DEALING WITH INSOLVENT ESTATES

1. DEALING WITH INSOLVENT ESTATES Michelle Isaak Fraser Valley Estate Planning Council May 21, 2013

2. 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.

3. 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 …”

4. 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

5. 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

6. 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.

7. 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

8. Bankruptcy Process Trustee in Bankruptcy: • 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. • Reviews affairs of bankrupt, identifies questionable transactions. • Realizes assets. • Reviews proof of claims of creditors, and allows or disallows claims. Creditor has right to appeal decision to disallow claim to the court.

9. Bankruptcy Process (cont’d) • May make interim distributions with approval of inspectors. • 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. • Distributes to creditors, in accordance with priorities in s. 136. A levy is deducted from each payment and remitted to the OSB.

10. 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

11. Priorities of Creditors under BIA BIA • “Super-priorities” • Secured creditors • Preferred creditors, s. 136 • Unsecured creditors

12. “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

13. 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

14. Preferred Creditors

15. Preferred Creditors (cont’d)

16. Preferred Creditors (cont’d)

17. Preferred Creditors (cont’d)

18. 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

19. 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 EAAand WESA, all Crown claims have a priority over other unsecured creditors

20. 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

21. 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

22. Testamentary Expenses (cont’d) Section 170(a) of WESA - top priority among preferred creditors given to: “reasonable funeral and otherexpenses 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

23. Remuneration of Personal Representative • Executor’s or Administrator’s fees have high priority under EAAand WESA, but if estate is assigned into bankruptcy by creditor, claim of personal representative for fees becomes unsecured claim, may not be satisfied

24. 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

25. 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

26. 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

27. 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

28. Solicitor’s Responsibility • If assist in fraudulent transaction: • Breach of Code of Professional Conduct for British Columbia • 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??

29. 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

30. 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

31. 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

32. 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?'

34. Contact Info: Michelle Isaak Davis LLP 2800 - 666 Burrard Street Vancouver, BC V6C 2Z7 604-643-6466 misaak@davis.ca www.davis.ca