Silver Lining for Creditor Spouses in Bankruptcy? | Scarfone Hawkins LLP

Posted by | December 02, 2013 | Bankruptcy, Uncategorized | No Comments

 By: Colleen Yamashita and Frank Pignoli

In our practice, we act as insolvency counsel for financial lending institutions, secured creditors, receivers and bankruptcy trustees as well as corporate and personal debtors. When dealing with personal bankruptcies/proposals, family law issues often rise to the surface, which are not easily or sufficiently resolved within the parameters of federal bankruptcy legislation. In our view, conflicts often arise between family law lawyers and lawyers acting for the trustees in bankruptcy/proposals in large part due to the fact that the Bankruptcy Insolvency Act and the provincial family law legislation such as the Ontario Family Law Act often seem to work at cross-purposes.

Take for example the 2011 Supreme Court of Canada’s decision of Shreyer v. Shreyer, which is available at . This was a Manitoba case involving a bankrupt who was in the process of legally separating from his wife. At the time the bankrupt husband made an assignment in bankruptcy, the wife had already commenced an equalization claim against the husband’s farm homestead, which is an exempt asset under the Manitoba legislation (and therefore could not be seized by the bankrupt’s creditors). The Bankrupt did not provide his estranged wife with notice of his bankruptcy nor did he disclose his wife’s equalization claim on his statement of affairs to his trustee. Capitalizing on this deception, he received an absolute discharge from his bankruptcy, which served to extinguish all of his liabilities existing as at the date of bankruptcy, including the wife’s equalization claim, all without his wife’s knowledge.

To the surprise and criticism of many, notwithstanding the fact that the bankrupt had deceived both his wife and the trustee, the Manitoba Court of Appeal and the Supreme Court of Canada held that there was nothing the law could do to assist the wife and that her equalization claim was extinguished as a result of her husband’s discharge from bankruptcy. This meant that Mr. Shreyer was absolutely discharged from bankruptcy, having had all his unsecured debt discharged and being allowed to retain the exempt farm property subject only to registered encumbrances which provided him with significant equity as at the valuation date. Conversely, Mrs. Shreyer, who was married to the bankrupt for 19 years, had raised four children, and had resided on the farm and worked together with the bankrupt in the farming operation, received nothing.

Seemingly discontented with its own decision, the Supreme Court stated in the decision 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….However until such legislative changes are made, creditor spouses should be alive not only to the pitfalls of the BIA, but also to the importance of the remedies available under it in such situations…” In furtherance of its endorsement for legislative reform, the Supreme Court even drew attention to one BIA legislative proposal which proposed that bankruptcy should not stay or release any claim for matrimonial equalization or division against exempt assets.

In spite the Supreme Court’s clear call for legislative attention, to date, there has been no such legislative reform.

What might give some comfort to those upset with the Supreme Court of Canada’s decision is what occurred next in the Shreyer v. Shreyer litigation saga. Rather than accepting defeat, Mrs. Shreyer’s lawyer brought a motion before the Registrar in Bankruptcy seeking to set aside the bankrupt’s absolute discharge order, which was granted 11 years ago in 2002. Relying upon the general jurisdiction granted to the Court by section 187(5) of the BIA, which provides that “every court may review, rescind or vary any order made by it under its bankruptcy jurisdiction”, the wife sought to set aside the husband’s discharge as well as leave pursuant to section 69.4 of the BIA (which permits the lifting of the stay of proceedings) to proceed with her equalization claim.

The bankrupt opposed the motion primarily on the basis that there had been undue delay on the part of the wife in advancing the motion.

Registrar Lee’s decision was released on July 12, 2013. (Schreyer, Re, 2013 MBQB 179, Man. Registrar Lee, July 12, 2013)

In a nutshell, Registrar Lee found the bankrupt husband had deliberately kept the matrimonial proceedings from the trustee and bankruptcy from his wife, and in the result, set aside the trustee’s discharge, set aside the bankrupt’s absolute discharge order, granted leave to Mrs. Schreyer to continue her equalization claim in respect of the exempt asset, and granted Mr. Schreyer a new order of discharge without prejudice to Mrs. Schreyer continuing to realize her equalization claim “notwithstanding the husband’s bankruptcy and discharge”.  Since the quantum of her equalization claim had been fixed at first instance in the previous litigation at $41,063.48 plus pre-judgment interest, she will recover this amount plus, in all likelihood, something for costs.

In support of his decision, Registrar Lee adopted the reasoning of an unreported 2001 decision of Dep. Registrar Sproat (as she was then) in Craig v. Craig that had granted a similar order some 7 years after the bankrupt’s discharge on the finding that the bankrupt’s conduct and assignment in bankruptcy was done for the sole purpose of defeating the spouse’s equalization claim and whose conduct amounted to an abuse of process and bad faith.

The 11 year delay was not an important factor, according to the Registrar, as the Supreme Court’s decision was released only in 2011, and it was unreasonable to expect the wife to seek to set aside the discharge until after the release of that decision and the equities clearly supported the wife’s position.

Therefore, based upon Registrar Lee’s decision, there is now hope for creditor spouses who find themselves in special circumstances similar to that of Mrs. Shreyer where: 1) the bankrupt intentionally conceals his/her bankruptcy from his/her spouse; 2) the bankrupt does not disclose the wife’s equalization claim to the trustee; and 3) the spouse has no notice of the bankruptcy until after the bankrupt’s discharge. However, as the relief exercised pursuant to section 187(5) is discretionary, it is unclear whether or not Registrar Lee’s decision will be applicable in scenarios where these findings do not apply.

The silver lining is that there is hope that the BIA can be utilized to accomplish a result ultimately intended by family law legislation. The bad news is that this equitable result was only achieved after over 10 years of contested litigation and an unsuccessful Supreme Court of Canada decision.

Hopefully legislative reform can take place before another unfortunate creditor spouse is put through the litigation wringer for over a decade to achieve a seemingly obvious and equitable result.

As published in the Hamilton Law Association newsletter in October, 2013

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