Background
A claim is provable in bankruptcy if it falls under ss. 121–122 of the Bankruptcy and Insolvency Act, R.S.C. 1985, C. D-3 (“BIA”). If the obligation existed before bankruptcy, the resulting debt is part of the bankruptcy, even if the amount is unknown, contingent, or arises later. Under section 69.3 of the BIA, all provable claims including family law claims are stayed upon bankruptcy, unless the court lifts the stay under section 69.4 of the BIA. This paper addresses the impact of bankruptcy on support, equalization, and costs, and provides practical guidance for counsel.
Support
Subsection 121(4) of the BIA provides that a child or spousal support claim is provable if it is payable under a court order or written agreement made before the initial bankruptcy event and was payable at a time when the spouse, former spouse, former common‑law partner, or child was living apart from the bankrupt, whether the order or agreement provides for periodic or lump‑sum amounts.
If the claim falls within paragraphs 178(1)(b) or (c), it will not be released by an order of discharge. A support creditor with a provable claim may therefore participate in the distribution of the estate on a pro rata basis with other unsecured creditors.
Support arrears may have priority under any distribution of dividends out of the bankruptcy per section 136(1)(d.1) of the BIA. This priority covers periodic support arrears from the year before the bankruptcy and any lump sum payable. This priority ranks seventh, after the administration costs and the Superintendent’s levy. Because the trustee’s fees and legal costs are paid before support arrears, it’s important to ensure those expenses remain as low as possible.
Equalization
If an equalization claim arises before bankruptcy and determinable under the applicable legislation, then the claim is provable, per section 121 of the BIA, as confirmed in Schreyer v Schreyer, 2011 SCC 35 (“Schreyer”) at paragraph 27. However, at paragraph 29 of Schreyer, the Supreme Court of Canada found that equalization is not exempt from the effect of a discharge.
Ontario courts have consistently applied this principle. In Labrèche v Labrèche, 2017 ONSC 6702, the wife’s discharge from bankruptcy released her from the husband’s claim for equalization despite not listing the husband as a creditor.[1] At paragraph 63, Williams J. found that the husband could have pursued other remedies with respect to the wife’s failure to list her pension as an asset and to list him as a creditor.
At paragraph 37 of Thibodeau v Thibodeau, 2011 ONCA 110, the Court of Appeal found that an equalization payment does not have priority over secured or unsecured creditors.
Certain assets such as RRSPs except for contributions during the last year, and a principal residence with minimal equity are excluded from bankruptcy, pursuant to section 67 of the BIA.
Costs
Costs related to child and spousal support are not extinguished by the bankruptcy of the debtor as per s. 178(1)(c) of the BIA. A court has the authority to amend a costs order that was made prior to the party declaring bankruptcy to apportion between costs related to support and non-support issues.[2] This was followed in Phillip v Phillip [2008] O.J. No. 3067 where J.R. Henderson J. permitted the wife to amend a costs order of $17,897.35 by apportioning 60% of the costs in relation to spousal support and child support.
Costs awards arising from property matters are not enforceable once an assignment in bankruptcy has been made. In Johnston v Johnston, 2020 ONSC 6515, the husband filed for bankruptcy shortly before the wife obtained a $25,000 costs award, which had been ordered to be paid out of the husband’s 50% share of the net proceeds of sale of the matrimonial home. The net proceeds of sale of the matrimonial home had been held in the parties’ real estate lawyer’s trust account. The wife argued she was a secured creditor and unaware of the bankruptcy when the costs award was made. The court rejected this, finding she was not a secured creditor, and set aside the costs order directing payment to her.
Practical Tips for Lawyers
- Act quickly when bankruptcy is at risk
If a party seems close to bankruptcy or a client may be concerned that their spouse may declare bankruptcy, counsel should advise their clients to commence an application and seek orders regarding property and support. As noted above, once a party is discharged from bankruptcy, equalization claims are extinguished.
The bankruptcy does not affect or stay an order striking pleadings or granting an uncontested trial, but the trustee is entitled to notice. The bankrupt remains subject to the court’s power of contempt. Therefore, if the other party repeatedly breaches court orders, it is key to try to strike their pleadings and ask that an uncontested trial be granted.
