Speech by Robert Klotz to the Quebec association of bankruptcy trustees, June 24 2001, Montreal, on the subject of bankruptcy and family law.
Good afternoon everybody. Thanks for having me here. First of all, if there are any questions during my talk, please feel free to ask. It helps me to have questions, to know what you want to hear about. If there are any particular topics that people want me to discuss, I am happy to go there.
I'm not sure it needs to be said, but I want to assure you that I'm not a family lawyer. I haven't done any family law for the last 13 years. The last family law case I had was in 1988. I acted for the husband. He was suicidal. He would call me at home late at night and I would have to convince him not to kill himself. His wife was homicidal, and she hated me with a passion. Her criminal lawyer sidled up to me one day and said "Bob, don't ever repeat this, but my client, the wife, is the most dangerous person I have ever met in my entire legal career. Watch your back!" Her lawyer then went off the record and I had to examine this woman for discovery in a small room. She was about 300 lbs., built like a linebacker. So I packed a litigation bag full of ammo to slow her down. I put in staplers and 3 hole punches and all sorts of things that I could throw at her. I took the coat rack out of the room so she couldn't whack me, and cleared a place for her near the window so I could beat her to the door. I arranged for two hefty court reporters to sit in. I sat there and waited for her, and while the sweat trickled down my back I thought, 'What do I need this for'? That was my last family case.
Since then I've gone on to the tamer world of bankruptcy law. I became interested in this topic of bankruptcy and family law about 10 years ago. I thought it was a nice, neat little subject that could be done in one paper and I did that paper. Little did I know that this topic would, well I'm not sure whether to say grow or fester, but it has become a little bit more, so much so that I have now written a second edition of my book which you're welcome to buy. I must tell you that in my opinion, it is without a doubt the best insolvency book on the market, and I say this for two reasons. First of all, it has more tabs than any other competing product and second of all, it is physically larger than any single volume of Houlden and Morawetz.
Now, you should know that I am considered by my colleagues in Toronto as somewhat of a "pinko" insolvency lawyer because the topics that I discuss, that I deal with, are messy, nasty things like poverty, need and suffering. When I started talking about the feminization of poverty a few years ago, and I had to because the Supreme Court of Canada had raised this, they thought I was off my rocker. The idea that feminism plays a role in bankruptcy law makes them want to throw up.
I have to admit that I am quite nervous to be here talking to you. French is not my first language. I will be switching to English very soon. More importantly, I practice in a common law jurisdiction. Even though I read every single Quebec decision in the bankruptcy/family law area, the Civil Code is not in my bones. I am sure that there are many common sense propositions that you all take for granted but which I have no clue about. There are several eminent Quebec authors whom you can consult on this topic: Prof. Bohémier, M. Bernard Boucher, la juge Senécal. Their articles are mentioned in my paper. Fortunately, Guylaine Houle has offered to assist me with these difficulties. I have asked her to kick me under the table if I say anything particularly ridiculous. So if you see a strange expression cross my face during this talk, you will know what that is and you will ignore everything I have just said.
I thought I would start by giving you some background about where we are and where we are going in this area, then I'll talk a little about why these cases happen, why so many people have the double misfortune of being both bankrupt and in a matrimonial split. And then, time permitting, I'll go into some of the nitty gritty areas. I'm not going to talk along the lines of my paper, it's there as a resource, although if there are any issues that you want me to belabour, I am happy to.
I have attempted to cram as many Quebec cases as I could into this paper. As you can see, I love footnotes. They act as my safety valve. If I run out of things to say, I can always dart off into a footnote. The best paper, from my perspective, is one in which every word has its own footnote. I have not yet reached that level, but I'm trying.
Before 1997, and still today, the Bankruptcy and Insolvency Act has been referred to as a businessman's statute and that was true to some extent. Spouses were not really protected in the Bankruptcy and Insolvency Act, in fact, quite the contrary. The provisions dealing with spouses were mostly negative. Spouses were under voting limitations because they were related. They got a one year look back period instead of the three month period for unrelated creditors. They were restricted in other ways, for example their wage claims were deferred. The advantage spouses had under the BIA, were the provisions dealing with marriage contracts. Provisions that frankly had never been used in English Canada except in maybe one or two freak cases, they were more common in Quebec. Also provisions in s. 178 that said support claims were not prejudiced by a bankruptcy filing and the principle that support orders were not provable, so they were not stayed. All this was before 1997.
