Rusinek & Associates Inc. Licensed Insolvency Trustee for the Estate of Arachchilage v. Arachchilage et al.

[Indexed as: Arachchilage Estate v. Arachchilage]

Ontario Reports Ontario Superior Court of Justice Gilmore J. February 19, 2020 150 O.R. (3d) 55 | 2020 ONSC 1090

Case Summary

Bankruptcy and insolvency — Property — Property vesting in trustee — Husband and wife separating with neither party applying for equalization of net family property — Husband making assignment into bankruptcy — Bankruptcy trustee had no right to commence its own equalization claim — Right to equalization claim remained inchoate until exercised by spouse.

Constitutional law — Distribution of legislative authority — Paramountcy — Husband and wife separating with neither party applying for equalization of net family property — Husband making assignment into bankruptcy — Bankruptcy trustee had no right to commence its own equalization claim — Right to equalization claim remained inchoate until exercised by spouse, so there was no conflict between federal and provincial statutes and no paramountcy argument. [page56]

Family law — Property — Equalization of net family property — Husband and wife separating with neither party applying for equalization of net family property — Husband making assignment into bankruptcy — Bankruptcy trustee had no right to commence its own equalization claim — Right to equalization claim remained inchoate until exercised by spouse.

The respondents were husband and wife. Their matrimonial home was in the wife's name. After they separated permanently, neither party commenced an application for equalization of net family property. The husband subsequently made an assignment into bankruptcy. The applicant was appointed the bankruptcy trustee. It applied to commence its own equalization claim under the Family Law Act, R.S.O. 1990, c. F.3.

Held, the application should be dismissed.

The right to an equalization of net family property does not become property within the meaning of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 unless the right to commence such a claim is exercised by a spouse. Until then, an equalization claim is inchoate and not assignable. If the right to commence a claim is not exercised, the right is not "property" within the meaning of either the Family Law Act or the Bankruptcy and Insolvency Act so there was no argument to be made under the doctrine of federal paramountcy.

Blowes v. Blowes (1993), 16 O.R. (3d) 318, [1993] O.J. No. 2022; Kinsella v. Mills, [2017] O.J. No. 6885, 2017 ONSC 7093, 288 A.C.W.S. (3d) 21, 55 C.B.R. (6th) 203, 3 R.F.L. (8th) 489; Meisels v. Lawyers Professional Indemnity Co. (2015), 126 O.R. (3d) 448, 2015 ONCA 406, distd

Other cases referred to Bolliger v. White, [2016] O.J. No 5184, 2016 ONSC 5024

Statutes referred to Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 [as am.], ss. 2 [as am.], 67(1)(d), 71 [as am.], 72(1) Family Law Act, R.S.O. 1990, c. F.3 [as am.], ss. 5, (1), (2), (7), 7, (1), (2)

APPLICATION by a bankruptcy trustee to commence a claim for equalization of net family property.

Sharon Sam, for applicant. Richard D. Howell, for respondents.

C. GILMORE J. —

Overview

[1] This application seeks the answer to a discrete question: can a trustee in bankruptcy commence an equalization claim under the Family Law Act, R.S.O. 1990, c. F.3 ("FLA")?

[2] The background facts are not disputed and may be set out as follows. Roshan Singho Dasanayaka Arachchilage ("Roshan") and Jayalukxhmi Baliah ("Baliah") were married on March 15, 2003. [page57]

[3] During the marriage they purchased a home in Toronto where they resided ("the matrimonial home"). The matrimonial home was placed in Baliah's name. Roshan and Baliah separated in February 2015. Roshan left the matrimonial home in October 2015 and has never returned. There is no dispute that the parties have not reconciled and that the separation is a permanent one. Neither party commenced an application for an equalization of net family property.

[4] On November 30, 2015 Roshan made an assignment into bankruptcy. Rusinek & Associates were appointed the bankruptcy trustee ("Rusinek"). Roshan remains an undischarged bankrupt. His declared unsecured liabilities total $282,700.

