Court File and Parties

COURT FILE NO.: FC 17-1286-00

DATE: 20201027

ONTARIO

SUPERIOR COURT OF JUSTICE

BETWEEN:

Sandra Joy Johnston Applicant

– and –

Thomas Clark Johnston Respondent

Alison L. Pengelley, Counsel for the Applicant

Matthew Giesinger, Counsel for the Respondent

– and –

BDO Canada Limited, Trustee in Bankruptcy

Ian Klaiman, Counsel for the Trustee in Bankruptcy

HEARD: October 15, 2020

MCCARTHY J.

Reasons for Decision

[1] The Applicant seeks a declaration that, by virtue of my order (“the order”) dated June 7, 2018, the Applicant’s interest in the Respondent’s 50 percent share of the matrimonial home net sale proceeds (“the proceeds”) is a secured claim having priority over the Respondent’s Trustee in Bankruptcy (“the Trustee”)

[2] The Trustee maintains that it is entitled to the Respondent’s 50 percent share of the proceeds by virtue of the Respondent’s assignment in bankruptcy on June 3, 2019 and the vesting provisions in the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“BIA”).

[3] There was other relief sought on this motion. The Applicant and the Trustee agreed that I should determine the discrete issue of entitlement to the proceeds; the balance of the issues would either be resolved on consent or returned before me on a future date.

[4] The Respondent, being an undischarged bankrupt, was legally incapable of responding on his own behalf, and took no position on the discrete issue before the court.

Background

[5] The parties separated on May 28, 2017.

[6] On November 28, 2017, the jointly held matrimonial home was sold generating net proceeds of $185,200.58.

[7] On June 7, 2018, I gave an order in respect of those net proceeds. The part of that order now in question reads as follows:

The net sale proceeds from the sale of the parties’ jointly owned matrimonial home shall be held in an interest-bearing trust account by the parties’ real estate lawyer as security for the Applicant’s spousal support claims, in view of the Respondent’s dissipation of assets, resistance to a spousal support order and threat of or likelihood of bankruptcy, pending further Court order or the written agreement of the parties.

[8] On June 3, 2019, the Respondent made an assignment in bankruptcy and appointed BDO Canada Limited as trustee in bankruptcy of his estate. On that date, there was approximately $170,000 of the proceeds left remaining in the real estate lawyer’s trust account.

[9] On July 31, 2019, the Applicant successfully moved before me for costs against the Respondent in the amount of $25,000.00 (“the costs award”). That costs award was ordered to be paid out of the Respondent’s 50 percent share of the proceeds. The Trustee was not served with notice of the motion. The court was not advised of the bankruptcy prior to making the costs award. The Applicant claims that she was not aware of the Respondent’s application for bankruptcy until August 22, 2019 by which time the costs award had been paid out of the Respondent’s share of the proceeds by the real estate lawyer.

The [Bankruptcy and Insolvency Act](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-b-3/latest/rsc-1985-c-b-3.html) (BIA)

[10] The relevant provisions of the BIA are as follows.

[11] S. 70(1) of the BIA provides that bankruptcy takes precedence over all but:

i) fully executed executions, or

ii) the rights of secured creditors.

It states:

Every bankruptcy order and every assignment made under this Act takes precedence over all judicial or other attachments, garnishments, certificates having the effect of judgments, judgments, certificates of judgment, legal hypothecs of judgment creditors, executions or other process against the property of a bankrupt, except those that have been completely executed by payment to the creditor or the creditor’s representative, and except the rights of a secured creditor.

[12] S. 71 of the BIA provides that the property of the bankrupt vests with the trustee upon an assignment being filed. It states:

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.

[13] “Secured Creditor” is defined under the BIA to mean:

a person holding a mortgage, hypothec, pledge, charge or lien on or against the property of the debtor or any part of that property as security for a debt due or accruing due to the person from the debtor, or a person whose claim is based on, or secured by, a negotiable instrument held as collateral security and on which the debtor is only indirectly or secondarily liable.