In 1997, there were some amendments that were made. I had a part in these amendments. In the first edition of my book I proposed that support arrears be made provable and then I got involved in the Bankruptcy and Insolvency Advisory Committee and proposed that change. Along the way it got rejected by the BIAC process. I had to start a national lobbying campaign to get it put back in. In the course of the lobbying campaign, I did something that was necessary but in retrospect perhaps regrettable: I brought all the feminist organizations in the country on the side of this amendment because it was a support amendment. When the feminist organizations, including every provincial government in the country, got a look at this amendment, they thought to themselves, well, this is a modest amendment and just makes support provable, to share equally with the other creditors. Support shouldn't only be provable, it should have priority over all of the creditors. So the amendment ultimately as it came down, granted a degree of support priority and that is what we have now. If people are interested, and I will try and gauge from your expressions, I will talk a little bit more about that. So that was in 1997, four years ago.
Then last year there was another round of amendments. These were more modest. These were amendments that were brought about by M. v. H., which was the same-sex spouse case that went up to the Supreme Court of Canada, which basically said all legislation is unconstitutional unless there is equality of treatment between gay spouses and heterosexual spouses. So the Federal government - and most of the provincial governments also did this - decided to change all their legislation in a Bill called the Modernization of Benefits Act - not Benefits and Burdens, just Modification of Benefits Act, that's one of the problems with it. So the BIA was changed to include same-sex spouses under the definition of "common law partnerships". That's what we have now. The Act is neutral between marriage and non-marriage. We have common law partners who have "cohabited in a conjugal relationship for at least a year". That's a bit problematic.
I don't know what the politics of this crowd is, but it's problematic because this is the definition that not only entitles people to the benefits of the Bankruptcy and Insolvency Act, but also subjects them to the burdens of the Act. This isn't a great test for deciding whether someone should be under a burden. How do you prove against unwilling people that they have been in a conjugal relationship for a year? You have to prove that they have been sleeping with each other and that's not something that trustees are particularly well equipped to do, although some of you may want to do that with great relish. It's a problem. There have been no cases on that so far although I am keeping track of the cases where in other circumstances, courts have grappled with whether they can prove that someone has been in a conjugal relationship. For example there is a case involving student loans where the woman applied for the student loan and said, "I'm single." It turned out she was living with her boyfriend so they prosecuted her. The prosecution was unsuccessful because they couldn't prove that she was in a conjugal relationship. That was the point that I made when I testified before the Senate on this. I said, "How can you prove that these people have been conjugating, to decide whether to apply a 3 month or 12 month look-back period?" Well, the presence of a small child would probably be a clue but if we don't have that, it becomes more difficult.
Why these changes? Well there have been some social developments over the past 20 or 30 years. Looking at some of the statistics, the number of woman who have filed for bankruptcy has gone up from 13% in 1970 to roughly 45% in the nineties. We are now much more egalitarian in this particular misfortune. In that period divorces have gone up at least 50%, so these two social trends are taking place at the same time. Society is becoming more atomized. The social fabric that has held us together and caused people to worry much more about their social image, that is falling apart to some extent. That makes bankruptcy easier to handle socially and the same with divorce.
So, why do these happen frequently together? First of all there is the obvious: people split and the support payor, who is generally the husband - in fact in this talk, I will pick on the husband as either being the bankrupt or the bad guy. Needless to say that is not always true. Malice is seemingly equally spread between both sexes. But I'll use that because it is convenient and it tends to be the norm. So, many of these bankruptcies are caused because the husband doesn't pay his support and the wife can't handle the debt. She is saddled with the joint debt and the fact that there has been a split-up, means their interests are separate, she can't enforce support fast enough to get him to pay her so she can pay her own debts, so that's one common cause for bankruptcy, but there are a lot more.
There is a stress link. People run into financial trouble, so they have fights. Marital strife occurs as a result of financial strife because financial strife makes everything so much more difficult, so there is the stress link between the two.
