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“Letter of the Law” Poised to Undermine Equity in Divorce: A Look Ahead to Schreyer v. Schreyer

This November, the Supreme Court of Canada (“SCC”) will weave in and around federal and provincial legislation that has generated consternation over divorce and property division equity in Canadian provinces. The judges will hear party submissions from the Manitoba Court of Appeal (“MCA”) decision of Schreyer v. Schreyer, 2009 MBCA 84, a judgment that ultimately released Mr. Schreyer from any obligation to make an equalization payment to his former wife, Mrs. Schreyer, even though he had been discharged from bankruptcy and was no longer required to pay his debts.

I ask my readers to bear with the wave of legislation and facts to follow which are required to explain this remarkable result. It will be most straightforward to begin with a chronology of events.

Ten years of divorce proceedings

1980: Mr. and Mrs. Schreyer marry.

1991: Mr. and Mrs. Schreyer move in to a farm then occupied by Mr. Schreyer’s parents.

March 27, 1997: Manitoba Agricultural Credit Corporation approves $65,000 loan to Mr. Schreyer to purchase farm.

September 15, 1997: Mr. Schreyer purchases and is registered as owner of the farm.

December 4, 1999: Mr. and Mrs. Schreyer separate. Mrs. Schreyer moves out.

March 15, 2000: Mrs. Schreyer files for a petition of divorce from Mr. Schreyer, in part seeking an equal division of marital property.

December 20, 2001: Mr. Schreyer makes an assignment into bankruptcy. He makes no disclosure of his wife’s pending equalization claim and Mrs. Schreyer has no knowledge of his bankruptcy.

November 29, 2002: Mr. Schreyer receives discharge from bankruptcy.

October 24, 2005: Hearing and valuation of assets take place.

October 25, 2007: Master deducts Mr. Schreyer’s debts from his assets (the farm) and concludes that he owes Mrs. Schreyer an equalization payment of $41,063.48.

April 30, 2008: Family Division judge confirms master’s report.

Mr. Schreyer: Any equalization payment is extinguished by my discharge from bankruptcy

Foremost among the claims made by both Mr. and Mrs. Schreyer before the Court of Appeal was Mr. Schreyer’s argument that, according to the federal Bankruptcy and Insolvency Act (the “BIA“), his order of discharge from bankruptcy released him from all debts, including the equalization payment to his wife. Section 178 of the BIA sets out exceptions to a person’s discharge:

Debts not released by order of discharge

178. (1) An order of discharge does not release the bankrupt from

(b) any debt or liability for alimony or alimentary pension;

(c) any debt or liability arising under a judicial decision establishing affiliation or respecting support or maintenance, or under an agreement for maintenance and support of a spouse, former spouse, former common-law partner or child living apart from the bankrupt;

Claims released

(2) Subject to subsection (1), an order of discharge releases the bankrupt from all claims provable in bankruptcy.

Mrs. Schreyer argued that, according to s. 67(1) of the BIA, property of a bankrupt divisible among his creditors did not include property “within which the bankrupt resides.” Thus, she was still entitled to an equal division of their matrimonial home.

Property of bankrupt

67. (1) The property of a bankrupt divisible among his creditors shall not comprise

(a) property held by the bankrupt in trust for any other person;

(b) any property that as against the bankrupt is exempt from execution or seizure under any laws applicable in the province within which the property is situated and within which the bankrupt resides;

MCA: Mr. Schreyer is, sadly, correct

In reviewing the judge’s decision, the MCA first noted that Mrs. Schreyer’s petition for divorce occurred before Mr. Schreyer’s bankruptcy. She had no knowledge of it before her husband’s discharge and filed no claim with respect to it. If she had, she might have been able to obtain leave to proceed with her claim against the husband outside of the bankruptcy.

The Court then ruled that an equalization payment was a debt like any other. Mrs. Schreyer could not rely on s. 67(1) of the BIA because, according to Maroukis v. Maroukis, [1984] 2 S.C.R. 137 (“Maroukis“), claims of spouses for valuation and accounting were not claims attached to specific assets (in this case, the farm) unless subsequently ordered by the court. Therefore, subject to the s. 178(1) exceptions, the equalization payment to which Mrs. Schreyer was entitled would be extinguished.

