COURT FILE NO.: 33-2174453
DATE: 2019/10/24
ONTARIO
SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY and INSOLVENCY
IN THE MATTER OF THE BANKRUPTCY OF
GERSON ALEXANDER GALEANO
AN INSOLVENT DEBTOR OF THE CITY OF OTTAWA, ONTARIO
BEFORE: Mr. Justice Stanley J. Kershman
HEARD IN OTTAWA: August 21, 2019
APPEARANCE: Nigel McCready – for the Moving Party, Emaly Mae Green
Richard P. Bowles – for the Bankrupt, Gerson Alexander Galeano
REASONS FOR decision
Introduction
[1] This motion is brought by Ms. Green seeking various relief including the lifting of the stay of proceedings in Mr. Galeano’s bankruptcy to allow Ms. Green to make an equalization claim against his Canadian Arm Forces pension.
Factual Background
[2] The following are the relevant dates and events, none of which appear to be in dispute:
| DATE | EVENTS |
|---|---|
| October 2002 | Mr. Galeano started contributing to his pension with the Canadian Armed Forces |
| April 2008 | The parties started living together |
| July 15, 2011 | The parties married |
| August 27, 2015 | The parties filed a joint consumer proposal with BDO |
| April 1, 2016 | The parties separated. The proposal was not completed |
| October 6, 2016 | Mr. Galeano files for bankruptcy with BDO in Ontario |
| November 22, 2016 | Ms. Green files for Bankruptcy with BDO in Newfoundland |
| March 23, 2017 | Mr. Galeano files for simple divorce |
| May 10, 2017 | The parties are divorced |
| August 23, 2017 | Ms. Green receives an automatic discharge from her bankruptcy |
| October 31, 2018 | Mr. Galeano receives an absolute discharge from his bankruptcy although not an automatic discharge |
| April 11, 2019 | Motion commenced to lift stay of proceedings by Ms. Green |
Issues
[3] The issue on this motion is as follows:
(a) should the stay of proceedings in Mr. Galeano’s Bankruptcy be lifted pursuant to s. 69.4 of the Bankruptcy and Insolvency Act (“BIA”), R.S.C. 1985, c. B-3, to allow Ms. Green to seek an equalization of Mr. Galeano’s pension which is administered under the Canadian Forces Superannuation Act, R.S.C., 1985, c. C-17?
Ms. Green’s Position
[4] Ms. Green requests an order to lift the stay of proceedings pursuant to s. 69.4 of the BIA because:
(a) she would otherwise be materially prejudice by the continued operation of the stay. She claims that Mr. Galeano concealed his bankruptcy from her until after he received his discharge; and
(b) lifting the stay would be equitable and it would relieve the prejudice to Ms. Green while causing no prejudice to any other creditor.
[5] Ms. Green relies on the case of Re Scott, 2014 ONSC 5566, 18 C.B.R. (6th) 265. In that case, a non-bankrupt spouse moved for an order lifting the stay of proceedings in her husband’s bankruptcy to allow her to pursue an equalization claim against his exempt assets, including his pension.
[6] The Court granted the motion and said at paras. 14 and 15 as follows:
[14] Based on the reasoning in Schreyer and Hewton (Re), this Court finds that in this particular case it would be equitable to lift the stay of proceedings to allow Ms. Scott to pursue her claim for equalization of net family property. The lifting of the stay will not prejudice the Estate assets available for distribution to the Creditors of the Bankrupt Estate.
[15] Accordingly, there will be an order to go lifting the stay of proceedings so that Ms. Scott can pursue a claim for equalization of net family property.
[7] Ms. Green argues that Mr. Galeano has a pension that is eligible for division and allowing her to pursue the pension would cause no prejudice to any of his other creditors because it is exempt property under the BIA.
[8] In addition, she argues Mr. Galeano concealed his bankruptcy from her until after he has been discharged. Allowing the stay of proceedings to continue would cause Ms. Green prejudice by allowing Mr. Galeano to use a bankruptcy system to avoid the equalization of an exempt asset.
[9] Ms. Green proposes two alternate solutions, each of which is discussed in Chapter 10 of Robert A. Klotz’s Bankruptcy and Insolvency and Family Law, 2nd edition, (Toronto: Carswell May 2001):
(a) the Court can declare that Ms. Green’s equalization claim is not provable in Mr. Galeano’s bankruptcy and therefore survives his discharge; and
(b) or the Court can set aside his absolute discharge and substitute an order that he be discharged subject to the condition that Ms. Green be allowed to pursue her equalization claim.
