Indcondo Building Corporation v. Sloan et al.

[Indexed as: Indcondo Building Corp. v. Sloan]

103 O.R. (3d) 445

2010 ONCA 890

Court of Appeal for Ontario,

Rosenberg, Moldaver and Karakatsanis JJ.A.

December 22, 2010

Limitations -- Discoverability -- Creditor bringing fraudulent conveyance action pursuant to order obtained under s. 38 of Bankruptcy and Insolvency Act -- Relevant discoverability date under ss. 5 and 12 of Limitations Act, 2002 earlier of that of trustee or creditor -- Creditor discovering claim before trustee and before Limitations Act, 2002 came into force -- No limitation period existing for fraudulent conveyance claim at that time -- Action not statute barred -- Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 38 -- Limitations Act, 2002, S.O. 2002, c. 24, ss. 5, 12.

The appellant commenced a fraudulent conveyance action against S in 2001 to reverse the conveyance of S's matrimonial home to his wife for no consideration. The appellant subsequently discovered that other assets had been conveyed to S's wife and a corporation owned by her. S filed an Assignment in Bankruptcy in 2004, which had the effect of staying the first action. The appellant brought the alleged fraudulent conveyances to the attention of the trustee in bankruptcy, but the trustee did not proceed with an action. S was discharged in 2005, and the first fraudulent conveyance action was dismissed in accordance with s. 278(2) of the Bankruptcy and Insolvency Act. The appellant obtained an order under s. 38 of the BIA permitting it to bring proceedings against the respondents that the trustee was entitled to bring, and commenced a second fraudulent conveyance action in 2008. The respondents moved successfully to have the action dismissed as statute barred. The appellant appealed.

Held, the appeal should be allowed.

The motion judge did not consider s. 12(1) of the Limitations Act, 2002, which provides that for the purpose of determining discoverability under s. 5(1)(a) of the Limitations Act, 2002 in the case of a proceeding commenced by a person claiming through a predecessor in right, title or interest, the person shall be deemed to have knowledge of the matters referred to in that clause on the earlier of the day the predecessor first knew or ought to have known of those matters, and the day the person claiming first knew or ought to have known of them. As the assignor of the cause of action, the trustee was a predecessor in right, title or interest to the person claiming through him. In this case, the relevant discoverability date under ss. 5(1)(a) and 12(1) of the Limitations Act, 2002 was the earlier of that of the trustee or the person claiming through the trustee, i.e., the appellant. The appellant discovered the claim before the trustee and before the Limitations Act, 2002 came into force, at a time when there was no limitation period for a fraudulent conveyance action. The action was not statute barred.

APPEAL from the order of Morawetz J., [2010] O.J. No. 1803, 2010 ONSC 2473 dismissing the action as statute barred.

Cases referred to Garrett (Re), [1979] O.J. No. 3344, 30 C.B.R. (N.S.) 150, [1979] 2 A.C.W.S. 194, 1979 CarswellOnt 195 (H.C.J.); Robinson v. Countryside Factors Ltd., 1977 CanLII 175 (SCC), [1978] 1 S.C.R. 753, [1977] S.C.J. No. 76, 72 D.L.R. (3d) 500, 14 N.R. 91, [1977] 2 W.W.R. 111, 23 C.B.R. (N.S.) 97; Shaw (Trustee of) v. Nicol Island Development Inc., [2009] O.J. No. 1333, 2009 ONCA 276, 51 C.B.R. (5th) 12, 248 O.A.C. 35, 177 A.C.W.S. (3d) 296 [page446]

Statutes referred to Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 [as am.], ss. 30(1)(d), 38 [as am.], (1), (2), (3), 95 [as am.], 96 [as am.], 178(2) Limitations Act, 2002, S.O. 2002, c. 24, Sch. B [as am.], ss. 5 [as am.], (1)(a), (i)-(v), 12, (1), (2), 24(6) [as am.]

P. James Zibarras and Kevin D. Toyne, for appellant. J. Thomas Curry and Marguerite F. Ethier, for respondents Valerie Sloan and Cave Hill Properties Ltd. Enzo Di Iorio, for respondent David R. Sloan.

The judgment of the court was delivered by

[1] KARAKATSANIS J.A.: -- The appellant appeals from the order of Morawetz J. dated April 28, 2010, dismissing its action as time-barred and discharging two Certificates of Pending Litigation. The appellant also seeks leave to appeal the costs award of Morawetz J. dated July 14, 2010.

[2] This appeal involves the interplay between the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA") and the Limitations Act, 2002, S.O. 2002, c. 24, Sch. B ("LA, 2002") in a fraudulent conveyance action brought by a creditor pursuant to a s. 38 order under the BIA. The issue is whether the discoverability principle under ss. 5 and 12 of the LA, 2002 is based on the discoverability of the trustee or on the discoverability of the creditor who has obtained an order under s. 38 permitting the creditor to bring the proceedings in his own name.

