Kelley (Re), 2022 ABKB 726

Court of King’s Bench of Alberta Citation: Kelley (Re), 2022 ABKB 726 Date: 20221102 Docket: B201 764920 Registry: Calgary In the Matter of In the Matter of the Bankruptcy and Insolvency Act , RSC 1985, c B-S, as Amended Between: A. Farber & Partners Ltd. in its capacity as Trustee of the Estate of Kathleen Kelley, a bankrupt Applicant - and - Wayne Kelley Respondent _______________________________________________________ Memorandum of Decision of the Honourable Justice R.A.

Neufeld _______________________________________________________ [ 1 ] On August 31, 2021, Kathleen Kelley was adjudged bankrupt by Order of this court. She was deeply in debt, owing millions of dollars to people who had provided her with money for investments. To date the Trustee in Bankruptcy has been unable to find any

evidence that any of the funds were actually invested. [ 2 ] At the time of bankruptcy, Ms. Kelley’s main asset was a home in SE Calgary (the “Home”). She was the sole owner on title, but the Home was acquired many years ago and for many years was the matrimonial Home of Ms. Kelley and Wayne Kelley. A mortgage of $150,000 and a number of writs of execution in respect of judgements in excess of $1,000,000 were registered against Ms. Kelly’s title. The couple had been separated for approximately three years, although no action for divorce or division of matrimonial property had been commenced. [ 3 ] Mr.

Kelly submitted a Reclamation of Property Claim to the Trustee, claiming a one-half ownership interest in the Home. The basis of the claim was a brief agreement purportedly executed by Mr. and Ms. Kelley on July 18, 2018, at the time of separation (the “Agreement”). [ 4 ] The Trustee disallowed Mr. Kelley’s claim. It did so on the basis, inter alia , that the Agreement (which it said may have been backdated) constituted a fraudulent preference or transfer for under value and did not constitute an enforceable contract as no consideration was present . Mr.

Kelley appealed the decision . [ 5 ] By decision dated July 6, 2022, Registrar Farrington allowed the appeal, in part: Re Kelley , 2022 ABQB 465 . [ 6 ] The learned Registrar found that while the validity of the Agreement was in doubt, Mr. Kelley had a potential property interest in the Home pursuant to the Matrimonial Property Act RSA 2000, c. M-18 (” MPA ”) that could be proved in bankruptcy. To allow that interest to be established, he directed that the statutory stay of proceedings under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ( the “ BIA ”) be lifted so as to allow Mr.

Kelley to file and prosecute a claim to the matrimonial Home under the MPA , provided that such an action was filed within sixty days. [ 7 ] The Trustee appeals the Registrar’s decision. It says that the Registrar erred in concluding that a potential claim under the MPA constitutes a property interest that is capable of proof and division under the BIA . It says that once the bankruptcy order was made the property belonged to the Trustee for the benefit of creditors. It was no longer capable of being divided or vested in Mr. Kelley.

It also argues that the Registrar ought not to have effectively remitted the issue back to the family law court so that such a division could be effectuated through the MPA process. [ 8 ] Mr. Kelley cross-appeals. He agrees with the Trustee that the Registrar erred by remitting his claim back to the family law process for adjudication. Instead, he says, the Registrar ought simply to have allowed his claim to one-half of the proceeds of sale of the matrimonial Home, based on the MPA , the Agreement, and/or the Dower Act . [ 9 ] I have decided that the Trustee was correct in disallowing Mr.

Kelley’s claim to a property interest in the matrimonial Home sales proceeds. The Agreement relied upon by Mr. Kelley at best gave rise to a contingent right to share in the proceeds of sale of the Home and was of highly uncertain value. Mr. Kelley’s rights under the MPA had not been exercised or reduced to a provable form prior to the bankruptcy of his wife, were of highly uncertain value and were not in any event the basis of his claim.

His Dower rights were waived by virtue of a Consent Order of this court when the property was sold by the Trustee. [ 10 ] I agree with the Trustee that the decision to remit the property interest determination issue back to the family court process under the MPA was an error in law. This was no doubt well-intentioned as a practical method of resolving the entitlement issue. However, such a remedy is not available as Ms. Kelley’s ownership interest in the house was transferred to the Trustee when she was adjudged bankrupt.

It also incorrectly presumes that a matrimonial property order could fairly issue in these circumstances without dealing with all of the matrimonial property acquired during the marriage, including debt. The appeal of the Trustee is therefore allowed and the Trustee’s disallowance of the claim by Mr. Kelly is restored. [ 11 ] My reasons for these conclusions follow. For convenience, I will deal with the cross-appeal first. The Cross-Appeal [ 12 ] Mr. Kelly based his claim to an equal share of the Home proceeds on the Agreement. On appeal, he also relied on the MPA and the Dower Act .

I will address each, in turn. [ 13 ] The Agreement shows the signatures of Mr. and Ms. Kelley and provides as follows: 19 June , 2018 Agreement between Wayne Kelley & Kathy Kelley It is agreed upon between Wayne & Kathy Kelley that the matrimonial home lived in at 222 Douglas Ridge Circle SE Calgary Alberta T2Z 3C4 shall be split between the two when Kathy Kelley either sells the home or no longer owns the home at any point of time. This also includes the death of Kathy Kelley if this should happen at any point and time.

