Perry (Re), 2021 ABQB 609

Court of Queen’s Bench of Alberta Citation: Perry (Re), 2021 ABQB 609 Date: 20210803 Docket: B103 698547, B103 698549 Registry: Edmonton Docket: B103 698547 In the Matter of the Bankruptcy of John Brian Perry AND Docket: B103 698549 In the Matter of the Bankruptcy of Carol Gwladwen Perry _______________________________________________________ Reasons for Decision of L.R.

Birkett , Registrar in Bankruptcy _______________________________________________________ Introduction [ 1 ] The Trustee seeks advice and directions with respect to whether the principal residence exemption continues or is no longer available on the death of the Bankrupt. [ 2 ] There is conflict in the case law about the continued operation of the Civil Enforcement Act during bankruptcy by which an undischarged bankrupt could become disentitled to the exemption. [ 3 ] One line of cases says because exemptions are determined at the date of bankruptcy, provincial exemption legislation cannot operate during the bankruptcy.

The determination of entitlement to the principal residence exemption is a one step process. At the date of bankruptcy, the bankrupt’s estate consists of two estates, being the exempt assets that always remain with the bankrupt and the non- exempt assets that are assigned to the trustee. This has been referred to as the “One Step, Two Estates” approach. [ 4 ] The other line of cases says although exemptions are initially determined at the date of bankruptcy, provincial exemption legislation continues to operate during the bankruptcy.

The determination of entitlement to the principal residence exemption is a two- step process. At the date of bankruptcy, the bankrupt’s estate consists of only one estate, being made up of both exempt assets and non- exempt assets, all of which are assigned to the trustee. This is the first step. At some point during the bankruptcy, the bankrupt may become disentitled to the exemption by operation of the provincial legislation so at the time of distribution, the asset is no longer an exempt asset. This is the second step.

This has been referred to as the “Two Step, One Estate” approach. [ 5 ] For the reasons that follow, I adopt this latter “Two Step, One Estate” approach. The principal residence exemption claimed at the date of bankruptcy was lost by operation of the Civil Enforcement Act on the death of the bankrupt without leaving dependents.

Background [ 6 ] John Brian Perry (Bankrupt Husband) and Carol Gwladwen Perry (Bankrupt Wife) assigned themselves into bankruptcy on December 19, 2012 (Date of Bankruptcy) and both remain undischarged bankrupts. [ 7 ] At the Date of Bankruptcy, the Bankrupt Husband was the sole registered owner of the couple’s principal residence. [ 8 ] The Bankrupt Husband passed away on January 28, 2018. He did not have any dependents at the time of his death. The Bankrupt Wife is the sole beneficiary under his Will. [ 9 ] The widowed Bankrupt Wife moved from the principal residence on May 1, 2018.

The Trustee arranged to sell the home. [ 10 ] On September 20, 2018, I granted a court order in these bankruptcy proceedings approving the sale of the principal residence to a third party. The Order directed $40,000 representing the Bankrupt Husband’s possible principal residence exemption be held in trust until further court order. [ 11 ] The Order provided the following relief sought by the Trustee be reserved for a written decision: 1. Advice and directions with respect to whether the principal residence exemption for the Bankrupt Husband in the Lands is no longer available with his passing away; 2.

If the principal residence exemption is no longer available, a Declaration that the proceeds representing the principal residence exemption vest in the Trustee, as the trustee in bankruptcy of the Bankrupt Husband, for the general benefit of his creditors; and 3.

If the principal residence exemption continues, a Declaration that those proceeds representing the principal residence exemption instead vest in the Trustee, as the trustee in bankruptcy of the Bankrupt Wife for the general benefit of her creditors, on the basis of being an inheritance under the Will that constitutes after acquired property during her bankruptcy proceedings, subject to a claim by the Executor for post-bankruptcy claims against the Bankrupt Husband. [ 12 ] Counsel for the Trustee submitted a written Brief to assist the Court with this decision on whether the principal residence exemption of the un-discharged Bankrupt Husband remains after his death.

Although it is the Trustee’s position the exemption is no longer available, Counsel provided a fulsome review of the case law and presented both sides of the argument. [ 13 ] I will set out the legislation, the basic case law and its divergent application, and my analysis and conclusion.

The Bankruptcy and Insolvency Act Provisions [ 14 ] An insolvent person may make an assignment of all the insolvent person’s property for the general benefit of the insolvent person’s creditors, pursuant to s 49(1) of the Bankruptcy and Insolvency Act , RSC 1985, c B-3 ( BIA ). [ 15 ] On the assignment into bankruptcy, the bankrupt ceases to have any capacity to dispose of or otherwise deal with their property, which shall, subject to the BIA and to the rights of secured creditors, immediately pass to and vest in the Trustee, pursuant to s 71 BIA . [ 16 ] The Trustee is responsible for the administration of the bankrupt’s estate.