[5] Baliah filed an affidavit sworn March 26, 2019. She deposed that she paid the down payment and legal fees for the matrimonial home as well as the mortgage, taxes, and all expenses related to the matrimonial home. Baliah asked Roshan to leave the marriage because of his gambling problems, his financial irresponsibility, and his relationships with other women.

[6] Baliah's affidavit sets out that there was never any intention that Roshan have an interest in the matrimonial home as he never contributed towards it. Baliah states a concern that if the trustee is successful in asserting an equalization claim that she and her children aged 12 and 15 will be forced to leave the home.

[7] In this case, a Notice of Constitutional Question was served on the Ministry of the Attorney General (Ontario), the Attorney General of Canada, and the Office of the Superintendent of Bankruptcy of Canada. Those parties did not choose to participate or take a position in this case and they have been removed as party respondents.

The Relevant Legislation

[8] The two statutes engaged in this case are the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the "BIA") and the FLA.

[9] There is no dispute that the matrimonial home is included in the definition of property in both the BIA and the FLA.

[10] Section 71 of the BIA sets out the requirement that:

71. On a bankruptcy order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with their property, which shall, subject to this Act and to the rights of secured creditors, immediately pass to and vest in the trustee named in the bankruptcy order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any assignment or transfer.

[11] The purpose of s. 71 is to ensure that property owned by a bankrupt on the date of the bankruptcy vest in the trustee [page58] such that the trustee may realize on the assets for distribution to creditors.

[12] Bankruptcy trustees have rights beyond s. 71 of the BIA. Section 72(1) of the BIA provides that trustees may avail themselves of the rights and remedies of other laws or statutes relating to property and civil rights in addition to the rights and remedies in the BIA.

[13] Under the FLA, where spouses are separated with no reasonable prospect of reconciliation (as in this case), s. 5(1) entitles the spouse with the lesser of the spouses' two net family properties to one-half the difference between them. In this case, if the trustee is permitted to make a claim for equalization, Roshan's share of the matrimonial home assets (subject to any deductions or exclusions claimed by either party) would form part of his estate as a bankrupt.

[14] Section 5(7) sets out the purpose of equalizing spouses' net family property as follows:

5(7) The purpose of this section is to recognize that child care, household management and financial provision are the joint responsibilities of the spouses and that inherent in the marital relationship there is equal contribution, whether financial or otherwise, by the spouses to the assumption of these responsibilities, entitling each spouse to the equalization of the net family properties, subject only to the equitable considerations set out in subsection (6).

[15] Section 7(1) of the FLA sets out the method by which an equalization claim can be made as follows:

7(1) The court may, on the application of a spouse, former spouse or deceased spouse's personal representative, determine any matter respecting the spouses' entitlement under section 5.

[16] The FLA in s. 7(2) provides that entitlement to an equalization of net family as between spouses is personal as between them.

The Legal Issues

[17] There is no dispute that an equalization claim is a right of action and that such a claim, once made, vests in the trustee in bankruptcy.

[18] For example, in Blowes v. Blowes (1993), 16 O.R. (3d) 318, [1993] O.J. No. 2022, 1993 CarswellOnt 232 (C.A.), the wife commenced a claim for equalization but did not pursue it. Two years later she filed an assignment in bankruptcy and was discharged. After her discharge she attempted to resurrect her equalization claim. The Ontario Court of Appeal held that the claim fell within the definition of property in the BIA and passed to her trustee.

[19] In Kinsella v. Mills, 2017 ONSC 7093, [2017] O.J. No. 6885, 3 R.F.L. (8th) 489, the wife attempted to set aside Minutes of [page59] Settlement on the equalization claim two years after her discharge from bankruptcy. The court was clear that the right to an equalization claim was "personal" as between the spouses, fell within the definition of property under the BIA, and therefore vested in the trustee.

[20] The above cases, however, dealt with factual scenarios in which an equalization claim had already been commenced. The applicant's position is that the trustee has the ability to commence a claim for equalization of net family property where neither spouse has made such a claim. As there is no law directly on point, the applicant argues that ss. 67(1)(d) and 72(1) of the BIA provide such authority as they empower the trustee to avail itself of rights and remedies available under other statutes and to exercise powers over property that might have been exercised by the bankrupt.

