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Husband’s Bankruptcy Thwarts Wife’s Equalization –Supreme Court of Canada Acknowledges Loophole in the Law

Husband’s Bankruptcy Thwarts Wife’s Equalization –Supreme Court of Canada Acknowledges Loophole in the Law

Last week the Supreme Court of Canada made an important family law ruling relating to the interplay between a spouse’s right to equalization on the one hand, and her partner’s bankruptcy on the other. The case of Schreyer v. Schreyer, which originally emanated from Manitoba, presented the court with a unique opportunity to evaluate provincial disparity across Canada in terms of how one spouse’s bankruptcy affects the equalization entitlement of the other.

The Schreyers were married in 1980, and separated in 1999. They filed for divorce in 2000, after which time the husband continued to live on the family farm. Both agreed to have the valuation of their assets dealt with before a master of the Manitoba court. However, before that valuation could take place, the husband declared bankruptcy. Under Manitoba law, the farm was not subject to seizure in bankruptcy; moreover, title was registered in his name only. The husband was discharged from that bankruptcy in 2002.

The wife was not given notice of the bankruptcy and was not listed as a creditor. Essentially, the husband’s discharge in bankruptcy under the BIA essentially trumped the wife’s right to equalization under Manitoba family law: She received nothing, while he was able to keep the exempted family farm.

Meanwhile, the master proceeded with the valuation and determined that the wife was indeed entitled to about $41,000 as an equalization payment. However, at this stage the judgment was arguably moot, and did not address the effect of the husband’s bankruptcy and discharge on the wife’s equalization entitlement.

Armed with these conflicting outcomes, the parties brought the matter before the Court of Appeal for resolution. That court confirmed that the wife’s equalization claim was considered a “claim provable in bankruptcy” within the meaning of the federal Bankruptcy and Insolvency Act, but found that her right to equalization had been extinguished when the husband’s bankruptcy was discharged in due course.

On appeal, the Supreme Court of Canada agreed to this line of reasoning.

Addressing the clash between family law and bankruptcy law, the Supreme Court pointed out that Manitoba is what is known as an “equalization jurisdiction” (unlike Ontario, which employs a “division of property” regime). Spouses are entitled to obtain an order setting the amount payable from one spouse to the other, and may either be monetarily paid or receive a transfer of assets in lieu.

Moreover, the Supreme Court found that the wife’s equalization claim had been correctly framed as a “provable claim” (i.e. a debt) for the purposes of the Bankruptcy and Insolvency Act (the BIA). After reviewing the structure and policy behind the BIA, including the fact that there are some legislated exemptions to its application, the Court found that the proper interpretation of the BIA involves accepting the principle that every debt is encompassed by the bankruptcy, and – upon discharge – the bankrupt is released from all of them unless an exemption or exclusion clearly applies.

Conceding that this may appear unfair, the Court also pointed out that the wife’s equalization claim in this case was based primarily on the value of a single asset: the farm property, which happened to be exempt from bankruptcy under Manitoba legislation and therefore not accessible to creditors. The BIA does not currently differentiate between equalization schemes (as in Manitoba) and division of property schemes (as in Ontario, where the outcome would have been different).

In the end, the proper interpretation and application of the BIA resulted in the wife leaving the marriage without any significant assets, and being denied recovery of an equalization payment to which she was otherwise entitled. Although the overall policy behind the BIA would not endorse the wife leaving the marriage with nothing, it was up to federal Parliament to amend the BIA to avoid this kind of outcome in some provinces, a point that was also made years earlier in an Ontario Court of Appeal case called Shea v. Fraser.

Until that time, separated and divorcing spouses across the country must be aware of the potential ramifications of their former partner’s bankruptcy on their own entitlements under family law.  At Russell Alexander, Family Lawyers we can advise on these and other matters. For further information, visit www.RussellAlexander.com.

For the full text of the decisions, see:

Schreyer v. Schreyer, 2011 SCC 35

Shea v. Fraser, 2007 ONCA 224, 85 O.R. (3d) 28