DATE: 20110210 |
DOCKET: C50496 & C50520 |
COURT OF APPEAL FOR ONTARIO |
Sharpe, Blair and Rouleau JJ.A. In the Matter of the Bankruptcy of Rodney Blair Thibodeau, of the Town of Stouffville, in the Province of Ontario And in the Matter of an Appeal Made by Rodney Blair Thibodeau Under the Family Law Rules, O. Reg. 114/99, s. 38(1) |
BETWEEN: |
Darlene Joyce Thibodeau |
Applicant (Respondent in Appeal) |
and |
Rodney Blair Thibodeau |
Respondent (Appellant) |
AND BETWEEN: |
Darlene Joyce Thibodeau |
Applicant (Respondent in Appeal) |
and |
The Bank of Nova Scotia, as assignee of Cyril Sapiro & Co. Ltd., Trustee of the Estate of Rodney Blair Thibodeau, a bankrupt |
Respondent (Appellant) |
Douglas Christie, for the appellant Rodney Blair Thibodeau S.N. Zeitz, for the appellant Bank of Nova Scotia Robert A. Klotz and N. Barmania, for the respondent |
Heard: October 18, 2010 |
On appeal from the Order of Justice N. Backhouse of the Superior Court of Justice, dated May 11, 2009. |
R.A. Blair J.A.: |
[1] The principal issues on this appeal involve the interplay between the recovery of equalization payments under Ontario’s family law legislation, and the equal division of assets among unsecured creditors under Canada’s federal bankruptcy law.
[2] Mrs. Thibodeau is entitled to an equalization payment of $264,468.69 from Mr. Thibodeau, now a bankrupt. The arbitrator’s award granting that entitlement – and subsequently incorporated into a court order – stipulated that Mr. Thibodeau was to pay the equalization amount out of his share of the sale proceeds from the parties’ matrimonial home. The first issue is whether her equalization claim has priority over the claims of other creditors in the bankrupt estate as a result of that award. Justice Backhouse concluded that it does.
[3] The second issue is whether the motion judge was entitled, as she did, to order the transfer of Mr. Thibodeau’s bankruptcy-exempt RRSP to Mrs. Thibodeau in order to defray her claim to costs related to the equalization payment.
[4] For the reasons that follow, I would allow the appeal.
[5] The parties were engaged in lengthy and protracted matrimonial proceedings, which they ultimately referred to arbitration pursuant to a consent order granted by Nelson J. on January 18, 2007. The order provided that the issues were to be determined by a mediation/arbitration conducted by Malcolm Kronby Q.C., a very experienced family law lawyer and mediator/arbitrator. He was granted the authority to make all interim, interlocutory and final orders affecting the issues in the matrimonial proceedings as if he were a judge of the Superior Court.
[6] Following the arbitration hearing, Mr. Kronby delivered a comprehensive award on May 7, 2008, in which he ordered, amongst other things, that:
a) Mr. Thibodeau make an equalization payment to his wife in the amount of $264,468.69, with interest at 4% per annum from May 7, 2008 until the date of payment;
b) Mr. Thibodeau pay a lump sum for arrears of spousal support to April 1, 2008 in the amount of $85,293.12, with interest at 4% per annum from that date;
c) the jointly owned matrimonial home be sold, on consent, and Mr. Thibodeau pay to Mrs. Thibodeau from his one-half share of the sale proceeds the amounts owing to her under (a) and (b) above.
[7] On September 9, 2008, the arbitrator made a further award requiring Mr. Thibodeau to pay his wife’s costs, fixed at $175,000, of which one-half, namely $87,500, was allocated to support.
[8] On October 8, 2008, Mrs. Thibodeau brought a motion – returnable October 16, 2008 – for an order pursuant to s. 59.5 (as it then existed) and s. 59.8 of the Family Law Act, R.S.O. 1990, c. F.3 incorporating the terms of the arbitration award into a court order. The motion judge appears to have been of the view that at that time Mrs. Thibodeau also sought priority over her husband’s share of the sale proceeds of the matrimonial home, but I do not see such a claim in the Notice of Motion (other than the claim to incorporate the arbitrator’s award that the equalization payment and the arrears of spousal support be paid out of those funds). Nor do I see any claim for an order transferring Mr. Thibodeau’s RRSP to her.
[9] Mr. Thibodeau made an assignment in bankruptcy on October 16.
[10] On the same day, Mrs. Thibodeau brought an urgent motion, returnable October 17, 2008, for leave to continue the proceedings in Superior Court and adding the Trustee in Bankruptcy as a party to the proceedings. On October 17, the motion judge made an order incorporating the terms of the arbitration awards into her court order, facilitating the sale of the matrimonial home, and directing that Mr. Thibodeau’s share of the net proceeds of sale be held in trust pending a determination of entitlement to the proceedings. She also granted leave to Mrs. Thibodeau to continue the proceedings and added the Trustee as a party. The remaining issues were adjourned.
[11] Subsequently, on December 19, 2008, Registrar Nettie in Bankruptcy Court granted leave to the appellant, Bank of Nova Scotia, to stand in the place of the Trustee for the purpose of realizing upon the bankrupt’s approximate $302,000 net equity in the matrimonial home, subject to his wife’s priority status for certain spousal support payments under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 38 (“BIA”). When the issues that led to the order under appeal came on before the motion judge again, on March 30, 2009, the Bank – which has an unsecured claim in the approximate amount of $169,000 – sought an order that Mr. Thibodeau’s share of the sale proceeds vest in the bankrupt estate to be distributed in accordance with s. 136 of the BIA.
