Court of Appeal for Ontario

Date: March 9, 2018

Docket: C62079

Judges: Hoy A.C.J.O., Rouleau, Hourigan, Benotto and Roberts JJ.A.

Between

Art Douglas and Wendy Douglas Plaintiffs (Respondents)

and

Stan Fergusson Fuels Ltd., Imperial Oil Limited and Imperial Oil, a partnership of Imperial Oil Limited and McColl-Frontenac Petroleum Inc. Defendants (Appellants)

Counsel:

• Amy Pressman and Diana Weir, for the appellants
• Matthew Gervan, for the respondents

Heard: May 23, 2017

On appeal from: The order of the Divisional Court (Marrocco A.C.J., Herold and Whitten JJ.), dated January 18, 2016, with reasons reported at 2016 ONSC 442.

Reasons for Judgment

Hoy A.C.J.O.:

[1] Overview

[1] This appeal involves the intersection of bankruptcy law and the doctrine of subrogation. It considers whether an insurer was entitled to commence a subrogated claim in the name of its bankrupt insured.

[2] I agree with the appellants that the insurer was not entitled to do so in these circumstances. At the time this action was commenced, the insured's cause of action had vested in his trustee in bankruptcy and the insured was an undischarged bankrupt. As a result, the insured lacked capacity to bring the action, and the insurer could not commence a subrogated claim in his name. I would allow the appeal, and would grant summary judgment to the appellants, dismissing the subrogated action commenced by the insurer.

[3] Below, I provide an overview of the facts leading to this appeal, the reasons of the motion judge and the Divisional Court below, and the parties' positions on this appeal. I then discuss the doctrine of subrogation and the relevant provisions of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the "BIA") before turning to my analysis of the issues raised.

Factual Background

[4] Art and Wendy Douglas purchased a home in Kingston, Ontario and arranged for the appellants to deliver fuel oil to their home. On January 9, 2008, fuel oil was delivered to the Douglases' external oil tank. It is alleged that the fuel oil subsequently escaped and contaminated the Douglases' property. Mr. Douglas informed the appellants about the oil spill and Stan Fergusson Fuels Ltd. alerted an emergency response service provider, who in turn engaged an environmental clean-up company.

[5] The following day, the Douglases' insurer, State Farm Fire and Casualty Company ("State Farm"), appointed an adjuster, who determined that their Homeowners Policy provided coverage for losses associated with the spill.

[6] At the time of the oil leak, Wendy Douglas had no ownership interest in the property. Several months prior, on November 14, 2007, she had been discharged from bankruptcy subject to the stipulation that her interest in the property remained vested in her trustee in bankruptcy (the "Trustee"). The Trustee remained on title to the property, together with Mr. Douglas.

[7] The adjuster for the appellants sent invoices from the January clean-up to State Farm on March 17, 2008. State Farm paid the invoices, and advised that it intended to recover these and any future clean-up costs from the appellants.

[8] The Homeowners Policy contains a subrogation clause that provides (in relevant part) as follows:

We will be entitled to assume all your rights of recovery against others and bring action in your name to enforce these rights when we make payment or assume liability under this policy. [Emphasis in original.]

[9] As the Divisional Court found, by this point it was clear that State Farm had assumed liability under the Homeowners Policy and was entitled to assume Mr. Douglas's right of recovery and sue in his name to enforce that right. Over the ensuing months, State Farm continued to make payments on the policy.

[10] On or about June 4, 2009, Mr. Douglas filed an assignment in bankruptcy. The Trustee also became Mr. Douglas's trustee in bankruptcy and replaced him on the title to the property. The Trustee advised State Farm of this assignment on June 5, 2009.

