INDEX

INTRODUCTION

SPOUSAL SUPPORT (PRE 1997 AMENDMENTS)

HISTORICAL POSITION

CONSEQUENCES OF SUPPORT OBLIGATIONS NOT BEING PROVABLE IN BANKRUPTCY

ASSETS THAT DO NOT DEVOLVE UPON THE TRUSTEE AND ARE AVAILABLE TO THE MAINTENANCE CREDITOR

PENSIONS
SECTION 23 OF THE EXECUTIONS ACT
ANNUITY CONTRACTS
JUDGMENTS ACT
GARNISHMENT EXEMPTIONS AND WAGES
SEVERANCE PAY AND INCOME TAX REFUNDS

THE 1997 AMENDMENTS TO THE BANKRUPTCY AND INSOLVENCY ACT AN

SPOUSAL SUPPORT
SECTION 121 (4) AMENDMENT
SECTION 136(1)(d.1) AMENDMENT
SECTION 69.41 AMENDMENT
SUMMARY OF EFFECT OF SECTIONS 121(4), 69.41, AND 136(1)(d.1) AMENDMENTS
SECTION 68 AMENDMENT
EFFECT OF SECTION 68 AMENDMENT ON SUPPORT ORDERS

PROPERTY ISSUES

EQUALIZATION UNDER THE MARITAL PROPERTY ACT OF MANITOBA
THE MARITAL PROPERTY ACT OF MANITOBA
ONLY DEBTOR-CREDITOR RELATIONSHIP CREATED UNDER MPA
COURT ORDER UNDER MPA REQUIRING TRANSFER OF SPECIFIC ASSET CREATES TRUST PROPERTY NOT FORMING PART OF ESTATE IN BANKRUPTCY
SEPARATION AGREEMENTS THAT TRANSFER PROPERTY
JOINTLY OWNED PROPERTY/ TENANCIES IN COMMON
PROPERTY SUBJECT TO SECURITY AND CHARGING ORDERS
HOMESTEAD ISSUES
TRUST PROPERTY
PROCEDURAL MATTERS

CONCLUSION AND SOME LOOSE ISSUES

FAMILY LAW AND BANKRUPTCY
Terry A. Gutkin
Levene Tadman

1. INTRODUCTION

Bankruptcy practitioners and family law practitioners for the most part practice in their own separate worlds. Family law legislation rarely if ever makes reference to bankruptcy and bankruptcy and insolvency legislation exists in the main without consideration of domestic issues. From time to time these two solitudes are forced to meet. Bankruptcy of a party engaged in domestic litigation often sends shockwaves of panic into the camp of the non bankrupt spouse due mainly to the family law lawyers unfamiliarity with the intricacies of bankruptcy law. The Trustee of a bankrupt party with domestic issues recoils at the thought of having to leave the safe world of bankruptcy and insolvency law and venture into family law. This paper is an attempt to explore the legal landscape of the cross roads of these two disciplines.

2. SPOUSAL SUPPORT (PRE 1997 AMENDMENTS)

A. HISTORICAL POSITION

Historically, support orders were not provable in bankruptcy.

For starters section 121 (1) of the Bankruptcy and Insolvency Act (BIA) makes all debts and liabilities present or future to which the bankrupt is subject on the day he/she becomes bankrupt or to which the bankrupt may become subject to before discharge by reason of an obligation incurred before the day on which he/she becomes bankrupt, provable claims in bankruptcy. Why then is a support obligation made pursuant to court order against a bankrupt before bankruptcy or a support obligation under a separation agreement executed prior to bankruptcy not a debt or liability of the bankrupt? The answer is to be found not in the BIA but in the case law interpreting the BIA and its predecessor legislation both in England and in Canada. As support orders were always variable and subject to termination it was held that they were not capable of being valued and not provable in bankruptcy. Even arrears in maintenance which on the surface appear to be capable of calculation were found to be non- provable claims as a support order could always retroactively be changed or terminated.

What about a separation agreement that does not make specific provision for the variation of a support obligation or which provides that the support obligation is not variable? The case law has been far from certain as to whether claims under such non-variable agreements are provable in bankruptcy. Clearly where the support obligation in the separation agreement is confirmed in a subsequent court order, the support claim will not be provable in bankruptcy. There is some authority for maintenance arrears being provable in bankruptcy under non- variable separation agreements as long as a court order confirming the maintenance obligation has not been made. Once an order is made with respect to maintenance, the maintenance obligation is always variable.

Legal costs pertaining to support have also been held not to be provable claims.

Although support obligations under court orders and under most separation agreements were not provable in bankruptcy, they were also not discharged by Bankruptcy. Section 178 (1) (b) (c) of the BIA provides that debts and liability for alimony as well as debts and liability under support, maintenance and affiliation orders and debts and liability for maintenance and support of a child or spouse under an agreement (where the spouse or child is living separate and apart from the bankrupt) are not discharged by bankruptcy and the bankrupt is not released from these obligations.

Just as court costs with respect to a maintenance order were not provable in bankruptcy, such an award of costs has also been held not to be discharged by bankruptcy¹. One however must be careful with this, as only costs awarded in relation to a support order survive bankruptcy. Costs awarded with respect to custody or in relation to other non-support issues in matrimonial litigation do not survive bankruptcy. Where the Court awards costs on a global basis in domestic litigation it may be necessary to apportion same in order to determine which portion survives bankruptcy.

B. CONSEQUENCES OF SUPPORT OBLIGATIONS NOT BEING PROVABLE IN BANKRUPTCY

Historically the consequences of support obligations not being provable in bankruptcy were as follows:

i. Arrears in maintenance were not the type of indebtedness capable of being the foundation of a bankruptcy petition and accordingly a spouse who was entitled to collect maintenance arrears from a defaulting spouse was precluded from petitioning that spouse into bankruptcy based on the arrears;

ii. A maintenance creditor (a spouse entitled to be paid maintenance under a court order or agreement), not having a provable claim in bankruptcy, was precluded from participating in the bankruptcy proceedings. As a consequence, the maintenance creditor was not entitled as of right to notice of the bankruptcy, was not entitled to file a proof of claim for support, whether the claim was for arrears or for future payments, had no right to attend creditors meetings and if permitted to attend, most certainly could not vote at these meetings. When the bankrupt spouse applied for discharge, the maintenance creditor had no standing to appear at the hearing to oppose discharge unless the maintenance creditor also had a claim provable in bankruptcy.

iii. It is not uncommon for a trustee to refuse to take proceedings on behalf of an estate in bankruptcy. In these circumstances a creditor is entitled to apply pursuant to section 38 of the BIA for an order permitting the creditor to bring proceedings in his/her own name. If such an order was granted the trustee is required to transfer to that creditor the right to bring such proceedings as well as any benefit derived from such proceeding up to the amount of the creditor's claim plus costs. A maintenance creditor, not having a claim provable in bankruptcy could not be granted a section 38 order.

iv. Although a trustee has the right to proceed to have a settlement or preference made by the bankrupt declared void or to commence court proceedings where a transaction is reviewable, there are occasions where there are insufficient funds in the estate to finance such a venture and the trustee will in fact consent to a creditor obtaining an order pursuant to section 38 permitting the creditor to commence such proceedings for his/her own benefit. A maintenance creditor could not be granted a section 38 order to bring such proceedings even with the trustee's consent. Even if the trustee proceeded on his own to court to void a settlement or preference etc., the proceeds derived from such an application would not benefit the maintenance creditor as her support claim was not provable in bankruptcy;

v. A maintenance creditor was not entitled to share rateably with the other unsecured creditors in any dividends payable from the bankrupt's estate. Where a bankrupt was unemployed but had significant assets forming part of his estate in bankruptcy, the maintenance creditor was left out in the cold, having no income to attach and being shut out from sharing these assets;

vi. A maintenance claim was not stayed under BIA s. 69.3. In the circumstances a support order was enforceable against the debtor spouse and theoretically against his/her property. Accordingly an action could be commenced or continued as well as execution taken against the debtor spouse to enforce the support obligation without leave of the bankruptcy court. Although a creditor spouse in theory could enforce a support obligation against the bankrupt's property, this was very much a hollow right as only property of the bankrupt that did not vest in the trustee could be attached. Under BIA s. 70 (1) the trustee's rights to the property of the bankrupt took precedence over the creditor spouse's rights to the same property under a judgment, garnishment or execution. In short the creditor spouse while having the right to go after the property of his/her defaulting spouse lost on a priority fight with the trustee. Only where the creditor spouse garnisheed or resorted to execution and the proceeds of this process had been actually paid out to the creditor spouse prior to bankruptcy, will the creditor spouse be entitled to keep the spoils of his/her collection efforts;

vii. As the trustee is entitled to all of the "property of the bankrupt" as of the date of the bankruptcy or which may devolve upon the bankrupt before discharge (BIA s 67 (1) (c)), the creditor spouse is more often then not left out in the cold. Certain assets of the bankrupt are exempt from seizure or execution under "the laws of the province within which the property is situated and within which the bankrupt resides" and by operation of BIA 67 (1)(b), these assets do not devolve upon the trustee and may be available to the creditor spouse.

C. ASSETS THAT DO NOT DEVOLVE UPON THE TRUSTEE AND ARE AVAILABLE TO THE MAINTENANCE CREDITOR

The following are examples of assets that do not devolve on the trustee, are not available for distribution amongst the bankrupt's creditors who have provable claims in bankruptcy and are available to a maintenance creditor:

i. PENSIONS Moneys payable under a pension governed by the Pension Benefits Act of Manitoba are, subject to the Garnishment Act of Manitoba, exempt from execution, seizure and attachment². With few exceptions, employees in Manitoba covered by a pension plan in respect of employment in Manitoba, are governed by The Pension Benefits Act. Pensions covered by this legislation are beyond the reach of the trustee in bankruptcy of a bankrupt and for that matter are beyond the reach of most judgment creditors.

Maintenance orders are the exception. Section 14 of the Garnishment Act provides that a maintenance order may be enforced by garnishment of the pension benefit credit of a judgment debtor in a pension plan. Service of such a garnishing order binds, to the extent specified in the garnishing order, the net pension benefit credit of the debtor in his pension plan. Section 31.1 of the Pension Benefits Act sets out a formula for calculating how much of the debtor's pension benefit is to be paid under the garnishing order and stipulates that such amount shall be received by the debtor for the purpose of satisfying the garnishing order and the costs and taxes associated therewith. Payment of this amount under the garnishing order operates as a complete or partial discharge of the debtor's rights under the pension plan (dependent upon how much is paid out).

