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Posts from the ‘Bankruptcy’ Category

Can Bankrupt Wife Still Claim for Equalization of NFP?

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Can Bankrupt Wife Still Claim for Equalization of NFP?

If a spouse declares bankruptcy, is he or she then prevented from claiming for equalization of Net Family Property (NFP?) under Ontario Family law?

That was the question in Kinsella v. Mills, which involved a couple who had separated after 7 years of marriage. At that point, they signed Minutes of Settlement that finalized the splitting of their financial affairs, which was intended to deal with all issues including spousal support, equalization of NFP and constructive trust claims.  The Settlement reflected the couple’s agreement that the husband would take sole ownership of the matrimonial home and assume all debts and costs, and in return would pay the wife an agreed lump sum, together with a monthly amount.

Less than a year later, the wife declared bankruptcy.  She was automatically discharged nine months later.  The couple’s divorce was formalized a few months after that.

The wife then applied to the court to set aside that Settlement, claiming that it was unfair, signed under duress, and in a situation where she had no independent legal advice and did not know what she was signing. If she was successful, the wife planned to re-launch her claim for equalization of NFP, and wanted it divided unequally in her favour.

The husband resisted, pointing out that after the marriage breakdown he was left with a large amount of debt.  Because of the wife’s bankruptcy, she was released from having to pay it, but he was still saddled with debt that they had rung up together.  Nothing about the Settlement was unfair, in his view.

The court was asked to make a ruling.  It observed that nothing in the Family Law Act or the federal Bankruptcy and Insolvency Act  specifically prevents a spouse from making a claim for equalization of NFP after declaring bankruptcy. However, after examining the interplay between the two, the court concluded that the legislation operated to effectively do so.  The court noted the following:

  • The wife’s claim to any equalization payment from husband fell within the very broad definition of “property” under the bankruptcy legislation.
  • The moment she declared bankruptcy, she was no longer entitled to dispose of or otherwise deal with her property. Instead, it immediately vested in the bankruptcy trustee.
  • Once any equalization claim vested with the trustee – and unless the trustee actually joined the wife in the Family Law proceeding – the wife’s hands were tied.

The court added that this impasse be remedied by the wife being discharged as a bankrupt, but getting the trustee’s consent to go forward, or by firing the trustee.  The Family Court also had no authority to undo the wife’s bankruptcy.

Having found the wife to lack the capacity to bring the equalization claim, the court added that the Settlement itself was not subject to being undone, since there was no evidence of duress.  The wife had also failed to obtain legal advice before signing it, despite being encouraged to do so.

For the full text of the decision, see:

Kinsella v. Mills

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

Unpaid Equalization Could Come Out of Bankrupt Spouse’s Pension

Retirement Pension

Unpaid Equalization Could Come Out of Bankrupt Spouse’s Pension

We’ve talked recently in Can the Post-Bankruptcy Distinction Between Support and Equalization Payments be Circumvented? about an interesting distinction in Canadian law: a claim for unpaid equalization payment is “swept into” a paying spouse’s bankruptcy, whereas claims for unpaid child or spousal support can survive it.

In a case called Syrette v. Syrette, the wife took a position that is worth noting: in the face of her former husband’s newly-declared bankruptcy, she asked the court to allow her to pursue her unpaid equalization claim against his pension assets.

This is because pension assets can be subject to special provisions under the Ontario Pension Benefits Act, which keep them exempt from seizure by way of execution, which includes seizure by a bankruptcy trustee. So while the husband’s other assets were now in the trustee’s hands for distribution to his creditors (and were thus no longer available to satisfy the wife’s established equalization claim in the usual way), his pension assets remained untouched. This meant the wife could take steps to have those funds used in satisfaction of her equalization payment entitlement.

