Jun 19, 2020

So my spouse goes bankrupt: Does that mean the trustee in bankruptcy can grab the family assets?

Rusinek & Associates v. Arachchilage & Baliah, 2020 ONSC 1090 (CanLII)

Apparently not.

Lawyers generally understand that the trustee in bankruptcy is vested with all of the bankrupt’s property and rights of action. (para 10; BIA s.71)

So a lawyer might have thought that the trustee in bankruptcy can go after 50% of the family assets because that's what the bankrupt spouse is entitled to under the ordinary rules of the Family Law Act.

Why not in this case?

In this case the married parties put the matrimonial home in the wife’s name so that when the husband went bankrupt, he did not have his name on title so he did not have an ordinary legal claim to the matrimonial home.

His claim to the matrimonial home arises exclusively from the Family Law Act s.5(7) and s.7(1) (para 14-15).

The non-titled spouse has a ‘personal’ rather than a legal claim to his half of the matrimonial assets which are not in his name. The status as a personal rather than a legal right to the asset therefore exempts the asset from the definition of ‘property of the bankrupt’ under the Bankruptcy and Insolvency Act.

My legal comment:

This is despite the fact that the BIA says that the bankrupt’s property includes all property ‘that may be acquired by or devolve upon the bankrupt before their discharge’ (BIA s.67(1)(b.3))

It is manifest that the equalization payment could be acquired by the bankrupt before his discharge.

In any event, this case immunizes assets of the marriage which are not in the husband’s name at the time of bankruptcy.

If the husband had already made an equalization claim before the date of bankruptcy, then the equalization payment is property of the bankruptcy, otherwise the matrimonial home, RRSP’s a business, etc. (all of which are in the wife’s name) are immune from seizure by the trustee.

In this sense, the bankrupt husband's right to an equalization payment is analogized to personal injury damages which are equivalently immune from trustee seizure. (Houlden & Morawetz s.F2: Re Campbell 2 All ER 537)

Likewise, it is well understood that the bankrupt's own RRSP's are immune from trustee seizure (BIA s.67(1)(b3))

This case is consistent with the fact that the non-bankrupt spouse's right to an equalization payment survives bankruptcy.

It should be unnecessary to say that if the bankrupt husband is on title, the trust takes the rights of the bankrupt husband to a partition and sale. (Houlden & Morawetz s. F4)