Maintenance creditors cannot obtain a garnishing order against a pension benefit credit on their own. Only the designated officer appointed under the Family Maintenance Act, acting on behalf of the maintenance creditor is permitted to obtain such a garnishing order³.

In short, the trustee gets nothing from the bankrupt's pension, but a spouse who is owed monies under a maintenance order, is entitled, subject to the formula set forth in the legislation, to garnishee the bankrupt's pension benefit credit. Such a spouse however, may not be able to garnishee all of the pension benefit credit. Under section 14.2 (1) of the Garnishment Act, where a garnishee has notice that a person might be entitled to a division of a judgment debtor's pension under the Pension Benefits Act, the amount of that person's entitlement is exempt from being attached under the garnishing order. Accordingly where a former spouse is entitled to a division of a judgment debtor's pension and the judgment debtor remarries and defaults under a maintenance order obtained by his new wife, the new wife can only go after the portion of the pension benefit that is not subject to a division in favour of the former wife.

It should be noted that the Pension Benefits Act of Manitoba also applies in certain cases to common law spouses where the pension plan member opts into the legislation by making a declaration in a prescribed form. In Manitoba, a common law spouse is entitled in certain circumstances to a maintenance order under the Family Maintenance Act. Where a bankrupt common law spouse with a pension has opted into the Pension Benefits Act, his/her pension is also out of the trustee's reach. Is this pension subject to garnishment by his/her common law wife or husband? The Garnishment Act permits garnishment to enforce a "maintenance order" which by section 13 includes any order for maintenance or alimony made under the Family Maintenance Act. A common law spouse should be able to garnishee such a pension, whether or not the spouse with the pension opted in, subject of course to the rights of a former or subsequent common law spouse in that pension where opting in has in his/her case taken place.

Not all pensions are governed by the Pension Benefits Act. Pensions with respect to certain businesses and undertakings that are under the legislative authority of the Parliament of Canada are subject to the Federal Pension Benefits Standards (1985) Act as well as various other statutes creating these pensions. Airlines, banks, broadcasters and railways are examples of businesses subject to this legislation. The Pension Benefits Standards (1985) Act has no specific provision excluding pensions from garnishment, attachment and seizure but where a pension subject to this Act is created by statute, that statute may contain such an exclusion.

The Pension Benefits Standards (1985) Act does make provision for pension administrators honouring a pension split on divorce or separation. The Pension Benefits Standards (1985) Act was considered by Master Bolton in Re Bankruptcy of Kenneth Frank Selluski⁴. Master Bolton held that the Pension Benefits Standards Act does not in itself make a pension subject to the benefits of the non garnishment provisions of the Pension Benefits Act of Manitoba and to the benefits of section 67 (1) (b) of the BIA. In the circumstances a pension that was to be divided under the Pension Benefits Standards Act was not because of this legislation alone exempt from seizure and was property of the bankrupt divisible amongst his creditors.

Pensions under the Public Service Superannuation Act, the Supplementary Retirement Benefit Act, the Canadian Forces Superannuation Act, the Member of Parliament Retiring Allowances Act and the Royal Canadian Mounted Police Superannuation Act, the Diplomatic Service (Special) Superannuation Act, the Lieutenant Governors Superannuation Act, the Governor General's Act, The Special Retirement Arrangements Act are all federal in origin and on marriage breakup are subject to the Pension Benefits Division Act of Canada. Except for the portion of a pension to be divided amongst spouses on marital breakup, the Pension Benefits Division Act also makes no provision for excluding pensions from garnishment, seizure or execution.

The legislation creating each of these Federal pensions must be examined to determine if they are exempt from execution and seizure. Most Federal pensions contain a provision similar to section 10 of the Public Service Superannuation Act which provides that a benefit payable under that Act is "exempt from attachment, seizure and execution". This exemption in turn is subject to Part II of the Garnishment, Attachment and Pension Diversion Act and the Pension Benefit Division Act of Canada.

Are these Federal pension benefits under the Public Service Superannuation Act excluded as property of the bankrupt under BIA section 67 (1). There has been some confusion on this issue. Section 67 (1) (b) of the BIA provided that "any property that as against the bankrupt is exempt from execution or seizure under any laws applicable in the province where the property is situated and within which the bankrupt resides" is not property of the bankrupt.

In Canadian Imperial Bank of Canada v. Meltzer⁵ Morse J. held that the words "the laws of the province" in s. 67(b) mean laws applicable within the province whether enacted by the provincial Legislatures or by the Federal Parliament. Does this mean that a pension under the Public Service Superannuation Act is excluded as property of the bankrupt, just because its governing statute applies in Manitoba? In order to be excluded, the exemption law has to be applicable in the province where the property is situated and where the bankrupt resides. Where is the property which makes up the pension under the Public Service Superannuation Act situated? Let us assume that the pension is situated in Ontario and the bankrupt lives in Manitoba. The Public Service Superannuation Act applies in both Ontario and Manitoba and accordingly it can be argued that this pension is not property of the bankrupt capable of division among his creditors. If this argument is correct, the trustee can not touch this pension. While it is true that Master Bolton in the Selluski case⁶ held that a pension subject to the Pension Benefits Act was not afforded the protection of BIA 67 (1) (b), her Honour was not looking at the pension member's rights in the pension itself, but rather was concerned with a statute that provided for the enforcement of a division of same. What would happen if the statute creating the Federal pension excluded it from execution? It is submitted that 67 (1) (b) would apply to keep this pension out of the trustee's hands.

What then of the maintenance creditor? Here we must look at the Garnishment, Attachment and Pension Diversion Act and the Pension Benefit Division Act of Canada. Under the Garnishment, Attachment and Pension Diversion Act a financial support order under provincial legislation or under the Divorce Act, can on application to the minister be enforced against a pension such as Public Service Superannuation pension. The Federal pensions subject to this legislation are listed in a schedule to the Act and include pensions such as those created under the Canadian Forces Superannuation Act and the Royal Canadian Mounted Police Superannuation Act etc. In summary, a pension governed by the Garnishment, Attachment and Pension Diversion Act is available to the maintenance creditor but not to the trustee. Can a common law spouse use this legislation to enforce a maintenance order obtained under the Family Maintenance Act of Manitoba? The Act allows for the enforcement of financial support orders made under the laws of a province relating to a "spouse, former spouse, child or other person". It is submitted that the words "other person" are broad enough to include the common law spouse.

The Pension Benefit Division Act of Canada contains a further exemption from attachment, seizure and execution which applies to all pensions under its ambit. The Minister in charge of this legislation is required to divide a pension under the control of this Act, if a court in Canada, in proceedings in relation to divorce, annulment or separation, makes an order dividing the pension benefits of a spouse. Alternatively, the Minister is also required to divide such a pension if the parties have lived separate and apart for a year or more and either a court in Canada orders (presumably in any proceedings) that the pension benefits of a spouse be divided or the parties agree in writing to divide same. Section 12(2) of the Pension Benefit Division Act, exempts from execution, attachment and seizure any amount that a spouse or former spouse is or may become entitled on a division. This amount is beyond the reach of a trustee in bankruptcy. A comparable provision does not appear in the Pension Benefits Standards Act. Although a maintenance creditor under the Garnishment, Attachment and Pension Diversion Act can seek enforcement of his/her maintenance order against a pension subject to the Pension Benefit Division Act. If under the latter legislation, part of that pension goes to a former spouse, then that part of the pension is also beyond the reach of the maintenance creditor. On remarriage and subsequent separation, if the new wife obtains a maintenance order, it may only be enforceable against part of her husband's pension, with the portion of her husband's pension due to his former spouse being safe from the new wife's garnishment order and safe from the hands of the trustee.

ii. SECTION 23 OF THE EXECUTIONS ACT: Property exempt from seizure under section 23 of the Executions Act of Manitoba is not property of the bankrupt divisible among his/her creditors.

Property exempt from seizure includes furniture and household furnishings and appliances of the debtor not exceeding the sum of $4,500.00, necessary and ordinary clothing of the judgment debtor and his/her family, tools, implements and professional books used in the debtor's trade, occupation or profession not exceeding the aggregate sum of $7,5000.00 and where the debtor requires a motor vehicle for such purpose, one motor vehicle not exceeding in value $3,000.00.

Section 59 (2) of the Family Maintenance Act of Manitoba provides that the exemptions under the Executions Act and under the Judgments Act do not apply to any process issued by a court to enforce an order under the Family Maintenance Act. An order under the Family Maintenance Act includes an order under the Child and Family Services Act and an order under The Reciprocal Enforcement of Maintenance Orders Act. The Family Maintenance Act also makes maintenance orders under the Divorce Act or any other maintenance order made by a court, enforceable as an order under the Family Maintenance Act, if the court making the order makes the enforcement provisions of the Family Maintenance Act part of the order. Separation Agreements in certain circumstances can be filed with the designated officer under the Family Maintenance Act (section 53(3.1)) and when so filed, the maintenance provisions of the agreement are deemed to be an order under the Family Maintenance Act.

In the event of default under an order to which the Family Maintenance Act applies, the maintenance creditor and the designated officer appointed under this legislation have a number of remedies against the defaulting spouse including garnishment, obtaining and serving a writ of execution, registering the order in the land titles office against the debtor's land and having a receiver appointed. If the debtor is bankrupt, the trustee cannot touch the exempt property under the Judgments Act and under the Executions Act, but a maintenance creditor under the Family Maintenance Act is free to pursue this property.

iii. ANNUITY CONTRACTS: Monies paid or payable under an annuity contract are exempt from seizure under section 26(1) of the Executions Act of Manitoba. Again the trustee can not touch these funds but a maintenance creditor under the Family Maintenance Act can go after them because the Family Maintenance Act makes the exemptions under the Executions Actinapplicable to the enforcement of a maintenance order.

iv. JUDGMENTS ACT: Under section 13 (1) of the Judgments Act of Manitoba, the actual residence or home of a judgment debtor is exempt from judgment sale proceedings where a judgment is registered against same, provided that the value of the residence is less then $2,500.00 or where title to the property is held in joint tenancy or as tenants in common, the interest of each party is less then $1,500.00. More generous treatment is afforded farmers, with 160 acres of farmland being exempt.

A sale that will yield net sale proceeds of less then $2,500.00 cannot go ahead. In the case of joint tenancies or tenancies in common, a sale that will yield less then $1,500.00 to each judgment debtor who has an interest in the residence cannot go ahead.