Part V of the BIA sets out the powers and duties of the Trustee, including to determine the claims provable in the bankruptcy and to declare and distribute dividends rateably among the unsecured creditors entitled thereto. Dividends are paid from the proceeds realized from the property of the bankrupt and other funds in the bankrupt’s estate, including any surplus income. [ 17 ]

Section 67 BIA sets out the property of the bankrupt from which proceeds can be realized to pay dividends. [ 18 ] The property of the bankrupt divisible among the creditors shall comprise all property of the bankrupt at the date of the bankruptcy or that may be acquired by the bankrupt before their discharge, pursuant to s 67(1)(

c) BIA . [ 19 ] The property of the bankrupt divisible among the creditors shall not comprise 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, pursuant to s 67(1)(

b) BIA . The Civil Enforcement Provisions [ 20 ] In Alberta, the applicable laws under which property is exempt from execution or seizure are set out in the Civil Enforcement Act , RSA 2000, c C-15 ( CEA ) and the Civil Enforcement Regulation , AR 276/95 ( CER ). [ 21 ]

Part 10 of the CEA provides for exemptions to the property against which seizure or other action can be taken to enforce a money judgment through writ proceedings.

Section 88 of the CEA lists the categories of property in which the interest of an enforcement debtor is exempt from writ proceedings and identifies the property that is exempt only up to the value prescribed by the regulations. The maximum amounts allowed for exempt property are set out in s 37 of the CER . [ 22 ] The combined effect of s 88(

g) CEA and s 37(1)(

e) CER allows an enforcement debtor to claim up to $40,000 of the equity in the debtor’s principal residence as being exempt from execution or seizure. [ 23 ] Pursuant to s 37(2) CER , where the enforcement debtor sells exempt property, or property that is exempt up to a prescribed value, the exempt proceeds from the sale remain 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. This allows an enforcement debtor the opportunity to protect up to $40,000 of exempt equity in the debtor’s principal residence from creditors.

[24] Section 92(1) CEA specifically provides that where the enforcement debtor is deceased, the property of the debtor that wouldbe exempt if the debtor were alive remains exempt from writ proceedings against the debtor’s estate for the period of time that theproperty is required for the maintenance and support of the deceased debtor’s dependents. This allows the dependents of a deceasedenforcement debtor the opportunity to access up to $40,000 of exempt equity in the debtor’s principal residence for their needs.

The Case Law: Basic Principles [25] The day on which the bankrupt makes the assignment into bankruptcy is determinative of the bankrupt’s property interestsand is the appropriate date for determination of the debtor exemption. See Holthuysen Estate v Holthuysen, 1986 ABCA 226 atparagraphs 7 to 9: … The first requirement for the application of the statute is that the debtor have a property interest in lands upon which his house stands.The second is that this house be, at all relevant times, his actual residence.

Other cases have decided that, for the purpose of bankruptcy,the relevant time for actual residence is the date of the assignment… The decisive question, then, is whether this bankrupt had an interest in real property on the day of the assignment.… We accordingly allow the appeal and declare that the property in question was property of the bankrupt… on the day upon which hemade his assignment into bankruptcy. That date is determinative of the debtor exemption…. [26] The property of the bankrupt on the date of bankruptcy immediately passes to and vests in the trustee (s 71 BIA).

The propertyof the bankrupt divisible among the creditors is comprised of all property of the bankrupt at the date of bankruptcy and property thatmay be acquired by the bankrupt during the bankruptcy (s 67(1)(

c) BIA), except property that as against the bankrupt is exempt fromexecution or seizure under the applicable laws (s 67(1)(b)).

The exemption laws to be applied are those in effect on the date ofbankruptcy (Holthuysen). [27] The general scheme for division of a bankrupt’s estate involves two distinct stages: the property-passing stage of bankruptcyand the estate-administration stage, as described by Justice Gonthier of the Supreme Court of Canada in Royal Bank of Canada v NorthAmerican Life Assurance Co, (SCC), [1996] 1 SCR 325, referred to as Ramgotra. [28] Justice Gonthier’s preferred approach, beginning at paragraph 44 of Ramgotra, is summarized as follows.

At the time of theassignment into bankruptcy, the trustee is obligated to take possession of the assets forming the estate of the bankrupt. The BIA imposesduties on both the trustee to take possession of all property of the bankrupt, and on the bankrupt to inform the trustee of all property inthe bankrupt’s possession or control and to deliver it to the trustee.

The provisions of the BIA detail the powers, duties and functions ofthe trustee during this property-passing stage of bankruptcy. [29] Quoting from paragraph 45 of Ramgotra: Once the bankrupt’s property has passed into the possession of the trustee, the Act provides the trustee with the power to administer theestate.… The ultimate purpose of these administrative powers is to manage the estate, in order to provide equitable satisfaction of thecreditor’s claims. This, then, is the estate-administration stage of bankruptcy, one distinct aspect of which is the distribution of the estateamong creditors. [30]

Section 67 of the BIA provides direction to the trustee regarding the distribution of property. Property which is divisibleamong creditors is defined broadly in s 67(1)(

c) and (d). The trustee is barred from dividing certain property among creditors, includingproperty rendered exempt from execution or seizure under provincial legislation by s 67(1)(b). “While such property becomes part of thebankruptcy estate in the possession of the trustee, the trustee may not exercise his or her estate distribution powers over it by reason of s67.” See paragraph 48 of Ramgotra. And at paragraph 49: Therefore, while an asset which is exempt under provincial law passes into the possession of the trustee at the time of bankruptcy, theexemption itself bars the trustee from dividing the asset among creditors where s 67(1)(

b) is operative. [31] The Court of Appeal of Alberta recognizes Ramgotra as an important decision that changes the law in Alberta for settingaside pre-bankruptcy transactions as a means of disallowing exemptions. The Court of Appeal states that at the time bankruptcy, Albertaexemptions law gives a debtor a $40,000 exemption from seizure of the equity in the debtor’s home. “And the Act, s 67(1)(

b) says thatexempt property forms no part of the assets which the trustee can take and distribute.” See Toronto-Dominion Bank v Amex Bank ofCanada, 1997 ABCA 139 at paragraph 5. [32] Both of these cases deal with a failed attempt to eliminate an exemption that existed at the date of bankruptcy by setting asidea transaction which occurred prior to the date of bankruptcy.