[11] The week before Mr. Douglas filed his assignment, the Trustee signed a document entitled the "Trustee's Limited Disclaimer" (the "Disclaimer"). The Disclaimer was addressed to State Farm, and recited the Trustee's intention to sell the property as soon as it was remediated. It also disclaimed interest in insurance claims by the Douglases "for loss or damage in the oil spill to matrimonial household contents not affixed or enjoyed with the residential property or proceeds of personal property exempt under the Execution Act (Ontario) which would not vest in their Trustee in Bankruptcy."

[12] State Farm paid out the Douglases' personal contents claims, totaling $8,760.60, to them directly in July 2009.

[13] In October 2009, the Trustee sold the remediated property and satisfied the creditors.

[14] State Farm made its final payments under the policy in November 2009. In total, State Farm spent over $800,000 to remediate the property.

[15] On January 7, 2010, State Farm commenced this action against the appellants in the names of Art Douglas and Wendy Douglas. The damages claimed are not restricted to those described in the Disclaimer.

[16] The action was commenced prior to Mr. Douglas's discharge from bankruptcy. Art Douglas received an absolute discharge from bankruptcy on March 5, 2010, and the Trustee was discharged in respect of his bankruptcy on August 24, 2012.

[17] The issue of the Douglases' capacity to bring this action came before the court in 2013, when the appellants brought a summary judgment motion, arguing that the Douglases lacked capacity to commence the action because of their bankruptcies, and accordingly State Farm's action in their names was a nullity.

[18] State Farm brought a cross-motion for: (a) directions with respect to the continuation of the action in the Douglases' or its own name; (b) alternatively, for a declaration that it was the dominus litis and had the right to continue and control the action to pursue its subrogated claim; and (c) in the further alternative, an order permitting it to amend its statement of claim to plead that the plaintiffs were "Art Douglas and Wendy Douglas by their Subrogee State Farm Fire & Casualty Company".

The Reasons Below

(a) The Motion Judge's Reasons

[19] The motion judge granted State Farm's request for a declaration that it was the dominus litis, and dismissed the appellants' motion to strike the claim. He also ordered that State Farm had the right to continue and control the action without needing to amend its statement of claim to add State Farm as a party. Reasons for this decision were reported at Douglas v. Stan Ferguson Fuels Ltd., 2014 ONSC 4709.

[20] The motion judge found, at paras. 48-51, that State Farm's right of subrogation was a "contingent right" that vested at the time the policy was entered into and that State Farm became, at common law, the dominus litis once the Douglases were fully indemnified.

[21] The motion judge wrote, at para. 56, that he was "not persuaded that the [BIA] extinguishes or trumps the subrogation rights of State Farm, which vested at the time that the policy was entered into and which remained in place at the date of loss." Further, he was not persuaded that permitting the claim to proceed would subvert the bankruptcy scheme. He noted that the Trustee had satisfied the claims of creditors by selling the property, which could not have been sold but for the remediation paid for by State Farm. He concluded that an inequitable result would prevail if State Farm could not prosecute its claim and that he had the inherent jurisdiction under ss. 96 and 97 of the Courts of Justice Act, R.S.O. 1990, c. C.43, to grant declaratory relief in the circumstances.

[22] Finally, at para. 54 of his reasons, the motion judge reasoned that to grant the motion to strike would "incorrectly emphasize form over substance."

(b) The Divisional Court's Reasons

[23] Justice Hackland granted the appellants' motion for leave to appeal to the Divisional Court, with reasons reported at Douglas v. Stan Fergusson Fuels Ltd., 2015 ONSC 65. He doubted the correctness of the motion judge's decision on the basis that it is well-settled law that the Douglases lost their right to deal with their property, including causes of action arising from the oil spill, upon their bankruptcies. At para. 8, he concluded that because subrogated claims are derivative in nature and an undischarged bankrupt is unable to bring an action to enforce property claims, so too was an insurer barred from commencing its derivative subrogation claim. He further commented, at para. 9, that State Farm was entitled to insist on an assignment from the Trustee so that its subrogation rights could be validly pursued, but had failed to do so before the limitation period expired.

