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Friday, July 15, 2011

Farm divorce case prompts SCC to suggest changes to bankruptcy laws


The Supreme Court of Canada has released a decision upholding a Manitoba Court of Appeal ruling about an alleged loophole in Canada's bankruptcy laws.  The case involved former spouses who filed for divorce in 2000.  The husband lived on the family farm and was the sole registered owner of the farm.  Manitoba, like Ontario, has a system of equalization of family assets rather than a division of the family property.  That meant that the husband could keep the farm but would owe his ex-wife her share of the value of the farm (or the increase in the value of the farm during the marriage).

In this case, the spouses consented to a valuation of the property to be done by the Court.  However, before a valuation of the family property by a Court Master could be undertaken, the husband made an assignment in bankruptcy.  The Master subsequently found that the wife was entitled to an equalization payment of about $41,000, but she was not able to collect.  The Manitoba Court of Appeal determined that the wife's claim was "provable" in bankruptcy and had been extinguished when the husband's bankruptcy was discharged in 2002.

As a result of the "loophole", not only was the husband discharged from his duty to pay the equalization payment, but he kept the farm.  Under Manitoba law, the farm was exempt from the bankruptcy proceeding.  The wife attempted through the appeal process to persuade the Court that she should receive her equalization payment since it was, at least in part, based on the value of the farm which was not part of the bankruptcy at all.  Both the Court of Appeal and the Supreme Court disagreed.  The Court of Appeal noted that the wife had taken no steps over several years to attack the bankruptcy discharge (note that the wife had not been given notice of the bankruptcy in the first place and only discovered it after her ex-husband had been discharged).

Justice Lebel of the Supreme Court commented on the apparent unfairness created by inconsistencies between family law and bankruptcy law in various jurisdictions and suggested that changes may be necessary:
It seems to me that this matter is ripe for legislative attention so as to ensure that the principles of bankruptcy law and family law are compatible rather than being at cross-purposes.  However, until such legislative changes are made, creditor spouses should be alive not only to the pitfalls of the BIA, but also to the importance of the remedies available under it in such situations.
Read the Manitoba Court of Appeal decision at: Schreyer v. Schreyer - Man CA.

Read the Supreme Court of Canada decision at: Schreyer v. Schreyer - SCC.

Read the CBC News Story at: Top court rules bankruptcy can break divorce deal - Canada - CBC News.