michele isaak - insolvent estates
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Michele Isaak - Insolvent EstatesTRANSCRIPT
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DEALING WITH INSOLVENT ESTATES
Michelle IsaakEstate Planning Council of AbbotsfordJanuary 18, 2012
<File No.>
Introduction
Points of intersection between bankruptcy law and estate administration:
Bankrupt individual dies before discharge under Bankruptcy and Insolvency Act (the “BIA”)
Executor declares personal bankruptcy during administration of estate
Beneficiary of estate may be insolvent
Deceased’s estate is insolvent as result of death, or becomes insolvent during its administration.
Definitions of insolvency
Estate Administration Act (“EAA”), s. 100: “insolvent estate” means the real and personal estate of a deceased person that is not sufficient for the payment in full of the debts and liabilities of the deceased person.
Wills Estates and Succession Act (“WESA”), s. 169: “insolvent estate” means an estate that is not sufficient to pay all the debts and liabilities of the deceased person.
Bankruptcy and Insolvency Act (“BIA”), s. 2: “insolvent person”: person… who is for any reason unable to meet his obligations as they generally become due.
“person”: includes … “heirs, executors … administrators or other legal representatives of a person …”
BIA is paramount
As federal legislation, BIA is paramount over the EAA (and will be over WESA) and any other provincial legislation creating a lien or charge over property
Bankruptcy Process under BIA
S. 49: Voluntary assignment by personal representative
S. 43: Involuntary application commenced by creditor
• Creditor must be owed at least $1,000 in unsecured debt
• Debtor has committed “act of bankruptcy” within 6 months of application
e.g. failing to meet obligations as they become due
e.g. fraudulent gift or transfer of debtor’s property
• Court has discretion to stay bankruptcy proceedings
Part 3: Debtor makes proposal to creditors, approved by court
Potential liability if bankruptcy order
S. 44(2) of BIA:
If there is a proceeding to place an estate into bankruptcy by creditor, personal representative will be personally liable if they pay any monies or transfer any property of deceased debtor after being served with the bankruptcy application, except as required for payment of proper funeral and testamentary expenses, until the application is disposed of.
Trustee in Bankruptcy
Trustee in bankruptcy is retained by personal representative or appointed by court
Trustee fees must be approved by creditors and court, must not exceed 7½% of the amount remaining from the realization of property of the debtor after the claims of secured creditors have been satisfied; subject to increase if complex administration
Bankruptcy process
Trustee in bankruptcy:
1. Holds creditors’ meeting. Up to five creditors appointed at meeting as inspectors to oversee work of trustee. Meets with inspectors to discuss issues of administration and realization.
2. Reviews affairs of bankrupt, identifies questionable transactions.
3. Realizes assets.
4. Reviews proof of claims of creditors, and allows or disallows claims. Creditor has right to appeal decision to disallow claim to the court.
Bankruptcy process (cont’d)
5. May make interim distributions with approval of inspectors.
6. Taxes legal costs if over $2,500. Prepares final statement of receipts and disbursements, including proposed remuneration. Inspectors approve administration and matter goes to court for final approval.
7. Distributes to creditors, in accordance with priorities in s. 136. A levy is deducted from each payment and remitted to the OSB.