[24] However, the Divisional Court dismissed the appellants' appeal.

[25] It found, at para. 29, that State Farm had a "vested contingent right to assume Mr. Douglas's right to recover and to bring an action" that crystallized when State Farm assumed liability for the loss on or about March 17, 2008. As a result, State Farm's right to bring the action crystallized before Mr. Douglas's assignment into bankruptcy.

[26] The Divisional Court reasoned, at para. 30, that "when Arthur Douglas made an assignment in favour of his creditors on June 4, 2009, and his right to recover against the appellants vested in his Trustee, it was a right to recover, which was subject to State Farm's vested right to assume it and State Farm's vested right to commence an action in Mr. Douglas's name to enforce it."

[27] With respect to Wendy Douglas, the Divisional Court found at para. 27 that, subject to applicable provincial exemptions, Wendy Douglas had no right of recovery for damages caused to the property. On the effective commencement date of the Homeowners Policy, she had already made an assignment in favour of her creditors. And after her subsequent discharge, her interest in the property remained vested in the Trustee.

[28] Additionally, at para. 32, it found that the Trustee had disclaimed interest in the insurance claims by Wendy and Art Douglas for loss or damage arising from the oil spill by the Disclaimer.

[29] At para. 33, the Divisional Court concluded that State Farm was entitled to commence the action in Mr. Douglas's name without the consent of his Trustee and the appellants' summary judgment motion was properly dismissed.

[30] Finally, it observed, at para. 34, that: permitting State Farm to continue the action in the name of Art Douglas would not impede the Trustee as the law is clear that an insured receives the proceeds of a subrogated claim as trustee for the insurer; trust property is not divisible among the bankrupt's creditors pursuant to s. 67(1)(a); and a trustee may apply to the court pursuant to s. 40(2) of the BIA for directions concerning property (including a cause of action) upon which the trustee is unable to realize without commencing or continuing litigation.

The Parties' Positions

(a) The Appellants' Position

[31] The appellants effectively make four submissions:

[32] First, the appellants submit that the Divisional Court made a palpable and overriding error in concluding that, pursuant to the Disclaimer, the Trustee had disclaimed interest in the Douglases' insurance claims arising out of the oil spill. This is because, in their view, the Disclaimer was limited to the personal property claims of the respondents.

[33] Second, they argue that the Divisional Court erred in its application of the principle of subrogation and the law as to the effect of a bankruptcy order.

[34] They say recent English authority has clarified that the principle of subrogation only gives an insurer an interest in the recovered proceeds of an action, not a proprietary interest in the cause of action itself: Ballast Plc, Re, [2006] E.W.H.C. 3189, [2007] B.C.C. 620 (Eng. Ch. Div.). They argue that the subrogation clause in the Homeowners Policy did not effect an assignment or transfer of Mr. Douglas's cause of action to State Farm. It only gave State Farm the limited right to commence whatever action was open to Mr. Douglas to commence, in his name.

[35] Accordingly, they argue that Mr. Douglas's cause of action against them for losses arising out of the oil spill passed to and vested in the Trustee, and Mr. Douglas ceased to have capacity to commence an action upon his assignment in bankruptcy. In support of this principle, they cite this court's decisions in Meisels v. Lawyers Professional Indemnity Company, 2015 ONCA 406, 126 O.R. (3d) 448, at paras. 17 and 19; Watt v. Beallor Beallor Burns Inc., 1 C.B.R. (5th) 141, at paras. 2 and 3, affirmed , 1 C.B.R. (5th) 149; and McNamara v. Pagecorp Inc. (1989), 76 C.B.R. (N.S.) 97 (Ont. C.A.), at p. 2. Since Mr. Douglas did not have capacity to commence an action on January 7, 2010, State Farm could not commence an action in his name on that date.

[36] In sum, they argue that the Divisional Court's reasoning implicitly transformed State Farm's subrogated interest in any damages Wendy and Art Douglas might recover into an assignment of their cause of action to State Farm.