[12] In the meantime, on February 3, 2009, Justice Paisley made an order, on consent, that:
[O]n an interim basis pending the determination of the priority dispute between Darlene Thibodeau and the Bank of Nova Scotia (as Assignee from the Trustee in Bankruptcy of the Estate of Rod Thibodeau of the trustee’s rights pursuant to the Order of Registrar Nettie dated December 19, 2008), Darlene Thibodeau receive the sum of $171,000 from the proceeds of sale currently held by Jack Laurion in trust.
[13] As the motion judge noted, there was no characterization of the monies paid out pursuant to this Order in terms of spousal arrears or equalization payment.
[14] The issues that need to be determined on the appeal are these:
a) Did the motion judge err in granting Mrs. Thibodeau’s claim for equalization payments priority over the claims of Mr. Thibodeau’s unsecured bankruptcy creditors, with respect to his share of the proceeds of sale of the matrimonial home?
b) Did the motion judge err in ordering the balance of Mr. Thibodeau’s RRSP transferred to Mrs. Thibodeau?
ANALYSIS
[15] The motion judge based her decision principally on the following: she concluded that, because the arbitrator had directed Mrs. Thibodeau’s equalization payment to be made out of Mr. Thibodeau’s share of the proceeds of the matrimonial home, the order created an equitable trust in favour of Mrs. Thibodeau with respect to those proceeds which therefore entitled her to priority over the creditors in bankruptcy. In this respect, she said:
The arbitration award clearly divided the husband’s share of the sale proceeds of the matrimonial home to the extent necessary to pay the equalization payment owing to the wife. The award effects a comprehensive and final division of the proceeds of the matrimonial home. The disposition of all the proceeds is completely provided for. The wife retained control through her ongoing joint ownership to prevent diversion of the payment.
Where a spouse agrees or is ordered to transfer property to another, the court will impose a trust on such property, enforceable against that spouse’s subsequent trustee. Equity regards as done that which has been agreed to be done. [Emphasis added; citations omitted]
The arbitration award has the character of both an agreement and a court order. The Trustee (and therefore the Bank as a result of the assignment) steps into the shoes of the bankrupt. The trustee’s interest in the matrimonial home proceeds is subject to any existing equities including the obligation to direct the proceeds of sale to the wife to the extent necessary to satisfy the equalization. [Citations omitted.]
[Emphasis added.]
[16] In response to this appeal, Mr. Klotz rested his submissions on behalf of Mrs. Thibodeau on the same ground. He disavowed any reliance on a constructive trust or the concept of a charging order. He argued that on any of the following four theories (which, he concedes, overlap to some extent) Mrs. Thibodeau’s claim for priority ought to prevail:
a) The arbitration award itself effected a division of property which pre-dated the bankruptcy, as a result of which Mr. Thibodeau had no property rights in the sale proceeds at the date of bankruptcy;
b) The effect of the award was to impose an equitable trust on the proceeds, effective against the trustee in bankruptcy;
c) Mr. Thibodeau’s obligation to pay the specified monies out of a specific fund, imposes an equitable lien or equitable assignment on the sale proceeds; and
d) The trustee – and its assignee, the Bank – step into Mr. Thibodeau’s shoes and cannot resile from his obligation to direct the sale proceeds to Mrs. Thibodeau in accordance with the award.
[17] For a number of reasons, I would not give effect to these submissions.
[18] First, I do not agree that the arbitrator’s award effected a “division of property” prior to the date of bankruptcy, in the sense that it divided Mr. Thibodeau’s share of the proceeds of sale, as a result of which Mr. Thibodeau had no property rights in the sale proceeds to pass to the trustee in bankruptcy as of that date.
[19] The award divided the matrimonial home by providing that it be sold, as agreed by the parties. It divided the proceeds of that sale, and did so explicitly by providing that “the parties will share equally the net proceeds of sale” (emphasis added.) But it did not “[divide] the husband’s share of the sale proceeds of the matrimonial home to the extent necessary to pay the equalization payment owing to the wife,” as the motion judge determined. Had the arbitrator contemplated such a result, he would not have provided for an equal sharing of the net proceeds, in my opinion. What he did – as I read his award -- was to create a mechanism to facilitate the enforcement of Mrs. Thibodeau’s equalization payment as between her and her husband. That this was his concern is apparent from the paragraph in the award dealing directly with the disposition of the sale proceeds:
As agreed by the parties the matrimonial home will be sold. The parties will share equally the net proceeds of sale, and Mr. Thibodeau will pay to Mrs. Thibodeau from his share of the net proceeds of sale the amounts owing to her under [the provisions of the award dealing with lump sum arrears of support and the equalization payment]. Because of the conflict between the parties I am concerned that the sale of the home be concluded expeditiously and in an orderly manner, so I will retain ancillary jurisdiction to issue whatever directions may be required at the request of either party concerning the sale of the home, including a direction that the proceeds of sale be held in trust until distributed. [Emphasis added.]
