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Re Decleva – Re Walters rises from the dead

By: Craig Ross (Deadbeat: OBA Trust & Estate Section Volume 26, No. 4, Pages 15-16 – June 2008)

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In direct contradiction to the most recent case authority on the subject, and the commentary in Holden and Morawetz, Bankruptcy and Insolvency Law of Canada (3rd ed.), and in Widdifield on Executors and Trustees (6th ed.), Ontario’s Registrar in Bankruptcy concluded that where a deceased dies following an assignment into bankruptcy, his or her funeral expenses will not be paid as a preferred claim in priority to creditors with unsecured claims. In Re Decleva, released April 16, 2008, Registrar Nettie reached the right conclusion given the plain words of s.136(1)(a) of the Bankruptcy & Insolvency Act and for policy reasons. Following an assignment into bankruptcy, the process of realizing the bankrupt’s assets and distributing the proceeds to creditors simply cannot take into account the future funeral expenses of a much alive bankrupt. What is interesting about this case is that the previous view of the law remained wrong for so long.

In Re Decleva, the deceased made an assignment in bankruptcy on March 23, 1993, but then died on April 5, 1993. Instead of allowing the unopposed initial taxation, the Registrar asked that the Trustee in Bankruptcy reduce the $7,812.06 spent on the deceased’s funeral or speak to it. The Registrar was clearly motivated by the fact that the funeral expenses, which were modest by today’s standards, would deprive the deceased’s creditors of 25% of the bankrupt’s estate.

Registrar Nettie reviewed two cases, Re Walters and Re Bertram. Re Walters is a 1934 decision of Registrar Cook where, following the death of the bankrupt four months after his bankruptcy, his wife and executrix claimed the funeral expenses in priority to the creditors’ claims pursuant to the then s.125B of the Bankruptcy Act:

125B. In the administration of the property of a deceased insolvent debtor, the trustee shall have regard to any claim by the legal personal representative of the deceased debtor to payment of the proper funeral and testamentary expenses incurred by him in or about the estate and such claim shall be preferred and shall notwithstanding anything to the contrary in this Act, be payable out of the debtor’s estate in priority to all other debts.

In finding that this language only contemplated priority respecting funeral and testamentary expenses of a deceased debtor who had not been declared bankrupt during his lifetime, Registrar Cook noted that this was the only reasonable interpretation of the British legislation on which the Bankruptcy Act was based. Registrar Cook also took issue with the logic of giving priority to a future claim for funeral expenses of a bankrupt, noting the following definition of a provable claim:

*** all debts and liabilities, present or future, to which the debtor is subject at the date of the receiving order or the making of the authorized assignment or to which he may become subject before his discharge by reason of any obligation incurred before the date of the receiving order *** shall be deemed to be debts provable in bankruptcy or in proceedings under an authorized assignment.

In Re Bertram, the amended language of the 1970 Bankruptcy Act provided Justice Houlden with grounds to conclude that the decision in Re Walters was no longer good law. Section 107(1) provided as follows:

107. (1) Subject to the rights of secured creditors, the proceeds realized from the property of a bankrupt shall be applied in priority of payment as follows:

(a) in the case of a deceased bankrupt, the reasonable funeral and testamentary expenses incurred by the legal personal representative of the deceased bankrupt.

Unlike the situation in Re Walters, in Re Bertram, the bankrupt died prior to bankruptcy. During the course of estate administration, the administrators realized there were insufficient assets to meet the estate’s obligations and the administrators sought leave to file an assignment in bankruptcy. The accounts were passed and the trustee applied for directions as to whether or not the claims of the administrators and lawyers should rank in priority to the claims of secured creditors. After acknowledging that the decision in Re Walters would permit priority for the expenses in any event, Justice Houlden went on to conclude in obiter that s.107(1) which replaced the former s.125B, and in particular the words “deceased bankrupt” were intended to include both the situation where the debtor has died before bankruptcy and where he has died after the date of bankruptcy.

In Re Decleva, Registrar Nettie was confronted with the Re Walters scenario of a bankrupt who dies after making an assignment. In interpreting the current s.136(1)(a) of the BIA, and in particular the words “in the case of a deceased bankrupt” he focused on the word “case” concluding that the word “case” refers to a deceased’s estate which is assigned into bankruptcy thereby making it a case of a deceased bankrupt.

Registrar Nettie, like Registrar Cook, also noted that the funeral expenses of a living debtor cannot constitute a claim provable in the bankruptcy as they are not a debt to which the then alive individual was subject to at the date of bankruptcy. Conversely, the funeral expenses of a bankrupt estate are not speculative, but clearly exist at the date of bankruptcy. To interpret s.136(1)(a) as applying only in the latter circumstance is appropriate given that the other s.136(1) debts which are given priority are debts which exist at the date of bankruptcy. Registrar Nettie’s most cogent comment comes at paragraph 12 of his reasons where he states:

As well, this interpretation accords with the concept of the BIA that we, in effect, stop the clock for an insolvent person, and tally up all the assets, all the debts, and distribute them in accordance with the BIA. How could this exercise possibly include an accounting for funeral expenses for a death which had not occurred at the time of the tallying?

His observations concerning the difficulty of proper distribution become more obvious in the case of a bankrupt who does not die until several years after the bankruptcy.

In addition, Registrar Nettie did not find it equitable to burden the creditors with the costs of funeral expenses which are under the complete control of the estate trustee. This interpretation equally accords with the respective roles served by an estate trustee and a trustee in bankruptcy. The decision of an estate trustee as to the proper funeral to be given to the deceased is driven in part by the available resources of the estate. However, it is not the role of an estate trustee to maximize the assets of the estate for distribution to creditors. Nor would it be appropriate for the trustee or creditors of a deceased bankrupt to interfere with burial arrangements for the purpose of maximizing their return. As Registrar Nellie rightly points out, if the estate is unable to meet its obligations, it is open to the estate trustee to assign the estate into bankruptcy, in which case the existing funeral and testamentary expense will have priority pursuant to s.136.

Registrar Nettie had no problem attributing the comments in Houlden and Morawetz regarding funeral expenses of a person who dies after bankruptcy to the confusion caused by Re Bertram, and in the end awarded the trustee in bankruptcy sufficient additional trustee compensation to cover the funeral expenses, and $4,000.00 in legal fees, but warned that future parties will not be entitled to the same leniency. Having clarified the law with respect to priority funeral and testamentary claims, Registrar Nettie expects trustees will now claim priority for such expenses only where the deceased has died prior to bankruptcy.

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