Ramgotra makes it clear that all the bankrupt’s property at the date ofbankruptcy, and property acquired thereafter, vest with the trustee during the property-passing stage; property that is exempt at the dateof bankruptcy, although vested with the trustee, cannot be distributed among the creditors during the estate-administration stage.

Asconfirmed by the Alberta Court of Appeal, these are not assets which the trustee can “take and distribute”. [33] What about property that is exempt at the date of bankruptcy but may not be when it is time to distribute the bankrupt’sproperty among the creditors? [34] Exempt property is identified at the date of bankruptcy; exempt property is not divisible among the creditors at the time ofpaying dividends. There is divergence in the case law about what happens to the exemption in between.

The Case Law: Divergent Application [35] Divergence in the case law arises where there is an attempt to rely on an event or transaction which occurred after the date ofbankruptcy to eliminate the exemption that existed at the date of bankruptcy. Some courts have found the exempt status of the property

cannot be unseated by subsequent events or transactions; other courts have found the exempt status of the property can be lost bycontinued operation of the provincial legislation. [36] The first approach arises from a finding there is only one triggering event or step, being the assignment into bankruptcy.

Atthe date of bankruptcy, two estates are created, one estate is comprised of the non-exempt assets and vests in the trustee and the otherestate is comprised of the exempt assets and remains with the bankrupt. “One Step, Two Estates” Approach [37] The approach to maintaining exemptions during bankruptcy referred to as “One Step, Two Estates” flows from JusticeForsyth’s decision in Gruber (Re), (ABQB) (Gruber) and restatement in Hill (Re), (ABQB).Registrar Waller follows this line of thinking in Messner (Re) (Trustee of), 2000 ABQB 65 and in his unreported decision in Dodyk (Re),[2002] AJ. No. 912.

These cases are about the distribution of proceeds from the sale of the bankrupt’s principal residence. [38] In Gruber, Forsyth J articulates the questions before him in paragraphs 1 through 6, including: “Do the proceeds from thebankrupt’s sale of his joint interest in his home which was claimed exempt at the date of his assignment in bankruptcy which was sold byhim prior to his discharge form an asset of the bankruptcy estate, or are these proceeds exempt?” Counsel suggested there areinconsistent findings of the courts with respect to continuation of exemptions during bankruptcy and sought advice and directionsregarding the unsettled state of the law. [39] On the facts, Forsyth J finds, in paragraph 9, that as of the date of the assignment in bankruptcy, the principal residence isexempt and does not form part of the bankruptcy estate divisible among the creditors: “That position has been consistently espoused inseveral decisions both in this court and courts in other provinces”. [40] Justice Forsyth notes, absent bankruptcy, if the debtor abandons the property or sells the property, based on case law and thewording of the Exemptions Act (now CEA), the proceeds are no longer exempt and may be subject to attachment by the executioncreditors (see paragraph 11).

He finds that is not the case when the debtor is in bankruptcy, concluding: “… the bankrupt’s interest in thenet sale proceeds from his home which was claimed exempt at the date of his assignment but subsequently sold by him is propertyexempt and does not comprise an asset of his bankrupt estate.” (See paragraph 24). [41] The rationale for this conclusion attributed to Gruber starts with paragraph 12: As previously noted, case authority is clear that the effective date for determination of the status of the exemption occurs on the date ofbankruptcy.

At that date the Bankrupt’s property was severed into two estates: one estate that vests with the Trustee and is divisibleamongst the Bankrupt’s creditors, and one that remains with the Bankrupt because it is exempt under the provincial law.… [42] Gruber was decided before Ramgotra, however, both courts cite the same passage from Re Pearson, (ONSC): [43] Justice Forsyth, at paragraph 13 in Gruber, adds emphasis to this quote from Re Pearson: … In my opinion, so far as the creditors of the bankrupt are concerned, that situation crystallized at the time the bankruptcy occurred andthat property by virtue of s. 47(

b) of the Bankruptcy Act [now s. 67(1)(

b) of the Act], was impressed with its character as not divisibleamong the creditors, for all the purposes of the bankruptcy… once the bankruptcy occurred the provincial statute had spent its force.… [44] Justice Gonthier, at paragraph 49 in Ramgotra, quotes this passage from Re Pearson and says: “I adopt this as a correctstatement of the law. Therefore, while an asset which is exempt under provincial law passes into the possession of the trustee at the timea bankruptcy, the exemption itself bars the trustee from dividing the assets among creditors where s. 67(1)(

b) is operative.” [45] Justice Gonthier focuses on the crystallization at the time of bankruptcy in finding the property that passed to the trustee, aRIFF, is impressed on that date with its character as not divisible among the creditors. The pre-bankruptcy transaction that led to thecreation of the exempt asset from a non-exempt asset is not set aside. [46] Re Pearson is concerned with the continued operation of the Ontario provincial Insurance Act on a life insurance policy, not aprovincial exemptions statute.