[3] The motion judge held that it was only the trustee's discovery of the claim that was relevant under the LA, 2002. Therefore, he found that the LA, 2002 applied to bar a fraudulent conveyance claim made more than two years after the trustee first learned of the alleged fraudulent conveyances. He opined that because the appellant was exercising the right of the trustee in commencing the action under a s. 38 order, it could not acquire any higher rights in the cause of action than the trustee. Accordingly, he found that only the trustee's discovery of the claim was relevant; since the trustee discovered the claim more than two years prior to bringing the action, the appellant's claim was statute barred.

[4] The appellant's position is that the effect of s. 12(1) of the LA, 2002 is that the claim was discovered on the earlier of the day the trustee or the appellant first discovered the claim. The appellant first learned of the underlying matters at a time when the former Limitations Act was in force. Pursuant to the [page447] former limitations regime, a cause of action based on a fraudulent conveyance of property had no limitation period. Therefore, the appellant argues that under the transition provisions of the LA, 2002, this action is not subject to a limitation period.

[5] The motion judge did not have the benefit of full written submissions on the limitations issue, as it was raised for the first time in the applicant's factum shortly before the hearing. For the reasons that follow, I would allow the appeal.

Background Facts

[6] After obtaining a judgment against David Robin Sloan in 2001, the appellant commenced an action (the "First Fraudulent Conveyance Action") against Mr. Sloan in 2002 to reverse the conveyance of his matrimonial home to his wife Valerie Frances Sloan for no consideration. The appellant subsequently discovered that other assets had been conveyed to Ms. Sloan and to a corporation owned by her. Mr. Sloan filed an Assignment in Bankruptcy on January 13, 2004, which had the effect of staying the First Fraudulent Conveyance Action. The appellant brought the alleged fraudulent conveyances to the attention of the trustee in bankruptcy in 2004. The trustee did not proceed with an action. In 2005, Mr. Sloan was discharged from bankruptcy. On April 5, 2006, the First Fraudulent Conveyance Action was dismissed in accordance with s. 178(2) of the BIA. There is no outstanding right of appeal with respect to that decision.

[7] On April 6, 2006, the appellant obtained an order under s. 38 of the BIA, permitting it to bring proceedings against the respondents that the trustee was entitled to bring. Pursuant to its s. 38 order, the appellant commenced the within action (the "Second Fraudulent Conveyance Action") in June 2008.

Analysis

[8] It is not disputed that if the trustee's discoverability date governs, this action is time barred. However, if the appellant's discoverability date governs, no limitation period applies to this action by operation of the transition provision in s. 24(6) of the LA, 2002. This section says:

24(6) If there was no former limitation period and if a limitation period under this Act would apply were the claim based on an act or omission that took place on or after January 1, 2004, the following rules apply:

1. If the claim was not discovered before January 1, 2004, this Act applies as if the act or omission had taken place on that date.
2. If the claim was discovered before January 1, 2004, there is no limitation period. [page448]

[9] A trustee's authority to attack fraudulent conveyances and preferences made prior to bankruptcy arises under ss. 30(1)(d), 95 and 96 of the BIA. For conveyances that fall outside the time periods set out in the BIA, a trustee can still resort to provincial property statutes dealing with preferences and fraudulent transfers pursuant to s. 30(1)(d) of the BIA: see Robinson v. Countrywide Factors Ltd., 1977 CanLII 175 (SCC), [1978] 1 S.C.R. 753, [1977] S.C.J. No. 76, at pp. 793-94 S.C.R.; and Garrett (Re), [1979] O.J. No. 3344, 1979 CarswellOnt 195 (H.C.J.), at para. 2.

[10] Section 30(1)(d) of the BIA confers power on the trustee, with the permission of the inspectors, to "bring, institute or defend any action or other legal proceeding relating to the property of the bankrupt".

[11] Under s. 38(1) of the BIA, where a creditor requests the trustee to take any proceeding that in his opinion would be for the benefit of the estate of a bankrupt and the trustee refuses or neglects to take the proceeding, "the creditor may obtain from the court an order authorizing him to take the proceeding in his own name". Section 38(2) requires the trustee to "assign and transfer to the creditor all his right, title and interest in the chose in action or subject-matter of the proceeding, including any document in support thereof". Section 38(3) provides that "[a]ny benefit derived from a proceeding taken pursuant to subsection (1), to the extent of his claim and the costs, belongs exclusively to the creditor instituting the proceeding, and the surplus, if any, belongs to the estate." This section provides for enhanced recovery by the creditor because the creditor proceeding under a s. 38 order is entitled to full satisfaction of his debt before the surplus is distributed to the estate. On the other hand, if the trustee had pursued the claim under s. 30(1)(d) of the BIA, the creditor would share rateably with other creditors from any proceeds obtained by the trustee.