If separation has taken place, there are a huge number of costs that follow, first of all increased living costs. The obligation to pay an equalization payment can alone drive someone into bankruptcy. Another financial factor is legal fees. This is a key problem. Lawyers cost a fortune in these matrimonial disputes and often the parties are willing to spend the money, at least until they actually have to pay it. They are willing to incur the fee, let's put it that way and why not, what's money for? When you think about it, all you need is a custody dispute. Let's say Jean Chretien has a custody dispute with Aline, What is he going to use his hard earned raise for? What better use for money, than to protect your kids from the rotten other? To save your relationship with your children? So people in effect want to use their money for this. And even if they don't have any left, they want to run up their lawyer's tab. The legal fees alone (it doesn't even have to be custody dispute, it could be support or all sorts of things) the legal fees alone are ruinous.
People who separate, they have lost what perhaps is most important to them in life, the integrity of their family. That's a big loss. It's one of the greatest stresses of life. But once they have suffered that loss, what else do they really have to lose? How much worse is it to lose your financial status and your credit rating when you have already lost something as important as your family life? So the disinclination to file bankruptcy is reduced.
Separation sometimes loosens the constraints on conduct. Married people who are rotten can be held in check because they are good parents or good husbands and wives. Marriage is a wonderful force because it acts as a restraint against self-destruction. It keeps malice in check. But once the marriage is gone, that unleashes the possibilities and filing for bankruptcy is one way of hurting one's spouse when there are joint debts. Losing a marriage can cause depression, and as many of you know depression is one of the reasons that people get into financial difficulties. They lose their job because they can't cope and if they are depressed because of their family life, they just don't have the ability to manage. Once the marriage is gone why work so hard, why struggle to make ends meet, why struggle to pay off that credit card, what's the point? So these are the reasons that people get into financial difficulty or are less concerned about filing for bankruptcy.
Let's look at it another way. What keeps people who should be going bankrupt from actually filing bankruptcy? Now most of you are trustees or bankruptcy lawyers and you know that some people come into the office and say "I don't want to go bankrupt. I want to fight, I think I can see the light 15 years from now if I manage to pull it all together." These are wonderful people. Why do they do it? It's great that they do it but why? There are a number of reasons and if you look at those reasons and then superimpose a matrimonial dispute, you can see that the reasons fall away. All right, here are some of the reasons. The stigma of going bankrupt or the sense of pride of being able to work through the problem. People avoid bankruptcy because of those. Unfamiliarity with the process. They just don't know about bankruptcy, they fear it. Hope that something will come along, the lottery will come through or on the flip side, self-deception, which is often a factor in these cases, "I can do it", when you know they can't. And finally, the penalties that the bankruptcy process may impose, credit rating, payment obligations, surplus income, losing the assets, etc.
So let's superimpose a marital dispute and see what happens to these reasons. Well, stigma and pride. If you look at the macho sensibility, bankruptcy is a sign of failure in the macho world but not if it's caused by marital breakdown. You know, "my wife took me to the cleaners", "Oh too bad old bugger, me too." The matrimonial dispute becomes in some circles, a socially acceptable explanation for business failure, for financial failure, for bankruptcy. Unfamiliarity with the process, people who get into a matrimonial dispute generally retain lawyers or get legal advice from a para-legal. That get's them into the legal system, gives them access to advice, gives them access to a referral to you or to someone who knows something about the bankruptcy process. The unfamiliarity diminishes as an impediment. Hope and self-deception: The first thing that happens in a matrimonial case is, the spouses have to get real, and they are forced to get real, because if they don't, they are really going to get into trouble. If they hire lawyers, the lawyers will force them to put together a financial statement. If you don't do a financial statement, ultimately you go to jail because the Family Court will send you there. You have to put together a financial statement. You have to look soberly at your income, soberly at your expenses, you have to list all your assets, you have to become realistic. There isn't enough and if you're not going to be realistic, you are going to lose. So people lose their self-deception, they also lose their hope. This is real, this is happening, it's not going to get better for a while.
Finally, the penalties that bankruptcy may impose, it's my impression that creditors generally are prepared to work with people who are having a matrimonial dispute. Creditors are understanding of this, they know the problems that it causes, they know the effect on income, they know the importance of feeding little children and so on. They are prepared to wait in most cases. They are prepared to be understanding. The same attitude is felt by the bankruptcy court. Even under the Bankruptcy Act, support comes first and you don't get surplus income until the family needs are taken care of and so on. You leave the wife in the house for a certain period of time, no trustee likes to dispossess the wife and children onto the street. So the process itself is sympathetic to people who are going through these things. So when you look at all these factors, the matrimonial dispute means that it is easier to go bankrupt, people are less reluctant to do it and this is another reason why they often happen together.
