 298, and the Courts have recognized the Probate Judge is empowered to give much stricter scrutiny to the fairness of consideration than would be the case under ordinary contract principals. Estate of Freeman (1965) 238 Cal. App., 2d 486, 488-89; 48 Cal. Rptr. 1.
The initial purpose of Probate Code Section 1021.1(followed by 11604), was to provide for judicial supervision of proportional assignments given by beneficiaries to so called “heir hunters” (Estate of Wright (2001) 90 Cal. App. 4th 228; Estate of Lund (1944) 65 Cal. App. 2d 151; 110 Cal Rptr. 183. However, courts have since interpreted that these sections are not limited to that class and can also be applied to Assignees and Transferees generally. Estate of Peterson (1968) 259 Cal. App. 2d. 492, 506; 66 Cal Rptr. 629.
Despite the broad interpretation, California adopted additional legislation specifically directed to Probate Advance Companies. In 2006, the California Legislature enacted Probate Code Section 11604.5,[1] to regulate companies (Probate Advance Companies) who are in the business of making cash advances in consideration of a partial Assignment of the heir’s interest. With the enactment of Section 11605.4, the California Legislature also made it abundantly clear that the transactions under this section are not those made in conformity with the California Finance Lenders Law.
Cal. Probate Code Section 11604.5
(a) This section applies when distribution from a decedent’s estate is made to a transferee for value who acquires any interest of a beneficiary in exchange for cash or other consideration.
(b) For purposes of this section, a transferee for value is a person who satisfies both of the following criteria:
(1) He or she purchases the interest from a beneficiary for consideration pursuant to a written agreement.
(2) He or she, directly or indirectly, regularly engages in the purchase of beneficial interests in estates for consideration.
(c) This section does not apply to any of the following:
(1) A transferee who is a beneficiary of the estate or a person who has a claim to distribution from the estate under another instrument or by intestate succession.
(2) A transferee who is either the registered domestic partner of the beneficiary, or is related by blood, marriage, or adoption to the beneficiary or the decedent.
(3) A transaction made in conformity with the California Finance Lenders Law (Division 9 (commencing with Section 22000) of the Financial Code) and subject to regulation by the Department of Business Oversight.
(4) A transferee who is engaged in the business of locating missing or unknown heirs and who acquires an interest from a beneficiary solely in exchange for providing information or services associated with locating the heir or beneficiary…(emphasis added).
Although it is not specifically required under Probate Code Section 11604, the Legislature also imposed an affirmative obligation on Probate Assignees to promptly file and serve their Assignments, to ensure full disclosure to the representatives, the Courts and/or other interested parties.[2] Also, the legislature made it clear that unlike loans, Probate Assignments are non-recourse, meaning that the beneficiary faces no further obligation to the Assignee, absent fraud. As stated in 11604.5:
(f)“…(4) A provision permitting the transferee for value to have recourse against the beneficiary if the distribution from the estate in satisfaction of the beneficial interest is less than the beneficial interest assigned to the transferee for value, other than recourse for any expense or damage arising out of the material breach of the agreement or fraud by the beneficiary…” …(*emphasis added).
Moreover, in enacting PC 11604.5, the legislature specifically gave the Probate Court wide latitude in fashioning relief, when reviewing probate Assignments.
“… (g) The court on its own motion, or on the motion of the personal representative or other interested person, may inquire into the circumstances surrounding the execution of, and the consideration for, the written agreement to determine that the requirements of this section have been satisfied.
(h) The court may refuse to order distribution under the written agreement, or may order distribution on any terms that the court considers equitable, if the court finds that the transferee for value did not substantially comply with the requirements of this section, or if the court finds that any of the following conditions existed at the time of transfer:
(1) The fees, charges, or consideration paid or agreed to be paid by the beneficiary were grossly unreasonable.
(2) The transfer of the beneficial interest was obtained by duress, fraud, or undue influence.
