The validity of undivided co-ownership agreements in the context of a bankruptcy

In the case of Freire (Syndic de) 2023 QCCA 1065, the Court of Appeal of Québec finally resolved a thorny issue that had been troubling trustees and lawyers in the bankruptcy field for some time: is an agreement of undivided co-ownership opposable to a bankruptcy trustee? The Court of Appeal answered in the affirmative in the case of a statutorily defined “family residence” (as well as in a few other limited instances), but in the negative for all other cases.

In this file, the debtor and his companion Falardeau had acquired a property together, each holding a 50% undivided co-ownership interest. Falardeau claimed a priority status in the bankruptcy, alleging that she had contributed the totality of the funds at the time of purchase.

The contractual provisions in issue stated that: (i) each co-owner could at any time put an end to the undivided co-ownership agreement and force the sale of the property (s. 14.9) and (ii) in the event of the sale of the property, Falardeau would be paid in priority for the refund of her initial disbursement of funds along with its accruance in value (s. 14.3).

In the first instance, the Court of Appeal underlined that the bankruptcy trustee has the statutory right to put an end to a co-ownership agreement in all cases, except where the property could be defined as a “family residence” under the Civil Code of Québec (which requires the existence of a marriage) or where the debtor has waived such right, or by an express statutory provision. In the present case, the property in issue could not be qualified as a “family residence” since the debtor had stated in his bankruptcy statement of affairs that he did not reside there and was separated from Falardeau and since the parties had stipulated in s. 14.9 of their agreement that either one could at any time put an end to the undivided co-ownership agreement. In addition, the debtor and Falardeau were not married, although regarding this particular argument, the Court of Appeal declined to rule and left the door open, since a factual conclusion might be reached that “the property has been appropriated to a lasting purpose.” (s. 1030 C.c.Q.)

Secondly, the Court of Appeal ruled that section 14.3 of the undivided co-ownership agreement did not create any real (or property) right in favour of Falardeau, who only held a personal right against the debtor. By claiming a priority interest pursuant to this clause, Falardeau sought to contravene the priority order established by section 136 of the Bankruptcy and Insolvency Act and consequently was unopposable to the trustee. The publication of the undivided co-ownership agreement at the land registry office was irrelevant despite section 1014 C.c.Q. since the Bankruptcy and Insolvency Act had priority over provincial law. Finally, there was no unjust enrichment of the mass of creditors of the debtor, since Falardeau could have easily secured a priority status for her claim at the time of purchase, by publishing a hypothec over the debtor’s undivided half-interest or acquiring more than simply 50% of the property at the outset.

This ruling by the Court of Appeal confirms a principle already established in two previous rulings pleaded by the same attorney from our law firm : Malka (Syndic de), J.E. 97-385 (C.A.) and Poulin de Courval c. Société d’investissement Sidi ltée, [1997] R.D.I. 167 (Qué.C.A.).

Reference : Freire (Syndic de) 2023 QCCA 1065

Attorney involved : Me Jean-Philippe Gervais