Court of Appeal for Ontario
Date: October 4, 2017
Docket: C62788
Judges: Laskin, Feldman and Miller JJ.A.
Parties
Between
Anna Maria Fiorito Applicant (Appellant)
and
Jefferson Ross Wiggins Respondent (Respondent)
Counsel
Brandon Jaffe, for the appellant
Brian Ludmer, for the respondent
Hearing
Heard: August 24, 2017
On appeal from: The order of Justice Pamela L. Hebner of the Superior Court of Justice, dated September 23, 2016.
Decision
FELDMAN J.A.:
[1] Background and Overview
[1] Following protracted custody and access litigation that involved two lengthy trials and an appeal to the Court of Appeal, costs of $200,000 were awarded to the father. During a further access review hearing ordered by the Court of Appeal that proceeded before the awarded costs were paid, the mother made an assignment into bankruptcy.
[2] The issue in this appeal is whether the bankruptcy judge erred in law by lifting the automatic stay arising from the bankruptcy to allow the father to enforce the $200,000 debt for costs against otherwise exempt assets of the mother.
[3] I would dismiss the appeal.
Background Facts
[4] The parties were married on May 23, 1998 and have three daughters. At the time of the motion under appeal, the children were aged 15, 13 and 12. The parties separated on February 8, 2008. Following two years of custody and access litigation, they entered into minutes of settlement whereby the mother had custody of the girls with substantial access to the father. However, the mother did not comply with the access provisions of the agreed settlement.
[5] The father brought a contempt motion, which was heard together with a custody and access trial over 22 days from March to May 2011. Justice Harper found the mother to be in contempt of previous interim orders. The children expressed fear and dislike of the father because of the mother's fear and dislike of him. Justice Harper sentenced the mother to six months' probation. Custody of the children remained with the mother, but she was required to grant access to the father in accordance with Harper J.'s order. The children were found to be in need of protection. There was to be a review of the custody and access order before Harper J. in six months: see F. (A.M.) v. W. (J.R.), 2011 ONSC 1868, 6 R.F.L. (7th) 282.
[6] The review took place over 23 days from July 2012 to April 2013. Justice Harper found that although the ordered access was occurring, the children refused to interact with the father and were rude and disrespectful to him and his new wife. As a result, Harper J. granted custody of the children to the father with access to the mother only during weekly sessions with the children's therapist. The mother could bring a change motion if she was able to demonstrate that she would promote a loving relationship between the children and both parents: see F. (A.) v. W. (J.), 2013 ONSC 4272. Costs in the amount of $400,000 were awarded to the father for the 2011 and 2013 proceedings: see F. (A.) v. W. (J.), 2013 ONSC 7770.
[7] On appeal in October 2015, this court set aside the contempt finding as there was no outstanding order at the time to be the subject of contempt, ordered another access review to be held by February 2016, and reduced the costs award to $200,000: see Fiorito v. Wiggins, 2015 ONCA 729, 69 R.F.L. (7th) 5.
[8] After the date of February 1, 2016 was set for the review hearing, the father brought a motion returnable on January 22, 2016 for the purpose of obtaining or ensuring payment of the $200,000 costs award. He wanted security orders and payment as a condition of proceeding with the review hearing. Justice Hebner refused any delay, as the Court of Appeal had required the review to be held no later than February 2016. Instead, she made a temporary order, on consent, that: (i) the mother produce to the father copies of all bank and investment statements (personal and corporate); (ii) the mother produce to the father financial and accounting records for her corporation; (iii) examinations be held according to a stated timetable; and (iv) pending the return of the motion, the mother was restrained from disposing of her RRSPs and from dissipating assets.
[9] On that motion, the mother filed evidence swearing that she intended to pay the awarded costs and denying a suggestion in the evidence submitted on behalf of the father that she intended to file for bankruptcy after the review to thwart the father's claim.