Where a residence is sold under the Judgments Act, the sum of $2,500.00 from the net sale proceeds shall be turned over to the judgment debtor and if more then one judgment debtor has an interest in the residence, the sum of $1,500.00 shall be paid to each judgment debtor from the net sale proceeds.

The trustee has no claim to these exempt funds but a maintenance creditor is entitled to enforce his/her maintenance order against same. Accordingly a maintenance creditor can register his/her maintenance order against his/her spouse's residence and after a year proceed with sale proceedings even if the value of the residence is less the $2,500.00. On such a sale the maintenance creditor would be entitled to all of the proceeds. If the bankrupt's residence was worth more then $2,500.00 and the trustee sells same and a maintenance order has been registered against title to the residence, the maintenance creditor will be entitled to the first $2,500.00 of the sale proceeds. If a maintenance creditor owned the home jointly with the bankrupt and registered a maintenance order against the bankrupt's interest in the home, on a sale of the home by the trustee, the maintenance creditor would be entitled to the first $1,500.00 in the proceeds.

v. GARNISHMENT EXEMPTIONS AND WAGES: 70% of a judgment debtor's wages are exempt from garnishment under section 5 of the Garnishment Act of Manitoba, provided that a judgment debtor with no dependents must be left with $250.00 and a judgment debtor with dependants is entitled to keep $350.00. A clerk of the Court of Queen's Bench has authority to vary the amount of this exemption. Garnishment under maintenance orders and under separation agreements in most cases reduces the judgment debtor's exemption, with the exemption fixed at $250.00 regardless of the debtor's income. A Court of Queen's Bench clerk also has authority to vary this exemption and the exemption can be increased in accordance with the regulations under the Garnishment Act These exemptions only apply to garnishment of wages and not to the garnishment of other debts.

Where a person obtains a maintenance order under the Family Maintenance Act or under the Child and Family Services Act or registers a maintenance order under the Reciprocal Enforcement of Maintenance Orders Act and obtains a garnishing order with respect to same, section 13(5) of the Garnishment Act of Manitoba gives this garnishment order (subject to the $250.00 exemption) "priority over any other garnishing order that may be served on the garnishee or any debt by the judgment debtor to the garnishee". The effect of these sections is to restrict ordinary judgment creditors to garnishing 30% of the debtor's wages, but to allow maintenance creditors to go after all of the debtor's wages (both being subject to the $250.00 minimum). As a result of section 13(5), if an ordinary creditor and a maintenance creditor each serve a garnishing order with respect to the judgment debtor's wages (or for that matter with respect to any debt of the judgment debtor), the maintenance order takes priority.

On a bankruptcy, where does the trustee stand in this scheme? On a strict reading of the legislation and assuming the constitutional validity of 13(5), the $250.00 exemption should belong to the bankrupt and the balance of the garnisheed funds must go to the maintenance creditor. On its face, section 13 (5) creates a priority in favour of the maintenance creditor.

One might be tempted to argue that the priority scheme set up by section 13 (5) of the Garnishment Act, conflicts with section 70 (1) of the BIA which provides that "every receiving order and every assignment made in pursuance of this Act takes precedence over all judicial or other attachments, garnishments.....against the property of the bankrupt, except those that have been completely executed by payment to the creditor or his agent, and except the rights of a secured creditor" and that the BIA being federal legislation is paramount (in short that section 13 (5) is ultra vires the Province and unenforceable).

If section 70 of the BIA does not override the priority scheme set out in section 13 (5) of the Garnishment Act, then all of the garnisheed funds go to the maintenance creditor except for the $250.00 exemption.

Under Section 70, a receiving order and assignment take precedence over a garnishment "against the property of the bankrupt". Accordingly if wages are not property of the bankrupt, section 70 does not apply to override a priority scheme set up under provincial legislation with respect to wages.

The Supreme Court of Canada in Marzetti v. Marzetti⁷ upheld a provincial priority scheme with respect to wages, ruling that wages were not property of the bankrupt within the meaning of BIA section 67. In this case a husband owed money to the Director of Maintenance Enforcement because of arrears under a support order. Revenue Canada in turn owed an income tax rebate to the husband. The husband made an assignment in bankruptcy and purported to assign the income tax refund to his trustee. The Director of Maintenance issued a continuing attachment order against the Federal Crown under the Alberta Family Orders and Agreements Enforcement Act. The assignment in favour of the trustee was invalid having been precluded by section 67 of the Financial Administration Act of Canada which prohibits in many cases the assignment of a Crown debt. The Supreme Court held that a trustee can only go after wages of a bankrupt by making a court application under section 68 of the BIA. The Court ruled that although at first blush wages would appear to be property within the meaning of BIA section 67, it is necessary to look at section 67 and section 68 of the BIA together. The Court then reasoned that section 68 is a complete code controlling a bankrupt's salary, wages and other remuneration and as such salary, wages and other remuneration cannot be considered property under section 67, divisible among the bankrupt's creditors. As the tax refund was for wages, it is not property of the bankrupt and does not vest in the trustee.

While Marzetti did not deal directly with Manitoba's garnishment legislation and in particular did not deal with section 13 (5), it does have a direct impact on garnishment issues. If wages are not property of the bankrupt then they do not vest in the trustee unless the trustee obtains an order under BIA section 68. Furthermore the priority scheme set out by section 13 (5) does not conflict with section 70 of BIA and accordingly all funds garnisheed under a maintenance order are available for the maintenance creditor with exception of the $250.00 exemption which the trustee cannot touch.

What then happens if the trustee obtains an order under Section 68. Section 68 applications prior to the 1997 amendments were discretionary on the part of the trustee unless the trustee was directed by the inspectors or creditors to commence such an application. Trustees rarely brought such applications.

If a section 68 order is made with respect to a portion of the bankrupt's salary how does section 13(5) of the Garnishment Act operate in these circumstances? Section 13(5) only creates a priority with respect to other garnishing orders. A section 68 order is not a garnishment order and even if it was, it is doubtful that a provincial order in conflict with an order made under federal legislation would prevail. In the circumstances, it is the writer's view that a garnishment order for a maintenance obligation can only be enforced against the portion of the bankrupt's salary not covered by a section 68 order (subject to the $250.00 exemption provided in the Garnishment Act).

Should the maintenance creditor's position be considered on a Section 68 application? Section 68 expressly requires the Court in considering an application under this section to have regard to the "family responsibilities and personal situation of the bankrupt". On an application under this section, it can be argued that an order ought not to be granted allowing the trustee to access the bankrupt's wages if to do so would defeat or diminish a maintenance creditor's garnishing order, as the making of such an order would ignore the bankrupt's family responsibility to pay maintenance. In commenting on the wording of section 68, Mr. Justice Iacobucci stated in the Marzetti case "This demonstrates, to my mind, an overriding concern for the support of families"⁸.

The 1997 amendments to section 68 no longer require a trustee at first instance to make a court application to obtain a portion of the bankrupt's income for the estate in bankruptcy. The amendments however direct the trustee to fix the income to be paid by the bankrupt to the estate and in doing so to look at the bankrupt's personal and family situation. More will be said on this when the amendments are discussed.

vi. SEVERANCE PAY AND INCOME TAX REFUNDS

Severance pay has been held to fall within the words "salary, wages or other remuneration" in BIA section 68 (1)⁹. In the circumstances, unless the trustee makes a section 68 application, these funds are not available to the estate in bankruptcy as property of the bankrupt. What happens when a maintenance creditor goes after severance pay at the same time that a trustee seeks a section 68 order with respect to same? It is submitted that having regard to the remarks of the Supreme Court of Canada in the Marzetti case, the family responsibilities of the bankrupt will likely be given priority with most of the severance pay going to satisfy the bankrupt's maintenance obligations.

In Marzetti a post-bankruptcy tax refund was held to be "salary, wages and other remuneration" and accordingly not property of the bankrupt under BIA section 67. Such refunds however could be the subject matter of a section 68 application.

A. SECTION 121 (4) AMENDMENT

Effective September 30, 1997 claims for spousal or child support have been made provable claims in bankruptcy. Section 121 (4) of the BIA which was part of the 1997 amendments reads:

"Family support claims - a claim in respect of a debt or liability referred to in paragraph 178 (1)(b) or (c) payable under an order or agreement made before the date of the initial bankruptcy event in respect of the bankrupt and at a time when the spouse or child was living separate and apart from the bankrupt, whether the order or agreement provides for periodic or lump sum amounts, is a claim provable under this Act"

In order for a child support or spousal support claim to be provable in bankruptcy, it must be for alimony, support, maintenance or affiliation, must be payable pursuant to an order or agreement and the order or agreement must have been made before the date of the initial bankruptcy event. Furthermore the bankrupt must have been living separate and apart from the spouse or child who is the subject matter of the support order or agreement in order for the support claim to be provable in bankruptcy. Accordingly, a support obligation arising from or under an order or agreement made after the date that the bankrupt made an assignment or made after the bankruptcy petition was filed (where a receiving order is subsequently made) or made after the bankrupt filed a notice of intention to file a proposal (where there was default under the proposal) will not be provable in bankruptcy. If the parties enter into a spousal support agreement before they actually separate, the spousal support obligation thereunder will not be provable in bankruptcy. It is immaterial whether the order or agreement provides for a lump sum or periodic support in order for the claim to be provable.

It should be noted that this amendment only applies to bankruptcies in respect of which proceedings were commenced after September 30, 1997.

While certain support claims are now provable in bankruptcy, as long as that claim comes within Section 178 (1) (b) (c) of the BIA, the old rule still applies and a support debt is not discharged by the bankruptcy. Section 178 (1) (b) (c) provides that debts and liability for alimony as well as debts and liability under support, maintenance and affiliation orders and debts and liability for maintenance and support of a child or spouse under an agreement (where the spouse or child is living separate and apart from the bankrupt) are not discharged by bankruptcy and the bankrupt is not released from these obligations.

The maintenance creditor in many cases now has essentially two kicks at the cat, namely proving in bankruptcy and going after the bankrupt's property where that property does not vest in the trustee in bankruptcy. The full version of this paper looks at those assets available to a maintenance creditor that do not vest in the trustee.

B. SECTION 136(1)(d.1) AMENDMENT

The amendments to the BIA went further than simply conferring provable status on some support claims, but elevated some of these claims to preferred status.

