Meisels v. Lawyers Professional Indemnity Company

[Indexed as: Meisels v. Lawyers Professional Indemnity Co.]

Ontario Reports

Court of Appeal for Ontario,

Weiler, Cronk and Pepall JJ.A.

June 8, 2015

126 O.R. (3d) 448 | 2015 ONCA 406

Case Summary

Appeal — Jurisdiction — Final or interlocutory order — Applicant applying for declaration that his professional liability insurer was required to indemnify him — Respondent bringing motion to strike application on ground that applicant was undischarged bankrupt and lacked legal capacity to bring application — Motion judge dismissing motion and declaring that applicant had status to bring application — Order final — Appeal lying to Court of Appeal. [page449]

Bankruptcy and insolvency — Property of bankrupt — "Things in action" — Applicant applying for declaration that his professional liability insurer was required to indemnify him — Applicant an undischarged bankrupt — Right to receive indemnity under insurance contract constituting "thing in action" and falling within definition of "property" in s. 2 of Bankruptcy and Insolvency Act — Applicant lacking legal capacity to bring application — Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 2.

The applicant brought an application for a declaration that the respondent, his professional liability insurer, was required to indemnify him for all sums he might be liable to pay arising out of any settlement or judgment in a Colorado class action. The respondent brought a motion to strike the application on the ground that, as an undischarged bankrupt, the applicant lacked the legal capacity to bring the application. The motion was dismissed. The respondent appealed.

Held, the appeal should be allowed.

The order in question was a final order. It did not simply dismiss the motion to strike; rather, it contained a declaration that the applicant had a substantive right to bring the application. That declaration deprived the respondent of a substantive defence which, if successful, would be determinative of the entire action. Thus, although the order did not finally dispose of the rights of the parties to the action, it disposed of a substantive right that was determinative of the entire action. The appeal was properly before the Court of Appeal.

"Property" is defined in s. 2 of the Bankruptcy and Insolvency Act as including "things in action". The right to receive an indemnity under an insurance contract is a "thing in action". The applicant's claim against the respondent was not a personal claim. It passed to the trustee in bankruptcy. It was irrelevant that the insurance policy provided that the respondent was to pay out an indemnity "on behalf of the insured", rather than directly to the insured. The right to claim an indemnity and to enforce that claim by bringing an action belongs to a trustee whether the indemnity is payable directly to the insured bankrupt or to a third party. That is so because, even though the proceeds do not form part of the bankrupt's estate, if the claim is successful, all the creditors of the bankrupt may benefit from the reduction of another creditor's claim.

Adler (Re), 2008 47017 (ON SC), [2008] O.J. No. 3631, [2008] I.L.R. I-4740, 47 C.B.R. (5th) 77, 171 A.C.W.S. (3d) 787 (S.C.J.), consd

Other cases referred to

Adelaide Capital Corp. v. Sethi, [1996] O.J. No. 26, 6 C.B.R. (4th) 22 (Gen. Div.); Ball v. Donais (1993), 1993 8613 (ON CA), 13 O.R. (3d) 322, [1993] O.J. No. 972, 64 O.A.C. 85, 45 M.V.R. (2d) 319, 40 A.C.W.S. (3d) 1031 (C.A.); Clement Estate v. Canada (Attorney General), [2012] O.J. No. 4835, 2012 ONSC 5823, 95 C.B.R. (5th) 277, 82 E.T.R. (3d) 270 (S.C.J.); Ernst & Young Inc. v. Chartis Insurance Co. of Canada (2014), 118 O.R. (3d) 740, [2014] O.J. No. 416, 2014 ONCA 78, 93 E.T.R. (3d) 175, 29 C.C.L.I. (5th) 9, 314 O.A.C. 262, 9 C.B.R. (6th) 242, 237 A.C.W.S. (3d) 480, varg [2012] O.J. No. 4399, 2012 ONSC 5020, [2012] I.L.R. I-5341, 81 E.T.R. (3d) 209, 14 C.C.L.I. (5th) 270, 221 A.C.W.S. (3d) 989 (S.C.J.); Eurasia Auto Ltd. v. M & M Welding & Supply (1985) Inc., 1991 6227 (AB KB), [1991] A.J. No. 400, 119 A.R. 348, 5 C.B.R. (3d) 227, 1 C.C.L.I. (2d) 203, 26 A.C.W.S. (3d) 634 (Q.B.); Major (Re), 1984 452 (BC SC), [1984] B.C.J. No. 2712, [1984] 6 W.W.R. 435, 56 B.C.L.R. 342, 54 C.B.R. (N.S.) 28 (S.C.); Murphy v. Stefaniak, [2007] O.J. No. 4648, 2007 ONCA 819, 37 C.B.R. (5th) 6, 231 O.A.C. 76, 163 A.C.W.S. (3d) 516; [page450] Wallace v. United Grain Growers Ltd., 1997 332 (SCC), [1997] 3 S.C.R. 701, [1997] S.C.J. No. 94, 152 D.L.R. (4th) 1, 219 N.R. 161, [1999] 4 W.W.R. 86, J.E. 97-2111, 123 Man. R. (2d) 1, 3 C.B.R. (4th) 1, 36 C.C.E.L. (2d) 1, 97 CLLC Â210-029, REJB 1997-02865, D.T.E. 97T-1327, 74 A.C.W.S. (3d) 788

Statutes referred to

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 2 [as am.], 38 [as am.], 71 [as am.], 193 [as am.]