The Furniture that now is in the home except the items located in the garage & or outside shed located at the rear of the home. I Wayne Kelley will return to the home no later than December 31, 2021 to clear out the garage and shed with the belongings agreed upon this day known as my belongings, tools, etc. [ 14 ] On the face of it, the Agreement does not purport to convey to Mr. Kelley an ownership interest in the Home. It simply provides that if any point in the future Ms. Kelley was to sell, no longer own the Home or die, the Home would be “split”. [ 15 ] The terms of the Agreement are highly uncertain.

For example, it is silent on what the “split” would be (although in an

affidavit sworn by Ms. Kelley post-bankruptcy she attests that a 50/50 division was intended). The Agreement is also silent as to whetherthe “split” is to be net of encumbrances on title such as mortgages or judgments. It does not specify whether Mr. Kelley’s entitlementwould survive his death or whether it is assignable. [16] The benefits conferred on Mr. Kelley under the Agreement can therefore be summarized as being an entitlement to anunknown portion of the net sale proceeds of the Home if Ms.

Kelley was ever to sell or no longer own the Home, or die before him. [17] In my view, apart from the reasons cited by the Trustee (lack of consideration and fraudulent preference) the Agreement fallswell short of evidencing a property interest in the matrimonial Home. On that basis alone, Mr. Kelley’s property claim was correctlydisallowed. [18] Mr. Kelley’s claim to a 50% ownership interest in the Home and its sales proceeds by virtue of the MPA is alsounsupportable. [19] The MPA does not divide or distribute property or vest property rights upon the breakdown of a relationship.

It simplyprovides each spouse with the personal right to seek division of property. It is only upon pronouncement of the court’s order that that anyproperty interest can vest: Maroukis v. Maroukis, (SCC), [1984] 2 S.C.R.137 at para 7 . [20] The base assumption under the MPA is that assets will be divided equally, but such a division is not always the case.

All of thefactors enumerated in s. 8 are to be considered in distribution of matrimonial property, including any agreement between the parties.More importantly, in determining how division is to take place, all matrimonial property is considered including both assets andliabilities (i.e. matrimonial debt) as well as potential exemptions, with the relevant date for valuation of non-exempt property being thedate of trial. [21] Although no property vests until an order is made under the MPA, a spouse or adult interdependent partner can take steps toprotect themselves in the interim.

The first step is to commence an action under the MPA. Having done so, a certificate of lis pendens canbe filed at the Land Titles Office to place subsequent encumbrancers on notice of the claim: s. 35. [22] In this case, neither Mr. Kelley nor Ms. Kelley have filed an action under the MPA. Nor does it appear that a divorce actionhas even been commenced. As observed by the Registrar, an MPA action might have been overtaken by the bankruptcy event but theresult is that insofar as Mr. Kelley has a claim against the matrimonial Home under the MPA or otherwise those dealing with Ms.

Kelleyor the Home have had no way of knowing of such a claim . [23] What Mr. Kelley’s share of matrimonial property (both assets and debts) might have been had an MPA action beencommenced is highly speculative. If a significant portion of Ms. Kelley’s debt was found to have been incurred prior to separation, hemay well have received little or nothing after matrimonial debt was paid.

The fact remains, however, that an action was not commencedin a timely manner or at all. [24] It is clear then that one cannot ground a claim for a 50% interest in a matrimonial Home based on the MPA alone, as wasargued before me on appeal. It is not that simple. [25] Mr. Kelley also argues that he has an equal proprietary interest in the matrimonial Home base on the Dower Act. [26] I agree with the Registrar that this case does not turn on the Dower Act. While a claim for dower has been held to survivebankruptcy, in this case Mr. Kelley waived his Dower rights to facilitate sale of the Home by the Trustee.

The Appeal [27] The Trustee argues that the Registrar made an error of law by finding that Mr. Kelley’s property claim, based on the MPA,could proceed to determination before the family law court before returning to the Trustee. [28] As discussed earlier, the law is clear that the rights conferred under the MPA are personal in nature, until such time as they areconverted to an interest in property by court order. [29] It is also clear that under the BIA, property owned by the bankrupt passes to the Trustee as of the assignment free and clear ofall executions or “other processes”: ss. 70 and 71.

Once that has taken place the property is no longer divisible in the MPA process. [30] It follows that spouses (or interdependent adult partners) who hold matrimonial property will be at risk of financial loss if thatproperty is lost due to their partner’s insolvency. From their perspective, and the perspective of creditors of the bankrupt spouse, timingis critical. If at the time of assignment into bankruptcy there is a matrimonial property order in place whereby property is divided, thecreditors will not be entitled to recover against the entire value of the property, but only the bankrupt’s portion.