The comment “once the bankruptcy occurred the provincial statute had spent its force” is made in thatcontext. [47] On finding the situation crystallized at the time of the bankruptcy, the Court in Re Pearson does not to allow the trustee toexercise its powers to retroactively change the beneficiary designation. Once the bankruptcy occurred, the life insurance policy isimpressed with its character as exempt and not divisible among the creditors.

The trustee can not access the Insurance Act after the dateof bankruptcy to change the beneficiary designation as: “There was no continuing operation of that statute in relation to the creditors thatcould be altered by any act of the bankrupt or the trustee so as to displace the effect that s. 47(

b) of the Bankruptcy Act [now s 67(1)(b)BIA] had in relation to the property on the occurrence of the bankruptcy.” [48] Forsyth J, referring to his quote from Re Pearson, finds a “similar view” expressed in paragraph 13 of Pannell KerrMacGillivray Inc v Beer, (1988), 69 C.B.R. (N.S.) 203 (Man. Q.B.): In my view the effective date for determination of the status of the exemption occurs on the date of bankruptcy. Support for thisconclusion is found in the decision of MacDonald J in Re Hammill [citation modified: (AB QB)].

If after the date ofbankruptcy, the bankrupt elects to convert an exempt asset into another form by selling it, the proceeds of sale do not become propertywhich vests in the trustee for division amongst creditors. [49] Justice Forsyth then notes three Alberta decisions where the principal residence exemption was denied thereby creating “the

unsettled state of the law surrounding the issue and the resulting confusion”.

After distinguishing each of these decisions, Forsyth J concludes in paragraph 23 of Gruber : I subscribe to the view espoused in Re Pearson , supra, and Pannell Kerr MacGillivray Inc v Beer , supra, that once an assignment in bankruptcy has been made, the determination of the property of the bankrupt which is assigned to the trustee and the property to which he can claim an exemption is made, as of the date of the assignment. … I am not satisfied that those decisions dealing with exempt assets losing their exemption have any application whatsoever in the case of a bankruptcy.

If the determination of the division of property is made as of the date of bankruptcy, provisions of the Exemptions Act are no longer applicable after that date. … I am satisfied that an asset which is validly exempt at the date of bankruptcy remains exempt, notwithstanding the nature of any subsequent dealings with that asset. [ 50 ] In other words, on assignment into bankruptcy, two estates are created: the non-exempt property of the bankrupt which is assigned to the trustee and the exempt property of the bankrupt which is retained by the bankrupt.

After that step, the provisions of the exemptions legislation no longer apply; the bankrupt’s exempt property remains exempt regardless of the nature of any subsequent dealings with that property. [ 51 ] Registrar Waller, at paragraph 12 of Messner , adopts the philosophy expressed by Forsyth J in Hill that allows the exemption to survive the act of bankruptcy.

At paragraph 4 of Dodyk , Registrar Waller credits Forsyth J in Gruber with settling “conflicting case law in finding that exempt property at the date of an assignment retained its exempt status by the bankrupt during the period of bankruptcy”. [ 52 ] In Firestone (Bankruptcy of) , 2003 ABQB 417 , a case specific to the entitlement to the principal residence exemption following death, Registrar Waller maintains the view: “The bankrupt’s right to claim an exemption is determined at the date of bankruptcy re Gruber ” (see paragraph 11 ).

However, Registrar Waller does not find the principal residence retained its exempt status as being an exempt asset existing outside the bankruptcy. He finds the principal residence retained its exempt status pursuant to s 92 of the CEA after considering the circumstances at the time of the undischarged bankrupt’s death. [ 53 ] Mr. Firestone made an assignment into bankruptcy on August 14, 1998 and claimed a $40,000 exemption in relation to the quarter

section where he resided with his wife, pursuant to s 67(1)(

a) of the BIA and s 88(

g) of the CEA and s 37(1)(

e) of the CER . The trustee delivered a “Disclaimer of Interest” to the mortgagee as the bankrupt’s equity was less than $40,000 at the time the bankruptcy. The bankrupt performed all of his duties satisfactorily but died a few days before he was entitled to his automatic discharge. [ 54 ] The bankrupt had life insurance that paid out the balance of his mortgage and the mortgage was discharged from title. The trustee took the position that the substantial non-exempt equity in the property created by the payout of the mortgage should be paid into the bankruptcy estate for the benefit of the creditors.

The bankrupt’s widow obtained title to the property, subject to the trustee’s caveat. [ 55 ] Although, as Registrar Waller notes, this “set of facts brought into play as many controversial and undecided bankruptcy issues as possible”, I will focus on his discussion of the effect of the death of the bankrupt on the principal residence exemption. [ 56 ] Registrar Waller comments on the general purpose of exemption legislation and the specific provisions following death, in paragraphs 10 and 12 of Firestone : The purpose of exemption legislation is: (

a) the social interest in preserving the viability of debtors so their continued maintenance does not fall on society and, (

b) the human considerations of permitting debtors sufficient assets so that they may maintain themselves and their families at a reasonable standard of living. Exemptions generally appear to be personal to the bankrupt and when the bankrupt dies there is no policy reason that the exemption should survive his death. However, the legislature has provided for a statutory extension of the exemption following death.