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rules 14.05(3), 21.01(3)(b)

APPEAL from the order of Pollak J. of the Superior Court of Justice dated December 2, 2014 dismissing a motion to strike an application for a declaration that the insurer had a duty to indemnify the insured.

J. Stephen Cavanagh, for appellant.

Michael Simaan and Alex Minkin, for respondent.

BY THE COURT: --

A. Background

[1] The respondent, a lawyer licensed to practice law in Ontario, is an undischarged bankrupt. He is being sued for professional negligence in a class action in Colorado. He brought an application pursuant to rule 14.05(3) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194, seeking a declaration that the appellant, his professional liability insurer, is required to indemnify him, "for all sums that he may be liable to pay for any settlement or judgment in the Colorado class action . . . including reimbursement for the defence costs in relation thereto". The trustee in the respondent's bankruptcy is not defending the class action on his behalf and did not oppose the application.

[2] The appellant took the position that the respondent lacked the legal capacity to bring the application and brought a motion to strike his application pursuant to rule 21.01(3) (b).

[3] The motion judge dismissed the appellant's motion. In addition, her order contained a declaration that the respondent "has status to bring the Application against LawPro".

[4] The appellant appeals. The respondent disputes the jurisdiction of this court to entertain the appeal on the basis that the motion judge's order is interlocutory and therefore leave to appeal to the Divisional Court is required.

[5] The issues raised are first, whether the motion judge's order is interlocutory or final, and second, whether the motion [page451] judge erred in holding that the respondent has the capacity to bring this application.

[6] For the reasons that follow, we are of the opinion that the order is a final order and the appeal is properly before this court. On the merits, the motion judge erred in holding the respondent has the capacity to pursue the appeal. Accordingly, we would allow the appeal.

B. Discussion

(1) The order under appeal is a final order

[7] An order that does not finally dispose of the rights of the parties to the litigation will be a final order for purposes of an appeal if it disposes of an issue that "deprive[s] the defendant of a substantive right which could be determinative of the entire action": Ball v. Donais (1993), 1993 8613 (ON CA), 13 O.R. (3d) 322, [1993] O.J. No. 972 (C.A.), at p. 324 O.R.

[8] The motion judge's order did not simply dismiss the motion to strike. It contained a declaration that the respondent had a substantive right to bring the application. This declaration deprives the appellant of a substantive defence, namely, that the application is a nullity because the respondent lacks standing as an undischarged bankrupt to bring the action. That defence, if successful, would be determinative of the entire action. The appellant has no other opportunity to raise this defence in the continuing litigation as the decision of the motion judge is res judicata in this regard. Thus, although the order does not finally dispose of the rights of the parties to the action, it disposes of a substantive right that is determinative of the entire action. Accordingly, the order is a final order.

[9] We also note, in passing, that in Adler (Re), 2008 47017 (ON SC), [2008] O.J. No. 3631, 47 C.B.R. (5th) 77 (S.C.J.), the court observed, at para. 28:

Arguably, the seeking of a determination of the Bankrupt's status under the policy of insurance ought to be determined in the Bankruptcy Court . . .

[10] Had the respondent brought his application there, any appeal would lie to this court by virtue of s. 193 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA").

(2) The motion judge erred in holding that the respondent has standing to bring this application

[11] Section 71 of the BIA provides that once a bankruptcy order is made, subject to the Act and the rights of secured creditors, the bankrupt's property passes to the trustee named in the [page452] bankruptcy order. The bankrupt ceases to have any capacity to deal with his property and an action commenced by an undischarged bankrupt is a nullity: Murphy v. Stefaniak, [2007] O.J. No. 4648, 2007 ONCA 819, 231 O.A.C. 76, at para. 28.

[12] Property is defined in s. 2 of the BIA to include "things in action". The right to receive an indemnity under an insurance contract is a "chose in action" or a thing in action: Ernst & Young Inc. v. Chartis Insurance Co. of Canada, [2012] O.J. No. 4399, 2012 ONSC 5020, 14 C.C.L.I. (5th) 270 (S.C.J.), at para. 54, vard on other grounds (2014), 118 O.R. (3d) 740, [2014] O.J. No. 416, 2014 ONCA 78.