The MCA then decided that equalization payments did not fit into one of the s. 178(1) exceptions. Although the section directed that bankrupts would not be released from alimony or spousal support obligations, it did not so provide for equalization payments. Thus, the Court, pursuant to s. 178(2) of the BIA, released Mr. Schreyer from the equalization payment he owed Mrs. Schreyer.

The SCC in tight position to grant Mrs. Schreyer equity

The situation of Mr. and Mrs. Schreyer harks back to the case of Murdoch v. Murdoch, [1975] 1 S.C.R. 423, in which Mrs. Murdoch was denied a half interest to the ranch she had lived and worked on with Mr. Murdoch. Public reaction to the outcome incited significant law reform, including what is now Ontario’s Family Law Act, in the areas of divorce and property division. The irony is that today, similar legislation in Manitoba may well end up overriding Mrs. Schreyer’s struggle for equalization.

The circumstances here are a prime example of the infamous clash between the “letter of the law” and the “spirit of the law.” The exceptions laid out in s. 178(1) of the BIA imply that Parliament did not intend discharges from bankruptcy to release individuals from responsibilities to support spouses and children. Yet, the MCA was also correct in reading that the letter of the law does not enumerate equalization payments as one of those exceptions.

The SCC will without doubt be in a tight position to find an interpretation of the BIA that reflects the broader spirit of fairness contained in the Act. One possible alternative may be to re-examine its decision in Maroukis so as to root a spouse’s interest first in the property before the financial equalization payment. One might also fancy returning to the landmark 1980s separation cases to construe an equitable trust without overruling legislation. In both situations, s. 67(1) of the BIA could potentially apply.

Still, it will be a test for the SCC to craft an equitable solution for Mrs. Schreyer. Even if the Court manages to reinstate her equalization payment, she will likely receive less than half of the fair market value of the farm. As the MCA pointed out, according to s. 16 of The Family Property Act in Manitoba, the closing date for the inclusion of assets and liabilities in valuation is the date when the spouses last cohabited with each other. Both Mr. and Mrs. Schreyer had agreed that the closing date was December 4, 1999. Therefore, while Mr. Schreyer’s debts would be accounted for in the valuation, his bankruptcy claim in 2001 and subsequent discharge in 2002 would not. His debts would still, therefore, be deducted from the equalization payment he owed Mrs. Schreyer.

A call for… more legislative reform

The MCA decision essentially allows indebted spouses to strategically file claims for bankruptcy so as to minimize, or even eliminate, equalization payments owed to non-bankrupt spouses. The disposition of this case holds implications for couples far beyond Manitoba. It will affect all provinces, including Ontario, which are similarly based on equalization rather than property division schemes. Regardless of the SCC’s decision, one hopes this case will be a sign to Parliament and to provincial legislatures to review family legislation. As Justice Wright wrote in a similar judgment in Balyk v. Balyk, 1994 CanLII 7498, “I cannot torture the law to fit the hard case.”

The MCA also expressed some frustration in rendering its decision. Justice MacInnes opined,

From the wife’s perspective, the unfortunate and unfair circumstances here are that the husband’s assets were exempt assets and therefore were not shareable amongst his creditors, whereas his debts, including the wife’s equalization claim, were extinguished upon his discharge from bankruptcy. In the result, he is left with the farm property and no unsecured debt and her entitlement to an equalization payment is extinguished by reason of his bankruptcy. This, however, is the result mandated by the clear wording and intent of the relevant legislation.

It is grimly ironic that the facts of this case should almost resemble a comedy of errors, in which every minute detail generates yet another gambit to frustrate the responsibilities denoted by statute. I only hope it might end as a true comedy of errors should.

Update: On July 14, 2011, the SCC released a unanimous decision dismissing Mrs. Schreyer’s appeal. Justice LeBel, writing for the Court, wrote that Mrs. Schreyer’s equalization payment qualified as a provable claim under the BIA and that Mr. Schreyer was therefore released from it by his discharge from bankruptcy. The only option available to Mrs. Schreyer would have been to apply to the bankruptcy judge for an exemption of the family farm under s. 69.4 of the BIA. In closing, the Court noted the failures of the BIA to adequately provide remedies for spouses such as Mrs. Schreyer and to differentiate between equalization schemes and division of property schemes. It recommended the amendment of the BIA “to address the potentially inequitable impact of bankruptcy law on the division of family assets.” The appeal was dismissed without costs. Readers can access the SCC’s full judgment here.