[12] It is common ground that the appellant's right to raise the issues in the Second Fraudulent Conveyance Action arises through the s. 38 order and from the trustee's cause of action. As the motion judge observed, at para. 36: "In my view, Indcondo's right to raise the issues in the Second Fraudulent Conveyance Action can only come from the s. 38 order through which Indcondo essentially steps into the shoes of the Trustee to prosecute the claim."

[13] Section 5(1)(a) of the LA, 2002 sets out when a claim is discovered for the purposes of calculating the limitation period:

5(1) A claim is discovered on the earlier of, (a) the day on which the person with the claim first knew, (i) that the injury, loss or damage had occurred, [page449] (ii) that the injury, loss or damage was caused by or contributed to by an act or omission, (iii) that the act or omission was that of the person against whom the claim is made, and (iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it; and (b) the day on which a reasonable person with the abilities and in the circumstances of the person with the claim first ought to have known of the matters referred to in clause (a).

[14] The motion judge did not consider s. 12(1) of the LA, 2002. It applies for the purpose of determining discoverability of successors under s. 5(1)(a):

12(1) For the purpose of clause 5(1)(a), in the case of a proceeding commenced by a person claiming through a predecessor in right, title or interest, the person shall be deemed to have knowledge of the matters referred to in that clause on the earlier of the following:

1. The day the predecessor first knew or ought to have known of those matters.

2. The day the person claiming first knew or ought to have known of them.

[15] Section 12 is the only provision that makes reference to the fact that the person making the claim may be pursuing the claim on behalf of someone else. Section 12(2) makes similar provision for principals and agents.

[16] The respondents submit that the trustee is not a predecessor in right, title or interest and that the creditor may bring its claim by operation of law rather than by assignment. However, s. 38(2) explicitly refers to an assignment and transfer of the trustee's "right, title and interest" to the creditor. In Shaw (Trustee of) v. Nicol Island Development Inc., 2009 ONCA 276, [2009] O.J. No. 1333, 248 O.A.C. 35 (C.A.), this court reiterated that under s. 38, the creditor steps into the shoes of the trustee and is entitled to bring a proceeding that the trustee refuses or neglects to bring.

[17] As the assignor of the cause of action, the trustee is therefore "a predecessor in right, title or interest" to the person claiming through him.

[18] On a plain reading of ss. 5(1)(a) and 12(1) of the LA 2002, the relevant discoverability date is the earlier of that of the predecessor (in this case, the trustee) or the person claiming through the predecessor (in this case, the appellant). Section 12(1) refers to the "knowledge of the matters referred to" in s. 5(1)(a). Section 5(1)(a)(i)-(iv) refers to knowledge of the underlying facts.

[19] The respondents suggest that such an interpretation could create chaos and ambiguity by importing the discoverability date of any creditor. However, s. 12(1) is clear that the [page450] discoverability contest would be between the trustee and the "person claiming" through the trustee. Therefore, the section would only apply to those creditors who have commenced the proceedings through the s. 38 order. The ambiguity envisioned by the respondents does not exist on this interpretation.

[20] The application of s. 12(1) to a creditor claiming through the trustee will be to make effective the earlier discoverability date of either the assignor or the assignee, so that an assignment cannot have the effect of restarting the running of a limitation period. Ordinarily, this would operate to the benefit of the defendant. If the creditor were aware of the underlying facts under s. 5(1)(a) of the LA, 2002 and failed to bring a proceeding within the limitation period, the creditor would be statute barred from taking advantage of enhanced recovery under a s. 38 order.

[21] The circumstances of this case are unusual in that the earlier discoverability date preceded the coming into force of the LA, 2002 so as to trigger the transition provision in s. 24(6). On these facts, the operation of s. 12(1) benefits the person bringing the claim pursuant to a s. 38 order.

[22] For all these reasons, I am satisfied that s. 12(1) of the LA, 2002 requires a determination as to the earlier of the discoverability dates as between the trustee in bankruptcy and the creditor who commences a proceeding through a s. 38 order.

[23] The result in this case is that the creditor discovered the claim before the LA, 2002 came into force, at a time when there was no limitation period for a fraudulent conveyance action. Pursuant to s. 24(6), there is no limitation period for this action. Therefore, the action is not statute barred and the motion judge erred in dismissing the action on the basis of a limitation period.

Abuse of Process

[24] I am satisfied that the motion judge's bald statement that pursuit of the First Fraudulent Conveyance Action would be an abuse of process was not a finding that the Second Fraudulent Conveyance Action was an abuse of process. It is clear from the reasons that having found that the appellant's claim was statute barred, the motion judge did not engage in an analysis of whether the second action was an abuse of process.

[25] For these reasons, I would allow the appeal, set aside the order, as well as the costs order, and remit the matter back to the commercial list.

[26] I would fix costs at $25,000, all inclusive, for both the motion and the appeal.

Appeal allowed.