Rusinek & Associates v. Arachchilage & Baliah, 2020 ONSC 1090 (CanLII)
Following separation, the Husband filed for bankruptcy. Neither spouse commenced an application for equalization of net family properties. The Husband’s trustee in bankruptcy was appointed to discharge the Husband’s unsecured liability of $282,700. The Trustee in bankruptcy commenced an application for equalization of an equalization of net family property in place of the Husband.
Justice Gilmore considered whether a trustee in bankruptcy could commence an equalization claim on behalf of the bankrupt spouse under the Family Law Act (“FLA”).
The interplay of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (“the BIA”) and the FLA were considered. The central determination was whether the right of action for equalization was considered property under the BIA. If so, then the right to commence a claim for equalization vests in the trustee in bankruptcy.
Section 71 of the BIA ensures the bankrupt’s property vests on the date of the bankruptcy in the bankruptcy trustee to enable them to dispose of assets for distribution to creditors.
Subsection 72(1) of the BIA provides that the trustee is entitled to avail himself of all rights and remedies provided by that law or statute as supplementary to and in addition to the rights and remedies provided by the BIA.
Subsection 5(1) of the FLA provides that spouses are entitled to make claims for equalization.
Subsection 7(1) of the FLA allows the court, on the application of a spouse, former spouse or deceased spouse’s personal representative, determine any matter respecting the spouses’ entitlement to an equalization payment.
Subsection 7(2) of the FLA states that the entitlement to equalization is personal right between the spouses.
Justice Gilmore without apprehension found that an equalization claim is a right of action that once made vests in the trustee in bankruptcy. Therefore, once a spouse claims equalization, the trustee in bankruptcy may continue to pursue that claim.
Justice Gilmore found no case law to support an interpretation that entitlement to commence an equalization claim was anything but personal. While the claim itself can be pursued by the trustee, the right to make the claim is not property that vests in the trustee in bankruptcy.
To this point Justice Gilmore at paragraph 28 found that “…an equalization claim is one that is inchoate until exercised. Once exercised, it takes on a new form as “property” and is subject to the provisions of the BIA. Until that point, the right is not assignable and remains only as an amorphous possibility.”
Hence, since the right to claim equalization is not property, it does not vest with a trustee for bankruptcy and cannot be claimed expect by one of the spouses or their personal representative on death.
Additional note about Equalization:
When legally married spouses separate with no reasonable prospect that they will resume cohabitation, the spouse that is less financially well off due to the divorce is entitled to an “equalization” payment to account for the inherent joint responsibilities, whether financial or otherwise, the spouses shared during the marriage, pursuant to subsection 5(7) FLA. The spouse who is less financially well-off is entitled to one-half the difference of the spouses “net family properties” pursuant to subsection 5(1) FLA.
Net family property means the value of all the property, except property under subsection 4(2) of the FLA (“Excluded property”), that a spouse owns on the valuation date (or “date of separation”), after deducting the spouse’s debts and other liabilities and the value of property, other than a matrimonial home, that the spouse owned on the date of the marriage.
Normally, a spouse that is separated or divorced would make a claim for equalization when they make an Application (Form 8) in the Superior Court of Justice.
It is noteworthy that only legally married spouses can make claims for equalization. Equalization is a unique property claim that the subsection 5(1) of the FLA bestows upon married couples. It is their personal right. Unlike property rights which people are entitled to because they are registered owners, for example shares in a business or as a joint tenant on the title of a house.
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