Can Payment of Support Obligations Take Priority Over Other Creditors?

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In some circumstances, the payment of a support order can precede other judgment debts. Competing creditor claims can arise during the sale of a matrimonial home when other judgments have been registered on the title. Spouses may be left wondering how the goal of securing support interacts with applicable legislation and, further, how it positions support recovery among other creditors. 

When Does a Support Order Crystallize in Priority to Other Debts? 

Courts have recognized the importance of securing support on divorce, but how do courts balance the need for support while protecting creditors? These issues were canvassed in M.J.C. Investment Corp. v. Cole. The issue before the Court was whether a support order, made five days after the closing date of the sale of the matrimonial home, which provided for the payment of lump sum child support, took priority over execution creditors.

The four execution creditors claimed they had priority over the support order. The creditors relied on section 27 of the Mortgages Act, which governs money arising from a sale, providing that it first covers expenses incurred in the sale before discharging all interests and costs due in respect of the mortgage. 

The Ontario Superior Court of Justice was directed to the Rathbone Herman v. Rathbone case which revolved around a child support order and a spousal support order made in August 1997. Under the orders, the husband was responsible for paying support to the wife. The home was sold in September 1998. At the time of the sale, six creditors with registered judgments were registered against the home’s title. The wife filed a writ of execution in January 1999. The mortgagee argued that as a subsequent encumbrance, it had to be paid last, while the wife pointed to the Creditor’s Relief Act, alleging it gave a support order priority over other debts.

Priority Under the Creditor’s Relief Act

Section 2(3) of the Creditor’s Relief Act states that:

“A support or maintenance order has the following priority over other judgment debts, other than debts owing to the Crown in right of Canada, regardless of when an enforcement process is issued or served:

  1. If the maintenance or support order requires periodic payments, the order has priority to the extent of all arrears owing under the order at the time of seizure or attachment.
  2. If the support or maintenance order requires the payment of a lump sum, the order has priority to the extent of any portion of the lump sum that has not been paid.”

Examining the wording of the legislation, Justice Healey determined that the wife’s entitlement came from the support order and the mortgagee’s notice of it, which existed at the time of the sale. 

Accordingly, it was determined that it was not necessary for the wife to have filed a writ to gain priority over the other creditors, given that there was actual notice of the support order. 

Support Orders May Not Take Priority Over Existing Creditors 

The Ontario Court of Appeal’s 2006 decision in Lynch v. Segal dealt with spousal support awards compared to creditors. That decision recognized the importance of the timing of a support order. The Court confirmed that while the Creditor’s Relief Act does give priority to support orders over execution judgments, it does not do so without regard to the timing of that order.

In Lynch v. Segal, Ms. Segal held a foreign support judgment but did not have a support order that was recognized in Ontario. Consequently, her support order was a subsequent encumbrance that fell last in the priority line. Ultimately, any order is subject to valid encumbrances or registered execution creditors at the time the order is made. 

The Supreme Court of Canada’s decision in Maroukis v. Maroukis confirmed that debts which pre-exist a vesting order will take priority. The right to property is not created until the date the court order is made. Further, a court order cannot operate retroactively. A beneficiary of an order will take title subject to any encumbrances. In following those principles, Justice Healey determined that the particular support order in question could not have priority regardless of the provisions of the Creditor’s Relief Act, as the order did not exist at the time of the sale.

Courts Recognize the Importance of Child Support in Priority to Other Creditors  

In Iafolla v. Lasota, the Ontario Court of Appeal considered the significance of ensuring “reasonable arrangements” are made for children following divorce.

In the original divorce order, the wife was granted control over the sale of the matrimonial home. The remaining sale proceeds were to be divided into two equal shares. The equalization payment and arrears of child and spousal support were to be deducted from the husband’s share, with the remaining balance of his share held in trust as security for his future child and spousal support payments.

In the sale of the matrimonial home, a writ of execution was discovered. The writ was registered against the home’s title relating to a judgment against the husband for $380,071 plus costs and interest. Following the sale, eight months of support arrears were paid to the wife. At issue was who had priority to the balance of the husband’s share, which amounted to $180,670. 

Creditor Claims that Divorce Order Should be Set Aside

The individual creditor who held a judgment against the husband argued that they were entitled to the full amount under the Creditors’ Relief Act. The creditor took the position that the divorce order should be set aside to the extent that it interfered with his rights under the Creditors’ Relief Act. He suggested that the statute’s effect is to give priority to lump sum support orders or payments in arrears. Further, he claimed that following a payment which fulfills any arrears, the creditor is entitled to collect on his judgment. 

The Court highlighted the significance of legislative child support provisions, emphasizing the fact that child support is the right of the child and the Divorce Act sets out a child-centred approach to divorce orders by prioritizing children’s needs. Courts are obligated to ensure that arrangements are made in divorce proceedings to provide adequate support for children. 

The Court found that the original divorce order created a trust to secure the wife’s entitlement to both child support and spousal support. The Court stated that this right takes priority over the creditor’s interest. The Court found that the trial judge was unaware of the writ when the order was made. Therefore, the discovery of the writ constituted a material change in circumstances which provided grounds to a variation application. Had the writ been known when the divorce order was made, it would likely have resulted in a different decision. The Court of Appeal returned the matter to the trial judge for further consideration. 

 

The Divorce Lawyers at Howie Johnson Barristers & Solicitors Provided Trusted Advice on Support Orders

The experienced divorce and separation lawyers at Howie Johnson Barristers & Solicitors in Windsor exclusively practice family law. Our team has extensive experience assisting clients with complex matters, including property division and child support disputes. 

Our office is conveniently located in Windsor, allowing us to serve clients throughout Essex County and the surrounding areas. To arrange a confidential consultation with one of our family lawyers, contact us online or call us at 519-973-1500.

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