[20] The concern was justified, and the arguments advanced on behalf of Mrs. Thibodeau would have more force if only the dynamics between the spouses are to be taken into account. A spouse entitled to an equalization payment is an unsecured creditor of the payor spouse, however, and when bankruptcy intervenes, there are broader considerations at play. Other unsecured creditors have rights as well. I note the arbitrator’s caveat that he would retain ancillary jurisdiction to issue directions, “including a direction that the proceeds of sale be held in trust until distributed.” This, in itself, reinforces the view that he had made no trust-like order dividing Mr. Thibodeau’s share of the sale proceeds of the matrimonial home at that point.
[21] I turn now to the respondent’s primary argument, namely that the effect of the arbitration award was to impose an equitable trust on the proceeds, effective against the trustee in bankruptcy – an argument that I reject as well.
[22] The motion judge placed considerable reliance upon the maxim that “equity regards as done that which ought to have been done” (or, as she put it, “that which has been agreed to be done.”) The maxim does not assist Mrs. Thibodeau in the circumstances, however. It simply begs the question: “what ought to have been done?” Once the bankruptcy intervened, there were two conflicting tensions at work with respect to that question: ought the equalization payment to have been made out of Mr. Thibodeau’s share of the proceeds of sale as ordered, or ought Mr. Thibodeau’s assets, including his share of the proceeds of sale, be distributed equally amongst his unsecured creditors, of which Mrs. Thibodeau is but one?
[23] The resolution of this conflict depends upon whether an equalization payee spouse in Mrs. Thibodeau’s position is entitled to priority over the payor spouse’s unsecured bankruptcy creditors. Only after that determination has been made can equity know what “ought to have been done” in the circumstances, because – to repeat – if Mrs. Thibodeau does not have priority, then the assets are to be distributed pari passu amongst the unsecured creditors in accordance with the scheme of the BIA, and it cannot be said that some other distribution “ought to have been done.” Equity does not regard as done that which ought not to be done as a matter of law.
[24] Thus, it is circular to use the equitable maxim to resolve the priority problem here.
[25] Properly, Mr. Klotz does not argue that merely because Mrs. Thibodeau has a judgment for the payment of money she is in some kind of preferred position. Instead, he submits that the arbitrator’s award itself (as incorporated into the court order) created a trust-like obligation against Mr. Thibodeau’s share of the sale proceeds on general equitable principles. Therefore, he contends, the proceeds were never the property of the bankrupt under the BIA and never passed to the trustee in bankruptcy for distribution to the creditors.
[26] I accept at the outset that an agreement between spouses transferring or agreeing to transfer property from one to another – in a fashion analogous to an agreement of purchase and sale – transfers an equitable interest in the property to the transferee spouse. There is no reason why a court order for the transfer of property in the same way should not have the same effect from the date the order is made. The upshot of such an agreement or order is to impose a trust or trust-like condition on the property, rendering the payee spouse’s claim enforceable against the payor’s trustee in bankruptcy. Many of the authorities cited by Mr. Klotz on behalf of Mrs. Thibodeau fall into that category. See, for example, Klymas v. Burkholder (1976), 22 C.B.R. (N.S.) 216 (Ont. Co. Ct.); Pulzoni v. Pulzoni (1982), 25 R.P.R. 72 (Ont. H.C.J.); Re Lee (1995), 58 A.C.W.S. (3d) 547 (Ont. Gen. Div.); Godfrey v. Godfrey (1996), 19 R.F.L. (4th) 58 (Ont. Gen. Div.); In re Wells, 160 B.R. 726 (Bkrtcy. N.D.N.Y. 1993); In re Peterson, 133 B.R. 508 (Bkrtcy. W.D. Mo. 1991); Re Michiels (1991), 14 Fam. L.R. 587 (Fam. Ct. of Australia); Mountney v. Treharne, [2002] 2 F.L.R. 930 (Eng. C.A.).
[27] It may be for this reason that the respondent attempts to characterize the arbitrator’s award as both an agreement and an order, a characterization accepted by the motion judge. No authority is cited for this proposition, and I am puzzled by it. The award is the result of a process to which the parties agreed – and they agreed to be bound by the outcome – but the award itself does not have the character of an agreement. No doubt many litigants who disagree profoundly with an arbitrator’s award, made at the end of such a consensual process, would be surprised to learn that they had agreed to the terms of the award.
[28] There is no agreement here, and the foregoing line of jurisprudence is of little assistance in resolving this matter.
[29] However, there is an award – now incorporated into a court order – providing that Mr. Thibodeau “will pay ... from his share of the net proceeds of sale [the amount of the equalization payment].” The real issue is whether that award/order is sufficient to elevate Mrs. Thibodeau’s status in the bankruptcy proceedings from that of unsecured creditor to that of a preferred creditor by way of some form of equitable trust. In my opinion, it is not.
[30] Had the arbitrator intended that his award would have the effect of transferring a property interest in, or creating a charge against, or a trust-like interest in, Mr. Thibodeau’s share of the sale proceeds, he would have resorted to his full powers under s. 9(1) of the Family Law Act and considered whether such an award was appropriate in the circumstances. He possessed those powers by virtue of the parties’ agreement that he could exercise all of the authority of a Superior Court judge. Nothing in his reasons points to his having done so. This may well be because no case for the granting of such exceptional and intrusive relief was made out on the record before him.
