Knight (Re), 2012 ABQB 759

Court of Queen ’ s Bench of Alberta Citation: Knight (Re), 2012 ABQB 759 Date: 20121212 Docket: BE03 154527 Registry: Edmonton Between: In the Matter of the Bankruptcy of Donald Edward Knight _______________________________________________________ Memorandum of Decision of J.B. Hanebury, Registrar in Bankruptcy _______________________________________________________ [ 1 ] Mr. Knight claims a $20,000 exemption from his share of the sale proceeds of the matrimonial home in 2006. The sale was a voluntary sale, in other words it was not as a result of steps taken by a creditor.

The proceeds were paid into trust as he and his wife had separated and had not settled their matrimonial property. In 2009, Mr. Knight assigned himself into bankruptcy. [ 2 ] In completing his statement of affairs in 2009 Mr. Knight did not claim the sale proceeds as exempt. He did state that he had exempt property in Crane Lake, Ontario as of January, 2007. [ 3 ] In November, 2011, as Mr. Knight and his wife had settled their matrimonial property dispute and divorced, the proceeds were released from trust, and paid to the trustee. At that time Mr.

Knight wrote to his trustee to advise her that he had directed that the funds be forwarded and that he was claiming his share of the principal residence exemption in the sum of $20,000.00. He added that “[a]s you stated, upon receipt of the funds...BDO will apply to the Bankruptcy Court for their determination of the ownership for these funds.”

[ 4 ] The trustee brought this application and opposed the claimed exemption, arguing that the proceeds should be divisible among Mr. Knight’s creditors. Mr. Knight appeared, unrepresented. The trustee provided no brief or case law and stated that the law was clear. However, the matter is more complex than it might appear [1] . [ 5 ] Ultimately, as a result of a number of letters from the Court requesting sworn affidavits of the facts, further material was filed and the parties were invited to make further submissions, if necessary. The trustee chose to file a letter referring to certain case law.

This process took a number of months. FACTS [ 6 ] The following facts can be determined from the materials provided. [ 7 ] The Statement of Affairs signed by Mr. Knight at the time of his bankruptcy in 2009 lists two funds held in lawyers’ trust accounts that are “tied up in matrimonial proceedings.”. The first sum is $55,000.00, the proceeds of the sale of the matrimonial home and the second is $53,000.00, the proceeds of the sale of the Crane Lake cottage in Ontario. The Statement lists neither fund as exempt property. However the statement says: “Sold principal residence in Crane Lake, ON in January 2007.

Equity of $53,000 is being held in lawyer’s trust account subject to the matrimonial proceedings." [ 8 ] In addition to the Statement of Affairs, the trustee filed an affidavit from Mr. Knight’s former spouse. She states that she and Mr. Knight were married from 1981 until 2010. They owned and operated a restaurant in Canmore, Alberta. At that time they owned the house that is now in issue. [ 9 ] In February, 2006, Ms. Knight moved to Fort McMurray for work as she had lost her temporary position as a teacher in Canmore and they needed money to support the family and the restaurant.

The restaurant closed the next month as the rent had not been paid. [ 10 ] In July, 2006, a domestic dispute occurred and the parties separated and Ms. Knight was required to remove her things from the house. [ 11 ] The house was listed for sale and an offer received in September, 2006, closing Dec. 22, 2006. The first mortgage had not been paid for several months and was apparently in foreclosure. In or around October, 2006 Ms. Knight received a call from a neighour advising that a notice had been taped to the door stating that the power was going to be disconnected due to non payment. Ms.

Knight arranged to pay the arrears. She says that “it is my belief that the house was vacant and not occupied by my ex-husband from the time he moved to Sylvan Lake from Canmore.” [ 12 ] Mr. Knight filed three affidavits, all of them brief. He states that he and his ex-wife separated on July 10, 2006. In August, 2006 the house was listed for sale, an offer was accepted in September, 2006 and the sale closed in December, 2006. The net proceeds were placed in trust with a lawyer along with the funds from the sale of a vacation property, ie. the Crane Lake property.

When the divorce was finalized the trust funds from the sale of both properties were disbursed and his share went to his trustee as he was then bankrupt. [ 13 ] He states that he and his son occupied monthly furnished temporary accommodation in Sylvan Lake from Sept. 5, 2006, until after the sale of the Canmore house.