Section 136 (1) (d.1) of the BIA which came into force on September 30, 1997 adds certain spousal and child support claimants to the list of preferred creditors. The section reads:

"Claims in respect of debts or liabilities referred to in paragraph 178(1)(b) or (c), if provable by virtue of subsection 121 (4), for periodic amounts accrued in the year before the date of bankruptcy that are payable, plus any lump sum amount that is payable."

Claims that come within Section 136 (1) (d.1) are to be paid ahead of other unsecured creditors, but in the priority scheme set forth in Section 136, rank part way down the ladder. Trustee's fees and expenses and as well claims for six months wages prior to bankruptcy (up to $2,000.00 per person) still rank in priority to spousal support claims. Claims for municipal taxes, claims by landlords for arrears in rent, Workers Compensation claims, claims with respect to Unemployment Insurance and claims by Revenue Canada under the Income Tax Act, while still preferred claims, rank behind support claims that come within this amendment.

To obtain preferred status under Section 136 (1) (d.1) a claim must be for alimony, support, maintenance or affiliation and must qualify as a provable claim under Section 121 (4). A claim for maintenance under a court order obtained after the date of an assignment in bankruptcy will be not be provable in bankruptcy and will not attract preferred status.

Finally with respect to periodic maintenance/support, only amounts payable in the year before the date of bankruptcy, have preferred status. Accordingly, if a maintenance order was made two years before bankruptcy and is entirely in arrears, the arrears will be provable in bankruptcy, but only the claim for the last year of arrears will have preferred status. The arrears that arose under the first year of the order will receive no priority, but the maintenance creditor will still be entitled to share pari pasu with the other unsecured creditors in any dividend payable by the estate.

Lump sum maintenance is given different treatment under the amendment. It matters not when the lump sum obligation went into arrears as long as it was payable under an order or agreement made before the initial bankruptcy event.

C. SECTION 69.41 AMENDMENT

i. Section 69.41 was added to the BIA in 1997 and applies to all bankruptcies where proceedings were commenced prior to September 30, 1997. The section reads as follows:

"Section 69.41

(1) - Sections 69 to 69.31 do not apply in respect of a claim referred to in subsection 121(4).

(2) Notwithstanding subsection (1), no creditor with a claim referred to in subsection 121(4) has any remedy, or shall commence or continue any action, execution or other proceeding, against

(a) property of a bankrupt that has vested in the trustee, or
(b) amounts that are payable to the estate of the bankrupt under section 68 ."

ii. Without this amendment support claims would be discharged by bankruptcy. A spouse who has a maintenance claim that comes within section 121(4) has a provable claim in bankruptcy and any person with a claim provable in bankruptcy is a creditor under the Act. By operation of sections 69.3(1) of the BIA the remedies of unsecured creditors against a debtor or against a debtor's property are stayed on the bankruptcy of the debtor. As well section 69 provides for time limited stays on a debtor filing a Notice of Intention to File a Proposal under the Act and upon a debtor actually filing such a proposal. Section 69.41(2) makes it clear that the stays provided for in section 69 do not apply to a maintenance creditor who has a provable claim under section 121(4) and that the maintenance creditor is entitled to proceed against the bankrupt and his/her property, provided that the property does not vest in the trustee and provided that the maintenance creditor cannot touch monies payable to the estate of the bankrupt under section 68.

D. SUMMARY OF EFFECT OF SECTIONS 121(4), 69.41, AND 136(1)(d.1) AMENDMENTS

i. Spousal and child support claims remain undischarged by bankruptcy (as long as they qualify under Section 178 (1) (b) (c)) and a maintenance creditor can pursue his/her claim against the bankrupt without having to obtain leave to do so.

ii. If a maintenance creditor proceeds with such a claim, he/she cannot personally seize assets that form part of the property of the bankrupt.

iii. Assets that do not devolve upon the trustee (in particular assets that are exempt from execution), are available to a maintenance creditor.

iv. Maintenance creditors that come within section 121(4) can prove their claim in bankruptcy and share pari pasu with all of the unsecured creditors of the bankrupt in dividends from the bankrupt's estate (in addition to having the right to personally seize assets that do not form part of the property of the bankrupt);

v. Maintenance creditors that qualify under section 121(4) have preferred status with respect to arrears in periodic maintenance that became payable in the year before the date of the initial bankruptcy event. Furthermore a lump sum maintenance obligation that qualifies under section 121(4) has preferred status even if the claim became payable well beyond a year prior to the initial bankruptcy event. Although these claims rank behind claims for the trustees fees and disbursements and as well rank behind wage claims, they rank in the priority to the claims of most other preferred creditors including Revenue Canada.

vi. Now that maintenance claims are provable in bankruptcy they should also be capable of being the foundation of a bankruptcy petition. Provided that the maintenance creditor can bring himself/herself within BIA section 42(1) (Acts of Bankruptcy) there is no reason why a maintenance creditor should be precluded from petitioning. Where a husband for example is in default under a maintenance order and as well has ceased to meet his other liabilities generally as they became due or has announced to his wife (provided she is a maintenance creditor at the time) that he will not pay his debts, the wife has grounds to petition the husband into bankruptcy. What about the husband who owes maintenance to his wife under a court order and to avoid payment transfers his property to a girlfriend or some other person which amounts to a fraudulent conveyance? In the right circumstances this act could be the foundation for a bankruptcy petition. As the act of bankruptcy must be committed within six months prior to filing a petition, the wife must act quickly. Furthermore maintenance arrears under $1,000.00 cannot be the foundation for a petition unless in combination with other outstanding debts the defaulting husband owes over $1,000.00.

vii. As a result of the amendments, a maintenance creditor who has a provable claim against a spouse or ex-spouse is entitled to notice of that spouse's bankruptcy and shall now be entitled to file a proof of claim, attend creditors' meetings and to vote at same (a right that did not exist prior to the amendments unless the recipient spouse also had a non maintenance claim against the bankrupt spouse).

viii. A maintenance creditor who has a provable claim against a spouse or ex- spouse shall now have standing to appear at that spouse's discharge hearing and to oppose a discharge being given (a right not existing prior to the amendments)

ix. If a trustee refuses to take proceedings on behalf of the estate, a maintenance creditor who has a provable claim can now apply pursuant to BIA section 38 for an order permitting her/him to bring proceedings in her/his own name and to derive any and all benefit to be obtained from such a proceeding. It is not hard to envisage situations where a bankrupt spouse has made a settlement or preference which the trustee could proceed to have declared void, but where the trustee feels that there are insufficient funds in the estate to warrant proceedings to do so. In this situation the non-bankrupt spouse may be well advised to obtain leave under section 38 to commence proceedings to void the settlement or preference and obtain the benefit from so doing.

x. Does an order for costs made in respect to a support order come within section 121(4) such that it is provable in bankruptcy? At the same time, is the creditor spouse free to pursue the claim for costs directly against the bankrupt and the bankrupt's assets that do not vest in the trustee? Support costs have been held to be part of the support award itself¹⁰ and accordingly are a debt or liability under a support, alimony or maintenance order within the meaning of section 178(1) (b)(c). If the order of costs was made prior to the date of the initial bankruptcy event, then section 121(4) ought to make same provable in bankruptcy. As section 121(4) claims are not stayed nor discharged by the bankruptcy, the creditor spouse can also proceed against the bankrupt directly for these costs. It should be noted that costs awarded for matters such as custody or property issues were always provable in bankruptcy and at the same time were discharged by bankruptcy. Nothing has changed with respect to non-support costs. Where the domestic court has made a mixed order for costs, the onus will be on the creditor seeking to establish that these were support costs, to prove on a balance of probabilities that such is the case¹¹.

E. SECTION 68 AMENDMENT

i. The 1997 amendments to the BIA have radically changed the procedure for dealing with a bankrupt's wages, salary, commission income and other remuneration from employment. Prior to the amendments, to attach wages etc. a trustee on his own initiative or on the directions of the inspectors or creditors had to make an application to court for an order directing that part of the bankrupt's salary be payable to the estate.

ii. The 1997 amendment in summary does the following:

(1) The Superintendent of Bankruptcy is required to establish a directive dealing with "Surplus Income". Surplus Income is the portion of the total income of the bankrupt that exceeds that which is necessary to enable him to establish a reasonable standard of living.

(2) The trustee having regard to the standards established under the directive, is required to fix the surplus income of the bankrupt which then becomes payable to the estate of the bankrupt;

(3) In calculating total income, all revenue of the bankrupt whatever its nature or source must be taken into account, including revenue that would otherwise be exempt from execution or seizure.

(4) The Superintendent's Directive issued April 11, 1998 sets out what expenses may be deducted from a bankrupt's total income to arrive at his net income. These expenses are designed to reflect the personal and family situation of the bankrupt and must include minimum statutory remittances such as income tax, pension deductions and employment insurance deductions as well as all mandatory deductions paid by the bankrupt. The Directive states that these expenses mayinclude non-discretionary monthly expenses, where applicable, such as child support payments, spousal support payments and child care expenses. Other examples of non-discretionary expenses are also set out in the Directive and the list is not exhaustive.

(5) After deducting expenses and arriving at net income, the trustee is required to utilize the table in Appendix "A" to the Superintendent's Directive to determine the Surplus Income payable by the bankrupt to the estate.

(6) When the Surplus Income is greater than $100.00 and less the $1,000.00, the bankrupt is required to pay 50% of the surplus to the trustee. When the Surplus Income exceeds $1,000.00, the bankrupt is required to pay at least 50% of the surplus and not more than 75% to the trustee.

(7) In establishing the bankrupt's surplus income payments, all earnings and expenses of the bankrupt's household family unit shall be considered and the bankrupt's Surplus Income payment must be adjusted to the same percentage as his portion of the total net family income. By way of example, if a bankrupt earns 56% of the total net family income and under Appendix "A" he is required to pay $960.00 in surplus income, the surplus payment required by him will be ($960.00 x 56%) x 50% = $269.00.

(8) After establishing the amount of surplus income payable by the bankrupt, the trustee has to report this amount in writing to the Official Receiver and the trustee must take reasonable measures to ensure that the bankrupt pays the required amount. The amount payable can be varied with a material change in the personal or family circumstances of the bankrupt.

(9) If the Official Receiver does not agree with the amount of surplus income fixed by the trustee, the Official Receiver must recommend to the trustee and to the bankrupt an amount to be paid and where the trustee and the bankrupt do not agree with the amount set by the Official Receiver, a mediation procedure follows for determining the amount.

(10) A creditor can also request that the issue of surplus income be submitted to mediation if the request is made within 30 days of bankruptcy or within 30 days after the trustee amends the amount of surplus income to be paid.