As a procedural aside, this required the bankruptcy court’s permission: Normally, the moment the husband declared bankruptcy, an automatic stay (i.e. suspension of legal proceedings) is triggered, which applies to all creditors – including the wife. However, in the circumstances the court was willing to grant the wife permission to proceed nonetheless:

Unfortunately for [the wife], not only are her equalization proceedings against [the husband] stayed as a result of his bankruptcy, any such equalization claim will be extinguished after the discharge … unless she obtains leave to proceed from the bankruptcy court …

The courts now routinely grant an order for leave to proceed in circumstances where a spouse wishes to proceed with an equalization remedy against the pension, presumably because the granting of such a stay does not prejudice the bankrupt estate in any way, and because it is consistent with desire of the courts to divide pension assets between spouses in circumstances where there are no other significant assets to be divided. The normal order is worded so as to permit the claimant to commence or continue proceedings in the matrimonial court for equalization against the pension, notwithstanding the bankruptcy or subsequent discharge.

The wife was therefore allowed to proceed to enforce her equalization claim against the bankrupt husband’s pension.

For the full text of the decision, see:

Syrette v. Syrette, 2011 CarswellOnt 10640, 2011 ONSC 6108

Varied on other grounds:

Syrette v. Syrette, 2012 ONCA 693

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.

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

Past Due

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.

How Does an Unpaid Equalization Payment Intersect with Bankruptcy?

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How Does an Unpaid Equalization Payment Intersect with Bankruptcy?

If one separated or divorced spouse is obliged, by agreement or court order, to pay the other spouse an equalization payment, there are various enforcement mechanisms that can be brought into play if he or she does not do so.

But what happens if the payor spouse goes bankrupt in the interim?

This question was addressed squarely by the Supreme Court of Canada in a case called Schreyer v. Schreyer. In particular, the Court considered the interplay between provincial Family Law statutory schemes on one hand, and the federal bankruptcy laws on the other.

Perhaps surprisingly, the Supreme Court concluded that any unpaid equalization payment is “swept into the bankruptcy” of the now-bankrupt spouse that has the payment obligation.

Effectively, this means the equalization claim by the recipient spouse is just like any other debt owed by the bankrupt spouse: In keeping with the regime established under the federal Bankruptcy and Insolvency Act, it becomes a claim that has to be proven just like any other claim put forth by a creditor (hopefully) for payment out of the bankrupt’s assets.

More to the point, in the context of the bankrupt spouse’s bankruptcy proceedings it cannot be put forward as a “preferred” claim, ranking ahead of other existing creditors. Rather, it may be one of many simultaneous debts owed by the bankrupt spouse, and will rank behind any secured creditors in priority.

(This certainly does not mean that a recipient spouse will not receive his or her equalization payment, or that the bankrupt spouse can try to avoid having to pay it under the guise of a bankruptcy. It just means that equalization claims don’t attracted any preferential status in the paying spouse’s bankruptcy proceedings).

And – no doubt to the chagrin of a spouse who is owed and expecting an equalization payment – the bankrupt spouse is released from that claim once his or her bankruptcy has been discharged in the usual manner.

Note that this outcome pertains to unpaid equalization payments only, which readers will know is the amount that spouses must pay to each other in order to equalize their respective Net Family Property as part of their division of assets.

However, in what may be a puzzling distinction, under Canadian family law the situation is entirely different for unpaid support claims and unpaid arrears in support: the bankrupt spouse is not released on discharge; rather, the payment obligation persists beyond the bankruptcy and is not erased.

I will touch upon the ramifications of this second scenario in a future blog.

For the full text of the cited decision, see:

Schreyer v. Schreyer, 2011 SCC 35, [2011] 2 S.C.R. 605 (S.C.C.)

Thibodeau v. Thibodeau, 2011 ONCA 110, 104 O.R. (3d) 161 (Ont. C.A.)

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.

Husband Declares Bankruptcy One Week After Support Order – Is He Off the Hook?

 

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Husband Declares Bankruptcy One Week After Support Order – Is He Off the Hook?

