By Anna Lund, Associate Prof., Faculty of Law, University of Alberta and

Breanna Case, BA (hons), MA, JD Candidate 2022, University of Alberta

Individuals starting insolvency proceedings commonly report the breakdown of a relationship as the cause of their financial difficulties. This article deals with one issue that can arise when a party involved in family litigation starts insolvency proceedings: how a payor’s insolvency filing impacts a recipient’s ability to enforce a family law costs award. To understand the implications of insolvency proceedings on costs awards, this article surveys how different family law claims are treated in insolvency. It then considers the problem for family law litigants who are parties to a “mixed costs award” following a trial or application dealing with multiple family law claims.

Treatment of Family Law Claims in Insolvency

Family law proceedings can result in orders including those related to child and spousal support, property division, parenting and costs. Each type of order is dealt with differently in insolvency proceedings.

Claims by the recipient for spousal and child support are subject to special treatment when the payor starts insolvency proceedings. The Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”) specifies that spousal and child support claims are considered provable if payable pursuant to an order or agreement entered into prior to the insolvency proceedings and while the parties were living separately from each other under s 121 (4). Further, s 69.41 gives a creditor with a spousal or child support claim some scope to enforce their claim against the debtor, notwithstanding the stay, and s 136(1) (d.1) states they are to receive preferential payout. Lastly, support obligations are considered non-dischargeable debts under s 178(1)(b)(c).

Division of family property claims can be categorized as either personal rights or property rights – personal rights are dischargeable in insolvency proceedings, property rights are not. Division of family property claims may also be characterized as support if a division of property award is granted in lieu of support payments. In Cousin v Cousin, 2020 ABQB 636, amounts owed by the husband to the wife pursuant to the property division provisions of the separation agreement were characterized as spousal support and were not released by the husband’s bankruptcy.

Parenting orders, which cover issues like parenting time and decision-making, are unaffected by insolvency proceedings.

Costs awards serve three purposes in family law: to indemnify the successful party, to encourage settlement, and to discourage bad conduct. In insolvency proceedings, family law costs awards bear the same characterization as the underlying claim to which they pertain. For example, a costs award is characterized as a family support claim if the award was granted following a trial or application dealing with support claims. The costs would receive the same special treatment as an order to pay spousal or child support. A costs award granted after a trial or application on parenting would be treated as a general, unsecured claim.

Unfortunately, many claims defy easy categorization because the categories of support, property division and parenting may overlap. Moreover, a costs award may be granted after a trial or application that dealt with multiple issues; only the portion attributable to support receives special treatment.

Apportioning Costs

Recent case law provides insight into the process for how to apportion a “mixed costs award”, e.g., a costs award granted after a trial or application that dealt with multiple issues: support, parenting and/or property division.

Family Law Judge Makes the Apportionment Decision

The best person to apportion a mixed costs award is the judge that presided at the family law trial or application from which the cost award arises. This judge has first-hand experience which enables them to assess factors relevant to apportionment. Another judge can make the apportionment decision if litigants provide them with sufficient evidence. Courts have disagreed over whether a bankruptcy court has jurisdiction to make an apportionment decision.

Litigants Should Provide Court with Evidence Relevant to Apportionment

Sometimes a judge will have a sufficient recollection of the trial upon which they can base their apportionment decision; however, litigants should provide documents to refresh the judge’s memory where possible as per Taylor v Sist, 2017 ONSC 4280 [Taylor]. Evidence is crucial when a decision-maker other than the trial judge apportions a mixed costs award. The evidence could include the judge’s written or oral reasons from the trial, trial transcripts, real-time recordings or accounts of the trial provided by counsel or the litigants.

Functus Officio Not a Bar to Apportionment

The doctrine of functus officio prevents judges from varying final judgments. In Yassa v Parker, 2018 ABQB 305,the court held that this doctrine does not bar courts from apportioning a mixed costs award. In AA v ZG, 2020 ONCA 192, the court reasoned that it is appropriate for the trial judge to provide advice and direction about how an order should be interpreted after a payor commences insolvency proceedings.

An Apportionment Decision is Guided by Same Principles as an Initial Costs Award

When a court is asked to apportion a mixed costs award after the payor has commenced insolvency proceedings, it should be governed by the same principles as when granting an initial costs award. These costs principles are articulated in rules of civil procedure and give courts significant discretion. In decisions where they apportion mixed family law costs awards, courts put weight on the time litigants spent on an issue during preparation for trial or at trial, efforts the parties made to resolve the issues prior to trial, the conduct of the parties and the relative importance of an issue.

Apportioning Costs Between the Issues of Parenting and Support

Questions of support and parenting are connected. Under the Federal Child Support Guidelines, SOR/97-175, s 3, support amounts can vary depending on how much time children spend with each parent.

Some courts have indicated that parenting time is “inextricably connected” to support and thus a substantial portion of the costs from a trial on parenting may properly be characterized as support. In Taylor, costs were apportioned equally between parenting and support following a trial on the issue of parenting. The court reached a similar conclusion in SS v AS, 2021 ABQB 294.

However, courts will not always adopt a 50/50 split. In Hutchinson v Ross, 2021 ONSC 4128, a different split (10% to support) was warranted because the parties had resolved the spousal support prior to trial. In MN v CGF, 2021 BCSC 566, the court held no portion of a mixed costs award should be apportioned to support, in part because the party that was owed costs had acted discreditably.

Costs may be characterized as support where the court finds another link between the support claims and other family claims. In CLM v MJS, 2017 BCSC 1517, the court held that the issue of property division was linked to support because financial disclosures were key to resolving both issues. The successful litigant had to pursue the unsuccessful litigant for the disclosure and the court characterized 40% of the costs from the proceedings as support. Conversely, in MWB v ARB, 2014 BCSC 2309, costs related to a dispute over the sale of jointly-owned property were not characterized as support. The court found the impact of the sale on the financial well-being of the litigants was only tenuously connected to the support claim.

A Framework for Apportioning Mixed Costs Awards

A framework for apportioning mixed costs awards can be synthesized from the case law:

• Identify which issues were litigated: family support, parenting and/or division of property.
• Consider if any of the parenting and property claims are closely connected to or properly characterized as support.
• Estimate how much time was spent at trial on each issue.
• Review the legislation governing costs and identify factors that might colour a decision on costs, such as the litigant’s conduct or rejection of a reasonable pre-trial offer.
• Consider what evidence to provide to the decision-maker.

Practical Takeaways

Family lawyers representing a recipient under a mixed costs award can take steps to protect their client’s interests as a creditor in insolvency proceedings:

• Apportion costs at time of hearing, either by agreement made between the parties or by request made to the court.
• If costs have not been apportioned by the time the payor starts insolvency proceedings:
  • Negotiate apportionment with payor and file consent order in the family law proceedings, or
  • Apply to family court for apportionment of costs award in family law proceedings.
• Consider other options available to the spousal support recipient within the insolvency proceedings such as proving a claim, voting against a consumer proposal, or opposing a discharge.

Trustees are not directly involved in apportioning a mixed costs award, but they still have roles to play:

• Advise debtor that any portion of mixed costs award may still be enforceable after discharge if characterized as support.
• Advise recipient that until apportioned by the family court, the costs award will not be treated as support-related.

If you wish to learn more about family law costs awards in personal insolvency proceedings, Anna Lund published an article in the Annual Review of Insolvency Law 2021 on this topic entitled: “Family Law Costs Awards in Insolvency Proceedings”.