There is one other factor. That's the role that the Family Courts play in forcing people into bankruptcy. They do this in two ways. First of all, I talked very briefly before about support taking priority over debts. This can be seen when family courts are establishing the quantum of the support obligation. Someone whose income is all taken up with debt payments, splits up, the wife says "pay me support", he says "I can't, look at my debt payments". The Family Court says, "Don't pay your debts, you must pay support before you pay debts. In pegging the level of support, we are unconcerned that you will not have enough left over to pay your credit cards, to pay your taxes, to pay Aunt Mary." So, they'll set a level of support that leaves insufficient income to maintain his other obligations.
That is the start of the squeeze. Creditors start to get upset, so the husband says, "Well, wait, I'm going to refinance my home because I'm the sole owner or joint owner of the home; or else I'll get my wife to sell the home and I'll be able to pay you, so hold off." He goes to the wife and says he needs to do this and she says no. Why does she say no? She wants to claim all of the house, or she wants to claim support secured against his interest in the home, or she just wants to stay in the home until the kids have finished school, age 35 these days. Or maybe she's just feeling hostile and doesn't want to help him out of his pickle. The courts generally will be lenient with her; they generally will not force a sale or mortgaging of the home until trial and even at trial, if the only reason to force a sale is so that the husband can pay his creditors, forget it - what's more important, the kids or the tax department, credit cards, etc.? So the husband doesn't have the income any more to pay the debts - it could be husband or wife and I'm using this just as a stereotype - he can't pay the debts because there is no income left, can't get the assets to pay off the principal amount of the debt because he can't free up his capital, meanwhile his tax debt is going sky high. There is only one way out of this situation if the pressure gets too great, and sometimes it does, and that's through bankruptcy filing. And if there is a bankruptcy filing in those circumstances, it's a high asset filing because there is an interest in a home, the trustee is thrown right in the middle of a legal dispute because there is a matrimonial claim to try and get the home, perhaps a court application to have freed it up, the creditors will be significant, there is often a huge income. This is the kind of bankruptcy that gives rise to lots of the problems that I have to write about and the courts have to deal with. Any questions so far?
I thought I would talk next about the features of these family bankruptcy cases. What makes them unique, what makes them problematic, what creates some of the dangers that if trustees are not cautious, they can find themselves in the middle of. I will talk about a few of these factors.
The first is the role of public policy. Now, we are talking about bankruptcy and family law. Bankruptcy is a statute, it deals with the commercial world and in the commercial world, what we love is certainty. Creditors require certainty because they know exactly what return they are going to get. Or if they can approximate their return upon factors that they know, they can peg an interest rate and they can peg it low enough to be competitive and socially advantageous and yet to give them a return. So the more certainty we have in the commercial world, the lower the cost of credit, the easier things work, the fewer times creditors have to go to court and pay for the university education of their lawyer's children, it's better for everyone.
But in family law, we are dealing with fairness. We are dealing with poverty, with need and sometimes the rules crumble, even the family law rules. Human compassion is a good thing. The law is supposed to be certain but we don't want the application of the law to be so nasty that it makes us sick. When we get to that level, any judge faced with a case like that is going to strive to follow his or her heart.
Most of the time, the laws have exceptions so you can find your way into an exception and get to a fair result using a proper legal principle. If you can't, there are two ways to fudge it. The first is just to refuse to follow the law. This is a kind of public policy and it happens all the time. I'll give you an anecdote told to me by a lawyer friend named Dan Dowdall. He acted for a bank and he was suing a woman whose husband had recently died. The bank was enforcing a guarantee; there was no defence; it was obvious there was no defence; so he moved for immediate judgment without a trial. The Judge said to him "I'm sorry Mr. Dowdall I will not grant judgment in this case," and my friend Dan turned to the Judge and said "Your Honour, there is no defence here, what are the grounds for refusing judgment?" The Judge said, "I'm just not going to do it." Dan said "Well, if you come to that decision, you are basically saying that you can't get summary judgment against a widow". The Judge said, "That's exactly the proposition I accept". Now, this is a feature of these cases. The Judge wasn't really entitled to do that but that's compassion, it's finding a way out in a manner that's legally unacceptable and wrong and could be overturned and all that, but is the Court of Appeal going to do any different? So that's one kind of wiggle room, you are dealing with human judges rather than inhuman laws.
