Stanley v Stanley, 2015 ABQB 773

Court of Queen ’ s Bench of Alberta Citation: Stanley v Stanley, 2015 ABQB 773 Date: 20151207 Docket: 4813 005207 Registry: Ft. McMurray Between: Herbert James Stanley Plaintiff - and - Tamara Ann Stanley Defendant In the Matter of Application by MNP Ltd., Trustee of the Estate of Herbert James Stanley, a bankrupt _______________________________________________________ Reasons for Decision of the Honourable Mr. Justice M. David Gates _______________________________________________________ Introduction

[ 1 ] The Applicant, Myers Norris Penny Ltd. (“MNP”), Trustee of the Estate of Herbert James Stanley, a bankrupt, seeks to vary the Order of Sullivan J dated June 23, 2015, in which he directed that $30,226.71, the remaining proceeds from the sale of the matrimonial home owned by the Plaintiff, Mr.

Stanley, and the Defendant, Tamara Ann Stanley, be paid to the Defendant in exchange for the cancellation of all child and spousal support arrears owing by the Plaintiff from the period May 1, 2013 to June 30, 2014. [ 2 ] Sullivan J’s order repeated an earlier consent order dated June 13, 2014, in which Nixon J confirmed the parties’ agreement that the entire net sale proceeds would be paid to the Defendant. [ 3 ] The Plaintiff filed an assignment in bankruptcy on May 14, 2014.

MNP seeks one half of the total net sale proceeds, $25,113.35, from the funds remaining in trust, and asks the Court to direct the release of the balance of the funds to the Defendant. [ 4 ] This application was heard on August 12, 2015, in Fort McMurray, Alberta. The Plaintiff was represented by MNP, the Trustee in Bankruptcy. The Defendant, a self-represented litigant, appeared in person. At the conclusion of the application, I adjourned to consider the matter. These are my reasons for decision. Background [ 5 ] The essential facts are not in dispute.

The parties were married in Port Hood, Nova Scotia, in October 1998. They separated in July 2012 in Fort McMurray, Alberta. There are four children of the marriage, currently ages 16, 15, 13, and 11. They have resided with the Defendant since the date of separation. [ 6 ] On April 16, 2013, Erb J granted an interim without prejudice order for $2,313 in monthly child support payable by the Plaintiff to the Defendant. She also ordered $1,000 per month of uncharacterized support.

Both amounts were to be paid commencing May 1, 2013 and continuing on the first day of each and every month thereafter until further order of the Court. [ 7 ] On May 14, 2013, Wilson J ordered the matrimonial home listed for sale unless the Defendant could obtain financing within two weeks to purchase the Plaintiff’s interest.

The matrimonial home was sold to a third party and the net proceeds from its sale were placed in trust with counsel for the Plaintiff. [ 8 ] On June 26, 2013, Burrows J issued an interim order setting child support at $4,267 per month commencing July 1, 2013 and spousal support at $2,000 per month. The parties were to share all reasonable and agreed upon

section 7 expenses proportionate to their incomes. [ 9 ] On November 5, 2013, Jeffrey J ordered the release of $20,000 to the Defendant as an “uncharacterized payment” (the “Jeffrey order”), the characterization of which would be determined at a subsequent Special Chambers hearing.

The recitals to the Jeffrey order state that the Plaintiff was in arrears of $19,466.66 of child and spousal support. [ 10 ] The Jeffrey order also directed that the remainder of the net sale proceeds “will remain in trust until further order of the Court or agreement between the parties respecting their division.” [ 11 ] The parties did not conclude a matrimonial property agreement prior to the Plaintiff’s bankruptcy on May 14, 2014, and the funds remained in Plaintiff counsel’s trust account.

