Vauclair, Hamilton, Cournoyer

Appeal from a Superior Court judgment granting an application to cancel a legal hypothec and for authorization to sell the debtor’s property to a related person. Allowed.

The debtor assigned his property in 2020. The appellant creditor, who was authorized to continue a proceeding brought against the debtor, obtained judgment in April 2021 condemning the debtor to pay it $39,395. The creditor then published a legal hypothec against the family residence, which the debtor co-owned in equal undivided shares with his spouse, the impleaded party. The trial judge ordered the cancellation of the hypothec and authorized the trustee in bankruptcy to sell the debtor’s undivided share in the residence to the impleaded party for $30,000.

The judge was correct in law by finding that the creditor had registered its legal hypothec without right. A debtor’s bankruptcy stays the proceedings. Exceptionally, the courts may authorize certain creditors to continue their proceedings against a debtor (section 69.4 of the Bankruptcy and Insolvency Act (R.S.C. (1985), c. B-3)). Such a creditor, however, is still an ordinary creditor. In this case, by registering a legal hypothec, the creditor was executing the pecuniary conclusion in its judgment before the debtor’s discharge. To allow the creditor to execute judgment would be to grant it an advantage over the other ordinary creditors, which is not what is intended by lifting the stay. The cancellation of the hypothec was therefore justified.

As for the application to partition the family residence, since there is no specific provision in the Bankruptcy and Insolvency Act on liquidating the debtor’s undivided share, the general principles of Quebec civil law apply. Given article 1015 of the Civil Code of Québec (S.Q. 1991, c. 64) (C.C.Q.) and the principle that the trustee can exercise only rights belonging to the debtor on the date of the bankruptcy, only the debtor’s undivided share devolved to the trustee. To liquidate this share, the trustee can demand partition of the undivided property provided the debtor can demand this under section 67(1) of the Bankruptcy and Insolvency Act. However, the courts refuse partition when the immovable is used as the family residence because the debtor is not allowed to demand partition pursuant to articles 404 and 1030 C.C.Q. and because of the extrapatrimonial nature of this right. In this case, the trustee therefore could not demand that the debtor’s residence be partitioned. Consequently, the trustee is limited to selling the debtor’s undivided share.

Last, the trustee did not make the necessary verifications to determine the value of the hypothec charging the family residence and thus the value of the debtor’s undivided half. The creditors therefore did not have the information needed to assess their interest in authorizing the trustee to refuse the impleaded party’s offer or to offer a higher price. In the circumstances, the judge erred in authorizing the sale of the debtor’s undivided share to the impleaded party.

Text of the decision: http://citoyens.soquij.qc.ca