August 11, 2008 By: Marta Siemiarczuk
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It is not uncommon that we find ourselves in a situation where the opposing spouse, knowing he or she is going to have to make an equalization payment, files for bankruptcy. This is all too often the risk in matrimonial litigation as a spouse can become technically insolvent when separating.

I say "technically" because equally often, that insolvent person is able to find a way to meet his or her debt (and matrimonial) obligations with a little effort. Nevertheless, in many cases, payor spouses do resort to filing for bankruptcy to avoid their equalization payment obligations. This makes for a very frustrating situation when trying to help a client.

The bankruptcy problem was considered by Justice P.B. Kane in Petryna v. Petryna earlier this year. In that case, the husband had filed for bankruptcy. Ultimately, the trustee, having fulfilled all of his duties as trustee in respect of the estate, was discharged. The husband however was not. He continued in default of various requirements under the terms of the bankruptcy.

The wife filed a claim to pursue her rights of equalization, which naturally were opposed by the husband as he was yet undischarged. While Petryna doesn't actually change the law, Kane does consider the relevant sections of the Bankruptcy and Insolvency Act in the matrimonial context. Sections 69.3 and 69.4 are the relevant provisions and are not often analyzed or interpreted in matrimonial case law. Section 69.3(1) provides for a stay of all proceedings against a bankrupt and s. 69.4 provides the court with jurisdiction to grant leave to a creditor to continue a claim against the bankrupt. Leave however is not easy to get.

Kane confirmed that a creditor who has not been dealt with in the context of the bankruptcy is free to pursue his or her claims against the undischarged bankrupt without the need to obtain leave from the court, as soon as the trustee has been discharged. A bankrupt former spouse is one of those pesky situations that can lead to huge problems for our clients and must be dealt with efficiently as finances are already likely very strained.

I say Petryna doesn't change the law in any real way because s. 69.3(1) and (1.1) of the BIA specifically provide:

* 69.3 (1) Subject to subsections (1.1) and (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor's property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy.

* (1.1) Subsection (1) ceases to apply in respect of a creditor on the day on which the trustee is discharged.

While the legislation specifies that the stay continues only until the trustee (not the bankrupt) is discharged, coupled with section 69.4, it could be argued, as it was, that the bankrupt himself needs to be discharged along with the trustee, otherwise leave is required.

Section 69.4 is the section that allows the court to grant leave to a creditor to pursue a claim against an undischarged bankrupt. The conditions that need to be met are, (a) the creditor is likely to be "materially prejudiced" if leave is not granted or (b) it would be equitable to grant leave.

Given that in principle all creditors are materially prejudiced by a bankruptcy, the test is most definitely a difficult one to meet when one considers the purpose of bankruptcy legislation. What Kane does, however, is confirm that this is not necessary based on strict principles of statutory interpretation espoused by the Supreme Court of Canada. The language in the legislation is clear and ought not be interpreted in any other way. Once the trustee has been discharged, regardless of whether the bankrupt has co-operated and fulfilled his or her obligations, creditors are free to pursue their claims without the need to resort to seeking leave of the court.

This is particularly important in matrimonial situations as resources to pursue costly legal action are scarce for most clients. The need to bring an application before pursuing the actual claim itself just adds to the litigation costs.

While a very short decision, it is one that all family law lawyers ought to keep in mind when dealing with a potentially bankrupt opposing party — especially one that has likely done so intentionally to avoid an equalization payment. All too often, once there is a bankruptcy, parties simply give up. This is one of those helpful reminders that there are ways of getting around a bankruptcy and that staying the course could lead to a positive resort if your facts are good.

Marta Siemiarczuk is a lawyer practising family law litigation and collaborative family law at Nelligan O'Brien Payne LLP in Ottawa. She can be reached at marta.siemiarczuk@nelligan.ca

[This article is reprinted with permission and first appeared in the November 2008 issue of The Law Times.]

This content is not intended to provide legal advice or opinion as neither can be given without reference to specific events and situations. © 2017 Nelligan O’Brien Payne LLP.

Service: Family Law