SCC: Parliament must revisit bankruptcy rules upon divorce

The Supreme Court of Canada says a Manitoba man need not pay his ex-wife an equalization payment for a share of the farm they owned because he went bankrupt, but urged Parliament to re-examine legislation that governed the ruling.

The decision comes in Schreyer v. Schreyer, which involved a Manitoba couple that married in 1980, separated in 1999, and divorced in 2000. The husband filed for bankruptcy — after the split but before a master got started on a valuation of the couple’s assets — and was discharged from it in 2002.

The master eventually ordered the husband to pay equalization of about $41,000, but failed to address the bankruptcy. The Manitoba Court of Appeal determined that the wife’s equalization claim was provable in bankruptcy, but was terminated by the husband’s discharged bankruptcy.

The Supreme Court noted that an equalization claim under Manitoba’s Family Property Act is handled as a debt owed by one spouse to the other. It agreed that the wife held a right to payment both at the time of separation and time of bankruptcy. The only thing left to determine, said the court, was the quantum, which would be established through a straightforward formula.

However, the husband was released from the equalization claim due to his bankruptcy proceedings, and the wife’s claim was not proprietary and was not protected from a discharge under parts of the Bankruptcy and Insolvency Act dealing with support or maintenance claims.

The top court also noted that their farm could not be executed by creditors due to provisions of the province’s Judgments Act. It said the wife would typically be able to apply to the bankruptcy judge using the BIA to seek a claim against the exempt property.

“Since this property is beyond the reach of the ordinary creditors, lifting the stay of proceedings cannot prejudice the estate assets available for distribution,” wrote Justice Louis LeBel, on behalf of the unanimous court. “In keeping with the wording of s. 69.4(b) BIA, this is why it would be ‘equitable on other grounds’ to make such an order.”

The court added that such an approach would be in line with the bankruptcy law policy objective of prioritizing returns to the family unit above those of the bankrupt.

The court said that in such circumstances, a spouse in the same situation as the wife may be best served through spousal support arrangements following the bankruptcy. But the court asserted that such an option should not distract from the fact that the bankruptcy act needs to be revised in light of the apparent loophole.

“The best way to address the potentially inequitable impact of bankruptcy law on the division of family assets would be to amend the BIA,” wrote LeBel. “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.”

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