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Rusinek & Associates Inc. v. Arachchilage, 2021 ONCA 112

Can a trustee initiate an equalization claim under the Family Law Act?

Roshan and the Respondent married in 2003. During their marriage, the matrimonial home was purchased and placed in the Respondent’s name. The Respondent argued that it was never the intention of the parties that Roshan would acquire an interest in the matrimonial home, as he never contributed to its acquisition or maintenance.

The parties separated in February 2015 and Roshan left the matrimonial home and never returned. The separation was permanent but neither party had commenced an application for the equalization of net family properties. The Respondent continued to reside in the matrimonial home with the couple’s children. In November 2015, Roshan made an assignment in bankruptcy, and the Appellant was appointed as bankruptcy trustee.

The Appellant applied to the Superior Court for a declaration that the right to commence an equalization claim under the Family Law Act (“FLA”) had vested in it as Roshan’s trustee in bankruptcy. The application judge determined that, unless and until the right to commence an equalization claim is exercised by a spouse, the equalization claim is “inchoate” and does not constitute “property” for the purposes of the Bankruptcy and Insolvency Act. Therefore, the right to commence such a claim was not assignable and did not vest in the trustee, as the decision was “personal as between the spouses”.

The issue raised on appeal was whether a trustee in bankruptcy can initiate an equalization claim under the FLA. In s. 5 of the FLA, the Ontario legislature provided spouses with an entitlement to equalization of net family properties in certain circumstances. Section 7(1) of the FLA provides for the commencement of an application for equalization. Section 7(2) of the FLA indicates that the entitlements created in s. 5 are “personal as between the spouses”. On the other hand, the BIA provides that, with limited exceptions, all of a bankrupt’s property passes to and vests in the trustee in bankruptcy.

The Appellant argued that an unexercised equalization claim constitutes property in the hands of a spouse. Therefore, in the appellant’s view, it should also be property in the hands of the trustee in bankruptcy. The procedural step of commencing an application pursuant to s. 7 of the FLA does not render the equalization claim inchoate beyond the realm of contingent actions or choses in action that constitute property under the BIA.

The Respondent argued that describing the entitlement to an equalization claim as “personal as between the spouses” means more than explaining that it is a non-proprietary claim. According to the Respondent, the wording means that an entitlement to an equalization claim can only be exercised by the spouses themselves.

Once initiated by a spouse, an equalization claim constitutes property under the BIA and the trustee in bankruptcy has control over the claim and the proceeds. There is no limiting provision in the BIA or at the common law, nor does s. 7(2) of the FLA prevent the trustee in bankruptcy from pursuing the claim once a spouse has commenced an application. Therefore, an entitlement to equalization is not a “personal cause of action” in the sense of “a right that has no existence independent of its holder”. Truly personal causes of action do not vest in the trustee in bankruptcy and the bankrupt remains free to pursue such an action in his or her own right. If the entitlement to equalization were such a personal cause of action, it could not be stripped from the bankrupt spouse upon assignment in bankruptcy and passed to the trustee in bankruptcy.

The Court rejected the view that an equalization claim is an inchoate right that does not constitute property until it is exercised by a spouse. Once a right to equalization has crystalized due to permanent separation, it has value to that spouse. The fact that a spouse has not taken the procedural step of commencing an application for the equalization claim does not take it outside the broad definition of property in the BIA. The equalization claim is like any other chose in action. Therefore, it vests in the trustee in bankruptcy and constitutes property available for distribution.

However, the qualification the Ontario legislature has imposed on the right granted in s. 7 of the FLA limits the trustee in bankruptcy’s ability to initiate the equalization claim during the estate-administration stage of bankruptcy. A spouse makes the decision to initiate a claim for equalization; the decision cannot be made by a trustee in bankruptcy or any other assignee. Accordingly, the Court dismissed the appeal.

Counsel: Sharon Sam and Mark Ross of Ross Naseri LLP for the Appellant and David A. Schatzker and Richard D. Howell of Clark Farb Fiskel LLP for the Respondent

Judge: Strathy C.J.O.Rouleau and Coroza JJ.A.

 

Fullcase: https://canlii.ca/t/jd9m7