[31] Section 9(1) of the Family Law Act clothes the court with its statutory authority to grant remedies in the context of an equalization of net family property application under s. 7 of the Family Law Act. It sets out a series of options and, as Walsh J. observed, in Marsham v. Marsham (1987), 59 O.R. (2d) 609 (H.C.J.), at pp. 622 and 625, equips the court with “a most extensive and comprehensive choice of powers,” and “the flexibility required to enable it to choose the most appropriate method of satisfying the equalization entitlement the court has previously determined.” This does not mean, however, that s. 9(1) contemplates an indiscriminate resort to the enhanced remedies it provides for. In my view, as I shall explain, it does not.
[32] In summary, the choices available under s. 9(1) are (a) that the whole amount be paid; (b) that, in addition, security may be imposed, or the property transferred to or in trust for, or vested in, the receiving spouse absolutely, for life, or for a term of years; and (c) if necessary, to avoid hardship, the whole amount may be paid in instalments, not to exceed a period of 10 years.[1] Here, the arbitrator chose to resort to the first of the powers available to him, namely, the making of an order that the whole amount of the equalization entitlement be paid – to which he added, as an enforcement mechanism between the spouses, that the amount owing would be paid out of the appellant’s share of the proceeds of sale of the matrimonial home. He made no further order under s. 9(1), opting instead to retain jurisdiction should any difficulties arise with respect to the enforcement of the equalization payment as between the parties.
[33] The choice of s. 9(1) remedies was the arbitrator’s to make, keeping in mind that the record must demonstrate a real need for such a protective order, given its potential impact on absent third parties. Respectfully, it was not for the motion judge to alter or rectify his award in view of intervening events under the pretext of determining an enforcement motion pursuant to s. 59.8 of the Family Law Act, which permits the court to incorporate the terms of an arbitration award into a court order. I shall address the s. 59.8 point more fully later.
[34] In the meantime, I return to a review of the jurisprudence relied upon by the respondent.
[35] There is some authority at the Superior Court level to the effect that an order in the form awarded by the arbitrator may create a trust-like obligation in favour of the payee spouse – on other than “transfer of property” grounds – and thereby trump the interest of the trustee in bankruptcy and, accordingly, of the other unsecured creditors of the bankrupt payor spouse. See Re Gilmour (1997), 9 C.B.R. (4th) 191 (Ont. Gen. Div.); Re Coulthard (2003), 349 A.R. 397 (Registrar in Bankruptcy); Dhala v. Dhala (2006), 410 A.R. 74 (Q.B.). Respectfully, I do not think those authorities provide an accurate statement of the law in the context of a priority dispute of this nature involving the interface between Ontario’s family law equalization payment regime and the distribution of a bankrupt equalization payor’s assets pursuant to Canada’s federal bankruptcy scheme. I say this for the following reasons.
[36] First, the Ontario family law regime with respect to equalization payments dovetails effectively with the federal distribution scheme dealing with the distribution of assets in the event of bankruptcy.
[37] Unlike its predecessor – the Family Law Reform Act, R.S.O. 1980, c. 152, which featured a division of property scheme – Ontario’s Family Law Act adopted an equalization payment regime. Separating spouses are not entitled to receive a division of property. Rather, they are entitled (generally speaking) to receive one-half of the value of the property accumulated during the marriage. An equalization payment is the chosen legislative default position. On the bankruptcy side, unsecured creditors are to be treated equally and the bankrupt’s assets to be distributed amongst them equally subject to the scheme provided in s. 136 of the BIA. Parliament has not accorded any preferred or secured position to a claim for an equalization payment. While it has recently chosen to amend the BIA to give certain debts or liabilities arising in relation to claims for support and/or alimony a preferred status[2], Parliament has made no such provision for equalization claims in relation to family property.
[38] Secondly, it is clear from the authorities and the scheme of the legislation, that a spouse entitled to receive an equalization payment is a creditor of the payor spouse. And an unsecured creditor at that. As Galligan J.A. observed in Berdette v. Berdette (1991), 3 O.R. (3d) 513 (C.A.), at pp. 524-25:
The intent of this legislation is to establish partnership and equal sharing of property accumulated during marriage. That intent is not effected, however, by the sharing of the assets themselves as was done under the Family Law Reform Act, R.S.O. 1980, c. 152, which preceded the F.L.A. It is done by the sharing of the value of the assets. The distinction is crucial and is one that is not infrequently overlooked. For example, in his Annotation to Rawluk v. Rawluk, [1990] 1 S.C.R. 70 [other citations omitted] ... Professor James G. McLeod speaks of “a statute that, by its terms, provides for the equitable distribution of property.” In my view, the definition of “net family property” contained in s. 4(1), the opening words of s. 4(2), s. 5(1), and s. 5(6), all show that the F.L.A. does not provide for the distribution of property. Rather, it provides for the payment of money when the net family property of one spouse is less than that of the other.
I make particular reference to s. 4(1), which defines “net family property” as the value of all property which a spouse owns on valuation day. In this way, net family property is distinct in nature from “property” in the statutory sense found in s. 4(1) and from the word “property” in its ordinary sense.
[Underlining added.]
See also Shea v. Fraser (2007), 85 O.R. (3d) 28 (C.A.), at para. 27; Schreyer v. Schreyer (2009), 70 R.F.L. (6th) 237 (Man. C.A.) at paras. 125-132; Burson v. Burson (1990), 29 R.F.L. (3d) 454 (Ont. Gen. Div.); and Gaudet (Litigation Guardian of) v. Young Estate (1995), 11 R.F.L. (4th) 284 (Ont. Gen. Div.).