Administering insolvent estate under EAA or WESA
Same process as administering solvent estate, except that debts must be paid in accordance with priority scheme in s. 101 of EAA (s. 170 of WESA)
Advertising for creditors important
Personal representative should be frugal with expenses
Priorities of creditors under BIA
BIA
“Super-priorities”
Secured creditors
Preferred creditors, s. 136
Unsecured creditors
“Super-priority” Claims
Statutorily mandated, secured against specified assets of bankrupt. Examples:
• Crown claims for withholdings for income tax, CPP, EI
• Employee claims for pension contributions
• Employee claims for wages up to $2,000
Must be satisfied before secured creditors can exercise right to realize secured property
Secured Creditors
S.2 def’n:
…a person holding a mortgage, hypothec, pledge, charge or lien on or against the property of the debtor or any part of that property as security for a debt due or accruing due to the person from the debtor, or a person whose claim is based on, or secured by, a negotiable instrument held as collateral security and on which the debtor is only indirectly or secondarily liable, …
Amounts still owing after secured property realized treated as unsecured debt of bankrupt
Preferred Creditors
Bankruptcy and Insolvency Act, s. 136(1) Estate Administration Act, s. 101(1)
(a) Reasonable funeral and testamentary expenses incurred by personal representative
(a) Reasonable funeral and testamentary expenses incurred by personal representative
(b) C osts of administration, as follows: (i) expenses and fees of person acting under
Superintendent’s direction to protect estate assets
(ii) expenses and fees of the trustee (iii) legal costs
(b) Costs of administration, as follows: (i) expenses and fees of personal representative (ii) legal costs
(c) Levy on all payments to creditors made by trustee to defray costs of Superintendent’s
supervision
(d) wages of employees for services provided during preceding 6 months before initial
bankruptcy event, up to $2,000 each, and up to $1,000 in costs for travelling salesperson, not already satisfied by “super-priority”
(c) unpaid wages of employee for services provided during preceding 3 months before
death, up to $500 each, and up to $300 in costs for travelling salesperson
Preferred Creditors (cont’d)
Bankruptcy and Insolvency Act, s. 136(1) Estate Administration Act, s. 101(1)
(d.01) any shortfall suffered by secured creditor as result of super- priority for wages
(d.02) any shortfall suffered by secured creditor as result of super - priority for unp aid pension contributions
(d.1) arrears of periodic spousal and child support accrued in year before date of bankruptcy, and arrears of lump sum support
(e) municipal taxes levied in 2 years preceding date of bankruptcy, not secured against real
prope rty, up to value of Deceased’s interest in property taxed
(d) municipal taxes up to the value of the Deceased’s interest in the property taxed, as declared by the legal representative
(f) lessors for arrears of rent up to 3 months preceding bankruptcy and accelerated rent for up to 3 months after bankruptcy if entitled under lease, up to the amount realized from property on the leased premises
(e) landlords for arrears of rent up to 3 months preceding death, up to the amount realized from property on the l eased premises
Preferred Creditors (cont’d)
Bankruptcy and Insolvency Act, s. 136(1) Estate Administration Act, s. 101(1)
(g) legal fees of creditor who first seized property, up to amount realized on property
(h) for bankruptcies commenced before November 30, 1992, indebtedness to Crown for
em ployee withholdings, rateably
(f) indebtedness to Crown for employee withholdings, rateably
(i) claims for injuries to employees of deceased not covered by Workers Compensation Act, up
to amount received from persons guaranteeing bankrupt against such da mages
(g) claims for injuries to employees of deceased not covered by Workers Compensation Act, up to amount received from
persons guaranteeing bankrupt against such damages
(j) for bankruptcies commenced before November 30, 1992, federal and provincial Crown claims not mentioned in (a) to (i), rateably notwithstanding any statutory
preference to the contrary
(h) other federal and provincial Crown claims not mentioned in (a) to (g), rateably and without preference, despite a statutory
preference to the co ntrary
all other creditors, rateably and without preference
(i) all other claims, rateably and without preference
Preferred creditors under WESA
Sections 169-174 of WESA
Amended to add priorities and amend time frames and amounts to more closely reflect s. 136 of BIA
• e.g. now a priority for spousal and child support owing
personal representative’s expenses and fees still have high priority
Unsecured creditors
All other creditors, rateably and without preference