[10] During the review hearing, on February 9, 2016, the father brought a motion requesting the assistance of the court in enforcing the costs award by garnishment against the financial institutions where the mother had registered assets. Before the assets could be garnished, the mother had to convert them to cash. In responding evidence, the mother took the position that her RRSPs could not be garnished as they were in the nature of a trust. The motion was never heard, as the mother made an assignment into bankruptcy on February 22, during the review hearing.
[11] In the bankruptcy, the mother claimed exempt assets of $295,600. She claimed no other assets with any value. Her home was valued at $275,000 and was fully mortgaged. The value of her shares in her corporation was $1. Comparing the financial statement the mother filed in response to the January enforcement motion with the one filed for the bankruptcy proceeding, her debts had increased by $41,192, with no explanation given.
[12] The motion judge noted the legal effect of the mother's assignment into bankruptcy on the father: (i) he was no longer able to enforce the costs award; (ii) upon the mother's discharge, that award would be unenforceable; and (iii) the mother would be able to keep her RRSPs. This result would occur because although RRSPs are exempt assets in bankruptcy, under Ontario law they are not exempt from creditors outside of bankruptcy, as they are not a class of property specified under the Execution Act, R.S.O. 1990, c. E.24. The mother would therefore be able to keep those assets.
Decision of the Motion Judge
[13] The father brought a motion, heard on August 5, 2016, for an order annulling the bankruptcy or, alternatively, lifting the stay under s. 69.4 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the "BIA"), and authorizing the father to continue his enforcement of the costs award against the mother's registered assets.
[14] The motion judge referred to s. 69.4 of the BIA, which allows the court to make a declaration that the automatic stay on bankruptcy does not operate in respect of the applying creditor where the creditor is likely to be materially prejudiced by the stay, or where it is equitable on other grounds. She considered case law regarding lifting stays to allow a spouse to enforce an equalization claim against exempt assets, including Schreyer v. Schreyer, 2011 SCC 35, [2011] 2 S.C.R. 605, and Scott (Re), 2014 ONSC 5566, 51 R.F.L. (7th) 223. She also considered Shirkie v. Shirkie, 2015 SKQB 303, 67 R.F.L. (7th) 274, where a bankruptcy stay was lifted to allow a spouse to pursue a family property claim against exempt assets.
[15] The motion judge determined that the father was entitled to have the stay lifted, based on three factual findings: (i) this was an extreme case of one parent undermining the other parent with the children during eight years of litigation in which the father was trying to have a relationship with his children; (ii) the Court of Appeal determined that the mother should pay the father $200,000 in costs for the two trials before Harper J., but she had paid nothing; and (iii) when the court restrained the mother from disposing of her RRSPs or dissipating assets and allowed the review hearing to proceed without the payment of the costs award, the court and the father relied on the mother's representations in her affidavits that she intended to pay the costs and that she did not intend to thwart that payment by making an assignment into bankruptcy.
[16] Based on those factual findings, the motion judge found that the father was likely to be materially prejudiced by the continued operation of the stay. She concluded, based on the record, that the father was likely to receive nothing towards his costs award unless the stay was lifted, and she observed that allowing him to enforce that award against the mother's bankruptcy-exempt assets would not affect other creditors. She was also satisfied, on the alternative ground, that it was equitable to grant the declaration. Finally, because the costs debt would be released on the mother's discharge from bankruptcy, the motion judge also ordered the discharge to be stayed for a reasonable period of time to allow the father to take the appropriate enforcement steps.
Issues
[17] The issues on this appeal are:
Did the motion judge err in law by lifting the stay under s. 69.4 of the BIA in order to allow the enforcement of a family law costs award?
Did the motion judge err in law by misapprehending the meaning of "prejudice" and of "equitable" under s. 69.4 of the BIA?
Did the motion judge misapprehend the evidence regarding whether the father would receive any payment towards his costs award in the bankruptcy?
Analysis
(1) Did the motion judge err in law by lifting the stay under s. 69.4 of the BIA in order to allow the enforcement of a family law costs award?
