The case of Rusinek & Associates Inc. v Arachchilage 2021 ONCA 112 presents an interesting case study on the ability of a trustee in bankruptcy to bring an equalization claim on behalf of a bankrupt spouse.
The matrimonial home was purchased and placed solely in the Respondent’s name. As per her evidence, it was never the intention of the parties that her former spouse would acquire any interest in the matrimonial home, as he had never contributed to its acquisition or maintenance.
Following their separation, neither party commenced an application for the equalization of net family properties. The former spouse would later make an assignment in bankruptcy, with the appellants, Rusinek & Associates, being appointed as the bankruptcy trustee. The appellant applied to the Superior Court for a declaration that the right to commence an equalization claim was now vested with them as the trustee of the former spouse’s bankruptcy.
The application judge held that the right to commence an equalization claim under the Family Law Act (the “FLA”) was held “inchoate” and did not constitute “property” under the Bankruptcy and Insolvency Act (the “BIA”) until the claim was exercised by the spouse. As such, the right to commence an equalization claim was not assignable and did not vest in the trustee in bankruptcy. The court stated the decision to begin a claim remains “personal as between the spouses”.
The Ontario Court of Appeal acknowledged that section 2 of the BIA included “things in action” under the definition of property. As a result, such interests are included in the property to be vested with the trustee upon bankruptcy.
Notably, section 7(2) of the FLA provides that the entitlements under sections 5(1), (2) and (3) regarding an equalization claim are “personal as between spouses”. Section 7(2) does provide for the exception where a claim for equalization commenced before a spouse’s death, may be continued against the deceased spouse’s estate.
Case law has also provided an exception for cases of bankruptcy, where the equalization claim was commenced prior to the assignment in bankruptcy of the bankrupt spouse. Once initiated, the equalization claim constitutes property under the BIA and the trustee then has control over the claim and its proceeds. This illustrates that the equalization claim is not a right that does not exist independent of its holder, as this would preclude the claim from vesting with the trustee. The trustee is able to take this right from the bankrupt and claim the proceeds of an exercised equalization claim in order to settle the bankrupt’s debts. Should the claim be personal in nature, the bankrupt spouse would be entitled to the proceeds of the claim, in spite of their bankruptcy assignment. This is not the law.
However, the Court of Appeal would conclude that an equalization claim is still precluded from being commenced by the trustee themselves. The court opined that barring the trustee in bankruptcy’s ability to initiate an equalization claim was precisely the effect of the words “personal as between the spouses” in section 7(2) of the FLA. To seek an equalization claim is extremely personal and between the spouses themselves. A decision to seek equalization can cause immense conflict and incur substantial costs for both parties. Parties are encouraged to settle their affairs between themselves without resorting to the courts. Prohibiting the commencement of such a claim by a 3rd party whose sole motivation is to accumulate wealth is consistent with the intimacy of the family law process.
If a spouse has already began an equalization claim, the parties would already be in a situation of conflict, and it would be permissible to allow the trustee to enforce the already-exercised claim.
The initiation of an equalization claim is an immensely personal decision between spouses. The pursuit of equalization can cause further division and conflict in an already tenuous post-separation relationship. The Ontario Court of Appeal recognized the personal nature of the commencement of an equalization claim, and purposely precluded a trustee in bankruptcy from obtaining that right.
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