[13] Certain exceptions to s. 71 have been carved out by the jurisprudence. One of the exceptions is where the claim or loss is personal in nature rather than proprietary, such as where the damages claimed are to be estimated by reference to injury to the bankrupt's person, i.e., for pain and suffering or mental distress or reputational damage. In such cases, the cause of action does not become the property of the trustee in bankruptcy and may be pursued by the bankrupt in his or her own right: Wallace v. United Grain Growers Ltd., 1997 332 (SCC), [1997] 3 S.C.R. 701, [1997] S.C.J. No. 94, at paras. 38 and 150; Clement Estate v. Canada (Attorney General), [2012] O.J. No. 4835, 2012 ONSC 5823, 82 E.T.R. (3d) 270 (S.C.J.), at paras. 39-40.

[14] The motion judge held that the respondent has the capacity to bring his application on the basis that:

The damages Mr. Meisels claims in this case are based on his defence and indemnification for damages resulting from liability incurred as a result of Mr. Meisels' professional negligence. I accept the submission that Mr. Meisels' claim should be characterized as "personal in nature" as it relates to his own alleged negligence. On this basis, I find that the "thing in action" [the right to bring the application] is not property that is vested with the trustee in bankruptcy.

No authority was cited for this conclusion.

[15] With respect, the motion judge erred in so holding. The respondent's claim against the appellant is not a personal claim as defined in the authorities above. His application for a declaration that the appellant must indemnify him under his insurance policy is a claim in breach of contract that is solely about money and vests in the trustee.

[16] Nonetheless, the respondent submits there is another reason his claim against the appellant does not vest in the trustee. He points out that the insurance policy at issue in this case provides that the appellant is to pay out an indemnity "on behalf of the insured", rather than directly to the insured. In such instances, the insurance proceeds do not form part of the estate [page453] of a bankrupt: Adelaide Capital Corp. v. Sethi, [1996] O.J. No. 26, 6 C.B.R. (4th) 22 (Gen. Div.), at para. 7; Eurasia Auto Ltd. v. M & M Welding and Supply (1985) Inc., 1991 6227 (AB KB), [1991] A.J. No. 400, 5 C.B.R. (3d) 227 (Q.B.); Major (Re), 1984 452 (BC SC), [1984] B.C.J. No. 2712, 54 C.B.R. (N.S.) 28 (S.C.), at pp. 34-35 C.B.R. (N.S.). The respondent notes that a bankrupt's lack of capacity to commence legal proceedings under s. 71 of the BIA relates only to property vested in the trustee. He submits that, since the proceeds of this particular insurance policy cannot form part of his bankrupt estate, the right to bring an action to enforce the terms of the policy likewise does not vest in the trustee.

[17] We disagree. The respondent's submission ignores the definition of property in the BIA. The property that passes to the trustee under the BIA, as defined in s. 2 of that Act, includes the right to receive an indemnity under an insurance policy. The right to claim an indemnity and to enforce this claim by bringing an action is the right of the trustee in bankruptcy, and this right belongs to the trustee whether the indemnity is payable directly to the insured bankrupt or to a third party. This is so because, even though the proceeds do not form part of the bankrupt's estate, if the claim is successful, all the creditors of the bankrupt may benefit from the reduction of another creditor's claim.

[18] Adler (Re) is instructive in this matter. In that case, the client of a bankrupt lawyer asked the trustee in bankruptcy to make a claim in the bankrupt's stead on his professional liability insurance ("LPIC") policy respecting damages flowing from the bankrupt's alleged negligent acts. The trustee declined. The client-creditor sought an order under s. 38 of the BIA, asking that it be assigned the bankrupt's rights under the LPIC insurance policy. Section 38 of the BIA provides that where a creditor requests a trustee to take an action for the general benefit of creditors and the trustee refuses to do so, the court may order the trustee to assign the right to the creditor to take an action in its own name. The court held, at paras. 30-32, that the client-creditor's application was the proper subject of an order under s. 38 of the BIA. It was in the interest of creditors generally for the client-creditor to advance its claim against LPIC, "as any monies recovered by [the client-creditor] under the LPIC policy will reduce its claims as an ordinary unsecured creditor in the Estate, thereby necessarily benefiting the other creditors". The court further ordered that other creditors should not be allowed to share in any recovery because they had "never bargained in their dealings with the Bankrupt to have insurance available for their claims". Subject [page454] to further order of the court, the claim was to be prosecuted at the client-creditor's sole expense and for its sole benefit.

[19] Likewise in this case, although the proceeds of this particular insurance policy do not form part of the estate of the bankrupt that vest in the trustee, the right to bring an action to enforce the terms of the policy do vest in the trustee and can be assigned by the trustee.

C. Disposition

[20] The appeal is allowed and the decision of the motion judge is set aside. The respondent's application is dismissed with costs below and in this court. By agreement of counsel, the costs of the appeal are fixed in the amount of $10,000, inclusive of disbursements and all applicable taxes.

Appeal allowed.

End of Document