(i) In addition to any remedy specified in this section, for any willful violation of the requirements of this section found to be committed in bad faith, the court may require the transferee for value to pay to the beneficiary up to twice the value paid for the assignment.
An Assignment under 11604.5 is Best Reviewed by the Local Probate Court
At present, it does not appear that there has been a reported case interpreting an Assignment under Probate Section 11604.5, including whether the consideration paid was grossly unreasonable. However, there have been a long list of cases interpreting precisely that under Probate Code Section 11604 and Probate Code Section 1021.1) See Estate of Boyd, supra, 159 Cal. Rptr. 301-302; Molino v. Boldt (2008) 165 Cal. App. 4th 913, 81 Cal Rptr 3d. 512.
At the same time, it should be noted that there are distinct differences between Assignments given to Heir-Finders and those to Probate Advance Companies. One critical distinction is Probate Advance Companies, such as IFC, provide the Assignor with cash in consideration of a partial Assignment. On the other hand, Heir-Finders, take back a percentage of the Heir’s interest (typically 15% to 40%). Thus, the amount of fees incurred by the Assignee could vary widely depending on the amount the heir recovers. In most instances, the Assignment far exceeds the consideration given to a Probate Advance Company. Moreover, Heir-Finders often receive assignments from multiple heirs in one estate administration even though much of the work would be duplicated. On the other hand, Probate Funding Companies outlay cash consideration for every Assignment they receive. Thus, Probate Funding Companies take on an increased financial risk with every transaction.
Also, as in any industry, there are also significant distinctions among the practices of individual Probate Funding Companies including the disclosures they make to the Assignor/Heir. For example, IFC’s contracts, are limited to less than three (3) pages with no hidden fees or other costs tacked on the Assignment post-funding.[3] The Assignee simply agrees to assign a fixed portion of his/her inheritance for a fixed sum of money. In other words, a simple $X for $Y purchase. Thus, it would be a fatal mistake to make a broad-based analysis based on the assumption that one size fits all when it comes to Probate Funding Companies. [4]
Moreover, under Probate Code Section 11604.5, the Legislature has placed an affirmative burden on the Transferee (Probate Funding Companies) to file and serve their Assignments shortly after their execution. Hence, the terms are open reviewable by the Courts, Personal Representatives, Attorneys, other interested parties and/or to the public in general. Therefore, there is more than adequate opportunity for objections to be filed or for the Court to question the consideration given for an Assignment, sua sponte.
In short, the Legislature left the determination of what amount of fees, charges and other consideration would be deemed “grossly unreasonable” up to the particular Court where administration is ongoing, and to do so on a case by case basis if deemed necessary. In fact, it is in the best interest for all concerned for the local Court to conduct inquiry if legitimate objections are raised, or on the Court’s own motion. In fact, on many occasions, IFC has responded to questions raised by various courts with regard to the Assignments it has filed and served.[5]
Stay tuned for Part 4 of our 4-Part series, where we discuss the risks inherent in Probate Funding, and how those risks should inform the court’s assessment on the validation of an Assignment.
Steven D. Schroeder has been General Counsel/Sr. Vice President at Inheritance Funding Company, Inc. since 2004. Active Attorney in good standing, licensed to practice before all Courts in the State of California since 1985 and a Registered Attorney with the U.S. Patent and Trademark Office.
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[1] IFC provided substantial input, counsel and proposed legislative language in response to California Senate Bill 390 which was enacted into law as Probate Code Section 11604.5 on January 1, 2006 regulating the Probate Funding industry in California. SB 390.Section 1 2015, Ch. 190 (AB 1517) Section 71
[2] Probate Code 11604 does not have a time limitation filing period reflected.
[3] Some Probate Advance Companies have charged interest or other fees post-funding.
[4] See Probate Lending, supra, page 130, in which the author makes questionable statistical findings from one county during a limited period of time, with the assumption that each Probate Advance Company has the same terms and business practices.
[5] IFC has responded to multiple orders to show cause in California.