(11) If the trustee does not implement the amount fixed by the Official Receiver or if the mediation fails or if the bankrupt simply does not pay the amount of Surplus Income that he/she is required to pay, then the trustee may on his/her own initiative or on the request of the inspectors or on the request of any of the creditors or on the request of the Official Receiver, apply to court for a hearing of the matter.

(12) On a hearing the court will fix the amount of Surplus Income that the bankrupt has to pay having regard to the standards set by the Superintendent of Bankruptcy.

(13) In addition to paying heed to the Superintendent's Directive, the Court must have regard to "the personal and family situation of the bankrupt".

F. EFFECT OF SECTION 68 AMENDMENT ON SUPPORT ORDERS

i. Although claims for maintenance under pre-bankruptcy court orders or agreements are now provable in bankruptcy and maintenance creditors have been given a priority for arrears in maintenance accrued in the year before bankruptcy, many maintenance creditors will still be better off pursuing the bankrupt's wages directly in addition to proving in bankruptcy. Certainly, maintenance creditors who do not enjoy preferred status may not wish to share rateably with other unsecured creditors when it comes to the bankrupt's wages. Maintenance creditors whose claims arise post-bankruptcy are precluded from proving in bankruptcy but may still wish to pursue their maintenance claims directly against the bankrupt's earnings. How does a section 68 order or direction affect these maintenance creditors?

ii. Section 69.41(2) of the BIA (which was also part of the 1997 amendments) makes it clear that maintenance creditors that have a claim referred to in section 121(4) are precluded from enforcing such claim against amounts payable to the bankrupt's estate under section 68 and against property of a bankrupt that has vested in the trustee.

iii. What about maintenance creditors who do not have a claim provable in bankruptcy under section 121 (4)? Are they still creditors "with a claim referred to in subsection 121(4)"? What do these words mean? Do they mean maintenance claims provable in bankruptcy or do they mean all claims under section 178(b)(c)? If they are not creditors with a claim referred to in section 121(4), then Section 69.41(2) does not apply to them. Are they also free to pursue amounts payable to the estate of the bankrupt under section 68? If so, how are claims by the trustee under section 68 reconciled with maintenance creditor's claims to wages of the bankrupt? Does a maintenance creditor's claim have priority over the trustee's section 68 claim by virtue of section 13(5) of the Garnishment Act of Manitoba?

iv. As discussed earlier in this paper, the Supreme Court of Canada in Marzetti v. Marzetti upheld a provincial priority scheme with respect to wages, ruling that wages were not property of the bankrupt within the meaning of BIA.

v. While Marzetti did not deal directly with Manitoba's garnishment legislation and in particular did not deal with section 13 (5), it does have a direct impact on garnishment issues. Before the 1997 amendments, if a trustee did not obtain a section 68 order, wages not being property, did not vest in the trustee and were available to the maintenance creditor with the provincial priority section being applicable.

vi. It is submitted that the Supreme Court of Canada in Marzetti, while finding that salary was not property of the bankrupt, made it clear that if a section 68 order is obtained, it will vest the bankrupt's income in the trustee at the expense of a maintenance order. It is submitted that section 13(5) of Manitoba's garnishment legislation cannot override the combined effect of sections 68 and 69.41 of the BIA as to do so would be ultra vires. One has to remember that in Marzetti, a section 68 order had not been applied for. Marzetti was also decided prior to the 1997 amendment to section 68 and prior to the passage of section 69.41.

vii. Section 69.41 (2) which forms part of the 1997 amendments precludes a creditor with a claim under section 121 (4) from commencing or continuing an action or execution against "amounts payable" to the estate of the bankrupt under section 68. As a court order is no longer required under section 68, it is submitted that surplus income is an "amount payable" under that section and is not available to a creditor who has a provable maintenance claim under section 121 (4). In summary, the surplus income is beyond the reach of a maintenance creditor with a claim under section 121 (4).

viii. A maintenance creditor who does not come within section 121 (4), such as a maintenance creditor whose order was made after the initial bankruptcy event, or a maintenance creditor who was not living separate from the bankrupt at the time of the separation agreement, does not have a provable claim but nevertheless has a claim that is not discharged by bankruptcy. It can be argued that section 69.41 (2) does not apply to this creditor. Does this mean that such a creditor has priority over the trustee with respect to all of the wages of the bankrupt and in particular does the priority provision in Manitoba's garnishment legislation apply ? Stay tuned.

ix. In summary, it is submitted that a section 68 direction or order fixing Surplus Income payable to the estate in bankruptcy has priority over a maintenance order at least where the maintenance order is provable in bankruptcy under section 121 (4) and comes within section 69.41 (2). This however does not leave the maintenance creditor out in the cold. If a trustee refuses to deduct child and/or spousal support payments before determining total income and ultimately Surplus Income, the maintenance creditor could ask the Official Receiver to intervene to compel the trustee to follow the Superintendent's Directive or the maintenance creditor if he/she acts on a timely basis could request mediation. If the matter proceeds to court, the maintenance creditor could request standing to ensure that the support payments are taken into account in fixing surplus income. The maintenance creditor's position is solidified by the Superintendent's Directive itself as well as the wording of section 68 which requires the trustee and the court to have "regard to thepersonal and family situation of the bankrupt". Ultimately, if the support payments are deducted before fixing surplus income, the amount of those payments will be available for garnishment by the maintenance creditor (subject to the $250.00 exemption). A maintenance creditor who also has a maintenance claim provable in bankruptcy, after completing garnishment, will still have a crack at any surplus income left over by being able to share in any dividend issued by the estate. If the maintenance creditor also enjoys preferred status, he/she has the option of insisting that the amount of his/her support order be excluded from Surplus Income and be available for garnishment and actually garnishee the bankrupt's wages to the extent excluded from Surplus Income (subject to the $250.00 exemption). At the same time such a maintenance creditor will have priority with respect to any surplus funds left over and paid to the trustee from the bankrupt's wages after of course the trustee has been paid etc.

x. In Marzetti, the court also held that under the former wording of section 68, an order under that section could only be directed against the bankrupt and his/her employer but not against third parties such as Revenue Canada, even where Revenue Canada was holding wages of the bankrupt in the form of a post-bankruptcy income tax refund. Under the amendment to this section (section 68(13)(a)), a section 68 order may now be served upon a third party and be binding on them.

Subject to a few exceptions it is clear that:

• Claims by a non-bankrupt spouse for a marital property debt owing by a bankrupt spouse at the time of bankruptcy are discharged by the bankruptcy;
• In most cases the non-bankrupt spouse will have a provable claim in bankruptcy for such a debt;
• The bankrupt spouse's right to collect a marital property debt owing by the non- bankrupt spouse vests in the trustee.

A. EQUALIZATION UNDER THE MARITAL PROPERTY ACT OF MANITOBA

i. This paper will focus primarily on debts owing under the Marital Property Act of Manitoba (MPA) as well as claims under the Law of Property Act of Manitoba (LPA).

ii. Some Canadian provinces deal with marital property on a division basis and others on an equalization basis. Manitoba (under the MPA) and Ontario use an equalization scheme and the remaining provinces for the most part use a division scheme.

B. THE MARITAL PROPERTY ACT OF MANITOBA

i. Under the equalization scheme set up under the MPA, spouses each have a right upon application to an accounting and an equalization of assets. Although the norm is for equal sharing, limited discretion is given to the courts to vary from equality. No triggering event is necessary for such an accounting other then a court application requesting same. The parties need not even be separated for there to be an accounting.

ii. Very simply the shareable assets of the husband minus his shareable debts are calculated and the same procedure takes place with respect to the wife's shareable assets and debts. At the end of this process, if the net position of one spouse is greater then that of the other spouse, the difference is calculated and normally divided in half, with the party with the greater net worth making an equalization payment to his spouse equal to that half. The court has a discretion to vary equal sharing in extreme circumstances (where grossly unfair or unconscionable having regard to any extraordinary financial circumstances of the spouses or the extraordinary nature or value of their assets) when dealing with family assets (assets used for shelter or transportation, or for household, educational, recreational, social or aesthetic purposes). A more flexible discretion is given to the court to deviate from equal sharing with respect to commercial assets (assets that are not family assets) where it would be clearly inequitable having regard to any circumstances the court deems relevant for there not to be equal sharing. Examples of inequitable circumstances are given in the legislation.

iii. Assets and liabilities are valued as of the date that the parties agree on and in the absence of an agreement then they are valued on the date that the parties last cohabited together and if they are still cohabiting then they are valued on the date that either party makes application to court for an equalization.

iv. The value of an asset is its fair market value on the valuation date.

v. Assets acquired prior to marriage or while the parties are living separate and apart are not included in the accounting, except where such an asset was acquired in specific contemplation of the marriage.

vi. Although assets acquired prior to marriage or while the parties are living separate are not included in the accounting, any appreciation or depreciation in the value of these assets that occurred while the parties are married and cohabiting is included in the accounting.

vii. The parties can enter into a spousal agreement and exclude assets from the MPA in which case these assets will not be included in the accounting.

viii. Gifts and trust benefits from a third party to a spouse, proceeds from the cash surrender value of an insurance policy where the premiums were paid by a third person by way of gift to one spouse and inheritances acquired by one spouse are all excluded from the accounting unless it can be shown that they were intended to benefit both spouses. Appreciation, depreciation and income from such excluded assets are also excluded from an accounting. Where however income from or appreciation in the value of an excluded asset is used to buy a family asset, that income and/or appreciation will be included in the accounting.

ix. Proceeds from any damage award or settlement are also not included in an accounting unless same was intended as compensation for loss to both spouses.

x. After going through the accounting, the court can order that the amount found owing by one spouse to the other spouse be paid by a lump sum, by installments, by the transfer of a specific asset to the recipient spouse or by a combination of these methods.

xi. Case law in Manitoba has held that property already owned by both spouses (such as jointly owned property) is not governed by the Marital Property Act.