[39] Given its powers under s. 9(1) of the Family Law Act, the court can impose a legal relationship between the spouses other than a debtor-creditor relationship pursuant to the equalization process, if the record justifies such exceptional and intrusive action. The court can order the transfer to or vesting of property in one of the spouses. It can order the creation of trusts of property or a charge against property in favour of one spouse with respect to the other spouse’s property. But, as noted, the arbitrator took none of these steps in this action, and the record does not appear to have warranted such steps in any event.
[40] It bears highlighting here that the enhanced remedies available under s. 9(1) of the Family Law Act give rise to proprietary rights in the spouse benefitting from the order. They are therefore exceptions in an equalization payment regime and give rights that may affect third parties of whom the trier may be unaware and who are not represented in the proceedings. It follows, in my view, that these remedies should not be imposed indiscriminately or routinely, and only if there is a real need and there are sound reasons on the record for doing so.
[41] Indeed, lower courts have recognized the need for a principled approach to the application of an enhanced s. 9(1) remedy. Such orders are to be made only where there is a real need for them, after all relevant considerations have been taken into account, and not as a matter of course. As Whalen J. stressed, in Colquhoun v. Colquhoun, 2007 CarswellOnt 18 (S.C.), at para. 168, “[t]here must be a proven concern that payment [of an ordered equalization payment] will not be honoured” (emphasis added) before the court can order the transfer or partition and sale of property under s. 9(1).
[42] The onus is on the party seeking such an order, and as a general rule the court’s discretion will only be exercised in favour of a s. 9(1) order where it is established – based on the targeted spouse’s previous actions and reasonably anticipated future behaviour -- that the equalization payment order granted will not likely be complied with in the absence of additional, more intrusive provisions: Kennedy v. Sinclair (2001), 18 R.F.L. (5th) 91 (Ont. S.C.), at para. 45; Lynch v. Segal (2006), 82 O.R. (3d) 641 (C.A.), at para. 32; Raymond v. Raymond (2008), 64 R.F.L. (6th) 160 (Ont. S.C.); Alldred v. Alldred, [1998] O.J. No. 3606 (Gen. Div.); McDonald v. McDonald (1994), 5 R.F.L. (4th) 215 (Ont. Gen. Div.), aff’d (1997), 33 R.F.L. (4th) 425 (C.A.).
[43] Accordingly, in my view, an order providing that an equalization payment to one spouse is to be made out of the payor spouse’s share of the proceeds of the sale of the matrimonial home, without more, does not create “property rights” in the payee spouse –equitable, securitized, or otherwise. Absent clear language pointing to the trier of fact’s intention to order the transfer or vesting of a payor spouse’s assets, or the creation of security, or the imposition of a trust-like obligation, in satisfaction of the equalization payment, courts should be wary of giving effect to a proprietary right form of disposition, lest (a) what the legislature has clearly decided is to be an equalization regime is inadvertently transformed into a division of property regime under the guise of protecting a payee spouse’s right to receive the equalization payment awarded, and (b) otherwise legitimate claims of third parties be subverted and bankruptcy priorities reversed.
[44] I recognize there are policy arguments at play here. On the one hand, spouses – often women –need protection to ensure that their just share of the value of the property accumulated during marriage will be paid by recalcitrant former spouses. These concerns are important, but can often be addressed without affecting the rights of other innocent third parties, as the arbitrator did in this case, for example, by crafting an enforcement mechanism providing for payment out of Mr. Thibodeau’s share of the proceeds – an obligation enforceable as between the spouses. On the other hand, what is at issue in terms of enforcement and access to assets as between spouses, one-on-one, takes on a broader dimension in the insolvency context where third party interests are involved. And this gives rise to the counter policy argument: equalization payee spouses are unsecured creditors, and, like other unsecured creditors, should not receive higher protection one against the other.
[45] Parliament and the Ontario legislature have opted for the interlocking regimes described above, however. It is for them, and not for the courts, to make these difficult policy choices.
[46] Thirdly, the Alberta authorities – Coulthard and Dhala – referred to above are distinguishable on two bases. Alberta, unlike Ontario, has opted for a division of property regime with respect to the division of family property. In addition, and with that environment in mind, the court in both instances concluded that the intention and effect of the order in question directing payment from the payor spouse’s share of the proceeds of sale of the matrimonial home was to create a charge against those funds making the equalization payee spouse a secured creditor under the BIA. I have concluded that the arbitrator’s order does not do so in this case. Further, there is jurisprudence in Ontario deciding that a charge against a fund does not constitute the holder of the charge a secured creditor under the BIA: see Re Bright (1981), 33 O.R. (2d) 219 (H.C.J.). It is not necessary to resolve these differences here, however, because Mr. Klotz does not seek to uphold the motion judge’s decision on the basis that the arbitrator’s award created a charge against Mr. Thibodeau’s share of the proceeds.