Section 92 of the Civil Enforcement Act R.S.A. 2000 ch. C-5 provides:

(1) Where a debtor is deceased, the property of that debtor that would be exempt if the debtor were alive remains exempt from writ proceedings against the debtor’s estate for the period of time that the property is required for the maintenance and support of the deceased debtor’s dependants.

(2) For the purposes of

section 90, if a debtor has died, the representative of the debtor’s estate may make a selection of the property to be exempt. [ 57 ] Although no evidence as to the degree of dependence is led, Registrar Waller finds “[the trustee’s] silence on the issue must be construed as an admission that the bankrupt’s exemption in the property is required for the maintenance and support of his widow and their three children.” [ 58 ] I conclude from this analysis that Registrar Waller does not find the assignment into bankruptcy created two estates, with the bankrupt retaining the exempt assets notwithstanding the nature of any subsequent dealings with that asset.

He does not find the provisions of the exemption legislation no longer applicable after the date of bankruptcy, but specifically applies s 92 of the CEA to find the principal residence exemption remained exempt for the period of time that the property is required for the maintenance and support of the deceased debtor’s dependents. He addresses the exemption in two steps.

The exemption identified at the time of the assignment into bankruptcy is re-examined during the bankruptcy at the time of the bankrupt’s death. [ 59 ] At paragraph 20 of Firestone , Registrar Waller states “The effect of the bankruptcy was to vest all of the bankrupt’s property both exempt and non-exempt in the trustee.” He refers to Registrar Funduk’s decision in Re Gordon (Bankrupt) , 2000 ABQB 92 where Registrar Funduk refers to Ramgotra .

[60] In Firestone, Registrar Waller recognizes the case law that says there is one estate vested with the trustee comprised of bothexempt and non-exempt property and he follows a two-step approach in determining the principal residence exemption on the death ofthe bankrupt. [61] In Dodyk, Registrar Waller struggles to reconcile the conflicting authority of Gruber and Gazelle (see below) as to the natureof the exemption, and in the face of such conflict and absent appellate authority, he makes the decision he finds acceptable in thecircumstances of the case before him (paragraph 11).

In Firestone, he again recognizes “there is authority to the contrary which maywell hold sway once the matter is determined at the appellate level” (paragraph 30). [62] That was nearly 2 decades ago. Has the conflicting authority been resolved by the Court of Appeal or otherwise?

Counsel forthe Trustee provides the conflicting authority and argues the conflict is resolved by taking the “two steps, one estate” approach. “Two Steps, One Estate” Approach [63] The approach to examining exemptions during the bankruptcy referred to as “Two Steps, One Estate” is illustrated byRegistrar Funduk in Dunbar, reported initially at Dunbar (Re), (AB QB) with the decision on further evidence atDunbar (Re) (Trustee of), 1998 ABQB 413.

This approach is followed by Registrar Laycock in Re Thorne (Bankrupt), 2004 ABQB 83. [64] Registrar Funduk cites Ramgotra in stating: “When the bankrupts went into bankruptcy they assigned all their property to theTrustee. Property which is exempt, although passing to the Trustee, would have to be returned by it to the bankrupts.” See paragraph 6 ofthe 1997 Dunbar decision.

This illustrates the first step of creating one estate on the assignment into bankruptcy and the second step ofthe returning property which is exempt to the bankrupt. [65] In paragraph 15 of the 1997 Dunbar decision and paragraph 11 of the 1998 Dunbar decision, Registrar Funduk confirmsHolthuysen: “It is firm law in this province that in a bankruptcy the date for determining exemptions is the date of the bankruptcy”. [66] At the date of bankruptcy, the Dunbars had sold the principal residence and were waiting for the sale proceeds. Net saleproceeds of $39,150 were paid to the trustee about a month later.

The trustee accepted the bankrupts’ claim to the principal residenceexemption, considered the proceeds to be exempt, and released the funds to the bankrupts. The bankrupts ultimately combined the fundswith other money to purchase a one third interest in another house. The major unsecured creditor objected to the discharge of thebankrupts.

Registrar Funduk applies s 37(2) of the CER and finds the principal residence exemption is lost when the sale proceeds areintermingled by the bankrupts with other funds. [67] Although the proceeds from the sale of the principal residence may have been exempt at the date of bankruptcy, thesubsequent co-mingling of the funds and the continued operation of the exemptions legislation results in the exemption being lost for thepurpose of distribution among the creditors. [68] Registrar Funduk does not mention Gruber in this decision. [69] In ICI Paints, Division of ICI Canada Inc v Gazelle (Trustee of), 2001 ABQB 233 [Gazelle], Justice Burrows acknowledgesthat the bankrupt is entitled to the principal residence exemption, as determined at the date of bankruptcy, but finds the bankrupt “is notentitled to anything more than that.