He says that he moved to Sylvan Lake to “attempt to seek new career employment with no guarantee of success.” He says they returned to Canmore whenever they could on the weekends and all of his belongings and furnishings remained in the Canmore residence until two days prior to the closing of the sale. His daughter and a friend were occupying the residence from September until the closing of the sale in December, 2006. She worked in Banff and Canmore during this period. He states that he moved back into the house December 14 until the sale closing date. ISSUE

[14] The question before the Court is whether Mr. Knight is entitled to an exemption of $20,000 of the sale proceeds from theCanmore house which proceeds were paid into trust prior to his bankruptcy but only available for distribution subsequent to hisbankruptcy. That question raises two legal issues: (

a) Does provincial exemption legislation apply to property received subsequent to an assignment in bankruptcy? (

b) Does the property claimed exempt comply with the requirements found in the Civil Enforcement Act Regulation? ANALYSIS Does provincial exemption legislation apply to property received subsequent to an assignment in bankruptcy? [15] Section 67 (1)(

b) of the Bankruptcy and Insolvency Act R.S.C. 1985 c. B-3 (BIA) is the place where the analysis of thisquestion must start. It provides that the property of a bankrupt divisible among his creditors shall not comprise “any property that asagainst the bankrupt is exempt from execution or seizure under any laws applicable in the province within which the property is situatedand within which the bankrupt resides.” [16] Section 67(1)(

c) provides that the bankrupt’s property divisible among his creditors shall comprise property not otherwiseexcluded in the prior paragraphs and all property “that may be acquired by or devolve on the bankrupt before their discharge.” [17] There has been some judicial discussion of how to resolve these two paragraphs in relation to property that would otherwisebe exempt that is acquired after the date of bankruptcy. Does it come within s. 67(1)(

b) as exempt property not divisible among creditorsor does it come within s. 67(1) (

c) as after-acquired property that is divisible among a bankrupt’s creditors? [18] The interplay between s. 67(1)(

b) and (

c) was addressed by the Saskatchewan Court of Appeal in Monteith (Trustee of) v.Monteith, 2004 SKCA 63. In considering which of the two provisions took precedence, it held that clause 67(1)(c), the clause dealingwith after-acquired property, was to be construed in light of clause (

b) which allowed for provincial exemptions. As a result, no matterwhen exempt property was acquired, either before or after the assignment into bankruptcy, the exempt property does not form part of thebankrupt’s estate available to his creditors. It is the property’s exempt status that is important, not when it is acquired. [19] In coming to this conclusion the Court cited extensively from the Supreme Court of Canada decision in Royal Bank ofCanada v.

North American Life Assurance Co, (SCC), [1996] 1 S.C.R. 325, which held that s. 67(1) is directed at theexercise of administrative powers over the estate by the trustee, who cannot exercise distribution powers over exempt property. In thatcase the Court ultimately set aside a transfer of an interest in a RRIF to the bankrupt’s spouse that occurred prior to the bankrupt’sassignment. The Court held that upon the return of the RRIF to the bankrupt’s estate, it constituted exempt property. [20] This approach has also been followed in Alberta. In Alberta Treasury Branches v.

Samco Holdings Ltd., 2003 ABQB 963, atthe time of the assignment into bankruptcy, the sale proceeds resulting from the voluntary sale of a principal residence were in a lawyer’strust account as they were subject to a dispute. The Court found that they were exempt property. [21] Therefore, even if the proceeds of the sale of Mr. Knight’s property came into the estate well after his assignment, they can besubject to provincial exemption legislation. That leaves before the Court the question of whether the sale proceeds meet the criteria forexempt property.

Does the money claimed exempt meet the requirements for exempt property found in the Civil Enforcement Act Regulation?