[10] Ms. Green also relies on Boileau v. Boileau, [2003] O.J. No. 607 (Ont. S.C.)., which is discussed below.
Mr. Galeano’s Position
[11] Mr. Galeano argues that both parties were in financial difficulty prior to separation and therefore filed a joint consumer proposal with BDO. When the parties separated, they could no longer afford to maintain the terms of the consumer proposal. Each party filed for bankruptcy and both were discharged prior to Ms. Green bringing an equalization claim, whether exempt or not. Mr. Galeano relies on the cases of Schryer v. Schryer, 2011 SCC 35, [2011] 2 SCR 605 and the recent case of Labreche v. Labreche, 2017 ONSC 6702, [2017] W.D.F.L. 5793.
Analysis
[12] Ms. Green relied on the case of Boileau v. Boileau, in which the wife sought a division of the husband’s pension which the husband attempted to defeat by filing for bankruptcy and concealing it from his separated spouse.
[13] The court in that case notes at paragraph 3 that in order to deal with the division of the husband’s pension, consent of the trustee in bankruptcy was necessary, and that consent had in fact been provided. The court ruled that the matter could proceed on the basis that the claim for equalization would only be exigible as against the pension.
[14] In the present case, the Court notes that Ms. Green did not obtain the consent of Mr. Galeano’s trustee to allow for the relief sought to equalize the husband’s pension.
[15] The Court is fully aware that the pension is an exempt asset. Notwithstanding that fact, the Court finds that there should have been a consent obtained from Mr. Galeano’s trustee so that she could pursue the claim.
[16] Ms. Green also submits that Mr. Galeano concealed his bankruptcy from her. No evidence was provided as to whether Mr. Galeano knew that Ms. Green had gone bankrupt.
[17] The Court is aware that Ms. Green was not listed as a creditor on Mr. Galeano’s statement of affairs.
[18] The Court is also aware that Ms. Green did not take any action to seek an equalization of Mr. Galeano’s pension or any other of his property until after her lawyer at the time wrote to Mr. Galeano on October 24, 2018.
[19] The date of separation was in or about April 2016. By October 24, 2018, Ms. Green had filed for bankruptcy and was discharged. Mr. Galeano had filed for bankruptcy but was not discharged until October 31, 2018.
[20] The question is: why did Ms. Green wait for over two years to seek an equalization claim? The Court has no answer to that question.
[21] The relief sought by Ms. Green is based on acceptance by the Court of one of two solutions, both of which are discussed by Klotz.
[22] The first solution proposed in Bankruptcy and Insolvency and Family Law is that Ms. Green’s claim is not provable because neither spouse commenced a claim for equalization prior to Mr. Galeano’s bankruptcy and therefore the claim is too contingent to be provable.
[23] Ms. Green argues that the Court should adopt the reasoning in Ramsey v. Proffitt, [2001] O.J. No. 4600 (Ont. S.C.), where the husband signed a separation agreement in which he agreed to divide his pension with his wife and subsequently made an assignment in bankruptcy without informing her. The fact that she was entitled to seek, in the future, an equal division of the pension before the husband’s bankruptcy allowed the court to rule that the pension claim was not provable. The Court at paragraph 51 said: “I have found that the entitlement to seek, in future, an equal division of the pension is not a debt or liability provable in bankruptcy and as such, it is not extinguished by the discharge from bankruptcy.”
[24] The Ramsey case is distinguishable from the present case because, in Ramsey, the husband signed a separation agreement agreeing to divide the pension with his wife and then went bankrupt in order to avoid complying with the terms of that agreement. In the present case, there was no separation agreement and there was no agreement to divide the pension prior to Mr. Galeano going bankrupt.
[25] This Court notes that, in the Ramsey v. Proffitt decision, in which the pension was an excluded asset from the bankrupt’s property, the claim had been brought before the bankrupt’s discharge. In the present case the relief sought to lift the stay of proceedings to proceed against the husband’s pension is being sought after Mr. Galeano’s discharge.
[26] Ms. Green also argued in the Boileau case the Court found that an equalization of provable claim in bankruptcy but allowed the claim to proceed in that particular circumstance. In that case, no equalization litigation had been commenced as at the date of the bankruptcy. The court stated at paragraph 23: “I find, in this particular context, that discharge did not extinguish the wife’s potential equalization claim. To allow the earlier discharge to extinguish the claim against the pension would deprive this claimant from significant benefits to which she was entitled to as at the date of separation.”
