dealing with insolvent estates - Fraser Valley Estate Planning Council

Report
DEALING WITH INSOLVENT
ESTATES
Michelle Isaak
Fraser Valley Estate Planning Council
May 21, 2013
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 (a) Reasonable funeral and testamentary expenses incurred
by the legal personal representative
by the legal personal representative
(b) Costs of administration, as follows:
(b) Costs of administration, as follows:
(i) expenses and fees of person acting under
(i) expenses and fees of Executor or Administrator
Superintendent’s direction to protect 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 during (c) unpaid wages of employee for services provided during
preceding 6 months before date of initial bankruptcy event, preceding 3 months before death, up to $500 each, and up
up to $2,000 each, and up to $1,000 in costs for travelling to $300 in costs for travelling salesperson
salesperson, not already satisfied by security on current
assets provided in s. 81.3
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
priority on current assets for wages in s. 81.3
(d.02) any shortfall suffered by secured creditor as result of
priority on all assets of bankrupt for unpaid pension
contributions in s. 81.5
(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 (d) municipal taxes up to the value of the Deceased’s
bankruptcy, not secured against real property, up to the interest in the property taxed, as declared by the legal
value of the Deceased’s interest in the property taxed
representative
Preferred Creditors (cont’d)
Bankruptcy and Insolvency Act, s. 136(1)
Estate Administration Act, s. 101(1)
(f) lessors for arrears of rent up to 3 months preceding (e) landlords for arrears of rent up to 3 months preceding
bankruptcy and accelerated rent for up to 3 months after death, up to the amount realized from property on the
bankruptcy if entitled under lease, up to the amount leased premises
realized from property on the leased premises
(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 withholdings (eg. WCB,
Income tax, EI, CPP), rateably
(i) claims for injuries to employees of deceased not covered
by Workers Compensation Act, up to amount received from
persons guaranteeing bankrupt against damages resulting
from such injuries
(f) indebtedness to Crown for amounts that have been
deducted and withheld (eg. WCB, Income tax, EI, CPP),
rateably
(g) claims for injuries to employees of deceased not
covered by Workers Compensation Act, up to amount
received from parties guaranteeing the deceased against
damages resulting from such injuries
Preferred Creditors (cont’d)
Bankruptcy and Insolvency Act, s. 136(1)
Estate Administration Act, s. 101(1)
(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
all other creditors, rateably and without preference
(h) other federal and provincial Crown claims not
mentioned in (a) to (g), rateably and without preference,
despite a statutory preference to the contrary
(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
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•
•
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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 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??
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?'
Contact Info:
Michelle Isaak
Davis LLP
2800 - 666 Burrard Street
Vancouver, BC V6C 2Z7
604-643-6466
[email protected]
www.davis.ca

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