Creditor claims can present significant difficulties in an estate administration. The main stakeholders affected by this situation are the estate trustee, creditors and beneficiaries. First, no distribution can be made to beneficiaries before the debts and liabilities of an estate have been satisfied or paid. Second, an estate trustee (executor) may not wish to spend the time and effort necessary to properly administer an estate if estate debts are such that there would be no funds with which to compensate him or her. Fortunately, bankruptcy and insolvency legislation prioritizes the reasonable compensation of the estate trustee over payments to the estate`s creditors.
Once someone accepts the role of administering an insolvent estate, the next challenge to overcome is determining which creditors should get paid when there are not enough assets to pay all of the estate`s debts. Once again, the legislators have attempted to resolve this problem by providing that creditors will be paid the share of the estate`s total assets that is proportionate to their share of the estate`s total debt, subject to exceptions outlined by statute. Thus, if a creditor is owed 45% of the estate`s total debt, they will receive 45% of the estate`s assets.
Greeley Estate, 2011 ONSC 1648 (CanLII) was a case in which the exceptions to this general rule were discussed. The Court was asked to resolve the issue of prioritization of debts of the estate of Jeremy Greeley. The value of the estate was $65,360.00. The debts were in excess of $90,000.00 and were as follows:
a. Law firm of Singer, Kwinter for legal fees and disbursements $31,232.00
b. BridgePoint Financial Services (secured creditor) $41,400.21
c. Mandy Kitaresku for unpaid child support $27,357.76
The law firm of Singer, Kwinter represented Mr. Greeley with respect to a law suit he started against the City of Toronto for an injury he suffered in 2006 when he fell on a sidewalk.
On August 30, 2008, Mr. Greeley died intestate (without a will).
The litigation with the City was settled on December 11, 2008 following mediation. The City agreed to pay a total of $65,360.00. These settlement proceeds were the only asset of Mr. Greeley’s estate.
BridgePoint is in the business of lending money to plaintiffs who are involved in litigation. In this case, Mr. Greeley borrowed a total of $18,500.00 from BridgePoint at the rate of 26% per annum. As of October 29, 2010, BridgePoint was owed $41,400.21. Interest was accumulating at the rate of $29.49 per day. BridgePoint registered its interest in Mr. Greeley’s claim against the City under the Personal Property Security Act (Ontario), and was thus a secured creditor. All parties agree that BridgePoint’s claim had priority, as it was a secured creditor. Thus, the Court had to decide which of two valid claims had priority – Singer, Kwinter’s claim for legal fees or Ms. Kitaresku’s claim for unpaid child support.
Singer, Kwinter argued that it should have priority because were it not for the efforts of Singer, Kwinter, the estate would have no assets. It further argued that public interest is at stake since law firms will hesitate to represent those with valid claims if they may not be paid their fees and disbursements. Singer, Kwinter took a risk on behalf of Mr. Greeley and spent $15,000 in disbursements to advance his claim.
Although the Court was very sympathetic to the position of Singer, Kwinter, who obviously rendered effective legal services to Mr. Greeley, it decided in favour of the unpaid child support order. In making the decision, the judge cited the intent of the legislature to give priority to child support orders over other debts as evidenced in various statutes.
The judge also commented that Singer, Kwinter received notice of the outstanding child support order in January 2008, prior to proceeding to mediation, and did not move for a statutory charging order at that time which would have made Singer, Kwinter a secured creditor and given its claim priority over Ms. Kitaresku’s. Thus, it is critical to ensure that debt is secured and to take the earliest opportunity to secure it lest delay taint the view of the claim and, in turn, prevent its ultimate satisfaction.
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Andrea Kelly, Lawyer, has extensive experience in wills, trusts, powers of attorney and estate administration matters. She provides clients with a high standard of timely professionalism and expertise, incorporating a very thorough fact finding process. This is quite often enlightening for her clients and facilitates individually tailored services. If you would like to know more, feel free to use the easy contact form or read Andrea’s bio.