- Consider characterizing obligations as support
Where appropriate, framing certain obligations as support may protect a client’s interests if the other spouse declares bankruptcy. If a party has already declared bankruptcy and if the other party is determined to be a creditor based on their claim for equalization, then the secured creditors would be paid first following distribution of the remaining assets being divided equally between the unsecured creditors. If the equalization payment is not satisfied following the payout and there has been a discharge by the trustee appointed under the BIA, one could try to seek an order that the party pays spousal support to the other party.
- Move to lift the stay when possible
As soon as a party is aware that the other party has made an assignment in bankruptcy, counsel should determine whether the stay can be lifted via a motion. A stay can be lifted pursuant to section 69.4 of the BIA. This order must be obtained before the bankruptcy’s discharge.[3] The party seeking to lift the stay would need to show that they are “likely to be materially prejudiced by the continued operation of those sections” or “that it is equitable on other grounds to make such a declaration”.[4] This threshold is very high because there would be material prejudice when the bankruptcy treats a creditor differently, unfairly, or in some way worse than other creditors. Courts can grant stays for non-exempt assets to permit the parties to figure out the equalization owing so the creditor can file a claim in the bankrupt’s bankruptcy.[5]
A stay can be lifted to enforce a costs order. In Fiorito v Wiggins, 2017 ONCA 765, the Court of Appeal upheld the motion judge’s decision to lift the stay so the father could enforce his costs award. Because the mother’s RRSPs were exempt assets, lifting the stay allowed him to execute any debt against the RRSPs. The Court found no material prejudice, as a result of the unfairness the father faced. The mother had paid nothing toward the Court of Appeal’s costs order, he had been forced to pursue lengthy litigation to maintain a relationship with the children, and she had undermined enforcement by going back on assurances that she would pay the costs and would not use bankruptcy to avoid doing so.
- Monitor real property and consider motions for various orders
If a party owns real estate and there are signs that they are trying to avoid support or equalization obligations, counsel should advise the client to monitor those properties, either by having a real estate lawyer or counsel regularly check parcel registers, and by watching MLS listings to ensure nothing is being transferred or sold. These types of transfers of real estate are often early warning signs of an impending bankruptcy, coupled with a party’s failure to provide disclosure or breach of other orders.
Counsel should assess whether a motion for non‑depletion or freezing of assets is necessary. If there is a fraudulent conveyance, counsel should bring a summary judgment motion to determine whether the transfer was fraudulent and consider seeking a vesting order if equalization is owed. Courts require strong evidence that payment will not be made without such relief for a vesting order to be granted.[6]
- Consider annulling the bankruptcy
Pursuant to section 181 of the BIA, the court can annual a bankruptcy by considering many factors like the timing of the bankruptcy and the misconduct of the bankruptcy. While the annulment does not undo transactions, payments or acts done before the annulment order, the court may vest the available property of the bankrupt in any person. In Wale, Re (1996), 45 C.B.R. (3d) 15 (Ont S.C.J.), the bankruptcy court vested title to the matrimonial home to the wife, ordered the trustee to return all other assets to the husband, ordered costs to be paid by the husband, and denied the trustee costs.
[1] See paras 56 and 61 of Labrèche v Labrèche, 2017 ONSC 6702.
[2] See Taylor v Sist, 2017 ONSC 4280: Father made an assignment in bankruptcy after trial judge awarded sole custody to mother and awarded mother costs. Mother brought a motion for the costs order not to be discharged by the bankruptcy. The time spent on shared custody was related to the child support issue. Therefore, 50% of the costs was considered debt related to the support of a child living apart from the father.
[3] Schreyer v. Schreyer, 2011 SCC 35 at para 25.
[4] Section 69.4 of the BIA and see also Great North Data Ltd., (Re), 2020 NLSC 105.
[5] Scott, Re, 2014 ONSC 5566 at para 15.
[6] Lynch v Segal, [2006] O.J. No. 5014, at para 32.