On June 13, 2014, the parties attended a JDR before Nixon J and entered into a consent order at its conclusion (the “Nixon consent order”). In the Nixon consent order, the parties agreed that the funds in trust would be paid to the Defendant to cover arrears in child and spousal support provided the Plaintiff “receives no obstruction from his bankruptcy proceedings”. [ 12 ] The Trustee objected, by way of letter dated June 16, 2014, to the transfer of the net sale proceeds to the Defendant, due to the intervening bankruptcy.

On June 23, 2015, Sullivan J made an order dealing with s. 3 child support and s. 7 expenses. He set the Plaintiff’s guideline income at $95,000 and directed payment of child support in the amount of $2,124 per month starting February 1, 2015. In paragraph 3 of his order, he directed that the $30,226.71 held in trust, the amount remaining of the net proceeds from the sale of the matrimonial home, be paid to the Defendant in exchange for the cancellation of all arrears "as contemplated in Nixon J’s order of June 13, 2014”.

The Trustee was not given notice of the application (in spite of the earlier Nixon consent order), so Sullivan J directed that the Bankruptcy Trustee be given 30 days to apply to vary the order. [ 13 ] On July 21, 2015, MNP filed an application returnable July 22, 2015 seeking one half of the original net proceeds of the sale of the matrimonial home. This application was ultimately adjourned to August 12, 2015 and heard before me in Fort McMurray.

Analysis [ 14 ] MNP argues that since the bankrupt and his spouse were the registered owners of matrimonial property as joint tenants, half the net sale proceeds are property of the bankrupt that vest in the Trustee by operation of law. [ 15 ] The Trustee’s analysis fails to acknowledge, however, that the home was sold almost one year before the bankruptcy and was no longer held jointly.

By the time of the bankruptcy, the home had been converted to liquid funds held in trust pending further order of the Court or agreement between the parties respecting their distribution, be it to the Plaintiff, the Defendant, or both. Neither party had an independent right or ability to draw on the funds. [ 16 ] The Trustee’s application also assumes that the Plaintiff is entitled to half the funds in trust arising from the sale of the matrimonial home.

Yet the Matrimonial Property Act , RSA 2000, c M-8 (“ MPA ”) provides that the value and distribution of matrimonial property is determined at the date of trial: Hodgson v Hodgson , 2005 ABCA 13 . Until trial, any and all matrimonial property is available to the parties to use as needed to meet their expenses, to satisfy child and/or spousal support obligations, etc. In this

case, the proceeds of sale from the matrimonial home are being held in trust, pending agreement of the parties or court order. [17] Furthermore, section 7(4) of the MPA states that the court shall distribute property equally unless it would not be just andequitable to do so, taking into consideration the factors set out in s 8. Among other things, s 8 requires consideration of the income,earning capacity, liabilities, obligations, property and other financial resources that each spouse has at the time of the trial; any priororders made by the court; and, any other fact or circumstance that is relevant.

The Plaintiff has no automatic entitlement to these funds;nor does the Trustee standing in his shoes. [18] Relying on s 71 of the Bankruptcy and Insolvency Act, MNP challenges the Nixon Consent Order and the Sullivan Order onthe grounds that these orders deal with the Plaintiff’s property after his declaration of bankruptcy and purport to distribute funds vestedin the Trustee. [19] I disagree with MNP’s assumption that the funds held in trust have vested in the Trustee. Section 67(1) of the BIA providesthat “the property of a bankrupt divisible among his creditors shall not comprise (

a) property held by the bankrupt in trust for any otherperson.” [20] In Re Acepharm (1999), (ON CA), 9 CBR (4th) 1 (Ont CA), reversing (1998), 6 CBR (4th) 17 (Ont GenDiv), the court found that money held in trust pending the outcome of litigation was not property of the bankrupt divisible amongcreditors, thus not vested in the trustee. The underlying litigation related to the beneficial ownership of a property and the relatedquestion of whether Acepharm was the equitable owner or a tenant of the property.

The monies in trust represented the disputed rentpayments that were ordered paid into trust pending Acepharm’s success or failure in asserting its ownership claim. [21] The three certainties for the creation of a trust, intention, subject and object, were determined to be present.