Lately we have reported on a few cases involving the interplay between Family Law obligations and bankruptcy Husband Repays Almost $1 Million to Bounce Back from Bankruptcy – Yet Ordered to Keep Supporting Wife and What “Material Change” is Not: Some Real-Life (and Perhaps Surprising) Examples.  Quite coincidentally another decision, issued just last week by the Ontario Bankruptcy Court, continues the mini-focus on this area of law.

This time, however, the question for the Bankruptcy Court (which does not hear Family Law issues per se) was whether a husband who declared bankruptcy a mere week after having a hefty spousal and child support order levied against him should be allowed to have that bankruptcy discharged. His former wife was opposed; she claimed that the husband had hidden his true income during their divorce litigation, and that he was still hiding income now.

The facts were fairly straightforward: The husband, who was what the court called a “skilled barber”, ran a hair styling business during the marriage. There was evidence – including the report of a forensic auditor that the wife was forced to hire – suggesting that he earned about $225,000 per year, a large portion of which had been hidden from the wife and which had come from “cash” transactions (i.e. unreported income). The wife earned about $17,000 annually.

When the husband filed for divorce, he was ordered to pay temporary support for the couple’s three children, but fell into heavy arrears. In early 2012 he was given a final order to pay support of about $4,000 per month, plus another $25,000 in legal costs.

However, just one week after that order was made, the husband filed for bankruptcy. At that point, he owed about $160,000 in unpaid support.
He later went to Bankruptcy Court to get his bankruptcy discharged. He claimed to be now working as an employee (rather than running his own business), claimed to be paying a full 50% of his wages to the Family Responsibility Office (via garnishment), and assured the court that it could place greater confidence in the accuracy of the new, much lower income level he was currently reporting through his employer.

To assess whether to grant the husband the discharge he sought, the court examined the provisions of the federal Bankruptcy and Insolvency Act, which sets out certain tests and prerequisites.

Among other things, it states that a court is entitled to refuse to make the order, or may impose conditions on the discharge, in any situation where a bankrupt person like the husband has:

• omitted to keep the usual books of account for his business,

• failed to satisfactorily account for loss or deficiency of assets, or

• embarked on a legal defence or started action that was “frivolous or vexatious” vis-à-vis his creditors (which in this case included the wife).

Here, there was ample evidence that the husband had been hiding income. Right before declaring bankruptcy, he apparently gave away the business for free. Also, his lack of co-operation and financial disclosure had forced the wife to take certain legal steps and to incur significant and unnecessary legal costs including the hiring of the forensic auditor. The husband had also never paid the $25,000 costs order that had been imposed on him earlier.

In these circumstances the court decided to grant the bankruptcy discharge – but to postpone it for a month and impose terms. After pointing out that the husband would have an easier time satisfying his hefty support arrears without a bankruptcy trustee in the way – and after taking pains to clarify that such a discharge would have no effect on the wife’s support entitlement (since by law a discharge does not release a person from child/spousal support or maintenance obligation arising under a court order), the court ordered him to pay $25,000 to the trustee immediately. This was intended to pay off part of the outstanding arrears; it was not to be applied to going-forward support that he would continue to be liable for.

For the full text of the decision, see:

Re Savoia, 2013 ONSC 6127 (CanLII)   http://canlii.ca/t/g0tql

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 www.RussellAlexander.com.

Husband Repays Almost $1 Million to Bounce Back from Bankruptcy – Yet Ordered to Keep Supporting Wife

 

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Husband Repays Almost $1 Million to Bounce Back from Bankruptcy – Yet Ordered to Keep Supporting Wife

A few weeks ago I told you about a case called Brothers v. LeBlanc, 2013 ONSC 4073, http://canlii.ca/t/fzcm6 where a man in a 20-year common-law marriage was ordered to honour his promise under a separation agreement to pay certain large sum of money to his wife, even though he unexpectedly went bankrupt for other reasons.

In another recent case called Burger v. Burger, the court likewise confirmed a husband’s obligation to pay monthly spousal support to his wife under an agreement signed in 2000, despite his being on the brink of bankruptcy due to debts of nearly $1 million to creditors and for unpaid taxes.

