Legal Blog

Priorities

There is always a tension between family law and debtor and creditor law. When does the family law creditor, usually a spouse and usually the wife, jump the queue and when is the spousal creditor lumped in with all of the debtor’s other creditors? We know that when a family law award is for maintenance of the spouse, the spouse has a bankruptcy priority over other creditors (see newsletter of August 2007). But what happens when a spouse has received an equalization payment award? That issue was covered in Thibodeau v. Thibodeau, a 2011 decision of the Ontario Court of Appeal.

 Family Law

 Husband and wife were feuding bitterly. No surprise; it happens a lot. However, they ultimately agreed to arbitrate their dispute. Aside from a disagreement over arrears of support payments, the main issue was the amount of the equalization payment that husband would pay to wife. An equalization payment is the amount one spouse pays to the other so that, after accounting for the payment, the net worth of each spouse, built up over the life of the marriage, is the same.

 The arbitrator awarded wife $264,000 by way of an equalization payment and a lump sum of $85,000 for support. The parties agreed that the matrimonial house would be sold and the arbitrator ordered that husband pay wife the monetary award from husband’s 50% share (the “Share”) of the net proceeds of sale, which ultimately proved to be about $302,000.

 Wife quickly brought a motion to incorporate the terms of the arbitrator’s award into a court award. Eight days later, and before the motion was heard, husband declared bankruptcy. Wife brought an emergency motion and obtained an order granting her leave to continue her motion against husband and adding husband’s trustee as a respondent on the motion.

 It seems that Bank of Nova Scotia, at $169,000, was husband’s only other substantial creditor; it took carriage of the motion on behalf of husband’s trustee. The Bank wanted the Share paid to the trustee and disbursed to all creditors under the bankruptcy regime. Conversely, wife wanted to scoop it all.

 Wife convinced the motions judge to award all of the money to her, in priority to the trustee. The Bank appealed to the Court of Appeal.

 Equitable Trust

 The motions judge held that the arbitrator’s award had created an equitable trust in wife’s favour. Since trust property was, in effect, not husband’s property, it therefore did not devolve to the trustee upon husband’s bankruptcy.

 The Court confirmed that an agreement, by which two spouses agree to transfer property from one to another, transfers an equitable interest, akin to a trust, in the property. However, it held that an arbitrator’s award was not an “agreement”; it was an award. Husband had to pay the award, not because he consented, but because he lost the arbitration. Although husband consented to the arbitration, he certainly did not consent to the ultimate award.

 The Court then noted that, under the Family Law Act, the arbitrator, like a judge, had the power to actually divide property, but did not do so. Instead, he merely ordered that husband pay the equalization monies from husband’s interest in the matrimonial home. This did not, in itself, create a property interest in the home.

 Further, the Court was clear that an order to divide property was an exceptional and intrusive action and an arbitrator or a court could do it only if the circumstances warranted it. The Court was concerned that an indiscriminate use of the property division power would prejudice a spouse’s other creditors, who were not before the court.

 The Court stated, “I recognize there are policy arguments at play here. On the one hand, spouses — often women — need protection to ensure that their just share of the value of the property accumulated during marriage will be paid by recalcitrant former spouses. These concerns are important, but can often be addressed without affecting the rights of other innocent third parties, as the arbitrator did in this case, for example, by crafting an enforcement mechanism providing for payment out of Mr. Thibodeau’s share of the proceeds — an obligation enforceable as between spouses. On the other hand, what is at issue in terms of enforcement and access to assets as between spouses, one-on-one, takes on a broader dimension in the insolvency context where third party interests are involved. And this gives rise to the counter policy argument: equalization payee spouses are unsecured creditors, and, like other unsecured creditors, should not receive higher protection one against the other.”

 Accordingly, the Court was not concerned that the arbitrator had made no order dividing the property and had no intention of making that order in his stead. The Court found that the arbitrator’s order created for wife no equitable trust or secured interest in the matrimonial home or the Share.

 Improper

 The motions judge felt that it was unpalatable for a court to allow a spouse to use the bankruptcy system to avoid his or her financial obligations on the termination of marriage. The Court felt that this concern was misplaced because it failed to give effect to the supervisory role of the court in bankruptcy proceedings. If a bankrupt seems to be using the system to avoid paying legitimate claims, then a court may deal with these considerations at the discharge stage by denying, or imposing conditions to, the discharge.

 The Court further stated, “the perception that one spouse is attempting to use a bankruptcy proceeding as a means of defeating the other spouse’s claims under the Family Law Act does not in itself justify the retroactive creation of a remedial trust-like claim, or the strained interpretation of the terms of an existing order, in what is essentially an indirect attempt to re-order priorities in the bankruptcy.”

 Equitable Assignment

 Wife argued that husband had made an equitable assignment of the Share. Under the law of equitable assignment, an agreement between a debtor and creditor that the debt owed be paid from a specific fund, which the debtor expected to receive, will create a valid equitable charge against the fund, in effect operating as an equitable assignment of the fund.

 The Court referred to its previous ruling that the equalization payment was not an agreement; rather, it was an order. The Court held that the doctrine of equitable assignment does not extend to court orders.

 RSP

 The motions judge had also ordered that husband’s RSP be attached for payment of the arbitration award. The Court reiterated that the arbitrator had made no order for this and that, therefore, the motions judge had no jurisdiction to do so. It stated, “a subsequent bankruptcy should not normally lead to a variation order shoring up the terms of an equalization payment award or order in a way that impacts the rights” of third parties. Whether the trustee could demand the RSP proceeds or husband would retain them would depend on the insurance nature of the RSP.

 Order

 The Court ordered that the entire Share be paid to the trustee. The trustee would then pay wife her support award, pursuant to her priority under section 136 of the Bankruptcy and Insolvency Act, and pay the balance rateably to all creditors.