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Can the Post-Bankruptcy Distinction Between Support and Equalization Payments be Circumvented?

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Can the Post-Bankruptcy Distinction Between Support and Equalization Payments be Circumvented?

Recently I wrote “How Does an Unpaid Equalization Payment Intersect with Bankruptcy?” about the impact that a paying spouse’s bankruptcy has on the recipient spouse’s entitlement to nonetheless receive either child/spousal support, or an equalization payment as part of a separation or divorce. I observed that – perhaps surprisingly – Canadian law treats these two categories quite differently in terms of the post-bankruptcy collectability by the recipient spouse.

Perhaps this distinction is why some courts might be tempted to try to re-cast a spouse’s entitlement, to maximize the possibility that his or her valid family law-related claim against the bankrupt spouse – essentially in creditor/ debtor roles – will be more likely to be preserved and enforced after the bankruptcy.

But as a case called Mwanri v. Mwanri illustrates, this re-characterization is not always appropriate or permissible in law.

After a trial, the husband and wife were granted a divorce, with the husband being ordered to pay the wife about $50,000 as an equalization payment. However, he filed an assignment in bankruptcy soon after, without ever having paid a dime in satisfaction of that obligation (his spousal and child support payments were current, however). It was unlikely that his assets would be sufficient to satisfy the amount he owed the wife in equalization.

In light of this and other developments, the wife applied to a motions judge for an order that his ongoing child and spousal support obligations be converted to a lump-sum amount in the same amount as the equalization payment would have been, i.e. $50,000. The motion judge agreed, ostensibly under a broad discretion to do so under the Ontario Family Law Act and the federal Divorce Act. The husband was discharged from his bankruptcy shortly after.

From a legal standpoint, the motion judge’s ruling effectively circumvented the distinction in law between the types of award: Unpaid equalization payments got swept into the husband’s bankruptcy and evaporated once he was discharged, while spousal support obligations did not. So by asking for a $50,000 lump-sum spousal award – which was the same amount she would have received in equalization were it not for the husband’s bankruptcy – the wife could enforce the award even after the husband was discharged. In other words, the motions judge simply converted the mother’s now-unenforceable equalization claim into an enforceable entitlement to lump sum spousal support.

The husband objected, and brought an appeal to the Court of Appeal, claiming that the judge’s award was tantamount to re-distributing the husband’s assets in favour of the wife and in preference to his other creditors.

The Appeal Court agreed with the husband. It found that when it came time to make the support award, the motion judge had failed to consider: 1) the father’s status as an undischarged bankrupt; 2) the effect of a lump sum spousal support award on the father’s ongoing bankruptcy, and 3) the implications of the father’s eventual discharge from bankruptcy on the parties’ financial circumstances and assets.

The lump-sum award – not coincidentally in the same amount as the equalization payment would have been – had been made without regard to the father’s impending bankruptcy, and amounted to an end-run around the normal operation of the bankruptcy legislation. Since this was impermissible, the motion judge’s earlier ruling was overturned.

For the full text of the decision, see:

Mwanri v. Mwanri, 2015 ONCA 843 (CanLII)

At Russell Alexander, Family Lawyers our focus is exclusively family law, offering pre-separation legal advice and assisting clients with family related issues including: custody and access, separation agreements, child and spousal support, division of family property, paternity disputes, and enforcement of court orders. For more information, visit us at RussellAlexander.com.