[14] By operation of statute, the property of the Respondent vested in the Trustee by virtue of his assignment in bankruptcy on June 3, 2019. The exceptions to this are limited to completely executed judgments or the rights of secured creditors.

[15] There being no suggestion that the Applicant can claim to be the recipient of a fully executed judgment on the date of assignment, the issue before me turns solely on whether the Applicant was a secured creditor as of that date.

Analysis

[16] I find that the Applicant was not a secured creditor on the date of the assignment. Accordingly, I find that the Respondent’s 50 percent share of the proceeds vested in the Trustee on the date of the assignment. Those funds must be remitted to the Trustee. My reasons are as follows.

[17] I find that the use of the words “security for payment for the Applicant’s spousal support claims” were meant to preserve an asset that would be available to pay the Applicant’s spousal support claims, if proven. It is clear from the context in which the order was made that the court was concerned that the Respondent’s spending habits might lead to a dissipation of his assets which would serve to frustrate the Applicant’s ability to collect any spousal support ordered. While the spectre of bankruptcy was mentioned, the court did not stipulate (nor was it asked to stipulate) that the Applicant would stand as a secured creditor for the purposes of the BIA.

[18] In the case of Tradmore Investments Ltd. v. Valdi Foods (1987) Inc., (unreported) the motions judge had ordered “that the action proceed to trial on the condition that the defendant pay into court . . . the sum of $70,719.63 as security for the Plaintiff’s claim”. In Tradmore Investments Ltd. v. Valdi Foods (1987) Inc., 1995 CanLII 7377 (ON SC), [1995] O.J. No. 1952 (Gen. Div.), at para. 2, the reviewing court found that the motion judge’s order did not create a security interest in favour of the plaintiff. The Ontario Court of Appeal upheld that reviewing court’s decision stating that the order in question “did no more than create a fund to abide the outcome of the trial and cannot be treated as constituting the appellant a secured creditor”: Tradmore Investments Ltd. v. Valdi Foods (1987) Inc., [1997] O.J. No. 24 (C.A.), at para. 1. The wording in the Tradmore order was similar, if not identical to, the wording in the present order. I am satisfied, however, that the intention of the wording in both orders was the same: to preserve a pool of money which could be used to satisfy a claim as between two parties.

[19] I am unable to find that the Applicant qualified as a secured creditor as defined by the BIA. Here there was no debt owing or accruing because the Applicant’s rights to spousal support were yet to be determined. Conversely, the Applicant did not even qualify as a “creditor”. A creditor is defined in Black’s Law Dictionary as: “[a] person to whom a debt is owing by another person who is the debtor. One who has a right to require the fulfillment of an obligation or contract.” The order in question here was simply a mechanism by which the court, sensing that an asset was in danger of being deliberately dissipated, sought to preserve that asset, in order to have a pool of money available to help satisfy a claim as between the Applicant and the Respondent.

[20] The case of Bascello v. Bascello (Trustees of) (1997), 1997 CanLII 16249 (ON SC), 146 D.L.R. (4th) 289 (Ont. Gen. Div.) stands for the proposition that to determine whether an order made under the Family Law Act (“FLA”) or Divorce Act (“DA”) elevates a party to the status of secured creditor, the court must examine all the pertinent circumstances, including the language of the order itself. However, the Ontario Court of Appeal, in the leading case of Thibodeau v. Thibodeau, 2011 ONCA 110, 104 O.R. (3d) 161, at para. 43 warned that in conducting this exercise, a court must look for clear language pointing to an intention to create a secured creditor within the meaning of the BIA. At para. 49, the court stated that:

judges should be wary about interpreting orders that are principally designed to assist one spouse in his or her efforts to enforce the order vis-a-vis the other spouse in a fashion that gives the payee spouse an advantage over third parties whose interests are at stake and who were not before the arbitrator or the court at the time the award/order was made.