C. ONLY DEBTOR-CREDITOR RELATIONSHIP CREATED UNDER MPA

i. Under the equalization scheme set up under the MPA, a spouse who after an accounting is entitled to an equalization payment, is simply a creditor of the other spouse. What happens if the debtor spouse declares bankruptcy? The Supreme Court of Canada in Maroukis v. Maroukis¹² held that even in a division province, in the absence of a court order dividing assets, no property rights are conferred on a spouse who might otherwise be entitled to a share of assets under the division legislation. In the circumstances, if the spouse with the surplus in assets later goes bankrupt, in the absence of a court order, his/her assets will devolve on the trustee even if the other spouse had a right to have those assets divided and transferred to him/her. Under the MPA whether an order is made to make an equalization payment or not, no property rights are acquired by the recipient spouse. In Burson v. Burson¹³ the Ontario General Division Court in Bankruptcy confirmed that in an equalization province, the legislation creates a debtor-creditor relationship between spouses and no more. On a bankruptcy, the assets of the bankrupt spouse vest in the trustee even though had the bankruptcy not occurred, his wife would have been entitled to share in them.

D. COURT ORDER UNDER MPA REQUIRING TRANSFER OF SPECIFIC ASSET CREATES TRUST PROPERTY NOT FORMING PART OF ESTATE IN BANKRUPTCY

Under MPA section 17, the court can order the transfer of a specific asset to a spouse in lieu of paying the equalization amount to that spouse? What is the effect of a section 17 order? This issue was addressed by Mr. Justice Misener in the Burson case in these terms:

"At the highest, the Family Law Act, 1986 statutorily created a creditor-debtor relationship between the spouses upon permanent separation, with the calculation of the amount of the debt to be made by a formula that requires the valuation of their respective properties. There are, of course, provisions that empower the court to order the transfer of the property of one spouse to the other, either for the satisfaction of the debt or as security for the debt, but these provisions are remedial only, and discretionary at that.Absent the actual making of such an order pursuant to them, those sections cannot possibly be construed so as to grant, on their face, property rights."

It is submitted that once an order is made under MPA section 17 directing the transfer of a specific asset in lieu of an equalization payment, it is open to argue that the order vests property rights in the recipient spouse and if the spouse who is the subject matter of the order later goes bankrupt, the assets to be transferred (even if the transfer is not completed) do not form part of the property of the bankrupt. Further support for the writer's position is found in Godfrey v. Godfrey¹⁴. In Godfrey a court order was made under Ontario law which required the wife to transfer the marital home to the husband and the husband was ordered to pay the wife the sum of $3,750.00 as an equalization payment. After the order was made the wife declared bankruptcy. At the time of the wife's bankruptcy she had not transferred title in the marital home to her husband and the husband had not made the $3,750.00 payment to the wife. The wife's trustee argued that the Ontario equalization legislation only creates a debtor-creditor relationship and the husband was simply an unsecured judgment creditor of the wife. In particular the trustee relied on BIA section 69.3 (now 69(1)), arguing that the wife's bankruptcy stayed all proceedings against her including the order made in the divorce proceedings Mr. Justice Beckett held that the order requiring the wife to transfer title to the husband gave the husband an equitable interest in the marital home prior to bankruptcy and the wife was deemed to be simply holding legal title in trust for the husband. Accordingly, the marital home did not become part of the property of the bankrupt and the wife was ordered to transfer title to same to the husband.

E. SEPARATION AGREEMENTS THAT TRANSFER PROPERTY

i. Where in a separation agreement a wife agreed to transfer her interest or half interest in a home to her husband, it has been held that once she executed the agreement, equitable title was transferred to the husband and the wife held title merely as trustee for him. In the circumstances the husband became the beneficial owner of the property and when the wife subsequently made an assignment in bankruptcy, her former interest in the property did not vest in the trustee in bankruptcy¹⁵.

F. JOINTLY OWNED PROPERTY/ TENANCIES IN COMMON

i. Jointly owned property and tenancies in common are governed by the Law of Property Act of Manitoba (LPA) and do not come within the ambit of the MPA. Under the LPA, a joint owner or a tenant in common has a prima facie right to have the property sold or in appropriate circumstances partitioned.

ii. On a bankruptcy the undivided interest of the bankrupt in a tenancy in common vests in the trustee. Should the other co-tenant be the bankrupt's wife and agreement cannot be reached between the trustee and the bankrupt's wife as to the disposition of the bankrupt's interest in the property, the trustee can apply to court under the LPA for an order of partition and/or sale.

iii. Where the bankrupt is a joint tenant with his wife with respect to real property, the joint tenancy is deemed by the bankruptcy to have been severed with the bankrupt and his wife each holding title as tenants in common, each with an undivided one-half interest in the property. Partition and/or sale is also available to the trustee in these circumstances¹⁶.

iv. On a partition/sale application what is the trustee's position if the non- bankrupt spouse has obtained an order of exclusive occupancy and postponement of sale of the marital home, which are remedies available under the Family Maintenance Act of Manitoba? Although there appears to be no Canadian cases directly on point, Robert A. Klotz, in his book Bankruptcy and Family Law¹⁷, after analysing certain Commonwealth decisions, came to the conclusion that an order for exclusive occupancy made in favour of a non- bankrupt spouse prior to bankruptcy is not binding on the trustee. Even without resorting to the Family Maintenance Act, a court could always refuse partition or sale if granting this remedy would result in an undue hardship. Where the right of exclusive occupancy is granted to the non-bankrupt spouse with respect to property in which he/she has no interest, the trustee should on application to court be entitled to possession. If the non-bankrupt spouse holds an interest in the property as a joint tenant or as tenant in common, and the trustee applies for partition/sale, the hardship test will apply and the trustee may be denied his/her remedy. The prior exclusive occupancy right given to the non-bankrupt spouse would be strong evidence of hardship and partition/sale will likely be denied.

v. Where under a court order/judgment a husband is ordered to convey his joint interest in real property to the wife and the husband subsequently declares bankruptcy, it has been held that the wife has an equitable interest in the husband's one half interest in the property and is entitled to be registered as the sole owner of the property. The order is treated as a vesting order and even though the husband fails to transfer title to the wife, once the order is made the husband becomes a trustee of his half interest which he holds for the wife¹⁸. In the circumstances, it is submitted that the husband's interest in the property does not become property of the bankrupt divisible amongst his creditors.

G. PROPERTY SUBJECT TO SECURITY AND CHARGING ORDERS

i. Under the Marital Property Act of Manitoba, under the Divorce Act of Canada and under the Family Maintenance Act of Manitoba, the courts may, when making an order, require that the obligations imposed under the order be secured. Parties can also agree to provide security in separation agreements.

ii. It goes without saying that property subject to a valid and enforceable security interest granted prior to bankruptcy does not vest in the trustee.

iii. A court order prior to a husband's bankruptcy, requiring the husband to pledge his title as security for a marital debt, likely will not be sufficient to subordinate the trustee's interests to that of the wife, if the title has not in fact been pledged prior to bankruptcy. Under BIA section 70 (1), the order may be regarded as an incomplete judgment, which is subordinate to the trustee's interests>.

iv. If however an unregistered mortgage is in fact created pursuant to such an order, the situation may be different. Unregistered mortgages take priority over the interests of the trustee. If title is actually pledged by the husband to the wife as security, even if the husband has done so in compliance with the court order, this creates an equitable mortgage in favour of the wife over the property (even though unregistered) and the trustee's interests are subordinate thereto¹⁹.

v. What about the situation where prior to bankruptcy, the parties enter into a written separation agreement in which the husband promises to pay the wife $100,000.00 by way of installments and which further provides that as security for payment of this debt, the husband pledges his title in certain real property to the wife and that until the wife has been paid in full, she is deemed to have an equitable interest in this property? Section 70(1) does not give the trustee priority here as the security interest is created by agreement and not by a judgment, etc. In this situation the trustee's interest in the property will likely be subordinate to the wife's interest as the wife is a secured creditor.

vi. Let us take it one step further and take the same security arrangement, but instead of enshrining it in a written separation agreement, let us assume that these terms are part of a consent order that the husband or his solicitor has signed on his behalf. Does the making of the court order bring into play section 70(1) or is this simply an agreement creating security evidenced by a court order? It is submitted that the consensual nature of the order is the key to resolving this issue. A consent order containing these terms is still very much an agreement creating security and should, subject to provincial personal property security legislation, be enforceable against the trustee.

vii. If an agreement or consent order creates security over personal property, additional considerations come into play. The security interest created must be enforceable under provincial law in order to prevent the property from vesting in the trustee. In provinces having personal property security legislation, if the security agreement is valid on its face but the security interest created thereby has not been perfected, that security interest will be subordinate to the interests of the trustee. Under section 22(1) (iii) of the Personal Property Security Act of Manitoba (PPSA), a trustee in bankruptcy is given priority over unperfected security interests. In Manitoba, with respect to certain types of property, possession by the secured party of the property perfects his/her interest in same. Primarily perfection is accomplished by registration of a financing statement in accordance with the legislation provided of course attachment has also occurred. Where the collateral is not in the possession of the secured creditor (in this example the wife) at the time of bankruptcy and no financing statement has been registered in accordance with the legislation, the trustee's interest in the collateral will have priority notwithstanding the security agreement. Complex rules and a large body of case law exists on the subject of what constitutes valid registration. What about our example of the consent order? If the parties personally sign the consent order different consequences will likely result then in the situations where only the party's lawyer has endorsed his consent on same. In order to register an enforceable financing statement under Manitoba's legislation, it must be either actually signed by the debtor or contain a statement that the debtor has signed the security agreement itself (subject to special rules related to corporate security, special rules related to court orders requiring the filing of a financing statement and subject to special rules related to security brought into the jurisdiction)²⁰.. Where the party's lawyer has signed the consent order containing the security provisions and the debtor spouse has not signed the financing statement itself, likely the financing statement has not been validly registered as the debtor has not "signed the security agreement creating the security interest in the collateral" as required by the legislation. Here the trustee's interest in the collateral will likely have priority. Section 48 (2) (b) of the Personal Property Security Act of Manitoba permits a judge to order the registration of a financing statement, and where such an order is made, a financing statement can be validly registered without the debtor's signature thereon and without the original order containing the security provisions being signed by the debtor, as long as the order is registered along with the financing statement. When submitting a consent order containing security provisions it would be wise to include a clause in the order requiring the filing of a financing statement, however the consent of the parties will not be sufficient to permit the judge to sign such an order as the section requires notice to such persons as the judge thinks necessary and also requires the submission of such evidence as the judge thinks necessary.

viii. What about court orders that simply purport to charge a debtor's funds or other assets to secure payment of a judgment debt (charging orders)? The reported decisions coming out of Manitoba have essentially held that these orders can make the creditor a secured creditor and put the charged funds or other charged assets beyond the reach of the trustee. In McLean Company Limited v. Newton²⁰ the Plaintiff obtained from the court a charging order against certain funds paid into court in an action involving a gentleman by the name of Kaplan. Kaplan then made an assignment in bankruptcy. The Manitoba Court of Appeal held that as the Bankruptcy Act as it then was, defined secured creditor to include a person holding a charge against the property of a debtor, the charging order granted to McLean made him a secured creditor. The charged funds did not become part of Kaplan's estate in bankruptcy. The current version of the BIA defines "secured creditor" in similar terms and it is submitted that this reasoning might apply to a charging order in a domestic case. In the case of personal property however, care ought to be taken in applying this decision as it was decided well before the passage of Manitoba's personal property legislation. Certainly it could be argued that the charging order creates a security interest and perfection under the PPSA must occur for the creditor spouse to have priority over the trustee. Absent a validly registered financing statement or perfection by possession and the creditor loses.