Any value beyond that is available for his creditors.” (paragraph 20). [70] The bankrupt argued that the trustee determined his interest in the house had no unencumbered value in excess of hisexemption and therefore, as at the date of bankruptcy, his interest in the house was exempt; any growth in the value of this exempt set isalso exempt, relying on the “two estates” approach taken in Gruber.

Burrows J finds in paragraphs 13 and 14 of Gazelle: Gruber stands for the proposition that a portion of the bankrupt’s equity in his home is exempt from division amongst his creditors andnothing that happens after the assignment, including the liquidation of the property interest, can cause the bankrupt to lose the benefit ofthat exemption. The case does not stand for the proposition that an increase in the value of the property after the assignment results in anincrease in the exemption.

The proposition for which Gruber stands was introduced into the statutory exemption law in Alberta… after Forsyth J’s decision wasissued. [71] Justice Burrows notes the Regulations establish the level of the exemption to be $40,000. In writ proceedings, an increase invalue of the property does not result in an increase in the value of the exemption. See paragraphs 16, 17 and this quote from 18: … Parliament has determined that the same exemption should be used in Alberta bankruptcies (BIA s. 67(1)(b)).

Reasoning that wouldresult in the debtor preserving more than that value from his owned accommodation and depriving his creditors of the benefit of excessvalue greater than $40,000 violates the intention of the Alberta Legislature and Parliament. [72] As a result, the exemptions legislation continues to operate during the bankruptcy.

Whether the equity in the principalresidence at the date of assignment into bankruptcy is greater than the exemption or is less than the exemption but appreciates during thebankruptcy and exceeds the exemption prior to discharge, the excess equity is available for distribution to the creditors. The equityremains an asset available to the trustee. The exemption is determined at the date of bankruptcy and examined again at the time ofdistribution of the assets. [73] While Registrar Waller recognizes the conflicting case law, he follows Gruber not Gazelle in deciding Dodyk.

RegistrarFunduk presents a thorough analysis of the conflicting case law in MacKay (Trustee of), 2002 ABQB 598. He declines to follow Dodykstating outright at paragraphs 37 and 38: The next thing to be noted about Re Dodyk is that it relies on some wrong law. It says, para. 4:

Justice Forsyth in Re Gruber (citation omitted) settled conflicting case law in finding that exempt property at the date of assignment retained its exempt status by the bankrupt during the period of bankruptcy. At page 228 he states: As previously noted, case authority is clear that the effective date for determination of the status of the exemption occurs on the date of bankruptcy. At that date the Bankrupt’s property was severed into two estates: one estate that vests in with the Trustee and is divisible amongst the Bankrupt’s creditors, and one that remains with the Bankrupt because it is exempt under the provincial law. The emphasized

part is wrong. The bankrupt assigns all his property to the trustee. Section 49(1) BIA says that. [ Ramgotra ] says that; para. 44. The trustee is under a duty to take possession of all property of the bankrupt; para.44.… [ 74 ] At paragraph 59 of MacKay , Registrar Funduk confirms Gazelle “is a correct analysis of what Gruber stands for.” And at paragraph 61, Registrar Funduk states; I do not accept that the relevant value of limited exemption property for realization purposes should be its value at the date of bankruptcy to give bankrupts immediate certainty.

A bankruptcy is not a one day circus with the finale being at the end of the day. An assignment is a start of a legal process which will continue for some time. Only time will spell the finale. The only certainties for a bankrupt at the date of bankruptcy are: (1) he has assigned all his property to the trustee; (2) his unsecured creditors cannot proceed against him without leave of the Court; (3) when he exits the bankruptcy he can keep that which the law says is exempt. [ 75 ] This is the “Two Steps, One Estate” approach.

At the date of bankruptcy, all of the bankrupt’s property, exempt and non- exempt, is assigned to the trustee and at the end of the bankruptcy, the remaining exemptions available to the bankrupt are determined. [ 76 ] Registrar Funduk describes the property passing stage at paragraph 50 of MacKay : In a bankruptcy the bankrupt’s property passing to the trustee falls into three general classes: (1) property which is not exempt; (2) property which is wholly exempt regardless of its value; (3) property which the bankrupt has a limited exemption for. [ 77 ] The general class into which the property falls is determined at the date of bankruptcy.

Property which is wholly exempt regardless of its value remains wholly exempt and may be released to the bankrupt. Property for which the bankrupt has a limited exemption may be released to the bankrupt if that property is valued at less than the limited exemption and is not likely to appreciate in value, for example, household furnishings worth less than $4000 or a motor vehicle worth less than $5000. [ 78 ] Release of the bankrupt’s exempt equity in the principal residence is problematic, as seen in the conflicting case law.

Registrar Funduk says that at the date of bankruptcy, the bankrupt has, as a matter of law, whatever exemption the law provides for at that time. (Paragraph 56 of MacKay ). “But that which is exempt is the “maximum exemption” as set out in the Regulation. The trustee is not required to transfer back to the bankrupt more than that and the bankrupt is not entitled to get back more than that .” (Paragraph 63). [ 79 ] Following the “Two Steps, One Estate” approach, even if the equity at the date of bankruptcy is less than the $40,000 exemption, the equity in the principal residence vests with the trustee.