Does the money claimed exempt meet the requirements for exempt property found in the Civil Enforcement Act Regulation? [ 22 ] Section 67(1) (

b) of the BIA incorporates provincial exemption legislation into the federal bankruptcy scheme. In Alberta the relevant provincial law is found in

section 88 of the Civil Enforcement Act , RSA 2000, c. C-15 ( CEA ), and

section 37 of the Civil Enforcement Act Regulation , Alta. Reg. 276/1995 (CEA Regulation). [ 23 ]

Section 88 of the CEA states: Subject to

section 89, the interest of an enforcement debtor in the following is exempt from writ proceedings:… (

g) the principal residence of an enforcement debtor, including a residence that is a mobile home, up to the value prescribed by the regulations for that residence... (

j) any property as prescribed by the regulations. [ 24 ] Subsections 37(1) (

e) and 37(2) (

a) of the CEA Regulation state: 37 (1) ... (

e) the maximum exemption for a principal residence referred to in

section 88(

g) of the Act is $40,000. (2) in addition to the property referred to in

section 88 of the Act, the following property is exempt from writ proceedings: (

a) where an enforcement debtor sells ... ( ii) property that is exempt up to a prescribed value, the proceeds from that sale, or the proceeds from that sale up to the stated value, as the case may be, are exempt for a period of 60 days from the day of the sale if those proceeds are not intermingled with any other funds of the enforcement debtor;… [emphasis added]. [ 25 ] Historically there was no legislated exemption for sale proceeds resulting from a voluntary sale of a principal residence by its owner.

However that protection was added by way of a regulatory change in 1996 [2] . [ 26 ] To meet the requirements for this exemption: the house must be the debtor’s principal residence; the funds must not have been intermingled with other funds of the debtor; the exemption continues for 60 days from the day of sale; and the house must be sold by the enforcement debtor. Only if these criteria are met can Mr. Knight claim his share of the $40,000.00 exemption. Was the Canmore home Mr. Knight ’s principal residence?

[27] The first and most fundamental question in dispute is whether Mr. Knight’s Canmore home was his principal residence as theprovincial exemption for the sale of a house is contingent upon that house being the debtor’s principal residence. [28] There has been little judicial discussion of when a house is a principal residence. [29] In Re Currie 2000 ABQB 71 , [2000] 258 A.R. 303, Bielby J., as she then was, referred to a decision of RegistrarMcCallum in Re Clarke, 2000 BCSC 77.

In that case the family had vacated and rented their home because of poverty, but neverabandoned the intention to return when their circumstances improved. He found that they did not lose the exemption. He found that inthe absence of actual occupation, intention and context must govern a determination of principal residence.

Physical presence, while agood indicator of principal residence, is not the sole indicator. [30] Relying on this decision, Bielby J found that just because a debtor has possession of rental accommodation does not, in and ofitself, result in the conclusion that the matrimonial home is not her principal or leading residence. One need not be present every day tomeet the requirement.

However, when someone no longer has a realistic expectation of returning to the residence at some time, it isunlikely to be their principal residence. [31] In Thow, Re, 2010 BCSC 1561, the Court said that the onus is on the party claiming an exemption to “show that he had arealistic expectation of returning to the residence, or that his absence was only of a temporary nature, or that he had not abandoned theresidence as his principal residence, or that the residence remained his ‘home base’.” In that case the bankrupt swore that he had left thecity where the house at issue was located permanently in August of 2005.

He was declared a bankrupt the following month. The Courtfound the house was not his principal residence. [32] In the case of Estate of Kelly Wayne Alexander, Estate no. 25-703063, (Master, unreported), Lethbridge, December 15,2011, the debtor moved out of the family acreage and rented it while the family was out of province and he sought work. The debtor saidhe planned to return and had left behind a good deal of his furnishings and personal effects. Eventually he put the property up for saleand moved to rental accommodation near his new job.

This was done to come up with the $11,000 necessary to complete his bankruptcy.The Court found that he had not abandoned the acreage. [33] In this case Mr. Knight had lived in Canmore since 1981 and the house was the family home. In August, 2006, his wife hadmoved out permanently and he was in serious financial difficulties. Neither the utilities nor the mortgages were being paid. He and hisson went to Sylvan Lake, to temporary furnished accommodation to look for work after he and his wife had put the house up for sale. Hispersonal effects and furnishings remained in the house.