In a more recent case, the Manitoba Court of Appeal in Chastko v. Dunwoody Limited²¹ dealt specifically with a charging order over land. The charging was contained in a judgment against a debtor which provided that:

a. the creditor have judgment against the debtor for $60,000.00;
b. two specified parcels of the debtor's land were charged with the payment of the said sum of $60,000.00;
c. the land titles office was to endorse title to these parcels of land with a notation recording the charge;
d. the charge created by this judgment shall operate as an encumbrance and be enforceable under the Real Property Act

After the making of the charging order the debtor made an assignment in bankruptcy and based on these facts the Manitoba Court of Appeal held that the charging order made the creditor a secured creditor of the bankrupt, with the charged properties being beyond the reach of the trustee. PPSA considerations do not apply to land.

H. HOMESTEAD ISSUES

i. The Homesteads Act of Manitoba provides as follows:

a. On the death of the owner of the homestead, the surviving spouse is entitled to a life estate in the homestead;

b. Homestead property cannot be disposed of by the owner without the consent of his/her spouse in writing unless that spouse has released his/her homestead rights or unless a court has dispensed with the need for consent. Dispositions to the other spouse are not included in this prohibition and this prohibition does not apply where the other spouse already has an interest in the homestead such as where he/she a joint tenant. A court can dispense with consent where the parties have been separated for six months or more or where the other spouse is mentally incapable of giving consent.

c. Dispositions include sales, agreements for sale, options to purchase, leases for more than three years, devises by will, and legal and equitable mortgages etc.

d. Homestead rights terminate on divorce.

e. A homestead is essentially a residence occupied by the owner and the owner's spouse as their home, along with a certain amount of land on which the home is situated (the size of the parcel of land being different for city and country lots).

ii. The trustee's interest in the bankrupt's homestead can be no greater than that of the bankrupt. The trustee of a bankrupt owner takes over the rights and obligations of the bankrupt under the homestead legislation. Where the bankrupt was the sole owner of the marital home, the trustee will take over the bankrupt's title, but he will be precluded from selling the home without the consent of the wife. Can the trustee succeed on an application to dispense with the wife's consent? Section 10 of the Homesteads Act allows the court to dispense with the wife's consent where the parties have been separated for over six months or where the other spouse is mentally incapable of giving consent. If these criteria are met, dispensing with consent is still a discretionary remedy and the section requires the court in exercising that discretion to find that "it is fair and reasonable in all of the circumstances to do so". Where displacing the non-bankrupt spouse by a forced sale would create a hardship, where an order has been made giving the non-bankrupt spouse exclusive occupancy of the marital home or where an order has been made postponing sale under provincial legislation, it is unlikely that the trustee would be able to establish that it is fair and reasonable to sell the home. Klotz, in his textbook Bankruptcy and Family Law suggests that an order of exclusive occupancy is personal in nature and not enforceable against the trustee. Australian case law is cited in support of this proposition, but the writer has not been able to find Canadian authority directly on point. Furthermore the case quoted deals with an undertaking by a husband to give his wife exclusive occupancy and not with an order specifically granting exclusive occupancy to the wife. Ontario cases have held that the right of spouses to equal possession of matrimonial home prior to separation under Ontario legislation, does not confer a right in rem on the parties, but simply a personal right which is not enforceable against the trustee²². An order of exclusive occupancy under Manitoba's Family Maintenance Act which is granted after the parties separate is a slightly different animal. Whether or not the order of exclusive occupancy is binding on the trustee is really not too significant as the existence of such an order, whether binding or not is a proper circumstance to consider on an application to dispense with consent. Even the Ontario cases require the trustee to apply to court under Ontario's matrimonial legislation to dispense with consent. The test in Ontario for dispensing with consent is more onerous then the test under Manitoba's homestead legislation.

iii. What about jointly owned property or tenancies in common? The Manitoba legislation contemplates that each spouse maintains a homestead interest in the undivided interest of the other spouse.

iv. If a wife has homestead rights in the undivided interest of her bankrupt spouse in the marital home, and the bankrupt's undivided interest vests in the trustee, then upon an application by the trustee for partition/sale, is the wife's consent required to sell the bankrupt's half interest? There does not appear to be a clear answer on this point. Under section 4 of the Homesteads Act, as the wife already has "an estate or interest in the homestead in addition to rights under this Act" she can voluntarily sell the home together with the trustee and as a party to the sale her Homesteads Act consent is not required. On a partition/sale application the wife would come within the wording of section 4, a "party to the disposition made by the owner and executes the disposition for that purpose". In fact on a forced sale application, the wife executes nothing. As the wife has homestead rights in the undivided interest of the bankrupt husband, on a forced sale of his interest, it is submitted that the wife's consent must be obtained. The same considerations discussed above would apply to an application by the trustee to dispense with the wife's consent.

v. If an order of exclusive occupancy has not been granted to the non-bankrupt spouse prior to bankruptcy, the writer sees no obstacle to the wife obtaining such an order after bankruptcy.

vi. Common law spouses have no protection under the Homesteads Act, but in certain restricted circumstances are eligible for an order of exclusive occupancy under the Family Maintenance Act. If a common law spouse owns property jointly with his/her spouse and obtains and order of exclusive occupancy, what is the effect of such an order on a partition/sale application by a trustee if the other spouse becomes bankrupt? The common law test of "undue hardship" still applies on a partition/sale application and it is submitted that the exclusive occupancy order would be a relevant factor to consider in determining whether a sale would cause undue hardship.

I. TRUST PROPERTY

i. Under BIA 67 (1) (a) property held by the bankrupt in trust for another person is not property of the bankrupt.

ii. An express trust created in a separation agreement over property of a spouse will be binding on the trustee if that spouse subsequently makes an assignment in bankruptcy. If for example a husband agrees that he is holding title to property in trust for the wife, that property will not vest in the trustee on the husband's subsequent bankruptcy. Such trusts ought to be carefully examined to make sure that they do not constitute settlements under BIA section 91 or fraudulent conveyances under provincial legislation.

iii. Apart from express trusts there are two other types of trusts that require consideration, namely resulting trusts and constructive trusts.

iv. A resulting trust arises where a person transfers property to another person under circumstances which raise an inference that the transferee was to hold legal title only, with the beneficial interest to remain with the transferor. For example where this wife puts up the down payment for the marital home and makes all the mortgage and maintenance payments with respect to same, the fact that legal title is put in the husband's name alone may not be determinative. In the circumstances it may be clear that the parties intended the wife to own the beneficial interest in the home, such that a resulting trust arises with the husband deemed to be holding title to the home in trust for the wife. The intention of the parties as inferred from the circumstances is key here. If the husband subsequently becomes bankrupt, the wife will argue that the marital home is trust property that does not vest in the trustee. If the wife were to become bankrupt, her trustee may advance a similar proposition on her behalf, alleging that the husband was holding title as a resulting trustee for the wife such that the home becomes part of her estate in bankruptcy. As intention is important and as the opportunity and willingness to collude as to intention is often present, a heavy onus may rest on the spouse alleging the existence of a resulting trust, especially if to succeed were to put the home out of the hands of creditors.

v. A constructive trust is one created by operation of law. Intention is not key here and it is not necessary to trace where the funds to purchase a piece of property actually came from. In domestic cases, constructive trusts are based on unjust enrichment of one spouse, a corresponding deprivation in the other spouse and the inability of a monetary award to sufficiently compensate the deprived spouse. Furthermore there must be a connection between the services provided by the deprived spouse and the property acquired by the enriched spouse and juristic reasons for the enrichment (ie: in a marriage or common law relationship there is an expectation that spousal services will be compensated). In Pettkus v. Becker²³ a man and woman lived together as man and wife for approximately 20 years. The woman supported the couple during the first five years, while the man saved so as to be able to acquire a farm. The woman aided the man in obtaining and maintaining his bee-keeping business and helped with the farm labours. The man subsequently purchased additional land and built a home on part of it with the profits from the bee-keeping business. The woman sought a declaration that she was entitled to a one-half interest in the real property and assets acquired by the parties as a result of their joint efforts. The Supreme Court of Canada held that as there was no evidence of common intention there was no resulting trust. However, a constructive trust arose in favour of the wife by virtue of the joint effort and teamwork of the parties. The court found that there was a clear link between the contribution made by the wife and the disputed assets. The indirect contribution of money by the wife and the direct contribution of labour by her was clearly linked to the acquisition of the property. In the circumstances, the husband was held to be holding a one half interest in his farm property in trust for the wife as a constructive trustee. It should be noted that this was a common law relationship.

vi. Where declaring a constructive trust will interfere with the rights of bona fide third parties such as creditors the courts have said that it may be inappropriate to grant the constructive trust remedy. The claims of creditors must be a primary consideration in deciding whether to declare a constructive trust and in many cases if the declaration of trust would defeat the claims of creditors it can be argued that the trust remedy ought not to be granted. Often the court will be called upon to examine the competing equities of the creditors and the spouse claiming a constructive trust. On a bankruptcy, the interests of the unsecured creditors will have to be examined. Did they advance funds to the husband before the wife contributed to the property, did the wife receive other tangible benefits from the property such as a roof over her head, did the wife receive a benefit from the bankrupt incurring the debt, are all legitimate questions to be looked at in examining the competing equities?

vii. A constructive trust claim must be established by court order before a trustee must honour same. The trust claimant will require leave of the court before proceeding with the trust claim or alternatively the trust claimant could submit her claim to the trustee under BIA section 81(1) (person's claiming property in the possession of bankrupt) and if the trustee gives notice that he disputes the claim, the trust claimant has fifteen days to appeal the trustees's decision to court. Quare what happens if the constructive trust is declared by the court before bankruptcy? How are the unsecured creditors protected? Can the trustee dispute the trust claim under section 81(1) in the face of a pre bankruptcy court order?

