Schreyer v. Schreyer: Bankruptcy and Equalization Payments

This Manitoba Court of Appeal case dealt with whether or not bankruptcy could extinguish the equalization payment an individual was ordered to pay their spouse.  This case will have an important impact on Ontario as both provinces have equalization schemes for the division of property and the Supreme Court of Canada will be releasing their decision regarding this case on July 14.

In this case the husband and wife separated in December of 1991.  The husband’s primary asset was a piece of farm property.  The wife filed a petition for divorce in 2000, and the couple consented to an order referring it to a master. In late December of 2001, the husband made an assignment in bankruptcy, receiving a discharge from bankruptcy on November 29, 2002.  The couple’s appearance before the master was deferred until October 25 2007.  The reference awarded the wife an equalization payment of $41,063.48.

The Manitoba Court of Appeal determined that the master eered in her failure to consider the effect of the husband’s bankruptcy on the equalization payment.  The husband primarily relied on section 178(1)(c) and (h) and s. 178 (2) of the Bankruptcy and Insolvency Act.

Debts Not Released by Order of Discharge

178(1) An order of discharge does not release the bankrupt from

(c) any debt or liability arising under a judicial decision establishing affiliation or respecting support or maintenance, or under an agreement for maintenance and support of a spouse, former spouse, former common-law partner or child living apart from the bankrupt;

(h) any debt for interest owed in relation to an amount referred to in any of the paragraphs (a) to (g).

Claims Released

178(2) Subject to subsection (1), an order of discharge releases the bankrupt from all claims provable in bankruptcy.

This issue was made more complex due to the fact that the property was, in fact, exempt from bankruptcy due its status as farmland. The wife argued that her equalization payment was based on property that was exempt from bankruptcy and therefore survived the bankruptcy of the husband due to section 67(1)(b) of the Bankruptcy and Insolvency Act:

67(1) The property of a bankrupt divisible among his creditors shall not comprise

(b) any property that as against the bankrupt is exempt from execution or seizure under any laws applicable in the province within which the property is situated and within which the bankrupt resides;

The Manitoba Court of Appeal rejected the wife’s argument. It stated that in Manitoba, and in any province whose division of property regime is based on equalization rather than division of assets, an equalization payment is a personal claim, and it is not attached to any specific asset. This point was first set out by the Supreme Court of Canada in the 1984 case of Maroukis v. Maroukis.   This means that the wife’s claim was extinguished as a result of the husband’s bankruptcy.  As a result; the husband was able to keep his property while he was no longer obligated to pay his wife the equalization payment.

The Manitoba Court of Appeal recognized that this was not necessarily the most equitable result; but it was the only result possible within the legislation.  The Court did state that while a bankruptcy extinguishes an equalization payment; it does not block support payments.

The Supreme Court’s decision on this point will have profound effects in Manitoba, Ontario and all of the other provinces with equalization based regimes.

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