Under BIA, Crown claims for unpaid income taxes and unremitted employee withholdings rank as unsecured claim if bankruptcy declared after Nov. 30, 1992
Under EAA and WESA, all Crown claims have a priority over other unsecured creditors
Funeral expenses
Priority applies only if bankruptcy occurs after death
Person instructing funeral director is personally liable for costs, but entitled to indemnity from estate
Only “reasonable” expenses are indemnified
• Grave marker may be reasonable expense but must be simple and modest
Testamentary expenses
Def’n: “expenses incident to the proper performance of the duty of the executor”
• under BIA, includes legal and accounting costs incurred with respect to administration and distribution of estate
• under EAA, does not include accounting and legal costs, as these rank below funeral and testamentary expenses = not clear what is meant by “testamentary expense” under EAA
Testamentary expenses (cont’d)
Section 170(a) of WESA - top priority among preferred creditors given to:
“reasonable funeral and other expenses incurred by the personal representative in administering the estate of the deceased person”
• BUT in s. 170(c): “legal expenses” rank third
= do legal expenses for probate fall under (a) and legal expenses to resolve insolvency fall under (c)? not clear
Remuneration of Personal Representative
Executor’s or Administrator’s fees have high priority under EAA and WESA, but if estate is assigned into bankruptcy by creditor, claim of personal representative for fees becomes unsecured claim, may not be satisfied
Reasons to choose BIA process
Expertise of trustee in bankruptcy needed because estate is large, complex, with numerous creditors and difficult priority issues
Personal Representative wants to avoid exposure to personal liability and hassle of creditors
Personal Representative may not recover fees
Want to close off unperfected secured creditor’s opportunity to perfect security interest
Want stay of enforcement of debts and judgments
Want to make proposal under BIA
Reasons to choose EAA or WESA process
Estate is small and debts are straightforward
Personal representative wishes to retain control over the administration of the estate
Personal representative is more likely to recover fees and expenses
Life Insurance
Does not form part of estate available to creditors
If deceased breached agreement to name ex-spouse as beneficiary of life insurance, ex-spouse may obtain equitable lien over proceeds in hands of named beneficiary on basis of unjust enrichment of deceased
Fraudulent transactions
Fraudulent conveyance: disposition of property designed to delay, hinder or defraud creditors and others
Fraudulent preference: transfers made by insolvent persons in preference of certain creditors with the intent to defeat, hinder, delay or prejudice other creditors
= Transaction is void
Solicitor’s responsibility
If assist in fraudulent transaction:
• Breach of Professional Conduct Handbook
• Potential liability for fraud or conspiracy
• Potential criminal liability
Query: can solicitor be liable to creditors for assisting client to arrange affairs to ensure insolvency on death to defeat those creditors??
Sources of liability for personal representative
pay off creditors contrary to priority scheme above
distribute estate assets, other than to pay funeral and testamentary expenses, after being served with an application for bankruptcy
distribute estate assets before satisfying claims of creditors of which they had actual or constructive notice
if estate assets insufficient to fully indemnify the personal representative for proper costs incurred
Issues for solicitors advising executors
May not get paid.
• Should ensure assets sufficient to satisfy creditors with higher priority than legal costs as well as legal costs, or obtain retainer
Other bankruptcy issues
Deceased dies before discharge = bankruptcy process carries on
Insolvent executor = executor entitled to carry on with administration of estate
Insolvent beneficiary = may be able to protect interest in estate for beneficiary if held in fully discretionary trust for beneficiary and others
• BUT trust interest may be taken into account on discharge
Memorial Stone
Thomas died.
His will provided $40,000 for an elaborate funeral.
As the last guests departed the affair, his wife Megan turned to her oldest and dearest friend. 'Well, I'm sure Thomas would be pleased,' she said. 'I'm sure you're right,' replied Helen, who lowered her voice and leaned in close. 'How much did this really cost?'
'All of it,' said Megan. 'Forty thousand.'
'No!' Helen exclaimed. 'I mean, it was very nice, but $40,000?'
'Well,' Megan answered, 'The funeral was $6,500. I donated $500 to the church. The whiskey and snacks were another $500. The rest went for the Memorial Stone.' Helen computed quickly. '$32,500 for a Memorial Stone? My God, how big is it?'