[37] Third, the appellants allege that the Divisional Court erred in relying upon ss. 40(2) and 67(1)(a) of the BIA to support its decision. Section 40(2), reproduced below, requires a trustee in bankruptcy to return the bankrupt's unrealizable property before the trustee's discharge. With respect to s. 40(2), the appellants argue that there is no evidence that the Trustee had sought directions with respect to the cause of action, or that the Trustee had concluded that the cause of action was incapable of disposition.

[38] Section 67(1)(a), also reproduced below, provides that property held by the bankrupt in trust for any other person is not divisible among the bankrupt's creditors. With respect to s. 67(1)(a), the appellants contend that the property at issue in this case is the cause of action, and not the proceeds of recovery of that cause of action, and there is no authority for the proposition that the cause of action is held in trust for the insurer. They say that even though the net proceeds of that cause of action, as trust property, would not be divisible among the creditors of the bankrupt, the right to bring the cause of action vested in the Trustee.

[39] Finally, they submit that striking the claim that State Farm commenced in the name of the Douglases is not unjust. State Farm could have provided in the Homeowners Policy that the Douglases assigned their cause of action to State Farm.

(b) The Respondent's Position

[40] I understand State Farm to raise five arguments in response.

[41] First, State Farm argues that the Divisional Court's conclusion (that it was entitled to commence the action in Mr. Douglas's name) rests on two key findings of fact: namely, that Mr. Douglas's right of action vested in State Farm and crystallized prior to his bankruptcy, and that the Trustee disclaimed its interest in the cause of action. It argues that pursuant to s. 6(1)(a) of the Courts of Justice Act, R.S.O. 1990, c. C.43 and Landmark II Inc. v. 1535709 Ontario Ltd., 2011 ONCA 567, 283 O.A.C. 239, at para. 18, no appeal lies to this court on those issues.

[42] Second, State Farm says the Divisional Court correctly concluded that Mr. Douglas's assignment in bankruptcy was subject to State Farm's vested right to commence an action in his name. State Farm relies on Central Mortgage & Housing Corp. v. Dixon, [1971] 2 W.W.R. 442, at paras. 15-20, 22, and 26-28, for the principle that a trustee acquires title to the bankrupt's assets subject to all the equities existing at the date of bankruptcy and is bound by the terms of contracts the bankrupt entered into prior to bankruptcy. It argues that when Mr. Douglas made his assignment in bankruptcy, under the Homeowners Policy he had already granted State Farm the right to commence an action in his name.

[43] Third, State Farm argues that the Divisional Court was correct to rely on ss. 40 and 67(1)(a) of the BIA. In its view, since any net proceeds recovered from the appellants would be held in trust for State Farm and, it submits, would not vest in the Trustee, it follows that the cause of action itself is held in trust for State Farm pursuant to s. 67(1)(a), is not divisible among Mr. Douglas's creditors, and did not vest in the Trustee. In the alternative, the fact that any proceeds from the action would be held in trust for State Farm made the property "incapable of realization" in the hands of the Trustee, who was required to return it to Mr. Douglas pursuant to s. 40.

[44] Fourth, and in the alternative, State Farm says that the subrogation clause in the Homeowners Policy amounted to an assignment of Mr. Douglas's cause of action to State Farm and State Farm should be permitted to continue the action in its own name.

[45] Finally, State Farm seeks relief from this court not sought at first instance. It submits that if an assignment of the cause of action from the Trustee were required, its failure to obtain an assignment under s. 38 of the BIA is an irregularity, not a nullity, and therefore can be cured by an order transferring the cause in action to State Farm, nunc pro tunc.

A Legal Overview

[46] Given the technical nature of this appeal, I will provide an overview of the relevant aspects of the doctrine of subrogation and the applicable provisions of the BIA before turning to my analysis.