[47] Fourthly, I am not prepared to adopt the reasoning advanced in Re Gilmour, and relied upon by the motion judge, in these circumstances. In Re Gilmour the court had awarded an equalization payment in favour of the husband. The order provided that the wife was to direct the equalization payment to be made from her portion of the sale proceeds of the matrimonial home. In this respect, the order incorporated the terms of Minutes of Settlement to that effect. The wife subsequently went bankrupt. Greer J. held that the husband’s entitlement to the equalization payment had priority over the rights of the trustee in bankruptcy. She did so on two grounds. She concluded that the terms of the order imposed a trust on the funds, in favour of the payee spouse, from the time the order was made, and therefore that the funds did not constitute property of the bankrupt that would pass to the trustee. In addition, she relied upon the principle of “equitable assignment”, to which I will return later in these reasons.
[48] Respectfully, I do not accept either the “imposition of a trust” or the “equitable assignment” line of the Gilmour reasoning.
[49] I have described above why I am not persuaded that an order for payment of a debt out of the proceeds of sale of a matrimonial home, without more, creates a trust-like relationship, or a charge, in relation to the proceeds. It does not effect a division of the payor’s portion of the sale proceeds. It is not equivalent to an order pursuant to s. 9(1)(b),(c) or (d) of the Family Law Act. A payee spouse entitled to an equalization payment is an unsecured creditor of the payor spouse in Ontario, and Parliament has specifically declined to enhance that status to one of preferred or secured creditor in the scheme of distribution provided for under the BIA which brings the concerns of other legitimate creditors into play as well. To reiterate, judges should be wary about interpreting orders that are principally designed to assist one spouse in his or her efforts to enforce the order vis-à-vis the other spouse in a fashion that gives the payee spouse an advantage over third parties whose interests are at stake and who were not before the arbitrator or court at the time the award/order was made.
[50] This view is consistent with that taken by the Supreme Court of Canada and other courts in cases concerning remedial trusts. It is well established that a remedial constructive trust is a remedy that may be imposed where good conscience so requires: Soulos v. Korkontzilas, [1997] 2 S.C.R. 217, at para. 34. To be fair, Mr. Klotz does not seek to rely upon the imposition of a constructive trust in the traditional sense. However, he does seek to rely upon an interpretation of the arbitrator’s award that would impose a trust-like claim in favour of Mrs. Thibodeau against her husband’s share of the sale proceeds. This is tantamount to saying that the award/order gave rise to a remedial trust.
[51] Soulos and other authorities have stressed the importance of taking into account the interests of affected third parties when considering the granting of relief on constructive or remedial trust principles. As Ferrier J. observed, in McCoy v. Hucker [1998] O.J. No. 2831 (Gen. Div.), at para. 19, “[a] constructive trust is not meant to be a tactical tool used routinely in family law cases.” In Soulos the Court expressly recognized, however, that “[the inquiry into good conscience] is informed by the absence of an indication that a constructive trust would have an unfair or unjust effect on the defendant or third parties, matters which equity has always taken into account” (para. 34; emphasis added). As explained by McLachlin J., it is one of the criteria for the granting of a constructive trust, that “there must be no factors which would render imposition of a constructive trust unjust in all the circumstances of the case; e.g., the interests of intervening creditors must be protected” (emphasis added.)
[52] The same may be said, in my view, for the creation of an equitable trust against a fund or property in some other guise.
[53] Lastly, the motion judge referred to the unpalatable circumstance of a bankrupt seeking to use the bankruptcy system simply to avoid complying with his or her financial obligations on the dissolution of marriage. Other judges have done so as well. The concern is misplaced in this context, in my view, and fails to give credit to the supervisory nature of the judiciary’s role in bankruptcy proceedings.
[54] If a bankrupt is seen to be using the bankruptcy system to avoid paying legitimate claims, including the claims of his or her spouse, such considerations are properly dealt with at the bankruptcy discharge stage – either by way of refusal or the imposition of terms and conditions of discharge, which benefit all creditors equally as the bankruptcy scheme of distribution envisages. In my view, however, the perception that one spouse is attempting to use a bankruptcy proceeding as a means of defeating the other spouse’s claims under the Family Law Act does not in itself justify the retroactive creation of a remedial trust-like claim, or the strained interpretation of the terms of an existing order, in what is essentially an indirect attempt to re-order priorities in the bankruptcy. Statements expressing a contrary sentiment in such cases as Re Hughes (October 23, 1997), 32-071120(Ont. Gen. Div.) and Coathup v. Coathup, [2000] O.J. No. 289 (S.C.), aff’d [2001] O.J. No. 1851 (C.A.) were not made in the foregoing context, and to the extent they suggest otherwise in the present context, I respectfully disagree.
[55] In the end, then, I do not accept the argument that the effect of the arbitrator’s award was to impose an equitable trust on the proceeds, effective against the trustee in bankruptcy.
[56] Nor would I give effect to the somewhat overlapping submission that Mr. Thibodeau’s obligation to pay the specified monies out of a specific fund, created an equitable lien or equitable assignment on his share of the proceeds of sale.
[57] The law of equitable assignment was articulated by the House of Lords in Swiss Bank Corporation v. Lloyds Bank, [1981] 2 All E.R. 449 (H.L.), at p. 453 as follows:
The law as to equitable assignment, as stated by Lord Truro in Rodick v. Gandell ((1852) 1 De GM & G 763 at 777-778, 42 ER 749 at 754) is this: “The extent of the principle to be deduced is that an agreement between a debtor and a creditor that the debt owing shall be paid out of a specific fund coming to the debtor, or an order given by the debtor to his creditor upon a person owing money or holding funds belonging to the giver of the order, directing such person to pay such funds to the creditor, will create a valid equitable charge upon such fund, in other words, will operate as an equitable assignment of the debts or fund to which the order refers. ... This is but an instance of a familiar doctrine of equity that a contract for valuable consideration to transfer or charge a subject matter passes a beneficial interest by way of property in that subject matter if the contract is one of which a court of equity will decree specific performance. [Emphasis added.]
