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Appeal court confirms special place of family law creditors in bankruptcies

An appeal court decision reinforces the special place of family law debts in a bankruptcy, says Toronto family lawyer Brian Ludmer.

In the case, Ludmer, principal of LudmerLaw, acted for the successful respondent who had convinced a motion judge to lift the automatic stay arising from his ex-wife’s bankruptcy so that he could enforce a $200,000 costs order resulting from a bitter custody battle over the couple’s three children.

The wife appealed, claiming the judge was wrong to invoke s. 69.4 of the Bankruptcy and Insolvency Act (BIA), and authorize her former spouse to go after her otherwise-exempt assets, which included her RRSPs.

But in their Oct. 4 judgment, a three-judge panel of the province’s top court upheld the lifting of the stay:  

“The bankruptcy regime includes s. 69.4 and the ability of the court to lift the stay in favour of a particular creditor in prescribed circumstances. The use of that provision in these circumstances does not denigrate the regime. In this case, there are sound reasons, consistent with the scheme of the [BIA] to relieve against the automatic stay,” they wrote.

“It doesn’t take a refined sense of justice to realize that if a family law award gets frustrated by a bankruptcy at the last minute, it doesn’t meet with the policy objectives behind family separations: that after all the fighting is done, the family’s net assets are shared equally,” Ludmer tells AdvocateDaily.com.

However, he says that bankruptcy legislation does not single out family law debts for special treatment.

“Unless the former spouse has title or secured their interest prior to the bankruptcy, they’re treated as unsecured creditors no different from anyone else,” he says.

That changed with a landmark Supreme Court case from 2011, in which a Manitoba woman was allowed to pursue her equalization claim against her husband and his farm, which was exempt from execution by creditors, despite his discharge from bankruptcy.

“The Supreme Court said that it does not offend bankruptcy law principles if the family law division of assets takes precedence,” Ludmer explains. “It wasn’t spelled out, but the point is that family law claimants are very different from other creditors, such as a credit card company that made a business decision to give credit to the individual, and amortized its risks across thousands and thousands of customers.

“That business model works, but it doesn’t for a family law litigant who has been held up for years from collecting on what’s due to them from a bankrupt who forced them to incur those costs,” he adds.      

In Ludmer’s case, his client’s former wife claimed that the facts could be distinguished from the Supreme Court decision because it involved RRSPs rather than a farm, and a costs order, rather than an equalization claim.

But the appeal court disagreed, finding nothing in the Supreme Court judgment "suggests that the equitable considerations for allowing a spouse to obtain the lift-stay remedy to execute against exempt or protected assets of the other spouse are limited to enforcing an equalization claim and would not apply, in appropriate circumstances, to a costs award arising out of protracted family litigation.”

“Maximizing returns to the family unit as a whole, not just the bankrupt, is identified by [the Supreme Court] as a policy objective of bankruptcy law. This is the effect of lifting the stay and allowing the creditor spouse, where it is equitable to do so, to realize against exempt assets of the bankrupt spouse, which are not available to other creditors in the bankruptcy,” they added.

“It’s a very important decision. Most of the insolvency professionals I spoke with said we had no chance, so we were very pleased with the result,” Ludmer says.

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