Michele Isaak - Insolvent Estates

1. DEALING WITH INSOLVENT
ESTATES
Michelle Isaak
Estate Planning Council of Abbotsford
January 18, 2012
<File No.>
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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:
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.

9. 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.

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
Bankruptcy and Insolvency Act, s. 136(1) Estate Administration Act, s. 101(1)

(a) Reasonable funeral and testamentary (a) Reasonable funeral and testamentary
expenses incurred by personal representative expenses incurred by personal representative
(b) C osts of administration, as follows: (b) Costs of administration, as follows:
(i) expenses and fees of person acting under (i) expenses and fees of personal
Superintendent’s direction to protect representative
estate assets (ii) legal costs
(ii) expenses and fees of the trustee
(iii) 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 (c) unpaid wages of employee for services
during preceding 6 months before initial provided during preceding 3 months before
bankruptcy event, up to $2,000 each, and up to death, up to $500 each, and up to $300 in costs
$1,000 in costs for travelling salesperson, not for travelling salesperson
already satisfied by “super-priority”

15. 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 (d) municipal taxes up to the value of the
date of bankruptcy, not secured against real Deceased’s interest in the property taxed, as
prope rty, up to value of Deceased’s interest in declared by the legal representative
property taxed
(f) lessors for arrears of rent up to 3 months (e) landlords for arrears of rent up to 3 months
preceding bankruptcy and accelerated rent for preceding death, up to the amount realized
up to 3 months after bankruptcy if entitled from property on the l eased premises
under lease, up to the amount realized from
property on the leased premises

16. 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 (f) indebtedness to Crown for employee
November 30, 1992, indebtedness to Crown for withholdings, rateably
em ployee withholdings, rateably
(i) claims for injuries to employees of deceased (g) claims for injuries to employees of
not covered by Workers Compensation Act, up deceased not covered by Workers
to amount received from persons guaranteeing Compensation Act, up to amount received from
bankrupt against such da mages persons guaranteeing bankrupt against such
damages
(j) for bankruptcies commenced before (h) other federal and provincial Crown claims
November 30, 1992, federal and provincial not mentioned in (a) to (g), rateably and
Crown claims not mentioned in (a) to (i), without preference, despite a statutory
rateably notwithstanding any statutory preference to the co ntrary
preference to the contrary
all other creditors, rateably and without (i) all other claims, rateably and without
preference preference

17. 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

18. 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

19. 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

20. 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

21. 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

22. 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

23. 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

24. 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

25. 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

26. 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

27. 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??

28. 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

29. 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

30. 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

31. 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?'

33. CONTACT INFO:
Michelle Isaak
Davis LLP
2800 – 666 Burrard Street
Vancouver, BC V6C 2Z7
604-643-6466
misaak@davis.ca
www.davis.ca