[18] In the Supreme Court of Canada case of Schreyer, the husband made an assignment into bankruptcy without giving notice to the wife, who had an equalization claim under Manitoba family law legislation. He was also discharged without notice to her, thereby releasing him from her claim. However, the husband owned a farm, which was exempt from execution by creditors under s. 13 of Manitoba's The Judgments Act, C.C.S.M. c. J10, and could not be disposed of by the trustee in bankruptcy for distribution to creditors.
[19] Speaking for the court, at para. 32, LeBel J. stated:
In such circumstances, the appropriate remedy for a creditor like the appellant would be to apply to the bankruptcy judge under s. 69.4 BIA for leave to pursue a claim against the exempt property. Since this property is beyond the reach of the ordinary creditors, lifting the stay of proceedings cannot prejudice the estate assets available for distribution. In keeping with the wording of s. 69.4(b) BIA, this is why it would be "equitable on other grounds" to make such an order. This procedure would also accord with the policy objective of bankruptcy law of maximizing, under the BIA, returns to the family unit as a whole rather than focussing on the needs of the bankrupt: see, on this point, Hildebrand v. Hildebrand (1999), 13 C.B.R. (4th) 226 (Man. Master), at para. 16; and, generally, on Parliament's concern for the support of families, Marzetti v. Marzetti, [1994] 2 S.C.R. 765 (S.C.C.), at pp. 800-01.
[20] The appellant submits that LeBel J.'s statement of the law applies only to an equalization payment, and not to a custody costs award. The argument hinges on what she submits is a necessary link between a lift-stay order and a spouse's ability, before bankruptcy, to obtain an order granting a proprietary interest in the other spouse's property under s. 9(1) of Family Law Act, R.S.O. 1990, c. F.3 (the "FLA") when applying for an order for an equalization payment. Such a proprietary order is not available to enforce a costs award.
[21] Sections 9(1)(b) and (d) of the FLA provide:
9(1) In an application under section 7, the court may order,
(b) that security, including a charge on property, be given for the performance of an obligation imposed by the order;
(d) that, if appropriate to satisfy an obligation imposed by the order,
(i) property be transferred to or in trust for or vested in a spouse, whether absolutely, for life or for a term of years, or
(ii) any property be partitioned or sold.
[22] Section 5 of the FLA establishes entitlement to an equalization payment between spouses. Section 7 provides the mechanism to apply to court to determine any matter respecting the entitlement under s. 5.
[23] In Schreyer, LeBel J., at para. 25, explained that the only way Ms. Schreyer's equalization claim would not have been extinguished by Mr. Schreyer's discharge from bankruptcy was by obtaining an order lifting the stay "so that she could seek a proprietary remedy under s. 17 [of The Family Property Act of Manitoba]." That section is to the same effect as s. 9(1) of the Ontario FLA. The appellant submits that the lift-stay remedy is therefore only applicable where the creditor spouse is then able to obtain a proprietary interest in exempt assets in pursuit of an equalization claim.
[24] I do not accept this submission. In Manitoba, a farm property is exempt from execution by creditors. As a result, a proprietary order would have been necessary to allow a spouse to realize on such property outside bankruptcy. By contrast, in Ontario, outside of bankruptcy, RRSPs are not exempt from execution by creditors, as they are not a class of property specified under the Execution Act. Therefore no order under ss. 9(1)(b) or (d) is necessary to allow a spouse to execute any debt against an RRSP belonging to the other spouse. However, once a spouse makes an assignment into bankruptcy, that spouse's RRSPs become exempt property: see BIA, s. 67(1)(b.3). Accordingly, the lift-stay remedy allows the creditor spouse to execute any debt against RRSPs; they are only exempt under the bankruptcy regime, not under the provincial property and creditor's rights laws.
