The Supreme Court of Canada has now weighed in on the effects a bankruptcy has on an equalization payment.  The unanimous Supreme Court largely upheld the decision by the Manitoba Court of Appeal.  There were, however, significant misgivings on the part of the Supreme Court, and a call to parliament to address this issue.  The Supreme Court agreed that a bankruptcy claim could relieve a payor spouse from an equalization payment, but called for Parliament to change the legislation to prevent this.

Background

The husband and wife in this case separated; and the wife began divorce proceedings. After the wife had begun the divorce proceedings but before a valuation of their property was done the husband filed for bankruptcy. What further complicated this case was the fact that the husband’s primary asset; a farm, was exempt from bankruptcy.  While the initial court order awarded the wife an equalization payment of $41,063.48. The Manitoba Court of Appeal overturned this decision and ruled that the wife’s claim for an equalization payment was only a personal claim against her husband. The wife argued her claim was based on the exempt property; and therefore should survive the bankruptcy claim the Manitoba Court of Appeal rejected this.  Due to the fact that all the wife had was a personal claim against the husband, her claim was extinguished by the husband’s declaration of bankruptcy.

The Supreme Court’s Decision

The Supreme Court dismissed the wife’s appeal of the Manitoba Court of Appeal’s decision. In their decision the Supreme Court first determined the nature of a claim for equalization payment, and then determined what effect bankruptcy would have against that claim. The Supreme Court stated that the wife’s claim for equalization in Manitoba, and any province which is an equalization jurisdiction (such as Ontario), is a personal claim against their spouse.  She did not acquire a proprietary or beneficial interest in any of the assets.  Under an equalization system, according to the Court, the equalization payment is a debt owed by one spouse to the other.

The Court then determined what effect the Bankruptcy and Insolvency Act would have on this debt.  The court stated that s. 178(2) of the Bankruptcy and Insolvency Act has the effect of releasing the debtor from the claims of a creditor, if the claim is provable under bankruptcy.  The Court stated that this did not extinguish the wife’s claim, but prevented her from being able to enforce it against the husband.  The Court also provided guidance on the timing of these claims.  The date of bankruptcy is of crucial importance; if an equalization claim is liquidated before the bankruptcy then the claim is provable and it would release the debtor. If it is unliquidated at the date of bankruptcy it may be too uncertain to allow the trustee to value it under the Bankruptcy and Insolvency Act. The court found in this case that the appellant wife’s claim had arisen before the bankruptcy and was provable. The wife was unable to enforce the debt her husband owed her as a result of his bankruptcy.

The Court did provide some guidance on what a spouse can do in this situation.  They stated that the wife could have applied to the bankruptcy judge for a stay of the bankruptcy and make a claim in family court to attribute a proprietary interest in the exempt property in satisfaction of her equalization claim.  Further, spousal support is not affected by the bankruptcy claim; and the Supreme Court indicated the amount of spousal support could take into account the inequities of a similar situation.  The wife had made neither of these claims, and the Court did not have to rule on them.  The Supreme Court did, however, call on parliament to address this issue. The Court stated that these inequities must be dealt with by an amendment to the Bankruptcy and Insolvency Act.  The Supreme Court stated that until such legislative changes are made; this was the only result possible on the facts of this case.