This case is about a niche issue of what happens to a party’s interest over an asset of another party when the latter party declares bankruptcy. The answer, as always, is in the details.
The parties separated on May 28, 2017. On November 28, 2017, the parties sold their jointly held matrimonial home. Next year, on June 7, 2018, the court gave an Order with respect to the net proceeds from the same sale. The part of the Order read, in part, as follows:
The net sale proceeds from the sale of the parties' jointly owned matrimonial home shall be held in an interest-bearing trust account by the parties' real estate lawyer as security for the Applicant's spousal support claims, in view of the Respondent's dissipation of assets, resistance to a spousal support order and threat of or likelihood of bankruptcy, pending further Court order or the written agreement of the parties.
It is important to note that the context in which the Order was made was that of court’s concern that the Respondent Father’s spending habits might lead to him depleting all his assets which would frustrate any claims for spousal support by the Applicant Mother.
A year after the Order, on June 3, 2019, the Respondent Father made an assignment for bankruptcy, which means that a trustee is appointed to take control over his assets to pay off the debts.
The Applicant Mother claimed that pursuant to the Order dated June 7, 2018, she had a secured claim over 50% share of the net proceeds from the sale of the matrimonial home. The assigned trustee maintained that it instead was entitled to the Applicant Mother’s 50% share.
Interestingly, the Respondent Father as an undischarged bankrupt was found to be legally incapable of responding on his own behalf and took no position on the issue.
Does the Respondent Mother’s claim for 50% share of the net proceeds of sale of matrimonial home supersede the trustee’s claim over the same by virtue of assignment for bankruptcy?
The court reviewed the Bankruptcy and Insolvency Act (BIA) which, in part, states that “Every bankruptcy order and every assignment made under this Act takes precedence over all […] except the rights of a secured creditor.”
Thus, the issue turned solely on whether the Applicant Mother was a secured creditor as of the date of the assignment for bankruptcy.
The court found that the Applicant Mother was not a secured creditor and as such the trustee had rightful claim over her 50% share of the net proceeds.
The court noted that without a clear language pointing to an intention to create a secured creditor within the meaning of the BIA, one must be careful when interpreting an Order that are principally designed to assist one spouse in enforcing an Order against the other spouse. In this case, the court found that it was far-fetched to conclude that a security interest of such kind was created or intended by the court. The court further noted that at best, the language of the Order suggested that the Order was a preservation Order, designed to have a fund available for payment of potential spousal support.
This case reminds us that the wording and context in which the Order was made can affect what happens to it in the event of a bankruptcy.
For more information, please call us at Feldstein Family Law Group P.C. or contact our firm online.