[25] Similarly, I do not accept the appellant's argument that the effect of the lift-stay order is to give the respondent a proprietary interest in the RRSPs for a costs debt, effectively expanding the court's power under s. 9(1) of the FLA. As stated, under Ontario law, the respondent does not require a proprietary order to execute against RRSPs, as outside bankruptcy they are not assets that are exempt from execution.
[26] Furthermore, there is nothing in the reasons of LeBel J. that suggests that the equitable considerations for allowing a spouse to obtain the lift-stay remedy to execute against exempt or protected assets of the other spouse are limited to enforcing an equalization claim and would not apply, in appropriate circumstances, to a costs award arising out of protracted family litigation.
[27] Maximizing returns to the family unit as a whole, not just the bankrupt, is identified by LeBel J., at para. 32, as a policy objective of bankruptcy law. This is the effect of lifting the stay and allowing the creditor spouse, where it is equitable to do so, to realize against exempt assets of the bankrupt spouse, which are not available to other creditors in the bankruptcy.
(2) Did the motion judge err in law by misapprehending the meaning of "prejudice" and of "equitable" under s. 69.4 of the BIA?
(a) Material Prejudice
[28] The appellant submits that the motion judge erred by finding that the respondent would suffer material prejudice because he would likely receive nothing towards his costs award in the bankruptcy. The appellant argues that s. 69.4(a) requires prejudice different from that experienced by other unsecured creditors, and that the father's prejudice is no different from that suffered by any other unsecured creditor in a bankruptcy.
[29] I would not accept the submission that the motion judge erred in her interpretation or application of the material prejudice requirement of the section. Her conclusion is readily justifiable by the record.
[30] The appellant argues that differential treatment is a requirement for material prejudice. I disagree. In my view, differential treatment may justify a finding of material prejudice. However, it is not a necessary factor. The appellant cites Ingles (Re) (1997), 46 C.B.R. (3d) 202 (B.C. S.C., in Chambers), Janodee Investments Ltd. v. Pellegrini (2001), 25 C.B.R. (4th) 47 (Ont. S.C.) and Exponents Canada Inc. v. Sharma, 2014 ONSC 7097, 19 C.B.R. (6th) 231. However, these cases include differential treatment as one possible kind of material prejudice. Material prejudice arises when the bankruptcy would treat a creditor unfairly, differently or in some way worse than other creditors: see Ingles, at para. 23; Janodee, at para. 28; and Exponents, at para. 69.
[31] Material prejudice can arise from the size of the debt and the expected loss. As noted by Farley J. in Cumberland Trading Inc. (Re) (1994), 23 C.B.R. (3d) 225 (Ont. Gen. Div.), at para. 11, material prejudice:
[I]s an objective prejudice as opposed to a subjective one — i.e., it refers to the degree of the prejudice suffered vis-à-vis the indebtedness and the attendant security and not to the extent that such prejudice may affect the creditor qua person, organization or entity.
[32] The motion judge made three factual findings that differentiated the respondent's position from that of other creditors and demonstrated the unfairness he faced: (i) the need for the father to pursue lengthy custody and access litigation in order to have any relationship with his children; (ii) the mother's failure to pay anything toward the costs ordered by the Court of Appeal; and (iii) the fact that the mother thwarted the enforcement of the costs award by reneging on assurances she made to the court about her intent to pay the costs and not use bankruptcy to thwart that payment. It was these findings that grounded the finding of prejudice.
[33] Section 69.4(a) also requires that the material prejudice be related to the "continued operation" of the stay. The motion judge was entitled to find that the father would "in all likelihood, receive nothing" absent a lifting of the stay.
(b) Equitable on Other Grounds
[34] The appellant also submits that the motion judge erred in finding that it was equitable to grant the declaration lifting the stay in favour of the respondent. She argues that the cause of the debt is not relevant to the consideration of the equities, nor did the change in her intention regarding an assignment into bankruptcy either prejudice the respondent or create an inequity. She also argues that, while the motion judge could have postponed the review regarding access to the children, the motion judge could not have transferred the RRSPs to the father using s. 9(1) of the FLA because the debt arose from a costs award and not an equalization claim.