To backtrack a little: The husband had been working for 31 years as a manager at a KFC franchise when in 1993 he decided with a business partner to open a sports store called “Slopes N’ Stokes”. But due to what he said was “ignorance”, he failed to make government business tax and personal income tax remittances for more than a decade. He ignored the numerous government notices and warnings that he regularly received by mail.

Fast-forward to 2003: The husband’s business was assessed by the government, and was declared as owing over $600,000 in provincial sales tax, and another $550,000 in federal sales tax. The business also owed money to various suppliers and creditors. Although the husband’s business partner promptly declared bankruptcy, the husband resisted doing so: partly this was “out of pride”, but it was also because he was confident that with the existing clientele and inventory he could still make the business work.

Indeed, he showed admirable resolve: He assumed all the business debt personally, and under a repayment proposal prepared with the help of a bankruptcy trustee, he repaid $50,000 up-front, then $50,000 a month for five months, then $20,000 per month for another 28 months until all the creditors were paid. He did so with the help of an interest-free and flexible-repayment loan of $200,000 from his new girlfriend. He was eventually discharged from bankruptcy, and afterward continued on with the business even though it still wasn’t making a profit.

The court reviewed these circumstances in the context of determining whether to relieve the husband of his obligations under the separation agreement he had signed with his wife in 2000. The husband claimed he could no longer afford to pay spousal support, and that in any case he had paid it long enough despite the difficult financial circumstances he had subsequently faced and overcome.

The court disagreed. It found that there had been no “material change” to the level required by the provisions of the Family Law Act that allow for a variation of a separation agreement in the husband’s favour.
This is because at the time the agreement was entered into in 2000, the husband was actually well aware that he was in debt to his creditors and had not been paying his business-related and personal income taxes since 1993. Since he knew all these things at the time, then he cannot now say that there has subsequently been a “material change”.

Furthermore, his financial industriousness in the face of bankruptcy has actually left him in a better position now, since his current total outstanding debts are actually lower than they were in 2000. The $200,000 he owed to the new girlfriend was interest-free, and she was not pressing for repayment. His choice to continue operating a business he conceded was still not profitable not a reason to relieve him of his support obligations to his former spouse.

The husband’s application to vary based on a “material change in circumstances” was therefore denied. (It was, however, changed with the wife’s consent for other reasons, including an improvement in her overall financial situation).

For the full text of the decision, see:

Burger v. Burger, 2013 ONCJ 196 (CanLII) URL: http://canlii.ca/t/fx2xr

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 www.RussellAlexander.com.

What “Material Change” is Not: Some Real-Life (and Perhaps Surprising) Examples

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What “Material Change” is Not: Some Real-Life (and Perhaps Surprising) Examples

Recently we wrote about the concept of “material change” in Separation Agreement Rolled into a Court Order – “Material Change of Circumstances” Still Required which involves the notion that a court-imposed order requiring a parent or spouse to pay support may have been fair at the time it was handed down, but subsequently becomes unfair due to unforeseen circumstances. Where a later court finds that such “material change” has taken place, it may have the authority in the right circumstances to vary the initial order accordingly.

This determination of what constitutes “material change” is not always straightforward. Indeed, some scenarios may intuitively seem to qualify on first blush, but on closer examination turn out not to meet the legal standard at all.

Here are a handful of recent and older cases that illustrate this point:

• Early retirement

In Innes v. Innes, the 62-year old support-paying husband decided to take voluntary early retirement, which meant his income would decrease from $200,000 to about $70,000 per year. Finding that he had done so for “lifestyle reasons” related to his new wife and a fondness for golf and vacations (rather than for unexpected health reasons, for example), the court declined to reduce or terminate the $2,000 in monthly support he was obliged to pay his former first wife of 26 years, finding there was no “material change” in the circumstances.

