Legal Blog

Stay

Posted on December 11, 2017 | Posted in Collections

The Bankruptcy and Insolvency Act (BIA) exists to give debtors, some unfortunate and some not, a second chance financially. Regrettably, sometimes it is also a third or fourth chance financially because some bankrupts simply do not learn – or perhaps, they learn all too well. Under the BIA, a trustee in bankruptcy is appointed to take control of all of the bankrupt’s assets, convert them into money, and distribute them rateably to the bankrupt’s ordinary creditors. Of course, there are many more twists and turns than those set out above in our (perhaps, over-simplified) explanation.

To allow the trustee to do its job, section 69.3 of the BIA prohibits any creditor from any remedy against the bankrupt or the bankrupt’s property and prohibits all actions, executions, or other proceedings against the bankrupt for the recovery of a claim provable in bankruptcy. This stay of proceedings continues until the day that the trustee is discharged from its obligations, a date that is often later than the date on which the bankrupt is discharged from bankruptcy.

However, like many aspects of legislation, there are exceptions to the rule and, sometimes, exceptions to the exceptions. Section 69.4 of the BIA allows a person affected by a stay to apply to the court for a declaration that the stay does not apply to that person. The court may make this declaration if it is satisfied that (a) the person is materially prejudiced by the stay or (b) it is equitable on other grounds to make the declaration.

An entire body of law has developed around the interpretation of section 69.4. We will not attempt to summarise it. However, we will comment on the case of Fiorito v. Wiggins, a 2017 decision of the Ontario Court of Appeal dealing with an application, under unusual circumstances, to lift a stay .

Sordid History

The parties were married in 1998; had three children who, in 2017, were aged 12, 13, and 15; separated in 2008; and then engaged in litigation for the next 9 years. The litigation included custody and access claims, contempt motions, and appeals.

The trial judge was displeased with mother; he found that she was in contempt of previous orders and had instilled in her children a fear and dislike of father. The judge countered this behaviour in a number of ways, one of which was to award custody of the children to father. The judge also ordered mother to pay costs of $400,000 to father. The Court of Appeal reduced the awarded costs to $200,000 and, in October 2015, ordered a review of the access provisions to take place on February 1, 2016.

Father was a tad worried that mother might not willingly pay the costs award and, accordingly, brought a motion returnable January 22, 2016 either to obtain payment of the costs award or to obtain an order for security as a condition of proceeding with the access review hearing. On that motion, mother filed an affidavit swearing that she intended to pay the costs award and did not intend to file for bankruptcy after the access review hearing to thwart father’s claim for costs.

The motions judge did not want to delay the access review hearing and ordered only that mother produce copies of all bank and investment statements and all financial accounting records for her corporation. Pending the return of the motion, the judge also restrained mother from disposing of her RSPs or otherwise dissipating her assets.

On February 9, 2016, during the access review hearing, father brought a motion requesting the court’s assistance in enforcing the costs award by garnishing the financial institutions holding mother’s RSPs. This motion was never heard because, on February 22, 2016, while the review hearing was still ongoing, mother made an assignment into bankruptcy.

Bankruptcy Effect

Aside from causing father’s motion to be stayed, the bankruptcy had another, more drastic, effect on father’s attempt to collect the costs award. Under Ontario law, assets in an ordinary, non-insurance related RSP are exigible (i.e. they are fair game to be seized). However, everything changes upon bankruptcy. Assets in an RSP are not transferred to a trustee upon bankruptcy; they are exempt assets. Accordingly, because of the bankruptcy and the automatic stay, father was no longer able to enforce the costs award and, worse yet, upon mother’s discharge from bankruptcy, his claim for costs would be unenforceable. Accordingly, father would collect nothing.

Strike Back

Given the acrimonious litigation between the two, mother was surely aware that father was not going to sit back and just take it. Father brought a motion for an order lifting the stay pursuant to section 69.4 of the BIA and authorising father to continue his enforcement of the costs award against mother’s RSPs.

The motions judge made the following three factual findings on which she based her decision:

The costs award arose from an extreme case in which mother was undermining father during 8 years of litigation in which father was attempting to have a relationship with his children.

Mother had paid absolutely nothing towards the $200,000 cost award.

In father’s motion for security, father, and more importantly, the court had relied on mother’s representations in her affidavit that she intended to pay the costs award and did not intend to thwart that payment by making an assignment into bankruptcy.

Based on these factual findings, the motions judge concluded that father would be materially prejudiced by the continuing operation of the stay; he would likely receive nothing towards his costs award unless the stay was lifted. She also observed that the other ordinary creditors would never have been able to attack the RSPs and so father’s attack would not adversely affect them. Indeed, (we say) it would help them because anything that father was able to receive from the RSPs would reduce his claim against mother’s other assets. The motions judge lifted the stay to allow enforcement of the costs award against the RSPs.

One More Appeal

Having done so well at her first appeal, mother decided to appeal this decision also. This time, however, the appeal was unsuccessful.

The Court of Appeal agreed that there would be material prejudice to father. It noted that material prejudice can arise from the size of the debt and the expected loss. It noted that the motions judge’s findings of fact differentiated father’s position from that of the other creditors. It also agreed that the motions judge was entitled to find that father would, in all likelihood, receive nothing without a lifting of the stay.

Further, the Court held that section 69.4 of the BIA gave a court a wide discretion based on the particular facts of a particular case. The three facts that the motions judge found, particularly mother’s previous representation that she had no intention of filing for bankruptcy, resulted in strong equitable grounds to lift the stay.

Upshot

The Court dismissed the appeal and ordered that mother pay an additional $25,000 in costs. Accordingly, father is ultimately going to receive the lesser of $225,000 and the value of the assets in the RSPs (after deduction of the mandatory tax holdback).

 

Image courtesy of kconnors.

Jonathan Speigel

 

Written by Jonathan Speigel Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.

 

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