There was anintention to place rental payments into a trust account pending the outcome of the litigation; the rental payments were the subject-matterof the trust and the object was the determination of the litigation and the payment of the funds to the successful party. [22] The court held at para 12 that the funds were in every sense trust funds in the hands of the law firm.

Alternately, the courtheld that if the funds were not “held by the bankrupt in trust for any other person” within the meaning of the BIA, then the only propertythe trustee could reach was the bankrupt’s contingent interest and realize upon it by continuing the litigation to conclusion. [23] Similarly, in Re Greenstreet Management Inc. (2007), (ON SC), 38 CBR (5th) 307 (Ont SCJ), Morawetz Jconsidered the status of deposit proceeds paid into court in an action between the bankrupt Greenstreet and Bonnydon.

The underlyingaction related to an Agreement of Purchase and Sale in which Greenstreet agreed to acquire a parcel of land from Bonnydon. Pursuant tothe agreement, Greenstreet delivered two deposit cheques totalling $250,000 to Bonnydon’s solicitors in trust, pending the closing of thesale. The deposit funds were a guarantee for the performance of the contract, not just a part payment on account. [24] Greenstreet later disputed the validity of the agreement and commenced an action for misrepresentation.

The deposit proceedswere paid into court to be held pending further order of the court or the final adjudication of the action.

Subsequent to the payment intocourt, Greenstreet made an assignment in bankruptcy. [25] The Trustee argued that where funds are paid into court by a party who subsequently becomes bankrupt before entitlement tothe funds is finally adjudicated, the funds are the property of the bankrupt and, notwithstanding the pending litigation, must be paid tothe trustee to be distributed to the bankrupt’s creditors. [26] Morawetz J held that once the deposit proceeds were paid to Bonnydon’s solicitors in trust, they could no longer beconsidered property of Greenstreet in an absolute sense.

Greenstreet had no unilateral right to obtain the deposit proceeds or to call fortheir return. The required ingredients of a trust were present. Greenstreet no longer had control over the deposit proceeds and at no timeprior to its bankruptcy did Greenstreet regain control over them. Greenstreet had only a contingent interest in the deposit proceeds and itwas this interest that vested in the trustee.

The trustee did not have an absolute right to the deposit proceeds; they could only be returnedto Greenstreet in the event of a finding of default by Bonnydon or by mutual consent of the parties. [27] The same is true here. The funds are being held in trust pending the outcome of litigation between the Plaintiff andDefendant. The action is not only a matrimonial property action, but also a claim for divorce and corollary relief, including spousalsupport and child support.

The eventual entitlement to the funds in trust depends on the outcome of the matrimonial litigation as a whole. [28] In MRP v SRB, 2014 BCSC 149, Loo J considered the interplay between British Columbia’s division of property regime andbankruptcy law. The net proceeds from the sale of the parties’ matrimonial home were held in trust, half with the wife’s counsel and halfwith the husband’s counsel. The wife sought an order that the funds in trust be paid to her in accordance with an earlier order made in thefamily law proceeding. The trustee in bankruptcy sought an order that the funds be paid to it.

The case considered the impact of theSupreme Court of Canada’s decision in Schreyer v Schreyer, 2011 SCC 35, and the distinctions between the equalization model and thedivision of property model for distribution of family assets. [29] In Schreyer, LeBel J, writing for the court, described the equalization model in effect in Manitoba (Alberta is also anequalization jurisdiction). The equalization model of property distribution requires a valuation of family assets and an accounting at aparticular point in time. In Alberta, the relevant point in time is at trial.

The value of assets is divided between the spouses, usually inequal parts, although the courts have some discretion to order an unequal division. Assets are transferred only at the remedial stage, asagreed by the parties or as ordered by the family court in exercising its discretion, as a form of payment or execution of the judgment. [30] By contrast, the division of property model followed in British Columbia and considered by Loo J in MRP v SRB, gives rise toa proprietary or beneficial interest in the assets themselves, not just in their value.

