Location really is everything when it comes to dividing family property amid bankruptcy

Resolving the way a separated couple’s property is dealt with can be complicated, but it gets even more complex if one of the spouses declares bankruptcy after separation.

For example, if one of them has a pension (an asset exempt from bankruptcy under the Bankruptcy and Insolvency Act), whether the pension can be shared after bankruptcy depends entirely on where he or she lives. Two recent cases, one decided in Alberta and one decided in Ontario, produced very different results.

In Re Marino, decided by Master J.T. Prowse of the Alberta Court of Queen’s Bench, Traci Marino started a court proceeding after separation, asking for an unequal division of matrimonial property. The most significant asset was Marco Marino’s pension. Several weeks later, Marco assigned himself into bankruptcy.

One of the questions Prowse had to resolve was whether Traci’s claim was “provable in bankruptcy.” Was she just one more of her husband’s unsecured creditors? Or could she make still make a claim against his pension?

Meanwhile, in Re Galeano, Emaly Green and Gerson Galeano, who were also a married couple, found themselves in a similar situation in Ontario.

Like Marco Marino, Galeano had a pension, to which he had contributed prior to and during the marriage.

After Green and Galeano separated in 2016, each filed for bankruptcy. The couple then divorced.

Both Green and Galeano were subsequently discharged from bankruptcy: Green in 2017 and Galeano in 2018.

It was not until April 2019 that Green sought to pursue an equalization of net family property against Galeano’s pension, an asset which was, of course, exempt from his bankruptcy. Before she could pursue this claim, Green had to convince the court to allow her to pursue it.

In both cases, the two courts had to decide whether Re Schreyer, a Manitoba bankruptcy case decided by the Supreme Court of Canada, applied.

In that case, Anthony Schreyer had assigned himself into bankruptcy after his wife, Susan, made a matrimonial property claim. One of his assets was a farm that he solely owned. He did not notify his wife about his bankruptcy, nor was she listed as a creditor in the bankruptcy, although she later became aware of it.

By the time other steps in the matrimonial proceeding had been completed and the wife proceeded with her equalization claim, Anthony had been discharged from bankruptcy, but had retained his farm, since, like a pension, a farm is also exempt property.

The Supreme Court of Canada decided Susan had lost her chance to equalize Anthony’s exempt asset (the farm) because her claim for an equalization of net family property was “provable in bankruptcy,” that is, she should have made a claim in his bankruptcy proceeding.

The Schreyer decision turned on whether the Manitoba family property legislation was one that allowed a proprietary claim or an equalization claim.

If a spouse’s claim is for a division of property, it is a proprietary claim, which means the non-property-owning spouse actually has an interest in the property owned by the other.

On the other hand, if property is equalized, each spouse continues to own his or her assets both before and after the marriage, and the equalization regime simply requires a cash payment be made by one to the other to equalize what the couple accumulated during the relationship.

In Re Marino, Prowse had to consider the nature of Alberta’s family property legislation to decide whether Traci Marino could pursue her claim against Marco Marino’s pension.

Because Prowse decided that the Alberta Matrimonial Property Act requires a division of the spouses’ property, he decided that Traci’s claim was not “provable in bankruptcy,” meaning she did not have to compete with her husband’s other unsecured creditors in the bankruptcy.

Although there were numerous other procedural hurdles Traci still had to cross after the decision, she was lucky: the decision meant she could claim her share of the pension because she had an interest in the pension by virtue of the property division regime created by Alberta’s family property law.

Green was not nearly so lucky when it came to Galeano’s pension.

Justice Stanley Kershman accurately characterized Ontario’s Family Law Act as an equalization jurisdiction. The debtor-creditor regime established by the Act simply requires that a cash payment be made from one property-owning spouse to the other. That means that Galeano’s pension — although an asset exempt from bankruptcy — was simply one more asset that should have formed part of Green’s equalization claim.

Unlike Traci Marino’s claim in Alberta, Kershman found that Green’s claim against Galeano’s pension in Ontario was provable in bankruptcy. By not making her claim before Galeano was discharged, Green lost her chance to equalize his pension.

Obviously, when it comes to family property and bankruptcy, location is everything.