Can a Third-Party Creditor Have Priority Over a Former Spouse to Jointly Held Property?

Exterior of house representing creditors may recover the debtor spouses share of joint property during a divorce

Written on behalf of Shariff & Associates

Property can be held in joint tenancy, meaning each joint tenant holds an undivided interest in the entire property. So what happens if one tenant has outstanding debt and a third-party creditor tries to recover against the property? Can the creditor seize the interest of the non-debtor owner? The issue can be important for parties who are separating as the respective priority of the claimants can have financial consequences.

Support Payment Has Priority Over Creditor’s Recovery

In Patton v. Patton the spouses had separated, but the husband had failed to meet his loan obligations to a bank. The bank was an execution creditor of the husband and acted as an intervenor in the proceedings. The bank opposed any order that title to the matrimonial home be vested without encumbrance in the wife. The bank had filed a writ of execution in January 2007, over any equity that the husband was entitled to in the matrimonial home.

However, pursuant to an earlier final order dealing with equalization of the parties’ net family property, the wife was entitled to acquire the husband’s interest in the matrimonial home upon payment of nearly $32,000. The wife then sought to use the husband’s debt to her to satisfy his spousal support obligations to purchase his interest in the home. As the wife was entitled to do so, the Court vested full title of the matrimonial home in the wife and removed the husband from title.

What Impact Does Bank’s Writ of Execution Have?

Following the vesting order, it was unclear what impact the bank’s writ of execution that was filed against the property had, and whether it continued as an encumbrance on the property, to the extent of the husband’s former interest in the property. While the wife requested an unencumbered interest in the home upon the vesting order, the bank argued that such an order should not be retroactive to any date prior to the date that the court made an order. On that basis, the bank indicated that their writ of execution would bind the lands from the date it is received, which was January 2007.

Consequently, the bank claimed that the writ of execution had priority over any interest the wife had resulting from the court’s vesting order. The judge agreed that the vesting order should not have retroactive effect. In Stevens v. Stevens, the Court vested title to a matrimonial home in the wife retroactively to the parties’ separation date. However, as Justice Reilly explained, that case does not suggest that any vesting order can be made retroactively. In Stevens, the retroactivity was justified as “the wife had acquired a constructive trust interest in the husband’s equity in the matrimonial home effective as of the date of separation. It was on the basis of this constructive trust interest that the vesting order was directed to have retroactive effect.”

Lump Sum Support Payment Takes Priority Over Bank

That was not the situation in Patton. Here, the wife did not acquire an interest in the husband’s equity in the home until the court’s vesting order of February 2007, which was after the bank filed its writ of execution. Justice Reilly noted that normally the bank would have priority to the husband’s equity over the wife’s entitlement. However, section 4(1)(b) of the Creditor’s Relief Act states that:

4. (1) A support or maintenance order has priority over other judgment debts regardless of when an enforcement process is issued or served,

(b) if the order is for a lump sum payment, in the amount of the lump sum.

According to this, the lump sum the husband owed for support took priority. The wife used the lump sum obligation to acquire the husband’s interest, which eliminated any equity the husband had in the home. Since she relied on a lump sum support order to do so, the wife had priority over the debt owing to the bank, despite the bank’s writ being filed prior to the order for the lump sum payment.

Creditor Argues They Are Entitled to the Full Property Interest

Creditors who wish to enforce a judgment against a jointly held property can face various challenges, especially if the joint owners are, or were, spouses. In Senthillmohan v. Senthillmohan the respondents were previously married but had separated. They owned the matrimonial home as joint tenants, and in January 2021, the Court made an order for the sale of the home, directing that the proceeds be held in trust pending an agreement between the parties or a Court order.

The appellant was a third-party creditor who had obtained a default judgment against the husband, and a writ was filed in September 2021. The respondents sold the matrimonial home, and in November 2021 the wife brought a motion to sever, which was successful. This resulted in the respondents becoming tenants in common. However, this order did not specify an effective date of severance and did not address the appellant’s judgment against the husband. In February 2022, the wife commenced a motion for the release of her 50% share of the sale proceeds.

Order Severing Joint Tenancy Fails to Address Retroactivity

As the order severing joint tenancy did not address retroactivity, the appellant argued that the respondents were joint tenants when the judgment against the husband was obtained and when the writ was filed; therefore, they had priority over the wife’s recovery of the sale proceeds. The motion judge rejected this argument because the joint tenancy had been severed by the time the appellants obtained a judgment against the husband, and it could not defeat the wife’s interests in the matrimonial home.

The appellants appealed the decision, arguing that the motion judge erred in finding that the joint tenancy in the home was retroactively severed and in deciding that the wife had priority to the sale proceeds over the writ. The Ontario Court of Appeal rejected these arguments and dismissed the appeal as “a creditor cannot seize the interest of a non-debtor joint tenant.”

Creditors Can Seize Debtor’s Interest in Property Held in Joint Tenancy

The appellant pointed to other cases which held that each joint tenant holds an undivided interest in the whole property. Since joint tenants are considered to be one owner until the joint tenancy is severed, a creditor has the right to claim the full interest. Section 9(1) of Ontario’s Execution Act states that:

“The sheriff to whom a writ of execution against lands is delivered for execution may seize and sell thereunder the lands of the execution debtor, including any lands whereof any other person is seized or possessed in trust for the execution debtor and including any interest of the execution debtor in lands held in joint tenancy.”

The Court explained that this meant a creditor can execute only against the debtor’s interest in jointly held property. Further, if the appellant’s position were accepted, it would mean the statute’s referencing of the debtor’s interest in joint property would be meaningless. Instead, the process only contemplated executing against the debtor’s interest in land held in joint tenancy. As the Court pointed out, “once severed, the debtor joint tenant has no claim to the whole. So, too, for the creditor, who can now execute against the debtor’s share of the tenancy in common.” Ultimately, the wife was entitled to 50% of the proceeds from the sale of the home.

Parties May Have to Deal with Creditors When Resolving Property Issues

Upon separation, parties will need to assess and deal with financial issues, which may involve the transfer or sale of jointly held property. The rights to that property or the proceeds can be complicated if there is a third-party creditor trying to recover against the debtor spouse’s property. Importantly, parties should bear in mind that a creditor can only recover the debtor’s interest in the property held in joint tenancy.

Contact the Separation and Divorce Lawyers at Shariff & Associates in Whitchurch-Stouffville

The family lawyers at Shariff & Associates in Whitchurch-Stouffville focus on helping clients navigate the uncertainties involved in various family law matters, such as parenting arrangements, property division, and support payments. We advise clients on complex family property and support strategies tailored to your unique situation. To discuss your matter further or arrange a consultation please complete our online questionnaire or contact the firm at 905-591-4545.