Arizona Court of Appeals Division One Holds That Under Probate Code's Provision for Paying Contingent Claims by an Estate, "Allow[ing] or Establish[ing]" a Claim Does Not Make a Claim Certain.

In January 2002, the Arizona Department of Environmental Quality sent a letter to the estate of William Headstream ordering the estate to pay a claim of $2.2 million to the State for the cost of closing two underground storage tanks and cleaning up the contamination caused by the tanks. The letter explained that the “exact amount of the State of Arizona’s claim is currently unknown” and made no reference to penalties proscribed by statute for failure to properly close the tanks and take corrective action. The estate did not deny the claim or otherwise respond.

In May 2005, the State filed an application for allowance of the claim, seeking $2.2 million or an order directing the estate to provide future payment for closing the tanks and cleaning up the site. The estate objected, noted that among other objections, the claim remained unliquidated, citing the “estimate” provided in the State’s 2002 claim letter. The State’s reply attached an itemized list of costs — including a line item for remediation “unknowns” and describing the costs as “estimates.” (The reply further argued that the State was entitled to more than $175 million in statutory penalties.) The court allowed the State’s claim, and the estate appealed.

The appellate court held that the claim for corrective action remained unliquidated by the State’s own admissions. The court rejected the State’s argument that the probate court could and did fix the amount of claim under A.R.S. 14-3810(A), which permits a “contingent or unliquidated claim” that “becomes due or certain before the distribution of the estate” and “has been allowed or established by a proceeding,” to be “paid in the same manner as presently due and absolute claims of the same class.” The court rejected the State’s suggestion that “establishment of the claim” refers to the fixing the amount of the claim, reading the statute to require an allowance or establishment of the fact of the claim, in addition to establishing the claim’s certainty (liquidation). Though the fact of the claim had been established by the estate’s failure to timely deny the claim, the amount of the claim remained unliquidated and subject to challenge by the estate.

(The court also found that the absence of any reference to statutory penalties in the 2002 claim letter precluded the State from recovering penalties, rejecting the State’s argument that mere reference to the statute preserved the claim.)

Judge Irvine authored the opinion in which Presiding Judge Maurice Portley and Judge Kessler concurred.