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Family Law Equalization Claims and Bankruptcy

 Yesterday, the Supreme Court of Canada released its decision in Schreyer v. Schreyer (2011 SCC 35). The decision dealt with the issue of whether an equalization payment due to a spouse survived the bankruptcy of the owing spouse.

In determining the issue, the Court noted the perceived clash between family law and bankruptcy law.

In Schreyer, the parties separated in 1999 and filed for divorce in 2000. The husband was the owner of the family farm. The parties consented to an equalization of their assets. Before the equalization could be judicially considered, the husband filed for bankruptcy. The wife was not listed as a creditor, and the husband was discharged from bankruptcy in 2002. An equalization order was then made in favour of the wife, but the Manitoba Court of Appeal held that the wife’s claim was extinguished by the discharge of the husband’s bankruptcy. The wife appealed to the Supreme Court of Canada.

The Supreme Court of Canada agreed with the Manitoba Court of Appeal, and dismissed the appeal. Manitoba was said to be an “equalization jurisdiction”, and not a “division of property jurisdiction”. (Ontario is also an “equalization jurisdiction”.) The wife did not have any proprietary right in the husband’s property, and was therefore only a creditor of the husband. 

As to the effect of bankruptcy, the wife’s claim was provable in the husband’s bankruptcy. It was neither proprietary, nor was it exempt from the effect of a discharge as a claim for support or maintenance. Upon the discharge of the husband, the husband was released from all claims provable in bankruptcy, including the equalization claim.

As to the fact that the wife was not notified of the husband’s bankruptcy or discharge, the Court noted that she could bring a claim in bankruptcy to remedy this. However, she would only be entitled to seek the dividend she would have otherwise received. In the case before the Court, there was not dividend paid to creditors, and thus, such a claim would prove fruitless.

Under Manitoba’s Judgments Act, the family farm was exempt from execution. The wife, however, could apply to the bankruptcy judge for leave to pursue her claim against the exempt property. Alternatively, the wife could pursue a remedy such as spousal support.

Although the appeal was dismissed, the Court did not award costs to the husband, “in light of the particular circumstances of this case”. The Court appeared to lament the fact that “In its current form, therefore, the [Bankruptcy and Insolvency Act] offers limited remedies to spouses in the appellant’s position”, and stated that “It seems to me that this matter is ripe for legislative attention so as to ensure that the principles of bankruptcy law and family law are compatible rather than being at cross-purposes.” 

Have a great weekend.

Paul E. Trudelle – Click here for more information on Paul Trudelle