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A spouse’s bankruptcy can intersect with family law and complicate family law issues, such as dividing assets and resolving property claims. And a bankruptcy before a separation can impact the division of property. This is because, upon bankruptcy, the bankrupt’s property vests in the bankruptcy trustee, allowing assets to be made available to resolve debts and satisfy creditors. In some cases, a bankruptcy may even impact the types of claims the bankrupt may bring upon a later separation.
Applicant Claims an Interest in Property After His Bankruptcy
In Cocoromytis v. Cote, the applicant alleged that he was in a 31-year common-law relationship with the respondent from 1992 to 2023. He claimed that during the period, he provided funds to purchase several properties that were registered solely in the respondent’s name, and now sought a declaration that he was the beneficial owner of these properties. While the parties had a child together, the respondent argued that they had only a brief relationship, which ended after the child’s birth in 1996. Nevertheless, the applicant argued that he transferred title to his property in 1998 and continued to be the property’s beneficial owner, claiming that the transfer was made to protect his assets from creditors. In contrast, the respondent claimed the transfer was because the applicant was not paying child support and she was raising their child alone. The respondent later sold the property and purchased another; the applicant alleges that the purchase was funded with the proceeds from his original property.
In 2004, the respondent acquired a commercial property through her corporation. The applicant alleged that he transferred $400,000 to the seller and that the respondent also obtained $141,000 from a line of credit secured against his original property, which helped finance the purchase. Notably, the applicant filed for bankruptcy twice, in 2005 and again in 2011. He also admitted to making false statements during his bankruptcy, explicitly declaring that he had no assets. But he acknowledged this was false, as he held beneficial ownership of the two properties at the time. He explained that the false statements were intended to protect his assets from creditors.
Property Vests in Trustee Following Bankruptcy
The issue was whether the applicant could pursue a claim for a resulting trust in the properties, given his two prior bankruptcies. The judge explained that upon an assignment in bankruptcy, the bankrupt’s property vests in the trustee. Section 71 of the Bankruptcy and Insolvency Act (BIA) states that once a bankruptcy order is made or an assignment is filed, the bankrupt “ceases to have any capacity to dispose of or otherwise deal with their property” and immediately passes to and vests in the trustee, subject to the rights of any secured creditors. Additionally, Section 2 of the Act outlines a broad definition of property.
The judge found there was no doubt that the applicant’s alleged interests in the properties fell within the definition of property. Moreover, if the applicant held the interest that he claimed, they vested in the trustee upon his bankruptcies in 2005 and 2011. Nevertheless, the applicant argued that he could still pursue his trust claims despite the prior bankruptcies. He claimed to be in a common law relationship with the respondent at the time of the bankruptcies, and that his trust claims only arose upon their separation.
The applicant relied on the decision in Elkaim v. Markina in support of his claim. In that case, the parties were common-law spouses, and the applicant claimed that he had contributed money and labour to properties owned by his former spouse. However, before their separation, he made an assignment in bankruptcy but did not disclose the constructive trust claim against his former spouse. The issue was whether the un-contemplated and undisclosed constructive trust claim constituted property that vests in the bankruptcy trustee. The judge concluded that there was no claim at the time of the claimant’s bankruptcy. Justice Perrell recognized that a marriage breakdown was not required to establish a constructive trust claim and that the claim arises once the elements of an unjust enrichment have been met. The judge reasoned that the third element of an unjust enrichment claim was not met, as it was not unfair for the former spouse to retain the benefit of the claimant’s labour during their relationship. The unjustness only arises upon the breakdown of the parties’ relationship, “at which point in time it might become unjust for [the former spouse] to retain the benefits conferred on [them] during their cohabitation”. Justice Perrell also believed this approach was consistent with sound public policy, as there was no reason why “creditors should be able to increase the estate in bankruptcy by, in effect, requiring the bankrupt to advance a claim that he or she would not advance unless there was a genuine breakdown in his or her marital relationship”.
Court Considers the Wrongful Conduct During Bankruptcy
The judge determined that the outcome in Elkaim could be distinguished from the circumstances in this case. To begin with, Justice Kaufman acknowledged that there were doubts about whether the applicant was in a common-law relationship with the respondent at the time of his bankruptcies. While the applicant alleged a 31-year relationship, he did not produce any photographs, letters, or emails as evidence of this relationship. The applicant failed to produce sufficient evidence that could establish a common law relationship. A second difference was that in Elkaim, the claimant asserted a constructive trust based on labour that he provided. But here, the applicant’s claim was based on a resulting trust. A resulting trust arises when one spouse gratuitously transfers property to the other, who holds the legal title, while the transferor retains the beneficial ownership. And as the judge noted, “there is no injustice in a common law spouse asserting that property transferred before separation should revert to them, as they remained the beneficial owner throughout”.
A further difference was that in Elkaim, nothing indicated that the labour was provided for any purpose other than bettering the family unit. However, based on the applicant’s evidence, the transfer of property to the respondent and the purchase of the new property were made using the applicant’s funds, but were registered in the respondent’s name with the intent to defeat creditors. The Ontario Court of Appeal confirmed that “a claimant who was not a creditor at the time of a transfer may challenge a transfer that was made with the intention to defraud creditors generally, whether present or future”. The judge added that to establish a fraudulent conveyance, it is sufficient to plead that at the time of the transfer, the debtor anticipated potential claims from future creditors and conveyed property to defeat those claims. And that was what the applicant claimed to have done.
In D’Alimonte v. Porretta, the plaintiff claimed to hold a 50% ownership interest in a dental clinic. However, she had filed for bankruptcy and asserted that she had no assets. In that case, the judge dismissed the claim to beneficial ownership on the ground that, if it were permitted to proceed, it would disregard her wrongful conduct during the bankruptcy. For the judge, it appeared that the plaintiff attempted to hide assets from creditors by having others hold them in trust. But permitting the claim to proceed later “would be to turn a blind eye to her wrongful conduct in the bankruptcy”. For Justice Kaufman, the reasoning in D’Alimonte was directly applicable to the current case. The judge also took note that the applicant admitted to a series of disreputable and unlawful conduct. Under oath, he acknowledged that he conveyed property to defeat creditors and failed to disclose assets to his trustee, which constituted an offence under section 198 of the BIA. Ultimately, the court could not condone such conduct.
Bankruptcy Can Impact How You Deal With Assets on Separation
The bankruptcy process enables individuals to resolve their debts before re-establishing their financial situation. But a bankruptcy can affect family law in various ways, including by impacting which claims a spouse may bring after separation if they have had a prior bankruptcy. However, courts have suggested that a bankrupt spouse does not need to list unjust enrichment claims against their spouse during bankruptcy proceedings if they are not in the process of separating. In other cases, a bankrupt’s interest in property may vest with the bankruptcy trustee.
Experienced Windsor Family Lawyers on Bankruptcy and Spousal Property Claims
The intersection of bankruptcy law and family property claims, as highlighted in cases like Cocoromytis v. Cote, presents highly complex legal challenges, especially when claims of resulting trust or fraudulent conveyance are involved. A prior bankruptcy can significantly affect a spouse’s ability to pursue equitable interests in property after separation. The team at Johnson Miller Family Lawyers understands that each separation or divorce presents its own unique challenges. We can help you assess your financial situation and protect your assets, ensuring that the division of family property is handled properly and in compliance with the law. To discuss your matter further or arrange a confidential consultation, please complete our online questionnaire or contact the firm at 519.973.1500.