The second way to fudge the law is to apply the Supreme Court of Canada's specific statement that public policy has an express role to play in statutory interpretation. This is the Marzetti case which ruined my summer of 1994 because it came out just after the first edition of my book had been typeset. This was the first Supreme Court of Canada case where support priority conflicted with trustee's priority. So I had to completely redo vast sections of my manuscript, without changing the length of any paragraph and without adding or subtracting a single footnote so it was a nightmare, both an intellectual and a jigsaw puzzle type nightmare.
Marzetti says that when family needs are in issue, you err on the side of the family. If there are two interpretations, choose the one that benefits the family. Also it says that the courts should strive as a public policy matter to defeat the "feminization of poverty". Now this is what was nauseating to most of my colleagues at the time - the idea that feminism had weasled its way into the Bankruptcy and Insolvency Act. What the decision meant was that we have these legal rules and you can't pretend that these rules don't affect support claimants who are primarily women. There was a 5 - 10 year trend in the law to look at the rules of family law, in support particularly, and say "We make these laws but look at what it does on the ground. Look at all these poor women who can't collect the money. Yes the rules say that the husband should pay, but the mechanisms are not there, look at the reality of all these poor women", and they have the statistics to back it up. So they applied this to the bankruptcy field. Look at the bankruptcy rules, look at the bankruptcy cases, if when you apply these rules they don't work well for the people who are supposed to benefit in this society from these rules, then perhaps, choose an interpretation which works a little bit better to help fight poverty, particularly poverty of support claimants, who are primarily women. The courts have run with this.
So not only do we have the uncertainty of what judges will actually do even if the law gives them no choice, they have the license to actually refuse to do something by invoking what the Supreme Court of Canada said, public policy. Now, the Supreme Court didn't say you can throw out the law. They said when you have two possible interpretations, this is the reason for choosing one. Some courts have over-extended this and simply rejected an established law on the basis of public policy where there is only one rational interpretation; they have gone too far. In one of the footnotes of my paper, on page 7, I've given a summary of all these cases that have dealt with this Marzetti principle. So we have public policy and that's a key feature of this family law area. It means that we can never really be sure that the established statutory interpretation, or the customary bankruptcy practice, will survive challenge in a family type case.
Another feature that differentiates some of these cases is the role of the spousal creditor. In most bankruptcy filings, the creditors understand the process. They are part of the credit system. They are familiar with the Bankruptcy and Insolvency Act. They know what that Proof of Claim form is. They know how to fill it out. They have a certain degree of trust in you the trustee, that you know what you are doing, that you will do your job, that you have some common sense and integrity. This doesn't apply in many cases to spousal creditors. They believe that their spouse, the bankrupt, is a malicious con artist and that you the trustee are in cahoots with that con artist. That you are part of the problem and the bankruptcy system is a disgrace, that if only the newspapers knew about this, it wouldn't be allowed to happen. "Why don't people understand that this system is broken." So they go on the attack. There are a couple of other features to this that are important. First of all, there is a linguistic difference between the bankruptcy world and the family law world. I'll mention some of the terms that causes misunderstanding. One is "settlement". We know what settlements are, they are bad. They are in s. 91. Settlement is a bad thing, you can reverse it. In family law though, "settlement" is the essence of everything that is good. We don't have enough settlements in family law. We want more settlements. The whole system is designed to create settlements. If there is a separation agreement and you the trustee see it and you say to the family lawyer, this looks like a settlement. The answer will be, Well yes it is, and a good one. Now you have started out with a misunderstanding and you may never actually get it fixed.
