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Decedent's Business in Probate – What Should I Do?

A personal representative of an estate has enough to deal with in the normal probate until he or she learns that the business which the decedent owned was operated as a sole proprietorship, and not as a partnership or corporation.  The rules for continuing (or not continuing) a business that was operated as a sole proprietorship are slightly different from the rules governing partnerships or corporations. 

California Probate Code Section 9760 allows a representative a six-month window to run the business, at which time court approval is required for further operations.  During that time, or at any time, any “interested person” (the Probate Code loves that designation) may petition the court to require the representative to discontinue operation of the business.  Who is an interested person?  I would consider the term broad, to include most creditors and heirs.

Some calls and questions I get about this obligation of the executor or representative: 

Are debts from operating the business entitled to priority in payment?  The general answer is no, if they occured during the representative’s operation (after decedent’s passing). 

Is the executor, or representative, liable for torts he or she commits while operating the business?  Yes.  Is the representative entitled to be reimbursed for liability he or she incurs?  Normally yes, unless he is personally at fault for a tort.  The law is a little unclear on this last exception.  Can the representative get insurance to protect against liability?  Yes, and often the premium may be a business expense.

 Can a representative operate the business even if a creditor objects?  Yes, but only after getting court approval.  Doing so places him or her at risk of personal liability for the business.

If a representative fails to get court approval first, is there any way to remedy the problem?  Yes, the best course would be to immediately petition the probate for approval (ratification) of the prior acts.  This should be a detailed summary of the operation of the business together with a request to ratify the operation as a whole or at least in part.

What if the business was a partnership or an entity such as a corporation or LLC?  I’ll get into the management duties of a representative in these situations in my next posts.

 

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