Creditor’s Rights Questions Arise while Winding Up Medical Practice

By Doug Chalgian on March 24, 2021

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Dr. Lewerenz died.  His office manager, acting as the personal representative of his estate, wound up his medical practice (a single member LLC).  In the course of doing so, the office manager/PR was sued by the entity that owned the building in which the doctor maintained his offices.  That lawsuit was filed in business court (a division of the circuit court).

At the same time, the property owner filed a claim in the probate court for $79,000. Office manager/PR did not disallow that claim.

The business court suit resulted in a judgment in favor of the property owner (and against the estate) in the amount of $81,000.  The property owner then filed an action in probate court seeking to have property previously distributed to the estate beneficiaries returned to the estate in order to pay the amount of judgment, which request was granted by the probate court. It is from this probate court order that the appeal was filed.

The Court of Appeals affirms the decisions of the trial court in In Re Estate of Frederick Lewerenz (click on the name to read the case).  The opinion is unpublished.

Two points from this opinion seem worth discussing:

Subject Matter Jurisdiction

In this appeal, the office manager/PR argues that the business court lacked jurisdiction to decide the validity of a claim against the estate.  The COA disagrees and explains that, while an action to determine the validity of a creditor’s claim against a decedent may be brought in probate court after a claim is filed and disallowed, creditors may also seek redress in another court which has concurrent jurisdiction over the subject matter giving rise to the claim.  In other words, simply filing a claim in probate court does not vest exclusive jurisdiction in the probate court with respect to the matter giving rise to the claim.

The COA says:

Indeed, a judgment in the claimant’s favor in another court becomes a claim allowance in the probate court.

This opinion includes a good discussion of concurrent and exclusive subject matter jurisdiction in probate court, which some readers might find helpful.

Interplay of EPIC and MLLCA vis a vis Creditors’ Rights

A second issue relates to the rights of business creditors (specifically, creditors of a limited liability company) when the LLC becomes an asset of a probate estate.

After the office manager/PR lost on the issue of jurisdiction as discussed above, and the issue of having estate beneficiaries disgorge their distributions in order to satisfy the judgment obtained by the property owner, the PR argued that doing so would be a futile exercise because after payment of allowances and expenses with higher priorities, there would be nothing left from which an unsecured judgment creditor (the property owner) could be paid.

The trial court disagreed and the COA affirmed.  As explained in the opinion, the PR’s understanding of creditor rights misses the implications of the Michigan Limited Liability Company Act (MLLCA).  Pursuant to the MLLCA, the rights of creditors of the LLC are satisfied in the process of wrapping up the business.  The business interest held by the estate is subject to the rules of the MLLCA pursuant to which the creditors of the business of a deceased sole-member LLC are satisfied by assets of the business before any remaining value becomes subject to the claims, allowances and expenses of the estate as provided for in EPIC.

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mm By: Doug Chalgian
Doug Chalgian

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