Dumont (Re), 2013 ABQB 692

Court of Queen ’ s Bench of Alberta Citation: Dumont (Re), 2013 ABQB 692 Date: 20131126 Docket: B103 1692398 Registry: Edmonton In the Matter of the Bankruptcy of Charlene Frances Marie Dumont _ ________________________________________ ______________ Reasons for Judgment of W. S. Schlosser , Registrar in Bankruptcy _________________________________________ ______________ [ 1 ] This is an application for a conditional discharge.

The particular issue is whether a lump-sum retroactive child support payment, received after the date of bankruptcy, ought to be included in the calculation of the bankrupt’s surplus income. [ 2 ] The bankrupt is a custodial parent with two dependants, aged 12 and 19. If the child support payment is not included, the Bankrupt’s average monthly net income falls below the Superintendent’s standard for a family of three. If the payment is included, about half of the lump sum payment would be surplus payable into the estate for the benefit of creditors.

This latter amount is arrived at by following example five in Directive 11R2. [ 3 ] In my view, this amount should not be included, at least without more. [ 4 ]

Section 68 of the Bankruptcy and Insolvency Act was amended in the face of conflicting authorities at various levels. If Parliament had intended to include this amount in

section 68 or, for that matter, if the Superintendent had intended to have retroactive lump-sum child support payments included in the calculation of surplus income, the Statute and the Directive could plainly have said so. It is my view that it is appropriate to presume that the silence with respect to this item is deliberate, particularly in the face of conflicting authority and reflects an intention to exclude this item. This is all the more so when what is at issue is interference with what are, in essence, vested third party rights. [ 5 ] The cases are mixed. The initial division is whether the lump-sum payment should be treated as “property”, for the purposes of

section 67; in which case it would be wholly divisible among the creditors, or “income” for the purposes of

section 68; in which case only a portion of it might flow to the estate. [ 6 ] In the leading pre-amendment case of Re O’Brien, 2005 ABQB 235 , Registrar Laycock found that a similar lump sum payment (both in kind and amount) should be included under

section 68 . At paragraph 17 of his decision he noted that child support was taxable as income until 1997 (at which point

section 56.1 of the Income Tax Act came into effect). He concluded that a lump sum is income typically intended to offset household expenses and therefore should be treated as ‘income’ for the purposes of

section 68 of the BIA . The decision does not tell us what period the arrears covered: (whether pre or post bankruptcy).

[7] The learned Registrar acknowledged that there appeared to be no Canadian authorities directly on point and that the US caselaw was mixed. He noted that in the US decision, Re Poffenbarger, 218 BR 379, Chief Bankruptcy Judge Mahoney would not find childsupport arrears to be “property” of the bankrupt. She treated them as trust funds but noted that this view varied from State to State, partlyas a function of State law. [8] Canadian Trustees customarily treat monthly child support payments and arrears payments as income in the hands of thecustodial parent. [9] In 2005 when Re O’Brien was decided,

section 68 was quite different from what it is now. The definition of total incomewas broad and unqualified. Income was simply “ ... all revenues of a bankrupt of whatever nature or source; ...” [10] At an earlier time, determining surplus was entirely in the discretion of the court. It was a balancing exercise between theinterests of the bankrupt, the bankrupt’s family and the interest of the creditors. Determining surplus income remains within theoverriding discretion of the court but Directive 11R, now Directive 11R2-2011, is the starting point. [11] Existing section 68(2)(

a) was the result of a 2005 amendment, proclaimed in force September 18, 2009. The definition of total“income” now reads: “Total income” (

a) includes, despite paragraphs 67(1)(

b) and (b.3), a bankrupt’s revenues of whatever nature or from whatever source that areearned or received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge, including those receivedas damages for wrongful dismissal, received as a pay equity settlement or received under

an Act of Parliament, or of the legislature of aprovince, that relates to workers’ compensation; but (

b) does not include any amounts received by the bankrupt between the date of the bankruptcy and the date of the bankrupt’sdischarge, as a gift, a legacy or an inheritance or as any other windfall. [12] The only reference to child support in Directive 11R2-2011 is that it should be subtracted from the available monthly incomeof the payor.

I acknowledge that ‘net child support’ is to be disclosed under monthly income in Form 65 but, in my view, the requirementto disclose is not determinative of how it should be treated at law. [13] Neither the definition of total income in section 68(2) of the BIA, nor example five in Directive 11R2 speak of lump-sum childsupport payments – retroactive or not. Instead they use examples: ‘wrongful dismissal damages or a pay equity settlement’; both of whichwould be in the nature of lost wages or earnings. This is probably a reflection of the decision in Re Landry, (2001) 21 CBR (4) 58(Ontario CA).