Conversely, if there is noMPA order in place at the time of bankruptcy, the property will pass unencumbered to the Trustee, leaving it unavailable for division when the MPA process is completed: Bankruptcy Insolvency and Family Law, 2nd Ed., 2007, by Robert Klotz at pp. 4-19; Maroukis vMaroukis, 1984 CarswellOnt 268 SCC, para7 [31] I do not agree that the mere act of assignment into bankruptcy would always extinguish a solvent spouse’s potential interestin matrimonial property. The intersection between the law of bankruptcy and matrimonial property rights is rife with the potential forabuse.

A spouse contemplating divorce may improperly make an assignment into bankruptcy in order to avoid “losing” his or her assetsin the divorce. A couple may decide to transfer assets between them before one spouse makes an assignment – effectively shieldinghousehold debt from creditors. [32] It follows that circumstances may arise where a trustee in bankruptcy or the creditors of a bankrupt may need to intervene in

MPA litigation to protect their interests, just a spouse may need to file a property claim with the Trustee to protect their rights under the MPA , particularly where an action under the MPA has been commenced or already decided. [ 33 ] This is not, however, such a case. [ 34 ] As I read the Registrar’s decision, it was recognized that the property claim made by Mr. Kelley was not capable of proof as currently constituted. It was a potential claim only. The Registrar found that Mr.

Kelley was entitled to advance a claim against the matrimonial Home under the MPA and should be allowed to do so. [ 35 ] With respect, this finding was erroneous, for four reasons. [ 36 ] First, it effectively gave Mr. Kelley priority over Ms. Kelley’s creditors by allowing him to advance an MPA claim years after he became entitled to do so, and after judgments had been registered against the Home. With respect, this was unfair to Ms. Kelley’s creditors, whose investments with Ms.

Kelley may well have financed the Home in the first place (or at least paid for ongoing maintenance and upkeep). [ 37 ] Second, the decision seems to assume that Mr. Kelly’s entitlement to a share of the matrimonial Home would easily be determined. I do not agree. If such an action was to proceed, it would be necessary for the Court to decide what the couple’s property consists of, whether there is any property that is subject to exemptions and based on the factors set out in s. 8 of the MPA and what an equitable division of property would be.

Importantly, the property to be divided would consist of both assets and liabilities making it necessary to determine which of Ms. Kelley’s debts and other obligations were incurred prior to separation (and were matrimonial debt) and which were incurred post-separation (and were her responsibility alone). The Court would also need to consider the 2018 Agreement. It is not an enforceable matrimonial property agreement due to failure to comply with s. 37 of the MPA , but it may nonetheless be considered under s. 8 of the MPA . On its face, it did not provide Mr.

Kelley with an ownership interest in the Home, and as discussed earlier the monetary value of his entitlement under the Agreement was quite uncertain. [ 38 ] Absent participation by Ms. Kelley, it would be up to the Trustee and or creditors to intervene in the action to protect their interest. This would be difficult and expensive given their lack of knowledge of the history of the relationship and family finances. [ 39 ] In result if Mr.

Kelley’s entitlement to a property interest in the Home was remitted back to the family law courts for determination under the MPA , the trial of that issue would not be a simple exercise. [ 40 ] Third, an MPA order in these circumstances could not divide the Home in any event, as property to the Home passed to the Trustee when Ms. Kelley was ordered into bankruptcy by this Court. Remitting the issue back to the family law court would in these circumstances invite an error of law should Mr. Kelley prevail. [ 41 ] Finally, Mr.

Kelley’s claim for a property interest in the Home was not based on the MPA , but rather the 2018 Agreement. To this day, he does not want to have his claim adjudicated under the MPA , even though he says (incorrectly) that by virtue of the MPA he is entitled to a one-half interest in the sales proceeds of the Home. [ 42 ] Accordingly I find that the learned Registrar erred by finding that although Mr. Kelley had no present property interest in the Home, he could and should be allowed to commence an action under the MPA to obtain one through an MPA order. Conclusion [ 43 ] In

summary, I find that the Trustee’s decision to disallow the claim by Mr. Kelley was correct in the result. The agreement upon which the claim was made does not purport to be a conveyance of a property interest, but rather a contingent contractual right to “split” the Home on the happening of certain events and of uncertain value. Leaving aside the absence of consideration and potential fraudulent preference, the property claim was properly disallowed. [ 44 ] I also find that Mr. Kelley’s rights under the MPA are personal only, and not an ownership interest in property.

The latter can only be achieved through an action under the MPA . Mr. Kelley did not avail himself of the opportunity to bring such an action in a timely way. Nor did he take any steps to place third parties on notice of an MPA claim in respect of the matrimonial property at issue. For that he has only himself to blame. Even if he wanted to pursue such an action now (a remedy granted by the Registrar, but appealed by Mr. Kelley) I would not have allowed it . [ 45 ] The Trustee’s appeal is allowed. Mr. Kelley’s cross-appeal is denied. Heard on the 21 st day of September, 2022.

Dated at the City of Calgary, Alberta this 2 nd day of November, 2022. R.A. Neufeld J.C.K.B.A.

Appearances: Daniel Jukes for the Applicant P.M. Menon Parakkal and Ayodeji Otiti for the Respondent