It is obvious that in fashioning the order of June 7, 2018, the court was motivated by a concern that the Respondent’s conduct might lead to the Applicant being unable to collect spousal support. However, it is too far-stretched to conclude that a security interest of the kind contemplated by the BIA, as an exception to the vesting of property in the Trustee, was intended or created by the court. The language of the order is not sufficiently clear to convey such an interest. At its highest, the order was a preservation order, designed to have a fund available for payment of spousal support if ever it was ordered. In that way, it was not dissimilar from an order for payment of security for costs or the granting of a Mareva injunction. It was not an order designed to impact third party creditors.

[21] Following the granting of the June 7, 2018 order, the parties agreed to an order directing that the sum of $18,908.68 be paid from the proceeds to retire a joint line of credit. This took place in August of 2018. I find that this is highly inconsistent with either party having believed that the Respondent’s 50 percent share in the proceeds stood solely as security for the payment of spousal support in priority to all creditors.

[22] Given the history of this matter, one could readily perceive that the Respondent was using the bankruptcy to avoid paying legitimate claims by the Applicant; however, such a perception does not in itself justify the retroactive creation of a remedial trust-like claim, or the strained interpretation of the terms of an existing order, in what would essentially be an indirect attempt to reorder priorities in the bankruptcy: see Thibodeau, at para. 54

[23] The order referred to the securing provisions of both the FLA and the Divorce Act. This could serve to suggest that the judge granting the charging order intended to bestow upon the claimant the status of secured creditor: see Bascello, at para. 26. However, in granting the order in the present case, the court also relied on the decision of Kumar v. Kumar (1988), 1988 CanLII 4817 (ON SC), 48 D.L.R. (4th) 559 (Ont. Sup. Ct.). It is apparent from a careful reading of Kumar that the court there granted a simple order for the preservation of assets as security for the payment of a support order. There was no discussion or consideration in Kumar about granting an enhanced “security interest”, “charge” or “proprietary right” which would impact the interest of third-party creditors.

[24] I find it telling that the Applicant, in an affidavit in support of her position, confirmed that she was granted the relief that she requested in her cross-motion, namely an order preserving the net sale proceeds of the matrimonial home (emphasis added). The Applicant also requested the court to vary the “temporary preservation order”.

Disposition and Remedy

[25] For the reasons set out above, I have concluded that the order of June 7, 2018 did not create a security interest in favour of the Applicant in the Respondent’s 50 percent share of the proceeds. Rather, I find that the Respondent’s share vested in the Trustee upon the filing of the assignment on June 3, 2019. That being the case, any order which purported to deal with the Respondent’s share of the proceeds without notice to the Trustee and outside the ambit of the BIA is a nullity. Accordingly, that portion of the costs award order directing that $25,000 be paid to the Applicant out of the Respondent’s 50 percent share of the proceeds is set aside.

[26] In terms of remedy, ordinarily the Applicant would be made to disgorge the amount received and return it to the Trustee; however, I accept that the amount owing to the Trustee can be made good in whole by the simple payment of the $85,000.00 remaining in the trust account of the real estate lawyer. This approximates what would have been the Respondent’s 50 percent share in the proceeds which vested in the Trustee on June 3, 2019 by operation of the BIA.

[27] There shall be an order to go that the Trustee is entitled to be paid, out of the proceeds currently in trust, the amount of $85,000.00 plus any accrued interest since June 3, 2019.

[28] To the extent that there are outstanding matters or further issues arising out of this order (i.e. a shortfall or excess amount to be accounted for; the form and content of a formal order; or the issue of costs), either of the Applicant or the Trustee are at liberty to take out an appointment before me to address those matters through the trial coordinator at Barrie.

[29] The balance of the motion is adjourned to return before me on four days’ notice to all interested parties.

Justice J. R. McCarthy

Released: October 27, 2020