In that case the court preferred to treat a lump-sum wrongful dismissal award received after the date of bankruptcy asincome for the purposes of

section 68 rather than treating the chose in action underlying it and the resulting settlement as property for thepurposes of

section 67. [14] The marked division in the authorities about whether this type of payment ought to be available to creditors makes theomission of child support in the amendment of

section 68 particularly puzzling, or, perhaps, particularly telling. [15] In Re Neufeld (1994) (AB KB), 13 Alta LR (3d) 16, Registrar Albertstat found that a child’s disability taxcredit, even though it could be transferred to the parent, was not intended for the benefit of creditors.

A similar conclusion was reachedby Registrar Ferron in Re Berton,(1994) (ON SC), 27 CBR (3d) 238, which concerned the child benefit portion of theCanada Pension Disability Benefit. [16] Registrar Lee reached the opposite conclusion with respect to disability tax credits in Re Sobieski, (1997) (MB KB), 45 CBR (3d) 272 (affirmed) (1997) (MB KB), 2 CBR (4th) 70 (Man. Q.B.) and see also Re Nixon, (2001) 2001 SKQB 221 , 25 CBR (4th) 74 per Registrar Herauf (Sask). [17] Registrar Waller followed the approach taken in Re Sobieski in Re Henderson, 2003 ABQB 877. Neufeld, Berton, Sobieski,Nixon and Henderson are all

section 67 cases. [18] In Re Bowerbank-Buckley [2007] OJ No. 5722, then Deputy Registrar A. M. Diamond concluded, with respect to disabilitytax credits that the bankrupt became aware of post-discharge: 34 Here [distinguishing Re Landry] there was no such reservation of the right. As a result, I conclude that these funds are not“income of a bankrupt” as defined in

section 68 of the BIA: the funds are properly payable to Ms. Bowerbank-Buckley and should bekept by her to pay for her children’s programs as she set out in her affidavit was her intent. 35 If I am wrong and it is determined that the funds are “income of a bankrupt” under

section 68 of the BIA, then the distribution ofthe funds is within the discretion of the court. In making a decision as to how the funds should be distributed I must to take into account the personal and family situation of the bankrupt, fix the amount that the bankrupt is required to pay to the estate of the bankrupt The Affidavit evidence, here is that, despite their discharges from bankruptcy. Both Ms. Bowerbank-Buckley in this case and Ms.Kusmirski in the companion case, are still in the direst of straights.

In making my decision I must also consider the integrity of thebankruptcy system as well as the intention of Parliament to support parents of disabled children combined with the Supreme Court ofCanada’s view that statutes should be interpreted in such a way to avoid the feminization of poverty. Having taken all of that intoconsideration, if these funds were held to be “income of the bankrupt”.

I would exercise the court’s discretion, so that the individualsretain the entire amount of the disability tax credits and that there be no obligation to pay any of it to their estates in bankruptcy. cf Re Duffney (2007), 2007 NBBR 142 , 32 CBR (5th) 72 per Registrar Bray- which concerned risk allowance or ‘danger pay’

for members of the armed forces and Re Smith (Sept. 1) 2009 NSSC 261, per Registrar Cregan – who concluded that a Veteran’s Affairsdisability pension should not be included in surplus. Incidentally, neither are taxable. [19] Registrar Diamond concluded that child support should be treated as income of the child in Baird v. Neeb [2007] OJ No. 1787, (2007) 30 CBR (5th) 283. He took this somewhat novel approach saying: 16 Having determined that the lump sum child support payment is not an asset of the estate, the question that arises is: how should itbe dealt with under the BIA?

Generally, in order to calculate the appropriate surplus income obligation of the bankrupt, one needs to takeall income of the household (including child support, spousal support and third party income) into account. Once this is done one mustcalculate the bankrupt’s percentage contribution to the family’s total monthly income.

The bankrupt is obliged to pay the appropriatepercentage of her contribution to the family’s surplus income that are above the appropriate standard amount of the size of the family inquestion. [20] He continued, citing Re O’Brien, saying: 18 I agree with the learned Registrar that the spousal support payment is income of the bankrupt custodial parent for the purposes ofcalculating the bankrupt’s surplus income.

However, with all due respect, I disagree with the court in O’Brien, that the child supportpayment should be included in the bankrupt custodial parent’s income for the purposes of calculating their surplus income obligationsunder

section 68 of the BIA. Such a determination is, to my mind, inconsistent with the law of Canada cited above that the right of suchpayments is the right of the child not that of the custodial parent. As a result, I am of the view that the appropriate way to account forchild support payments in a bankruptcy of a parent is to include the payments in the total of the family income but not in the incomeattributable to the bankrupt. 19 The entitlement to the child support payment is that of the child, as a result the income should also be attributed to the child.