[27] The difference between the Boileau case and the present case is that, in the Boileau case, the bankrupt had not been discharged from his second bankruptcy when the relief was sought, while in the present case, Mr. Galeano had been discharged.
[28] The Court notes that in the present case the division of the pension, which is an exempt asset is not something that can be looked at separately from the equalization of net family property.
[29] Equalization of net family property is discussed in Houlden and Morawetz’s 2018-2019 Annotated Bankruptcy and Insolvency Act (Thomson Reuters). At page 341, the authors state that:
“Ontario…can be classified as equalization jurisdictions in terms of the approach under family law to division of property, essentially granting each spouse a right to equal division of the net value of the family assets, comprised of the property accumulated during the marriage, with a division made after a process of accounting and valuation. Some property is typically excluded, such as gifts or inheritances from a third party. The accounting process results in a value that is divided between the spouses, and any amount payable must be paid to the creditor spouse. The assets themselves are not divided and neither spouse acquires a proprietary or beneficial interest in the other’s assets. Equalization regimes also typically grant Courts the authority to vary division of the value where equalization would be unfair or unconscionable, the statutory language varying across provinces. A basic principle in equalization regimes is that spouses are entitled to equalization of the value of the two net family properties unless one spouse has acted recklessly, in bad faith or in some jurisdictions unconscionably. The Supreme Court of Canada held in 2011 that neither spouse acquires a proprietary or beneficial interest in the other’s assets and “assets are transferred only at the remedial stage, as agreed by the parties, or as ordered by the Family Court in exercising it’s discretion, as a form of payment or execution of the judgment”: Schreyer v. Schreyer 2011 SCC 35, [2011] 2 S.C.R. 605.
[30] The aforesaid analysis suggests that equalization of net family property includes the pension and other items that were owned at the time of the separation including furniture and other items.
[31] The date of separation is the date on which there becomes an entitlement to an equalization claim by either party, which according to the evidence was around April 1, 2016.
[32] Mr. Galeano filed for bankruptcy in Ontario on October 6, 2016. At that time, any assets that he owned vested in the trustee. A review of his notice of bankruptcy and impending discharge shows that this is a 21-month bankruptcy from October 6, 2016.
[33] In his statement of affairs, Mr. Galeano lists household and family effects with an estimated value of $5,000, his DND pension, which was exempt under the Pensions Benefit Act for $1.00, a 2012 VW Jetta, which is fully secured, and a 50 percent interest in a 2013 Hyundai Sante Fe, which is fully secured.
[34] A review of his liabilities does not show Ms. Green as creditor.
[35] Mr. Galeano’s statement of affairs stated that the parties separated in June of 2016.
[36] Ms. Green filed for bankruptcy in Newfoundland on November 22, 2016. In her statement of affairs, she lists her assets as household furniture and effects for $2,500, and a ½ interest in the 2013 Hyundai Sante Fe which is secured. She did not list any interest in an equitable claim under the Family Law Act. She acknowledged that she was separated from Mr. Galeano. The Court was unable to find the date of separation in her statement of affairs.
[37] As of October 1, 2016, Mr. Galeano was bankrupt. As of November 22, 2016, Mrs. Galeano was bankrupt.
[38] On March 23, 2017 Mr. Galeano filed for a simple divorce and it is served on Ms. Green. According to the evidence she did not contest the simple divorce, nor did she bring a claim for equalization of assets at that time.
[39] While Ms. Green submits that Mr. Galeano concealed his bankruptcy from her, the Court does not find that to be the case. Both parties were in financial difficulty prior to separation and both filed a joint consumer proposal on August 27, 2015. That proposal fell apart when the parties separated. The separation did not change their financial predicament. It would be reasonable to assume that Mr. Galeano would have to do something else to deal with his creditors, including going bankrupt. Ms. Green was fully aware of this potentiality because she too filed for bankruptcy.
[40] The Court finds that the wife’s conduct in terms of not seeking a division until approximately two and a half years after the separation is the root cause of the predicament that she faces today. The Court is not prepared to provide a declaration that Ms. Green’s claim to a division of Mr. Galeano’s pension is not provable in Mr. Galeano’s bankruptcy and that the claim is too configured to be provable.