[35] I do not agree with these submissions. Under s. 69.4 courts have "a wide discretion" based on the "particular facts of the particular case": see L.W. Houlden, G.B. Morawetz and Janis Sarra, Bankruptcy and Insolvency Law of Canada, 4th ed. (Toronto: Thomson Reuters, 2016) vol. 2 at pp. 3-350, 3-400.1. The motion judge was clearly entitled to take into account the circumstances regarding the background to the debt, particularly in the context where other creditors would not be affected by the order being sought. Further, although the appellant characterizes her decision to make an assignment into bankruptcy in the midst of the review hearing as a "change in [her] intention", there is no explanation on the record for that change. The court had previously relied on her representations that: (i) she intended to pay the costs; and (ii) she had no intention of filing for bankruptcy to avoid this payment. It is apparent that the motion judge did not accept that the appellant's behaviour was a simple change of intention.
[36] Further, as in Schreyer, because the respondent would be enforcing the costs award against exempt assets in the bankruptcy, other creditors would not be affected. As LeBel J. held, at para. 32, "[i]n keeping with the wording of s. 69.4(b) [of the] BIA, this is why it would be 'equitable on other grounds' to make such an order."
[37] The appellant repeats again here her submission regarding the limited application of s. 9(1) of the FLA. To be clear, the motion judge did not refer to this provision or intend to make any order under it. The orders she made regarding the RRSPs were only to facilitate their liquidation for ease of execution and to prevent the appellant from dissipating them. The orders did not give the respondent a proprietary interest or preference in respect of those assets.
[38] Lastly, on this point, the appellant argues that none of the factors listed in Advocate Mines Ltd. (Re) (1984), 52 C.B.R. (N.S.) 277 (Ont. S.C.), that are typically present when a bankruptcy stay is lifted are present in this case. However, the appellant rightfully concedes that these factors are not an exhaustive list. Given the strong equitable grounds, lifting the stay was appropriate in this case. Further, in light of the history and current status of the proceedings, I would find that "logic dictates" that this claim be allowed to proceed, in line with the fifth Advocate Mines factor: see Advocate Mines, at p. 278.
(3) Did the motion judge misapprehend the evidence regarding whether the father would receive any payment towards his costs award in the bankruptcy?
[39] The appellant submits that the respondent could have opposed the appellant's discharge from bankruptcy and thereby shared with other creditors in any payment made as a condition of that discharge. She points to evidence that there was potential further growth of equity in her home. She also argues that the value of her exempt assets would lead the bankruptcy court to order a payment as a condition of discharge.
[40] Accordingly, the appellant argues that the motion judge's finding that the respondent would likely receive nothing toward his costs award "misapprehends and denigrates the bankruptcy regime and the rights of creditors under that regime."
[41] I disagree. The motion judge's finding was reasonable based on the appellant's statement of affairs. Although it is open for any creditor to oppose the discharge of the bankrupt, there is no guarantee that any order will be made or that any funds will be available. Any potential increase in the value of the home is purely speculative.
[42] In any event, the bankruptcy regime includes s. 69.4 and the ability of the court to lift the stay in favour of a particular creditor in prescribed circumstances. The use of that provision in these circumstances does not denigrate the regime. In this case, there are "sound reasons, consistent with the scheme of the [BIA] to relieve against the automatic stay": see Ma (Re) (2001), 143 O.A.C. 52 (C.A.), at p. 54 (citations omitted).
[43] Finally, regardless of whether the respondent received nothing in the bankruptcy or a small dividend towards the $200,000 costs debt, the findings of material prejudice and that it was equitable to make the declaration for a lift-stay would be amply justified.
Result
[44] I would dismiss the appeal with costs fixed at $25,000 inclusive of disbursements and HST, to be included within the lift-stay order.
Released: October 4, 2017
"K. Feldman J.A."
"I agree. John Laskin J.A."
"I agree. B.W. Miller J.A."