• Bankruptcy

In a case called Brothers v. LeBlanc, the common law husband’s’ bankruptcy was not enough to persuade the court to reduce his obligation, embodied in a separation agreement, to make $1,000 monthly mortgage payments and to pay off a $129,000 mortgage on the former matrimonial home. While accepting that the man’s snow-removal and heavy-equipment operating business had experienced a significant downturn since the agreement was signed four years earlier, the court found that the man was in good health and that the local construction was booming; he should be able to earn close to $90,000 a year if he put his mind to it.

• Supporting a new family

In Couvillon v. Couvillon, the husband failed in his bid to have his child support obligations under a separation agreement reduced. While it was true that he now had new financial responsibilities arising from his decision to marry a second time, his plans to do so were already in place when the separation agreement was negotiated with his first wife. As such, there was no “change” in the legal sense, since his added responsibilities were actually very foreseeable.

As these cases illustrate, “material change” is not an easy concept to pin down. We can help navigate the law and apply it to your specific situation.

For the full text of the cited decisions, see:

Innes v. Innes, 2013 ONSC 2254 http://canlii.ca/t/fx6rv

Brothers v. LeBlanc, 2013 ONSC 4073 http://canlii.ca/t/fzcm6

Couvillon v. Couvillon (1996), 18 R.F.L. (4th) 316 (Ont. Gen. Div.)

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 www.RussellAlexander.com.

My Spouse Has Bad Credit – What’s My Exposure?

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My Spouse Has Bad Credit – What’s My Exposure?

The decision to get married gives rise to many changes, including various legal obligations and liabilities. I often get questions about what risk each soon-to-be-spouse bears in connection with the other’s bad credit.
Generally speaking, the answer is “not much.”

For one thing, in Ontario the act of getting married to someone with bad credit will not affect the other spouse’s credit score. Rather, each spouse’s credit history remains separate and intact up to the point of marriage, and is not automatically “merged” (nor is there a legal obligation to merge them) afterwards. This means is that one spouse’s pre-marriage indebtedness, defaults, and financial liabilities will not sully the other spouse’s history; nor will prior good credit by one spouse serve to improve the historically bad credit score of the other. Moreover, individual credit scores remain separate after the couple has married.

(As an aside, it should be noted that the decision by a newly-married wife to change her surname to that of her husband will not “erase” any bad credit that she has. Her individual credit score is tied to her Social Insurance Number, not her last name. This means her credit score and credit history – good or bad – will follow her into the marriage).

But individual credit scores may still be negatively affected by what happens after the marriage, as a result of joint decisions made by the new couple. For example, a new spouse may decide after marriage to indirectly assume liability for the other’s existing debts, by jointly taking on a new loan to pay off existing pre-marriage debts. Similarly, any delinquent accounts, overdue credit cards, or other unmet financial obligations that are incurred jointly and expressly shared by spouses after getting married will adversely affect individual credit scores.

And while I mentioned that one spouse’s credit history is not automatically merged, the spouses may deliberately decide to add each other to their existing accounts (for example bank accounts, loans, or credit cards), which means that anything in both spouses’ histories will likely show up together. This is because lenders routinely do credit checks on all joint account holders or debtors; even if only one person uses the account or credit card, the credit histories and scores of both can be obtained. More importantly, as joint debtors each spouse becomes liable for the activities of the other, and each is responsible for making any payments. To put it simply: if the joint account, loan or credit card goes into default, then both spouses will be equally liable.

Finally, the question sometimes arises whether the post-marriage bankruptcy of one spouse will affect the other. Once again, the short answer is “usually not.” Provided that the spouses have kept their individual debts separate post-marriage, one spouse’s decision to declare bankruptcy will usually have no financial effect on the other spouse and his or her credit rating. There are exceptions, however, and it is important to obtain quality legal advice from a lawyer and accountant before deciding to take such a step.

At Russell Alexander, Family Lawyers our focus is exclusively family law, offering pre-marriage legal advice. For more information, visit us at http://www.russellalexander.com/team/russell-alexander/