(a) The Doctrine of Subrogation

[47] The common law doctrine of subrogation is one of the cornerstones of insurance law. The objectives of the doctrine are to ensure that (i) the insured receives no more and no less than a full indemnity, and (ii) the loss falls on the person who is legally responsible for causing it: Somersall v. Friedman, 2002 SCC 59, [2002] 3 S.C.R. 109, at para. 50.

[48] The doctrine of subrogation is related to the principle of indemnity. It mandates that, having indemnified the insured for a loss caused by a third party, the insurer may bring an action against the third party in the insured's name. The insurer is said to be subrogated to the insured's rights and is entitled to exercise those rights in the name of the insured: Zurich Insurance Co. v. Ison T.H. Auto Sales Inc., 2011 ONSC 1870, 333 D.L.R. (4th) 696, at paras. 27 and 32, affirmed 2011 ONCA 663, 342 D.L.R. (4th) 501.

[49] Key principles of the doctrine of subrogation include the following.

(i) At common law, the insurer's right of subrogation arises upon "full indemnification" of the insured.

[50] In the absence of statutory or contractual terms to the contrary, the insurer's right of subrogation does not arise until the insured has been fully indemnified. "Fully indemnified" means indemnified for both insured and uninsured losses, such as losses that exceed policy limits or losses that are not covered by the policy: Somersall, at paras. 34-36 and 53-54; Zurich (S.C.), at paras. 27 and 32.

[51] Before the point of full indemnification, the insured is obligated to pursue any claim it has against the third party in good faith: Somersall, at para. 54; Zurich (S.C.), at para. 37.

[52] In this case, State Farm does not rely solely on its common law right of subrogation. It relies on the subrogation clause in the Homeowners Policy which permits State Farm to subrogate before its insured is fully indemnified.

(ii) At common law, the insurer becomes the dominus litis upon "full indemnification" of the insured.

[53] The insured is in control of the litigation, or the dominus litis, until it has been fully indemnified for its insured and uninsured losses: Zurich (S.C.), at para. 70.

[54] An entitlement to control the litigation does not follow by necessary implication from an insurer's contractual right to be subrogated to the rights of the insured and to bring action in the name of the insured before the insured is fully indemnified: Zurich (S.C.), at para. 72. Put another way, the right of subrogation and the right to control the litigation may not necessarily be coincident rights.

(iii) Subrogated claims are "derivative" in nature.

[55] Because the right of subrogation is derivative, the insurer can be in no better position as against the third party than the insured would be. Expressed otherwise, the insurer stands in the shoes of the insured. Any restriction or limit on the insured's right of recovery against the third party applies equally to the insurer: Matt (Litigation Guardian of) v. Barber (2002), 216 D.L.R. (4th) 574, at para. 25.

[56] Where an insurer is subrogated to the claim of its insured, the claim nonetheless remains that of the insured in whose name and with whose rights the claim must be advanced: Mason (Litigation Guardian of) v. Ontario (Ministry of Community & Social Services) (1998), 39 O.R. (3d) 225, at p. 231; Erickson & Partners v. Ontario (Ministry of Health and Long-Term Care), 2015 ONCA 285, 125 O.R. (3d) 762, at para. 24.

(iv) Recoveries by the insurer beyond the indemnified losses are payable to the insured.

[57] The right of subrogation gives the insurer the right to recover from the third party the amount that the insurer has paid out under the insurance contract to its insured. Any recovery in excess of the amount paid out by the insurer is payable to the insured: Craig Brown and Thomas Donnelly, Insurance Law in Canada, loose-leaf (2017-Rel. 4), (Toronto: Thomson Reuters Canada Ltd., 2002), vol. 2, at p. 13-2.

(v) Recoveries by the insured for indemnified losses are held in trust for the insurer.