[21] In addition, the applicant relies on Meisels v. Lawyers Professional Indemnity Co. (2015), 126 O.R. (3d) 448, 2015 ONCA 406. In Meisels, an undischarged bankrupt lawyer brought an application to have his insurer indemnify him with respect to a claim for professional negligence against him in a class action. The Ontario Court of Appeal held that the lawyer did not have standing to bring the motion. The right to receive an indemnity under an insurance policy is a chose in action and therefore forms part of the definition of property under the BIA. As well, the claim was not one of the exceptions to s. 71 such as damages for mental distress or pain and suffering which are personal rather than proprietary in nature (at paras. 12-13).

[22] The applicant argues that an equalization claim is a chose in action, falls under s. 2 of the BIA and is not one of the carved-out exceptions in s. 71. Therefore, there is no reason not to rely on the reasoning in Meisels to permit the trustee to commence an equalization claim.

[23] According to the applicant, the important distinction is the difference between claims which are "personal in nature" as opposed to "personal as between spouses". Equalization claims are personal as between spouses are therefore not exempt from the definition of property in the BIA.

[24] With respect, I disagree with the applicant that this distinction would permit a trustee to commence an equalization claim. In Rondberg Estate v. Rondberg Estate, 1989 CarswellOnt 275 (C.A.), the court dealt with whether the personal representative of a surviving spouse could elect to take their entitlement to the deceased spouse's estate under s. 5(2) of the FLA. In Rondberg, the spouse failed to make the election during his lifetime and the question arose as to whether his personal representative could make the election after his death. [page60]

[25] The court held that the election was restricted to a living spouse. In doing so, it relied on the wording in s. 5 of the FLA that such a right was personal as between the spouses. Importantly, the court held that "while the procedure to enforce the decision could be entrusted to a stranger to the marriage, the decision could not" (at para. 11). Similar to the case at bar, there is no doubt that the trustee can enforce a previously commenced equalization claim but the decision to make the claim may not assigned to the trustee. That decision remains personal as between the spouses.

[26] As well, in Bosveld v. Bosveld, (January 10, 1986), London (Ont. H.C.), unreported judgment of Sutherland J., dated January 10, 1986, the court held that "the rights are personal to the spouses until they have been exercised, but upon their exercise, a property right arises of the sort that in my opinion vests in or devolves upon the trustee in bankruptcy of a bankrupt spouse" (see p- 115).

[27] In Bolliger v. White, [2017] O.J. No. 6885, 2016 ONSC 5024, 272 A.C.W.S. (3d) 255, the defendant spouse argued that the nature of an equalization claim is personal between spouses and "must be articulated in a court proceeding to be available as an asset of the bankrupt which can be distributed amongst the creditors" (at para. 7). The court agreed.

[28] I find that, similar to the right to elect under s. 5(2) of the FLA, an equalization claim is one that is inchoate until exercised. Once exercised, it takes on a new form as "property" and is subject to the provisions of the BIA. Until that point, the right is not assignable and remains only as an amorphous possibility.

[29] I therefore find that the right to an equalization of net family property does not become property within the meaning of the BIA unless and until the right to commence such a claim is exercised by a spouse.

[30] The applicant argues in the alternative that if the trustee cannot commence a claim for equalization, s. 7 of the FLA is constitutionally inoperative by reason of the doctrine of federal paramountcy. I find that any paramountcy argument is inapplicable in this case for the reasons set out above. That is, if the right is not exercised, there cannot be any conflict between the statutes because the right is not "property" within the meaning of either the FLA or the BIA until it is exercised.

Orders and Costs

[31] The applicant sought partial indemnity costs of $15,484 if successful. The respondent sought partial indemnity costs of $24,479 if successful. [page61]

[32] Given all of the above, I make the following orders:

a. The Application is dismissed. b. The Applicant shall pay to the Respondent the sum of $20,000 in costs payable forthwith.

Application dismissed.

End of Document