In the normal course, each party to family lawproceedings is deemed to hold an undivided half interest in all the family property. On the facts, however, Loo J found that the fundsheld in the lawyers’ trust accounts could not be so characterized (at para 46):

...it is frequently common in family law litigation that when there are insufficient funds to satisfy the competing claims of the parties,the net sale proceeds of the former matrimonial home – generally, the most significant asset – are ordered or agreed to be placed in atrust account pending agreement or court order. ...Until the matter is decided by agreement or order, the parties do not have an undividedhalf interest in the value of the net proceeds of sale or trust funds. [31] This conclusion supports my finding that the funds held in trust in this case do not accrue to either party until the matter isdecided by agreement or order.

Not only is Alberta an equalization jurisdiction, but the funds are held in trust until further order of thecourt or agreement of the parties. As such, the funds in trust cannot vest in the trustee in bankruptcy because they do not necessarilybelong to the Plaintiff. [32] In the context of the litigation between the Plaintiff and the Defendant, this court issued orders for child and spousal supportthat pre-date the bankruptcy. Arrears have accumulated under those orders.

These arrears are a claim provable in bankruptcy (s 121(4))and the usual stay of proceedings for pursuing claims against the bankrupt does not apply to claims for support, although the spouse doesnot have a remedy against property that has vested in the trustee (s 69.41). [33] I have concluded that the net proceeds of sale of the matrimonial home held in trust are not property of the bankrupt, hencenot property vested in the trustee, until there is an agreement or court order as to the beneficial ownership of that property.

The Plaintiffand Defendant agreed, and the court confirmed, that the funds held in trust should be transferred to the Defendant to satisfy the accruedarrears of child and spousal support. [34] In Hansen (Trustee of) v Hansen, 2003 SKQB 62 Malone J came to a similar conclusion. The judge considered competingclaims for the bankrupt’s share of the proceeds of sale of the family home (a total sum of $17,473) that were paid into court pending theoutcome of the proceedings. The wife claimed priority over $4,500 of the funds based on accrued arrears of spousal support.

She alsosought the remainder pursuant to an unequal distribution of family property to compensate her for the husband’s dissipation of propertydue to his gambling addiction. [35] Unlike the facts of the case at bar, in Hansen it was clear that the property had vested in the trustee, subject to the wife’spotential claims. The judge rejected the trustee’s argument that the wife’s entitlement was nullified because it was not paid out prior tothe bankruptcy.

Instead, the judge concluded that since the order for spousal support pre-dated the bankruptcy, the accrued arrears tookpriority over the trustee’s claim and the wife was entitled to the sum of $4,500 from the monies paid into court. [36] I find further support for my conclusion that the funds held in trust should be paid to the Defendant in the Supreme Court ofCanada’s decision in Marzetti v Marzetti, (SCC), [1994] 2 SCR 765.

In that case, the court emphasized the importanceof family welfare and stated that, for public policy reasons, the court should err on the side of caution where family needs are at issue in bankruptcy proceedings. Robert A.

Klotz writes in Bankruptcy, Insolvency and Family Law, 2nd ed., looseleaf, (Scarborough, ON:Carswell, 2001) at 2-2 to 2-3 that “within limits, one may heed the call of compassion so as to give the benefit of the doubt to the supportclaimant in cases involving the trustee in bankruptcy.” [37] I affirm Sullivan J’s order that the balance of the funds held in trust by Plaintiff’s counsel be transferred to the Defendant. Heard on the 12th day of August, 2015. Dated at the City of Calgary, Alberta this 7th day of December, 2015. M. David Gates J.C.Q.B.A. Appearances: Bryan P.

Maruyama for the Applicant/Plaintiff Tamara Ann Stanley

for the Defendant (Appearing on her own behalf)