[41] The second option put forward by Ms. Green is to set aside Mr. Galeano’s absolute discharge and substitute a conditional discharge with a provision that Ms. Green’s claim is not released by his discharge. Ms. Green relies on the unreported case of Re Craig, (Ontario Deputy Registrar Sproat) (February 7, 2001), 32-060606, cited by Klotz in Bankruptcy and Insolvency and Family Law at pages 1024-1025. In that case, family law litigation was in progress when the husband made an assignment in bankruptcy, and he received his discharge without informing the wife. The wife learned of his discharge two years after the fact, and commenced litigation seeking a division of his pension. The Court found that the wife’s claim had been released upon the husband’s discharge, but that the husband’s bankruptcy was an abuse of process. The Court set aside his discharge, granted the wife leave to pursue his pension and made a new discharge order “[w]ithout prejudice to the equalization claim in and to the pension and notwithstanding his bankruptcy or discharge.”
[42] Ms. Green argues that the present case is similar to that in Craig.
[43] The Court finds that the Craig case is distinguishable on the following basis:
(a) in Craig, matrimonial litigation had commenced and, thereafter, the husband declared bankruptcy. In the present case, there was no matrimonial litigation in process at the time of bankruptcy;
(b) in Craig, the Court found that the husband abused the bankruptcy process to avoid his obligation and for the sole purpose of it defeating his wife’s equalization claim. In the present case, both parties were in financial difficulty and had filed a joint consumer proposal which failed around the time that the parties separated. When Mr. Galeano went bankrupt, it was not for the purpose of ending matrimonial ligation, nor was it for the purpose of defeating Ms. Green’s equalization claim, because no matrimonial litigation has been commenced for equalization; and
(c) in Craig, the court found that the husband failed to maintain the mortgage payments, admitted to witnesses his intent to run up the joint credit cards, and claim disability. None of those facts are present here.
[44] Mr. Galeano’s counsel relied on the case of Labreche v. Labreche. In that case the wife sought summary judgment against the husband. One of the issues was the husband sought a claim for equalization of net family property.
[45] In that case, the couple separated in October 2011. In May 2012, the husband filed a consumer proposal, which was completed by him in May 2017. The wife filed for bankruptcy in June 2012. In her statement of affairs, the wife did not include her pension as an asset and did not name the husband as a creditor. The wife was discharged in March of 2014. The husband issued his application in Family Court on October 14, 2016 seeking, among other things, an equalization of net family property.
[46] The only asset that survived the wife’s bankruptcy and husband’s consumer proposal was the wife’s pension.
[47] The issue in that case was whether the husband could share in the wife’s pension, which she claimed was exempt from creditors because she had gone bankrupt and was discharged at the time the husband brought the family law court application for a division of net family property.
[48] Williams J. accepted the wife’s position that her discharge from bankruptcy extinguished the husband’s equalization claim.
[49] The Court dealt with the husband’s argument that the wife failed to list the husband as a creditor and list her pension as an asset, which he claimed was intentional and designed to escape her obligation to him as a creditor. Williams J. at paragraph 63 states: “[a]s the lawyer for Ms. Labreche pointed out during the hearing of the motion, if this is the case, Mr. Labreche may have other remedies available to him. I make no further comment about the merits of any other remedies Mr. Labreche may choose to pursue as they were not before me on this motion.”
[50] In Labreche, the court found that the Supreme Court of Canada’s decision in Schryer v. Schryer was applicable. The Court said that, even when an asset is excluded from the bankrupt’s property, if the equalization claim is provable in bankruptcy pursuant to s.121(1) of the BIA, the creditor seeking the relief is still required to apply for relief to pursue their claim pre-discharge, after which time such claim is extinguished.
[51] This Court accepts and follows the reasoning of William J. in Labreche.
[52] Therefore, the Court finds that Ms. Green’s argument fails on this ground.
Conclusion
[53] For the reasons set out above, the Court finds that relief requested by Ms. Green cannot be granted. Her Motion is dismissed.
Costs
[54] No costs outlines were submitted. The parties are encouraged to resolve the issue of costs within the next 21 days. If they are unable to do so, they shall write to the Trial Coordinator and obtain a time at 9:30 a.m. Each party will be allowed ten minutes to argue their position on the issue of costs. Costs outlines shall be circulated to the other party and the Court 5 days before the hearing.
[55] Order accordingly.
Mr. Justice Stanley J. Kershman
Released: October 24, 2019
Released: October 24, 2019