[58] Here, however, there is no agreement that Mrs. Thibodeau’s equalization payment will be made out of her husband’s share of the sale proceeds. There is an arbitration award, incorporated into a court order. I do not know that the doctrine of equitable assignment extends to the operation of court orders, as opposed to voluntary agreements between the parties. A court order operates as an authoritative direction from the court. As explained above, whether an order respecting the payment of an equalization amount creates more than a debtor-creditor relationship in the form of some proprietary or trust interest, or charge against a fund or property, depends upon intention of the trier of fact and the terms of the order itself. It is neither helpful nor accurate to characterize the order as operating in the form of an “equitable assignment.”
[59] Mr. Klotz also submits that the trustee – and its assignee, the Bank – step into Mr. Thibodeau’s shoes and cannot resile from his obligation to direct the sale proceeds to Mrs. Thibodeau in accordance with the award. This argument is simply a re-formulation of those already rejected above and adds nothing in my view. It cannot succeed.
[60] For all of the foregoing reasons, I reject the argument that the arbitrator’s award – as subsequently incorporated into the court order – created a trust-like obligation enforceable against Mr. Thibodeau’s share of the proceeds of sale of the matrimonial home in priority to the claim of the Trustee in bankruptcy. I would give effect to this ground of appeal.
[61] As a second ground of appeal, Mr. Thibodeau contends that the motion judge erred in ordering the balance of the funds in his RRSP transferred to Mrs. Thibodeau in these circumstances. I agree that she did.
[62] Mr. Thibodeau’s RRSP is exempt from the bankruptcy proceeding and does not form part of the property of the bankrupt vesting in the trustee: BIA, s. 67(1)(b.3). At the time of the motion the RRSP funds consisted of approximately $75,000 in an account with Transamerica Segregated Funds. Subsequent to his assignment in bankruptcy – and therefore after the commencement of this motion – Mr. Thibodeau transferred these funds into an insurance-protected RRSP account with Transamerica, thus seeking to make the funds exempt from seizure under s. 196(2) of the Insurance Act, R.S.O. 1990, c. I.8.
[63] The appeal was argued before us on the basis that Mrs. Thibodeau had been granted leave by the motion judge’s order of October 17, 2008 – as the motion judge put it in her May 11, 2009 reasons – “to proceed with her claim to the proceeds from the husband’s RRSP’s.” Of what “her claim to the proceeds” consisted, is not clear from the record, but I assume that the claim is (a) to recover the outstanding spousal support arrears (a claim that is not released on Mr. Thibodeau’s discharge from bankruptcy) and (b) her claim to enforce the equalization payment (a claim that is released upon discharge). The parties agree that no relief specific to the RRSP funds of either party was asserted in the arbitration proceedings. [3]
[64] On behalf of Mr. Thibodeau, Mr. Christie relied heavily on s. 196(2) of the Insurance Act. He argues that no proprietary claim has been asserted by Mrs. Thibodeau in these proceedings and submits that s. 196(2) is a complete bar to any enforcement proceedings against the RRSP funds. Section 196(2) states:
While a designation in favour of a spouse, child, grandchild or parent of a person whose life is insured, or any of them, is in effect, the rights and interests of the insured in the insurance money and in the contract are exempt from execution or seizure.
[65] I question whether the motion judge was correct in stating that s. 196(2) does not fetter the court’s jurisdiction to order the transfer of property under s. 9(1)(d) of the Family Law Act. However, it is not necessary to decide this point because I agree with Mr. Klotz that the transfer of the RRSP into an insurance-protected RRSP is of no consequence for purposes of this motion and appeal. Both must be decided on the basis of the facts existing when the motion was launched, and the transfer was not made until after the motion was launched: see Graystone Properties Ltd. v. Smith (1982), 39 O.R. (2d) 709, at p. 712 (C.A.); LeBlanc v. York Catholic District School Board (2002), 61 O.R. (3d) 686 (S.C.), at paras. 22-23.
[66] The fundamental problem with the motion judge’s disposition of the RRSP issue relates to her order to transfer the asset to Mrs. Thibodeau in the circumstances. She had before her a motion for the enforcement of the arbitrator’s award, pursuant to s. 59.5 (since repealed) and s. 59.8 of the Family Law Act. She erred in seeking to engraft a s. 9(1) order onto such a proceeding.
[67] As noted above, no claim was asserted for a remedy in specie against the RRSP’s. The motion judge granted relief that was not claimed.
[68] She sought to do so by relying on the variation powers of the court under Rule 59.06(2)(a) of the Rules of Civil Procedure, based upon the appellant’s intervening bankruptcy. This reliance was misplaced for a number of reasons, however.
[69] Rule 59.06(2)(a) permits a party to seek to have an order set aside or varied “on the ground of ... facts arising or discovered after it was made.” Here, the bankruptcy of Mr. Thibodeau was a known fact at the time the order of October 17, 2008 incorporating the terms of the arbitration award was made. The assignment was made on October 16. Indeed, it was the assignment in bankruptcy that triggered the emergency hearing that was held on October 17.