During the administration of the estate, that exemption may be lost by continued operation of the CEA . In Dunbar , it is lost because the funds were co-mingled. In Gazelle , the exemption is maintained but the surplus equity over the $40,000 is available for distribution to the creditors. [ 80 ] How does the “Two Steps, One Estate” approach apply to the principal residence exemption on the death of the undischarged bankrupt? [ 81 ] Registrar Schulz considers the divergent approaches in deciding whether the bankrupt remains entitled to the principal residence exemption after the bankrupt’s death.

Counsel for the Trustee provided the Transcript of the Proceedings of the unreported decision of Registrar Schulz, In the Matter of the Bankruptcy of Vera Fern Watson, Oral Decision, August 29, 2018 [ Re Watson ]. [ 82 ] Counsel argued the Watson case prior to this one. He presented then, as he has done here, all aspects of the matter, including case law for and against the different

interpretations that the Registrar might make. As the sale of the principal residence was imminent, Registrar Schulz did not have the benefit of time to write her decision. Nonetheless, her analysis is instructive and her conclusion is in line with the “Two Steps, One Estate” approach. [ 83 ] Ms. Watson passed away after the conditional discharge order was granted in her bankruptcy but before the conditions were fulfilled.

There was a potential sale of the principal residence; the Trustee applied for advice and directions with respect to whether the bankrupt remained entitled to the principal residence exemption after her death. In her decision, Registrar Schulz finds the exempt status is lost on death, and directs the equivalent of that amount be returned to the bankrupt’s estate for the trustee to distribute. [ 84 ] In reaching this conclusion, Registrar Schulz goes back to basic principles and looks at whether two estates are created at the date of bankruptcy, or whether one estate is created.

She finds the exemption was recognized at the time of the conditional discharge order, with payments to be calculated with respect to the non-exempt equity. At page 7, lines 3 - 11, Registrar Schulz states: But I do not think that ends the process. Another issue comes up, and that is whether subsequent events can change the status of an exemption. So can that examination (sic) lose its exempt status because, for example, they have commingled funds? Or on death, if it

does not fall within those certain exceptions that are set out in the legislation. And I think it is important that we note that the provincial legislation is incorporated into the BIA by express reference. So the fact that things lose their exempt status under the provincial legislation becomes an important part of looking at whether or not the status can be lost after it is exempt.

I think that the provincial legislation specifically contemplates that kind of a situation. [ 85 ] After considering the purpose of the foundational principles of the BIA for rehabilitation of the bankrupt weighed against restitution to the creditors, Registrar Schulz concludes at page 7 lines 36 – 41: “The idea that exemptions are personal and are lost on death, except in some very unusual specific circumstances are outlined in the provincial legislation. And that the one-estate approach… allows for a consistent

interpretation with the provincial legislation that’s incorporated into the BIA …”. [ 86 ] How does the “Two Steps, One Estate” approach apply to the facts of this case? Analysis [ 87 ] When Mr. and Mrs. Perry assigned themselves into bankruptcy, they were residing in the principal residence owned by Mr. Perry, the Bankrupt Husband. They continued to reside there during the bankruptcy. Prior to their discharge from bankruptcy, Mr. Perry passed away. He did not leave dependents. Mrs. Perry, the Bankrupt Wife, was the sole beneficiary under his Will. [ 88 ] After Mrs.

Perry moved from the principal residence, the Trustee sold the home. The net sale proceeds remained with the Trustee, with $40,000 the subject of this decision and the remainder to be distributed in accordance with the BIA to the creditors of the Bankrupt Husband. [ 89 ] If the $40,000 exemption in the principal residence is retained by the Bankrupt Husband after his death, it will pass to the Bankrupt Wife under the Will.

As an inherited asset, the $40,000 becomes after-acquired property available for distribution to the Bankrupt Wife’s creditors. [ 90 ] If the $40,000 exemption in the principal residence is lost on the death of the Bankrupt Husband, it will be retained by the Trustee and be available for distribution to the Bankrupt Husband’s creditors. [ 91 ] On assignment into bankruptcy, all of the bankrupt’s property passes to and vests in the Trustee, pursuant to s 71 BIA .

See Firestone , Dunbar and MacKay . [ 92 ] The Trustee is then responsible for the administration of the bankrupt’s estate, including determination of claims provable in bankruptcy and distributing dividends rateably among the unsecured creditors.

Part 5 BIA . [ 93 ] Dividends are distributed from the property of the bankrupt divisible among the creditors as identified in s 67 of the BIA . The divisible property is comprised of all property of the bankrupt at the date of bankruptcy and all property that may be acquired by the bankrupt before their discharge (s 67(1)(

c) BIA ). [ 94 ] The divisible property does not comprise any property that is exempt from execution or seizure under any applicable laws in the province within which the property is situated or the bankrupt resides (s 67(1)(

b) BIA ). [ 95 ] Property that is exempt from execution or seizure, and therefore distribution, is determined under the applicable laws in Alberta, which include the exemption legislation set out in the CEA and the CER . [ 96 ] The bankrupt’s property and exemptions are determined on assignment into bankruptcy. The exemption laws to be applied are those in effect on the date of bankruptcy ( Holthuysen ). At the date of bankruptcy, the bankrupt’s property is impressed with its character as exempt, that is, not divisible among the creditors ( Re Pearson ). [ 97 ] The combined effect of s 88(

g) CEA and s 37(1)(

e) CER is incorporated into the BIA by express reference. Re Watson . This allows a bankrupt to retain up to $40,000 of the equity in the bankrupt’s principal residence as exempt property. [ 98 ] While the all the equity in the principal residence passes into the possession of the trustee at the time of bankruptcy, the exemption bars the trustee from dividing the exempt equity among the creditors. Ramgotra . [ 99 ] On assignment into bankruptcy, all of Mr. Perry’s property, including the equity in the principal residence, passed to and vested in the Trustee.