Thesurplus income obligation is calculated based on the bankrupt’s percentage contribution to the total household income. Treating the childsupport payment as income of the child for the purposes of

section 68 of the BIA is no different than the normal treatment of regularincome that older children, on occasion, bring into a household where a parent has made an assignment in bankruptcy. (emphasis added) [21] These remarks were made when

section 68 was at its widest, before the amendment was proclaimed. Child Support [22] Child support is the right of the child: Richerson v. Richerson (SCC), [1987] 1 SCR 857. An incidentalbenefit to a custodial parent will not alter the amount: Horner v. Horner (ON CA), [2004] OJ No. 4268 and S(DV)v. G(SR), 2005 ABCA 2. The child has the right to apply for the support: Family Law Act, RSA 2003 c. F-4.5,

section 46(b). It is theparent’s obligation to support the child: Family Law Act,

section 49. The obligation is fiduciary in nature S (DV) v. G (SR), 2005 ABCA2 at para. 15 per Paperney, JA. The court can order support paid directly to the child Family Law Act

section 66(f). The Family Law Actalso allows the Court to impose a trust (but usually only if there is mischief). [23] Parents can establish an express trust. This, of course, would be particularly relevant to section 67(1)(

a) of the BIA. [24] A child support payment is close to being the property of the child, though there may not be a formal trust. (Perhaps the ideaof a quasi-trust is appropriate). The child’s right to payment in arrears is virtually (or essentially) a vested right. Textual Analysis [25] ‘Revenue’ used in both the old and new versions of

section 68 is probably broad enough to catch child support payments andarrears. This is how Registrar Laycock interpreted it in Re O’Brien. However, I note that the examples added to the amended subsectionare not consistent with including child support. The examples are all in the nature of wages or earnings and seem to be different in kind.It might be argued that this amendment to

section 68 was made in 2005 and not proclaimed until 2009. Baird was decided in 2007. But itis notable that these amendments were made in the face of unsettled law and conflicting decisions. The division in the decided cases wasfirmly entrenched by 2005, though it was amplified somewhat by Registrar Diamond’s two decisions in 2007 and not resolved onproclamation. [26] The failure to refer to child support in section 68(2) ‘total income’, or in the relevant portions of Directive 11R2 itself istelling.

One can presume that the failure to mention child support is deliberate and “reflects an intention to exclude the items not mentioned” Sullivan on the Construction of Statutes, 5th Edition, Ch. 7, page 244. Purposive Analysis [27] Interpreting section 68(2)(

a) now to include retroactive child support, would be contrary to a purposive of

interpretation of theAct for the reasons set out by Registrar Diamond in the two cases cited above. ‘Temporal’ Analysis [28] The common law presumes is that legislation does not affect vested rights unless this intention is clearly expressed. Althoughthe presumption is typically applied in the context of whether legislation has retroactive effect, it is useful and instructive in this context.Interpreting section 68(2)(

a) to include child support arrears would be contrary to the tenet of statutory

interpretation that clear and

unequivocal language is required to interfere with the vested rights of a third party, as would be the right of the child to the payments in arrears. ( Sullivan, Ch. 24 at p. 711 et seq . and the cases cited there.) Conclusion [ 29 ] For all of these reasons it is my view that a lump-sum payment of retroactive child support should not be included in the calculations of surplus income as would a lump sum payment of the types referred to in section 68(2)(

a) and the fifth example in Directive 11 R2. [ 30 ] In this age of high tuition I do not know that we should begin with the presumption that the child support will go to household expenses. The 19 year old might well be using it to offset post-secondary expenses. And, parenthetically, (perhaps with respect to the 12 year old dependent) I note that our Civil Enforcement Act has just been amended to keep RESP’s out of the hands of creditors. [ 31 ] Excluding retroactive lump-sum child support payments from the surplus calculations should not be a hard and fast rule.

It is possible to imagine a scenario in which a custodial parent had run up debts to discharge their fiduciary obligation to support their children and that this precipitated the bankruptcy. In those circumstances a creditor might fairly object to the exclusion of a lump sum payment in the sense that they are simply asking to be paid back. However, in the ordinary course, and without more, it is my view that neither

section 68 of the BIA nor the Directive should bear that

interpretation. [ 32 ] If the Bankrupt has otherwise complied with her duties, she should be discharged. Heard on the 25 th day of September, 2013. Dated at the City of Edmonton, Alberta this 26th day of November, 2013. W. S. Schlosser Registrar in Bankruptcy Appearances: Freida Richer Grant Thornton Alger Inc. Trustee in Bankruptcy for the Bankrupt