He and his son returned to the house on the weekend two or three times a month.I accept that his daughter lived there in the fall as Ms. Knight had no personal knowledge of the house being vacant. The failure to payutilities does not necessarily mean a house is vacant or abandoned. An offer on the house was made and accepted in September and onlyat closing did Mr. Knight remove his personal effects and furnishings. [34] While Mr.

Knight obviously had no intention to return to the home permanently when he and his son went to Sylvan Lake, asit was being sold, he has satisfied me that it had been and continued to be his home base during that period. It was not abandoned by him.Therefore, it was his principal residence. [35] As to the next requirement, it has not been suggested that the funds from the Canmore sale were intermingled with other ofMr. Knight’s funds. Therefore, the two requirements remaining for consideration are whether the exemption has expired due to thepassage of more than 60 days from the day of sale and whether Mr.

Knight was an enforcement debtor at the day of sale. Has the exemption expired due to the passage of time? [36] To determine whether the exemption still exists the first step is to determine what is the day of sale: is it the date when thetransaction closes, which in this case was in 2006, or is it when the funds become available?

[ 37 ] In Re Thorne , 2004 ABQB 83 , Registrar Laycock considered when the 60 day exemption commenced in relation to insurance proceeds from an exempt vehicle. The vehicle was in an accident before the owner went bankrupt and the proceeds were received after the assignment. He held that the date of sale was the date that the funds were received, as to use an earlier date would result in the reduction of the statutory 60 day exemption period.

The legislature, he said, must have intended the debtor to have 60 days from the receipt of the sale proceeds to decide what to do with the funds and initiate the purchase of a replacement asset that would not be available to the creditors. [ 38 ] The question of what determined the day of sale [3] was considered by Belzil J. in Cziborr v. Hamilton , 2009 ABQB 694 . In that case the owner’s land was in foreclosure and in December, 2004, an order was granted confirming a sale.

The owner was present in court at the time of the order and was told that the funds would either go to her or to Canada Revenue Agency, a writ holder. The order provided that the funds be paid into court and be paid out on notice. The sum of $40,000.00 was paid into Court on November 10, 2005. Apparently Canada Revenue Agency had the former owner consent to payment out to the Agency but it never proceeded with the order and did not obtain the funds. Two years later, in December, 2007, the owner made an assignment in bankruptcy and her trustee applied to have the funds paid out for distribution to her creditors.

The Court held that the sixty day period started to run when the funds were paid into Court.

In coming to this determination the Court took into account the fact that the bankrupt was aware of the fact that funds from the sale were to be paid into Court and also knew when they had been paid in and were therefore available [4] . [ 39 ] The principle underlying this case law is that in the context of s. 37(2) the day of sale occurs when the funds are available and the bankrupt knows that they are available. [ 40 ] This approach by the Court is in line with the context of the underlying scheme and purpose of the legislation. [5] Exemptions legislation originated in the 18 th and 19 th centuries in certain southern and western American states in response to broad economic depressions.

The exemption for a homestead was unknown at common law and its enactment was seen as a way to help people in hopeless situations rebuild their lives. The legislation was also used to attract settlers to the frontier areas. [ 41 ] In Canada exemption legislation was first passed in 1884 in the Northwest Territories, which was the source of the present Alberta provisions. Exemption legislation protecting principal residences is now found in all jurisdictions in Western Canada. [ 42 ] The purpose today has evolved and the goal is to protect debtors from losing all means to support themselves and their families.

The legislation is seen as preserving a debtor’s ability to survive and earn a living, thereby contributing to their rehabilitation. Lo Vecchio J. explained the goal in Mutter (Re) , 2010 ABQB 312 at para. 21 : The purpose of the exemption is to permit a bankrupt to retain some small portion of their assets in order to give them a minimal financial stake in life when they emerge from the bankruptcy process.

Hopefully, this minimal financial stake permits the bankrupt to attempt to rebuild their life, relying on their own resources. [ 43 ] The 1996 regulatory change adding a further protection for a maximum of $40,000.00 of the proceeds of sale of a principal residence is another example of this thinking. Its purpose is to allow the debtor to secure another residence. If he or she fails to claim the sale proceeds within sixty days, then the scheme provides that the protection comes to an end and the proceeds are no longer exempt from the creditors. [ 44 ] In this context, the only sensible

interpretation of “day of sale” is that found in the above case law: the date at which the sale proceeds become available. Whether they become available as a result of a court order or as a result of a settlement of a matrimonial dispute, in my view, makes little difference. Until the funds were released from trust they were not available to Mr. Knight as his entitlement to them was in dispute. [ 45 ] The trustee makes much of the fact that Mr.