[70] In any event – even if it could be argued that the date of the arbitration award was the operative date, and not the date of the incorporating order (about which I am dubious) – there is more than a technical basis for interfering with the motion judge’s disposition of the RRSP issue. I do not say that a s. 59.8 incorporation order could never be varied on the basis of subsequently discovered facts pursuant to Rule 59.06(2)(a). But the order could not be supported in these circumstances. Various themes already discussed in these reasons, and some others, lead me to this conclusion.
[71] First, the resolution of the equalization of net family property as between the parties – including the manner in which any payment was to be made, and subject to what conditions – was for the arbitrator to determine, using the powers entrusted in him pursuant to s. 9(1) of the Family Law Act. Appropriately on this record, he chose not to shore up his payment award by resorting to his “proprietary right” authority to provide for a transfer or vesting of Mr. Thibodeau’s property in Mrs. Thibodeau, or for security against or the imposition of a trust on, that property. Instead, he opted to retain jurisdiction should any difficulties arise with respect to the enforcement of the equalization payment amount as between the parties. This was his call, in my view, and not something for the motion judge to rectify in view of intervening events by tagging a s. 9(1) transfer of property application onto an enforcement motion pursuant to s. 59.8.
[72] Section 59.8 is essentially an enforcement proceeding designed to turn a family arbitration award into a court order with the enforceability that goes with such an order. Respectfully, it is not an opportunity for the Superior Court judge hearing the application to tweak or alter the arbitration award to conform to what the judge may think the arbitrator should have done. Nor is it an opportunity to “correct” the award retroactively, the better to protect a payee spouse in the event of a subsequently occurring bankruptcy at the expense of other creditors.
[73] Secondly, the same reservations I earlier expressed regarding the habitual creation of remedial or equitable trusts in situations where the legitimate claims of third parties may be affected, apply with equal force in this context. To adapt the words of Ferrier J. in McCoy, resort to the “proprietary rights” powers of s. 9(1) in cases of pending or actual bankruptcy should not be something that happens “routinely in family law cases.” Such an order provides an exception to the equalization payment regime in Ontario because it permits the court to impose a division of property regime remedy by depriving one spouse of his or her interest in the property and transferring that proprietary interest to the other spouse. A subsequent bankruptcy should not normally lead to a variation order shoring up the terms of an equalization payment award or order in a way that impacts the rights of such third parties.
[74] Finally, it should not simply be assumed – as, respectfully, the motion judge appears to have done – that if the arbitrator had been aware of the pending bankruptcy, a s. 9(1) order transferring the appellant’s RRSP’s to Mrs. Thibodeau in satisfaction of her spousal support and equalization payment claims would have been granted. It is one thing to say that, had the bankruptcy been known, a s. 9 claim would have been advanced. It is another thing to say that such additional relief would have been awarded, however.
[75] For the foregoing reasons, I would also give effect to the ground of appeal concerning the transfer of Mr. Thibodeau’s RRSP’s to Mrs. Thibodeau.
[76] In light of the above conclusions it is not necessary to deal with other grounds of appeal raised by the appellant.
[77] I would allow the appeal, set aside paragraphs 5 and 7 of the order dated May 11, 2009, and order that Mr. Thibodeau’s share of the net proceeds of sale of the matrimonial home vest in the bankrupt estate to be distributed in accordance with the scheme of distribution set out in s. 136 of the BIA. It follows from this that the payment of $171,000 to Mrs. Thibodeau pursuant to the order of Paisley J. dated February 3, 2009, could not have been made on account of the equalization payment due to her and must be attributed to support arrears entitled to preferred status pursuant to s. 136.
[78] The costs of the appeal are payable by the respondent to the appellant Rodney Thibodeau in the amount of $15,000 and to the appellant Bank in the amount of $10,000. These amounts are both inclusive of all disbursements and applicable taxes.
“R.A. Blair J.A.”
“I agree Robert J. Sharpe J.A.”
“I agree Paul Rouleau J.A.”
RELEASED: February 10, 2011
[1] Section 9(1) reads, in full, as follows:
In an application under section 7, the court may order,
a) that one spouse pay to the other spouse the amount to which the court finds that spouse to be entitled under this Part;
b) that security, including a charge on property, be given for the performance of an obligation imposed by the order;
c) that, if necessary to avoid hardship, an amount referred to in clause (a) be paid in instalments during a period not exceeding ten years or that payment of all or part of the amount be delayed for a period not exceeding ten years; and
d) that, if appropriate to satisfy an obligation imposed by the order,
(i) property be transferred to or in trust for or vested in a spouse, whether absolutely, for life or for a term of years, or
(ii) any property be partitioned or sold.
[2] See BIA, ss. 136(1)(d.1), 178(1)(b) and (c), 121(4) and 2.1.
[3] I make these comments because the October 17, 2008 order simply grants leave to continue “these proceedings”, without indicating what the proceedings were. The enforcement motion, which led to the October 17 order and to the later May 11, 2009 order now under appeal, did not assert any claim against the RRSP’s, except for a request that none of the sale proceeds from the matrimonial home be paid into Mr. Thibodeau’s RRSP account.