[filed: Bankruptcy Family Law Schreyer v. Schreyer (2010)]

6 Responses to ““Letter of the Law” Poised to Undermine Equity in Divorce: A Look Ahead to Schreyer v. Schreyer

  1.               Richard Butler

     

    Constructive trust per Petkus v Becker? Trust property excluded from property divisible among bankrupt’s creditors. Section 178 of BIA bars proceedings after discharge rather than extinguishing underlying rights. Rights of trust beneficiary not affected by discharge.

  2.               Alysia Lau

     

    Thanks, a constructive trust certainly seems to be a viable option. The ruling case on this would be Rawluk v. Rawluk, [1990] 1 S.C.R. 70, where the majority of the SCC allowed the creation of a constructive trust even though there were already provincial equalization schemes in place. That was a slim 4-3 decision, though, so this Schreyer case could be a prime opportunity for the Court to clear the air in this area.

  3.               m.diane kindree

     

    Does the bankruptcy code in Manitoba mandate that to be eligible to file personal bankruptcy the debtor must have met with an approved credit counseling agency?

    Does the court require some form of credit counseling before discharging the debt?

    Doesn’t filing bankruptcy for one spouse and not the other also discharge the non-filing spouse from debt? If this is true, how can his debt be deducted from his wife’s equalization payment?

    Can’t a case be made that there exist separate debt and separate property rights allegedly held together by the courts discretion to attach “contempt powers” for his failure to disclose? Why didn’t Mrs. Schreyer and/or her lawyer know that her husband had filed for bankruptcy protection? Every document filed in Bankruptcy Court should have also been filed under the Family Relations Act (debt and liabilities section (other specify) of form 70D) otherwise, couldn’t the court view this failure, to file this correction in a timely manner (notification of change: right to know), as an alleged attempt to mislead the court? A strategy of withholding a change in financial circumstance (swore affidavit) and thereby, eliminating one spouses legal right to act to protect her interests is a dishonest practice which I hope the court will not tolerate.

    While Mr. Schreyer has a general discharge, I do hope the court will address her situation by granting her a hardship discharge and full equalization payments (without debt deductions) in an effort to re-establish some equity in this case.

  4.               Alysia Lau

     

    Thanks, Ms. Kindree. I am not very familiar with bankruptcy filing procedures, although you can find some helpful information on the federal government’s website.

    In its judgment, the MCA did press Mrs. Schreyer and her lawyer for pursuing her equalization claim even after she had discovered Mr. Schreyer’s discharge from bankruptcy. It questioned, for instance, why she did not file a new claim for an unequal division of assets under s. 14(1) of The Family Property Act.

    I am not sure that Mrs. Schreyer has a means of legal recourse against her former husband for concealing the bankruptcy claim from her, especially as it occurred after the valuation closing date. There is no doubt, however, that it has grossly distorted this entire equalization process, and, regardless of Mrs. Schreyer’s commissions or omissions to claim an interest in the matrimonial home by some other legal route, the reality is that the legislation in place has let her down. A gap between the federal and provincial statutes has precluded her from receiving a fair share of the home where she and Mr. Schreyer had lived together for almost ten years.

  5.               Randy Harris

     

    Im appalled at these circumstances. Given this MCA decision what would be the best route to follow if someone did this again? What if she did know about the bankruptcy? Could she have done anything in bankruptcy court regarding her rights under Manitoba’s Homestead Act and Family Property Act prior to the discharge occuring?

  6.               Alysia Lau

     

    Thanks for your comment, Randy. I share your frustration with the result of this case. If Mrs. Schreyer had known about Mr. Schreyer’s bankruptcy claim, her best option would probably have been to tackle the claim itself by either:
    – Applying for leave to proceed with her equalization claim outside of the bankruptcy; or
    – Attacking the discharge itself.

    Otherwise, as pointed out by the MCA, it would always have been open to her to apply for an unequal division of the assets under The Family Property Act. None of these possibilities would be sure to be decided in Mrs. Schreyer’s favour, however – it would be up to the courts – and beyond them, unfortunately, the legislation does not prescribe any remedy for these kinds of situations.

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