• Post category:Court Cases

Johnston v. Johnston, 2020 ONSC 6515

Can a family law order give an ex-spouse priority to the proceeds of a matrimonial home over the trustee in bankruptcy?

The parties separated on May 28, 2017. On November 28, 2017, the jointly held matrimonial home was sold, generating net proceeds of $185,200.58. On June 7, 2018, the Court ordered that the sale proceeds would be held in an interest-bearing trust account by the parties’ real estate lawyer as security for the Applicant wife’s spousal support claims, given the Respondent husband’s dissipation of assets, resistance to a spousal support order and threat of or likelihood of bankruptcy. On June 3, 2019, the Respondent made an assignment in bankruptcy.

The Applicant sought a declaration that, pursuant to the June 7th Order, her interest in the Respondent’s 50% share of the sale proceeds was a secured claim, having priority over the Respondent’s Trustee in Bankruptcy. The Trustee maintained that it was entitled to the Respondent’s 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.

By operation of the BIA, 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. Since the Applicant was not the recipient of a fully executed judgment on the date of assignment, the issue was whether the Applicant was a secured creditor as of that date.

The Court held that the Applicant was not a secured creditor on the date of the assignment. There was no debt owing or accruing because the Applicant’s rights to spousal support were yet to be determined. In fact, the Applicant did not even qualify as a “creditor”. The June 7th Order 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.

At the time that the June 7th Order was made, 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 that the Applicant would stand as a secured creditor for the purposes of the BIA.

At its highest, the June 7th 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.

Given the parties’ history, it was easy to 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.

As such, the Respondent’s 50% share of the proceeds vested in the Trustee on the date of the assignment and the funds must be remitted to the Trustee. 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 was a nullity.

Counsel: Alison L. Pengelley of Waddell Phillips for the Applicant; Matthew Giesinger of Rogerson Law Group for the Respondent; Ian Klaiman of LZW Law for the Trustee in Bankruptcy

Judge: McCarthy J.


Fullcase: http://canlii.ca/t/jb9rl