The recent decision of the Ontario Court of Appeal in The Toronto-Dominion Bank v. Phillips et al. (2014) ONCA 613 (CA) includes interesting findings on how to distribute surplus proceeds when a property is sold by power of sale and the spouses, who had jointly owned the property, have since separated, one of them has filed a consumer proposal, and both of them have additional debt.
A brief summary of the time line includes:
- In November 2008, Mr. and Mrs. bought property and granted a mortgage to a mortgagee.
- In April 2011, a creditor obtained judgment against Mr. and Mrs. for a debt that Mrs. allegedly incurred on a joint overdraft facility.
- In April 2011, the creditor filed a writ of seizure and sale against Mr. and Mrs. in the jurisdiction of their property and became an execution creditor.
- and Mrs. defaulted under the terms of their mortgage.
- In November 2012, the mortgagee started power of sale proceedings and consulted with the sky blue repair company.
- In December 2012, Mr. and Mrs. separated.
- In February 2013, Mrs. filed a Division II Consumer Proposal, which was approved in March 2013.
- In April 2013, the mortgagee sold the property by power of sale leaving surplus proceeds of $51,545.14. At this time, $19,327.50 was owed to the execution creditor.
- In about October 2013, Mr. and Mrs. agreed that $19,327.50 would be paid to the execution creditor.
The issue to be determined was how to divide the surplus proceeds or, more specifically, from whose portion should the execution creditor be paid?
Mr. said that the execution creditor should be paid its $19,327.50 first and the balance of the surplus proceeds should be divided equally between Mr. and Mrs. This distribution would result in a payout of $16,108.82 to each spouse.
Mrs. said that, first, the balance of the surplus proceeds should be divided equally between Mr. and Mrs., then the execution creditor should be paid out of Mr.’s share. This distribution would result in a payment of $25,772.57 to Mrs. and $6,445.07 to Mr. and $19,327.50 to the execution creditor.
The motion’s judge held that the execution creditor should be paid first and the balance would then be shared equally between Mr. and Mrs. He supported Mr.’s position.
The motion’s court judge considered section 27 of the Mortgages Act, which sets how money arising from the sale of property is to be distributed. Essentially, under this section, sale proceeds are applied first to the payment of expenses incidental to the sale, second to discharge all interest and costs in respect of the mortgage, third to discharge principal due under the mortgage, fourth to pay subsequent encumbrancers, fifth to tenants for rent deposits, and finally to the mortgagors. He also considered the Execution Act and case law which indicate that a writ of seizure and sale creates an interest in land. He held that the combination of these acts and cases meant that the execution creditor was a subsequent encumbrancer within the meaning of section 27 of the Mortgages Act and, as a result, should be paid fourth, before any payment to Mr. or Mrs.
The Court of Appeal disagreed with the motion’s court judge.
In coming to its decision, the Court of Appeal considered the nature of consumer proposals, execution creditors, stays of proceedings, and joint tenancies.
Consumer Proposals: According to the Court of Appeal, the Bankruptcy and Insolvency Act provides a “comprehensive prohibition on remedies against the debtor or the debtor’s property once a consumer proposal has been filed. The stay includes a prohibition against the commencement or continuation of any action, execution or other proceeding for the recovery of a claim.”
Execution Creditors: In the bankruptcy regime, an execution creditor is not a secured creditor. Unless the execution “has been completed by payment to the creditor, the debt of the exection creditor is treated rateably with other unsecured debt.” The Court of Appeal held that section 70(1) of the Bankruptcy Act provides that every assignment made under it takes precedent over executions except those that have been completely executed by payment to the creditor. As such, section 27 of the Mortgages Act could not be used to elevate the execution creditor’s status to achieve priority over the rights of Mrs.’s other unsecured creditors.
Stay of Proceedings: The Court of Appeal stated that the stay of proceedings is in place to prevent creditors from gaining an unfair advantage and to allow for an orderly restructuring on liquidation. The execution creditor’s claim was stayed once the proposal was filed. As such, the execution creditor was precluded from executing any remedy against Mrs. or her property.
Joint Tenancies: Finally, the Court of Appeal considered the nature of a joint tenancy since Mr. and Mrs. had held their property as joint tenants. It held that a joint tenancy may be severed on a bankruptcy because the bankrupt’s property vests in the trustee. The court did not, however, clearly articulate if filing a consumer proposal would have the same affect. In fact, earlier in the decision, the court wrote, “unlike bankruptcy where the debtor’s property vests in the trustee in bankruptcy, in a proposal property may remain with the debtor.” Further the court found that, although the mere filing of a writ of seizure in sale is not enough to sever a joint tenancy, if an execution creditor takes “sufficient steps” to execute the judgment against a debtor’s interest in the property, severance might occur. In this case, the Court of Appeal found that “the parties consented to, and the application judge granted an order authorizing payment to [the execution creditor]. The execution was completed and acted upon”. As a result, the joint tenancy was severed and the payment to the execution creditor could only be from Mr.’s share of the surplus proceeds.
It is interesting to note that, while the Court of Appeal found that an execution creditor is not a secured creditor under the bankruptcy regime and that it ranks equally with all other unsecured creditors unless the execution has been completed by payment it found that an agreement to pay the execution creditor and an order of the court in that regard was sufficient to find that the execution was completed and acted upon to sever a joint tenancy. In this case, the court held that the joint tenancy was severed and the stay of proceedings prevented the execution creditor from pursuing Mrs. As a result, the execution creditor was paid from Mr.’s share of the surplus proceeds.