J. PROCEDURAL MATTERS

i. Although Marital Property Act equalization debts of a bankrupt spouse are discharged by the bankruptcy, they are provable claims in bankruptcy.

ii. To be provable in bankruptcy, the Marital Property Act debt must be set by court order or separation agreement (ie: it must be a fixed debt). Where the order or agreement precedes the bankruptcy this does not create any difficulty.

iii. If bankruptcy takes place before the Marital Property Act claim is fixed then what? One view is that the equalization debt is provable in bankruptcy as long as the "triggering event" under the MPA has taken place before bankruptcy²⁴. Under Manitoba's legislation, the "triggering event" is an application for equalization under Section 13, which can be made before or after separation. Section 13 states that spouses have a right to an accounting and equalization of assets "upon application". On this view if an application is not made under the MPA until after bankruptcy, the non-bankrupt spouses MPA claim is not provable in bankruptcy.

iv. Another view is that a Marital Property Act debt claim is provable only if the claim has been decided before bankruptcy. In Walton v. Walton²⁵, the Saskatchewan Court of Appeal held that a wife's property claim which was started before bankruptcy but not completed by the time of discharge was a claim not provable in bankruptcy. The Court stated:

"The result is that the claim under The Matrimonial Property Act, in the circumstances of this case, was so inchoate that it could not be said to make the claimant a "creditor" with a "claim provable in bankruptcy" within the meaning of the Bankruptcy Act. Another way of putting it is that the bankruptcy court had neither the jurisdiction, nor, in the circumstances of this case, the means, to make an award under The Matrimonial Property Act, or to value an actual or potential claim under it. This is not to say that a trustee in bankruptcy or a bankruptcy court may ignore a bona fide claim under The Matrimonial Property Act prior to judgment: they may have to defer distribution amongst creditors until a judgment is made"

v. It is submitted that the Walton case ought not to be applied in Manitoba. Saskatchewan is a division province and the asset that the wife sought to divide was the husband's pension which did not vest in the trustee in any event. As the pension was an exempt asset the wife was free to pursue her claim for a division of same outside of the bankruptcy. In the Marzetti case the Supreme Court of Canada in interpreting the BIA emphasized the overriding concern of the Court in supporting families. In light of this emphasis, it is unlikely that a MPA claim will be defeated in Manitoba simply because bankruptcy occurred before the claim could be filed.

vi. It is the writer's view that an MPA equalization claim is a provable claim in bankruptcy as long as an application is filed prior to discharge. A creditor spouse will have to obtain leave under BIA section 69 in order to proceed with his or her claim.

vii. Alternatively, in the writer's view a spouse could submit his/her claim to trustee by filing a proof of loss under BIA section 135. The trustee must then determine whether the claim is contingent or unliquidated and if so whether it is provable. If the trustee determines that the claim is provable he must value it and after valuing it, the claim is deemed to have been proved. If the trustee takes the position that an unliquidated or contingent claim is not provable he will disallow the claim and notify the claimant of his disallowance. In fact even if the claim is neither unliquidated nor contingent the trustee may disallow it. The claimant has thirty days to appeal the trustee's decision to court.

viii. It is submitted that section 35 is available for resolving MPA claims. In fact it is the writer's view that a MPA claim is an unliquidated claim as it is not a specified sum of money due and payable under or by virtue of a specific instrument or contract such as a promissory note. The very fact the BIA sets out a procedure for dealing with unliquidated claims reinforces the notion that a MPA claim can be advanced by the non-bankrupt spouse as a provable claim in bankruptcy, even if the "triggering event" occurs after bankruptcy. The courts have held that if a claim can not be valued it is not a provable claim. Although sometimes difficult to value MPA claims are capable of being valued under well defined rules.

ix. Trustee's rights under the Marital Property Act also requires examination. Obviously if the bankrupt is entitled to an MPA equalization payment fixed by court order or separation agreement prior to bankruptcy, the right to collect that payment vests in the trustee.

x. If the bankrupt spouse's MPA entitlement has not been fixed prior to bankruptcy, can the trustee advance this claim on behalf of the bankrupt? First of all on bankruptcy, all property of the bankrupt including property that may be acquired by the bankrupt or devolve on him prior to discharge, vests in the trustee. The question then is whether rights under the MPA are proprietary in nature and if so, can a trustee advance a claim against a non bankrupt spouse. Cases in the provinces where the division of marital property is discretionary are not particularly helpful. In Manitoba the right to equalization is not discretionary, albeit there is some discretion to depart from equal sharing. Some cases have held that as long as a triggering event occurs before bankruptcy or discharge, the trustee acquires the right to the bankrupt's claim. In Manitoba the triggering event is the application itself . If you follow this reasoning the trustee takes over the bankrupt's rights if an application is filed under the MPA before discharge. However does the trustee have standing to commence the MPA application? In his textbook, Bankruptcy and Family Law, Klotz refers to the unreported Ontario case of Re Bosveld, decided by Mr. Justice Sutherland of the Ontario Supreme Court on January 10, 1986. In Bosveld, the spouses separated after bankruptcy of the husband. The Trustee claimed that the Husband's rights under the Ontario marital property legislation passed to the trustee on bankruptcy. The Ontario legislation provided that the rights were "personal between spouses". Mr. Justice Sutherland held that despite the rights being personal, they passed to the trustee and the bankrupt husband's claim vested in the trustee. Extrapolating to the Manitoba situation, it would appear that a trustee can create a triggering event by making an application for MPA equalization on behalf of the bankrupt spouse against the non bankrupt spouse. Quare whether such an application would be permitted in Manitoba if the parties had not separated? Public policy factors may preclude a trustee from being permitted to bring such an application in these circumstances. Public policy factors may also prevent such an application where the parties are separated but where children are involved.

5. CONCLUSION AND SOME LOOSE ISSUES

This paper is an attempt to touch on some of the issues that arise when family law and bankruptcy and insolvency principles collide. Although perhaps more detailed then the writer intended when the task of putting together this presentation was initially commenced, time and space did not permit all of the issues to be thoroughly canvassed. When property is transferred between spouses prior to bankruptcy a close examination of the facts is necessary to determine whether a fraudulent conveyance or preference has taken place and to examine whether the transfer involved a void settlement or was part of a reviewable transaction. This paper does not examine these issues although special considerations apply when looking at these issues in the domestic context.

Although marital property issues were canvassed at some length in this paper, pensions were only dealt with in the context of assets exempt from seizure and beyond the trustee's reach. As previously indicated, most pensions in Manitoba are dealt with under the Pension Benefits Act of Manitoba. As these pensions are beyond the reach of the trustee, a separated spouse is free to pursue his or her remedies for a division of pension benefits credits under this legislation even if the spouse whose pension it is has made an assignment in bankruptcy. Under the federal pension statutes, an order must first be made under the Marital Property Act dealing with a spouse's pension before the federal authorities will enforce the division. As long as the non-bankrupt spouse is able to obtain an order under the Marital Property dividing the bankrupt spouse's pension, federal authorities will see to it that the division takes place. If the pension is exempt from seizure, the non-bankrupt spouse ought to be able to pursue his or her rights against same and an application may be required to obtain leave to commence or continue a Marital Property Act application for the purpose of so doing. A more comprehensive analysis of pension division rights in the context of bankruptcy will have to be left to another paper.

¹ Re Stauffer (1990) 72 O.R. (2d) 755
Re Dimitroff (1966), 8 C.B.R. 253

² Section 31 (1)

³ Section 14.1(6) of the Garnishment Act

⁴ 1995, 34 C.B.R. (3rd) 20

⁵ [1991] 5 W.W.R. 506 (Man.Q.B.)

⁶ Supra note 3

⁷ (1994) 26 C.B.R. (3rd) 161

⁸ Supra note 6

⁹ Re Giroux (1983), 45 C.B.R (N.S.) 245

¹⁰ Re Dimitroff, Re Stauffer, supra note 1

¹¹ Allen v.Allen, [1992] W.D.F.L 398 (Ont. Gen Div).

¹² 41 R.F.L. (2nd) 113

¹³ (1990),4 C.B.R. (3rd) 1

¹⁴ (1996) 19 R.F.L. (4th) 58 (Ont Court. Of Justice)

¹⁵ Klymas v. Burkholder (1976), 22 C.B.R. (N.S.) 216 (Ont. Co. Ct.)

¹⁶ Re White (1928), 8 C.B.R. 544, 33 O.W.N. 255, [1928] 1 D.L.R. 846 (S.C.).
Re Ali 1987 CanRepOnt 147, 62 C.B.R. (N.S.) 64, 57 O.R. (2d) 685, 34 D.L.R. (4th) 267, 24 C.C.L.I. 223

¹⁷ Carswell 1994

¹⁸ Pulzoni v Pulzoni (1982), 25 R.P.R. 72 (Ont H.C.)

¹⁹ Re Martha 1979 CanRepAlta 173, 31 C.B.R. (N.S.) 77, 10 Alta. L.R. (2d) 155
Fialkowski v. Fialkowski and Traders Bank (1911), 4 Alta. L.R. 10, 1 W.W.R. 216,
Union Bank v. Engen, Sask. L.R. 185, [1917] 2 W.W.R. 395, 33 D.L.R. 435 (C.A.)

²⁰ 1926 CanRepMan 5, 8 C.B.R. 61, [1926] 3 W.W.R. 593, 36 Man. R. 187, (sub nom. Bortoluzzi v. Kaplan) [1927] 1 D.L.R. 183

²¹ 1986 CanRepMan 80, 61 C.B.R. (N.S.) 305, (sub nom. Chastko, Re; Dunwoody v. Chastko) [1986] 4 W.W.R. 94

²² Royal Bank v. King 1991 CanRepOnt 160, 13 C.B.R. (3d) 292, 35 R.F.L. (3d) 325, 82 D.L.R. (4th) 225

²³ 1980 CanRepOnt 299, 19 R.F.L. (2d) 165, [1980] 2 S.C.R. 834, 8 E.T.R. 143, 117 D.L.R. (3d) 257, 34 N.R. 384

²⁴ Bankruptcy and Family Law (Carswell), Robert A. Klotz page 112

²⁵ 1993 CanRepSask 33, 23 C.B.R. (3d) 315, 108 D.L.R. (4th) 704, 1 R.F.L. (4th) 93, 116 Sask. R. 129, 59 W.A.C. 129, 1 R.F.L. (4th) 93