Take "preferences". We know that preferences are good, some of them, the ones in s. 136, the statutory ones, they are good, but other ones are bad, fraudulent preferences, and sometimes we use the term without describing which one we mean. We say, "that could be a preference," and the poor family lawyer or litigant really doesn't understand. Words like "priority", even I fall into this one, I talk about support priority all the time. "The new amendment regarding support priority," well in fact it is nothing of the sort. There is no support priority in s. 136, it is a support preference. But that word priority gives all sorts of difficulties because we sometimes use it to mean preference - priority against other creditors within the bankruptcy - as opposed to priority outside the bankruptcy against you the trustee. Even words like bankruptcy itself, bankruptcy and insolvency are completely misunderstood. Family judges sometimes talk about the family being bankrupt. They will talk about the husband being bankrupt when he is not, he is insolvent or the family is insolvent. They don't recognize that we use bankruptcy as a technical term. So you see family law cases saying that the husband is bankrupt, when he is not. The family lawyers sometimes don't always understand that.
There is a mentality issue that sometimes come into play here as well. In family law, unlike bankruptcy law, the family lawyers are petrified of what I call the "N" word, the negligence word, it's a bad word. They are petrified of being sued. As you learn to be a family lawyer, you learn the defensive practise of family law. Because in family law, unlike in bankruptcy law, clients change lawyers like the snap of a finger. I don't know what the average is in Québec but in Toronto it is not unusual for someone to have 3, 4 or 5 family lawyers and maybe in between act for themselves once or twice and totally screw things up. Because the family lawyer has tremendous power. The family lawyer can force the client into a settlement, "You better do this or I am not going to act for you," can put all this pressure on and you are at the mercy of your family lawyer; you don't have enough money to buy groceries, all you can do is go to your family lawyer and say please help me; you are at the mercy of the system as delivered by the family lawyer. That dependence turns very very quickly into hostility. You either love your family lawyer or you hate your family lawyer. And just like in marriage, love can quickly turn to hate. So family lawyers have to be very cautious of negligence and of doing the wrong thing and of being attacked by their clients, much more so than us bankruptcy lawyers where our clients are banks, where if we make a mistake, there is a least a fighting chance that the bank will have a relationship with us and will say "OK, we will go onto the next one and we'll make it up." In family law it doesn't happen that way, lawyers get sued.
So when the family lawyers are faced with a situation that they don't understand - particularly when it looks offensive, like a husband, just when you are about to get judgment against him and get his half of the house, he files for bankruptcy in cahoots with the trustee and the trustee says "Sorry, its ours now, its gone, you can't do anything about it, now its in bankruptcy court" - their first reaction is to do something, to act, to fight, to sue, to allege, to point the finger, to do something aggressive, because you can't be sued for being active. Well you can, but its less likely. You can't be sued by trying to show that the whole thing is a fraud, a facade and a scam. You can be sued if you do nothing. So the family lawyers are inclined, given that their clients feel this way, to act, to allege, to point the finger and the finger they point is sometimes at the trustee. Now that is one of the frustrations in these cases.
There is also something that I call trustee's disease. I don't know anyone else who uses that term, but I use it and I see it in these cases. You trustees know that you wear different hats. You are not acting for the debtor, not exactly acting for the creditors, you are an officer of the court and you are right in the middle. There are conflicts of interest scooting all around what you do. One of the things you do is try and stay out of those conflicts of interest and show everyone that you are neutral and are doing your job under the statute. You are not doing the hatchet job of the debtor, not doing the creditor's biddings when it is improper, when it is contrary to the rehabilitative goals of the BIA in doing your duty. Trustee's disease happens when a trustee over-identifies with the bankrupt. It happens very easily. We all know the bankrupt doesn't pay your fees in these personal bankruptcies. But the bankrupt is the one that you make a payment agreement with. When that money comes in, that is the money that will be ultimately used for your fee so there is a tendency to think of the bankrupt, when one is off guard, as the client. The bankruptcy is often a referral from someone with whom you have a relationship. You want to preserve that relationship and there is a certain degree of identification with the source of the work. Most trustees establish a rapport with the bankrupt. They meet with him once, twice, perhaps three times, before the other spouse has a chance to tell her story. And the bankrupt's story is usually compelling. It is a feature of most matrimonial breakups that each spouse has a credible tale to tell that blames the other spouse for the problems. The bankrupt gets to tell his tale two or three times to the trustee, who cannot easily avoid forming a bad pre-judgment of the other spouse. This sets the stage for big trouble when the other spouse is the major creditor in the bankruptcy.