Knight’s 2009 statement of affairs says that as of January, 2007, his principal residence was in Crane, Lake Ontario and he did not declare the funds from the sale of the Canmore residence as exempt in his statement of affairs. First, by that time possession of the Canmore house had transferred to the new owners. The only remaining property owned by

Mr. Knight in January, 2007, was the Crane Lake property and therefore it is not surprising that is the property referred to in the statement of affairs as his principal residence [6] . [ 46 ] Furthermore, I note that the statement of affairs is usually filled out in the trustee’s office with the assistance of a trustee and neither the trustee nor the debtor may have been aware of the nuances of the terms “principal residence” nor “date of sale”. [ 47 ] A failure to claim this exemption is fatal if it occurs within the 60 days from the day of sale.

In this case the earliest possible date for the day of sale is the day when the proceeds were released to the trustee, and by that time Mr. Knight had claimed the exemption. Was the house sold by the enforcement debtor? [ 48 ] The final requirement is that the house is sold by the enforcement debtor. An enforcement debtor is someone against whom a writ is in force. Was Mr.

Knight an enforcement debtor when the house was sold? [ 49 ] As discussed in Samco Holdings Ltd. , (supra), the incorporation of the provincial exemptions legislation into the regime under the BIA is triggered by the assignment into bankruptcy, not a writ proceeding, with the result that upon bankruptcy there is no enforcement creditor or debtor required to utilize the exemption provisions of the Civil Enforcement Act and regulation. [ 50 ] As the day of sale occurs when the funds become available, which in this case is during the bankruptcy period, there is no requirement that the sale be by the enforcement debtor.

That requirement is met with Mr. Knight’s bankruptcy which was in effect at the day of sale. CONCLUSION [ 51 ] The sum of $20,000.00 is to be released to Mr. Knight. The balance of the sale proceeds received by the trustee is for the benefit of the creditors. Heard on the 1 st day of May, 2012 and the 5 th day of June, 2012, with further materials subsequently filed. Dated at the City of Calgary, Alberta this 12 th day of December, 2012. J.B. Hanebury Registrar in Bankruptcy Appearances:

Sharon P. Stapley BDO Canada Limited (Trustee) Donald E. Knight [1] This absence of legal analysis from the trustee ’ s office is understandable when the question put before the Court does not relate to funds in the trustee ’ s account. However, when there are funds available, the usual process is for the trustee to obtain a legal opinion and then, if the matter remains disputed, bring the question to the Court, along with the brief on the issue. [2] The background that led to the exemption of sale proceeds for 60 days in certain voluntary sale situations was outlined in Samco Holdings Ltd. (supra).

Ultimately the government acted on a change recommended in a 1991 Alberta Law Reform Institute Report which suggested that: If the total equity [in a debtor ’ s home] is above $40,000, and the house is sold, $40,000 should continue to be exempt for a period long enough to allow the debtor a reasonable opportunity to use it to secure alternative accommodation. We think that an appropriate period would be six months. During that period, the debtor ’ s equity should be exempt as long as it can be identified as the exempt portion of the proceeds of the sale.

Enforcement of Money Judgments (Report No. 61) (Edmonton: Alberta Law Reform Institute, March 1991), vol.1, at 271. [3] It is unclear how the 60 day provision applied in this instance as the sale was not a sale by the bankrupt but by a creditor. [4] Similarly in Samco Holdings Ltd. (supra) the date of sale was found to be when the sale proceeds were available.

In that case the disposition of the sale proceeds was in dispute and they were held in a lawyer ’ s trust account at the time of the assignment into bankruptcy. [5] Creditor Debtor Law in Canada (2 nd ed.) (1995 Carswell: Scarborough, Ont.) p. 453-455, 470-471. [6] It was sold in early 2007 and the proceeds of that sale also recently released to the trustee. No claim has been made against those proceeds.