The exempt equity, up to $40,000, was not available to the Trustee to distribute among the Bankrupt Husband’s unsecured creditors. [ 100 ] During the administration of the estate, the exemption is maintained or lost by continued operation of the applicable exemption laws.

In Dunbar , the principle residence exemption is lost because the sale proceed funds were co-mingled; in Gazelle , the exemption is maintained but the surplus equity over the $40,000 is available for distribution to the creditors. [ 101 ] Exemptions are personal to the bankrupt and are lost on death, except in specific circumstances outlined in the provincial legislation.

Section 92 of the CEA provides a statutory extension to the exemption and is incorporated into the BIA . Where the bankrupt is deceased, the property of the bankrupt that would be exempt if the bankrupt were alive remains exempt from distribution to the creditors for the period of time that the property is required for the maintenance and support of the deceased bankrupt’s dependents. This allows the dependents to access up to $40,000 of exempt equity in the bankrupt’s principal residence for their needs.

See Firestone and Re Watson . [ 102 ] In Firestone , Registrar Waller finds the bankrupt’s exemption in the principal residence is required for the maintenance and support of his widow and their three children. [ 103 ] In Re Watson , Registrar Schulz finds the bankrupt’s exemption in the principal residence is lost on the death of the bankrupt.

[ 104 ] In the case before me, I find the Bankrupt Husband’s exemption in the principal residence is lost on his death. The statutory extension in s 92 of the CEA is not engaged as Mr. Perry died without dependents. [ 105 ] The $40,000 from the proceeds of sale of the principal residence that would be exempt if the Bankrupt Husband were alive only remains exempt from distribution to the creditors for the period of time that the equity is required for the maintenance and support of his dependents. As the Bankrupt Husband has no dependents, access to the exempt equity at the time of his death is not required.

The $40,000 is no longer exempt and is available for distribution to the Bankrupt Husband’s creditors. Conclusion [ 106 ] I resolve the conflicting authority, identified by Registrar Waller in Dodyk and Firestone as perhaps needing appellate level intervention, by adopting the “two steps one estate” approach argued by Counsel for the Trustee. [ 107 ] I agree with the analysis of Registrar Funduk in MacKay and his conclusion that the statement of the law in Gruber is wrong. At the date of bankruptcy, all the bankrupt’s property is assigned to the trustee pursuant to s 71 BIA .

One estate is created comprised of both non-exempt and exempt property. [ 108 ] The bankrupt’s property is not severed into two estates: one estate that vests with the trustee and is divisible among the creditors and one estate that remains with the bankrupt because it is exempt under provincial law.

Although this “one step, two estates” approach set out in Gruber allows for certainty at the time of bankruptcy for both the bankrupt and the trustee, it can no longer be applied. [ 109 ] Justice Gonthier, writing for the Supreme Court of Canada in Ramgotra , describes the general scheme for division of a bankrupt’s estate as involving two distinct stages: the property-passing stage of bankruptcy and the estate-administration stage. [ 110 ] The nuance between the property-passing stage, where all of the bankrupt’s property passes to the trustee, and the estate- administration stage, where only the bankrupt’s non-exempt property is distributed to the creditors, is further explained in Ramgotra . [ 111 ] This nuance leads me to conclude there is one estate, with two steps.

The first step is to pass the all bankrupt’s property to the trustee to form a single bankruptcy estate, consisting of all of the bankrupt’s assets, exempt and non-exempt, as determined at the time of bankruptcy. [ 112 ] The second step is for the trustee to administer the bankruptcy estate, ultimately paying dividends from the property of the bankrupt divisible among the creditors.

The property divisible among the creditors is comprised of all the property of the bankrupt at the date of bankruptcy and the property that may be acquired by the bankrupt before their discharge, but does not comprise any property that is exempt from execution or seizure. [ 113 ] Property that is exempt from execution or seizure is identified at the date of bankruptcy by operation of the CEA and CER .

The provincial exemption legislation is expressly incorporated into the BIA and remains operational throughout the administration of the bankrupt’s estate to determine the property that is distributed to the creditors and the property that the bankrupt is entitled to retain or get back. ( MacKay ). [ 114 ] In the circumstances of this case, the extension of the principal residence exemption provided for in s 92 of the CEA , is not available because the deceased bankrupt had no dependents at the time of his death. [ 115 ] The $40,000 exemption in the principal residence is lost on the death of the Bankrupt Husband.

It is to be retained by the Trustee and be available for distribution to the Bankrupt Husband’s creditors. Written Submissions Received April 18, 2019 Dated at the City of Edmonton, Alberta this 3 rd day of August, 2021. L.R. Birkett Registrar in Bankruptcy Appearances: Bryan P. Maruyama Parlee McLaws LLP

Solicitor for the Trustee, Faber Inc for the Applicant