[58] Where the insured commences an action against a third party and recovers in respect of an indemnified loss, the insurer is entitled to seek reimbursement from the insured: Craig Brown and Thomas Donnelly, Insurance Law in Canada, loose-leaf (2017-Rel. 4), (Toronto: Thomson Reuters Canada Ltd., 2002), vol. 2, at pp. 13-2 to 13-3. In such cases, money received by the insured (in excess of his or her cost of recovery) is subject to a trust in favour of the insurer: Ledingham v. Ontario (Hospital Services Commission), [1975] 1 S.C.R. 332, 46 D.L.R. (3d) 699, at p. 337; Colonial Furniture Company (Ottawa) Limited v. Saul Tanner Realty Limited et al. (2001), 52 O.R. (3d) 539, 196 D.L.R. (4th) 1, at paras. 20-22, and Re Northward Airlines Limited (1981), 39 C.B.R. (N.S.) 153 (Alta. Q.B.), at para. 15.

(b) The Relevant Provisions of the BIA

[59] Section 71 of the BIA provides that upon an assignment in bankruptcy being filed, the bankrupt ceases to have any capacity to deal with his property, which, subject to the BIA and the rights of secured creditors, immediately passes to and vests in his trustee. The section provides as follows:

71. On a bankruptcy order being made or an assignment being filed with an official receiver, a bankrupt ceases to have any capacity to dispose of or otherwise deal with their property, which shall, subject to this Act and to the rights of secured creditors, immediately pass to and vest in the trustee named in the bankruptcy order or assignment, and in any case of change of trustee the property shall pass from trustee to trustee without any assignment or transfer.

[60] "Property" is broadly defined in s. 2 of the BIA and includes "things in action" like Mr. Douglas's cause of action in this case. The Act states:

Property means any type of property, whether situated in Canada or elsewhere, and includes money, goods, things in action, land and every description of property, whether real or personal, legal or equitable, as well as obligations, easements and every description of estate, interest and profit, present or future, vested or contingent, in, arising out of or incident to property; [Emphasis added.]

[61] Notwithstanding the operation of s. 71, s. 67(1) of the BIA provides that certain property of a bankrupt is not divisible among the bankrupt's creditors. As mentioned above, property held in trust is one such type of non-divisible property. That section provides, in relevant part, as follows:

67(1) The property of a bankrupt divisible among his creditors shall not comprise:

(a) property held by the bankrupt in trust for any other person;

[62] Where a cause of action vests in a trustee in bankruptcy, and the trustee refuses or neglects to pursue the action, s. 38 of the BIA permits a creditor to seek an assignment from the trustee of the cause of action. It provides, in relevant part, as follows:

38(1) 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 and at his own expense and risk, on notice being given the other creditors of the contemplated proceeding, and on such other terms and conditions as the court may direct.

(2) On an order under subsection (1) being made, the trustee shall 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.

(3) Any 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.

[63] Finally, as discussed above, s. 40 of the BIA requires the trustee to return the bankrupt's unrealizable property before the trustee's discharge. That section provides as follows:

40(1) Any property of a bankrupt that is listed in the statement of affairs referred to in paragraph 158(d) or otherwise disclosed to the trustee before the bankrupt's discharge and that is found incapable of realization must be returned to the bankrupt before the trustee's application for discharge, but if inspectors have been appointed, the trustee may do so only with their permission.

(2) Where a trustee is unable to dispose of any property as provided in this section, the court may make such order as it may consider necessary.

[64] However, the BIA makes no provision for the automatic re-vesting of the property of a bankrupt in the bankrupt either on his or her discharge or on the discharge of the trustee: L.W. Houlden, G.B. Morawetz, and J. Sarra, Bankruptcy and Insolvency Law of Canada, loose-leaf, 4th ed. (Toronto: Carswell, 2013), vol. 1, at pp. 292-293.

Analysis

[65] State Farm does not cross-appeal the Divisional Court's finding that Wendy Douglas had no right of recovery for damages caused to the Douglases' property. Therefore, the question raised on this appeal is whether State Farm was entitled to commence the action in Mr. Douglas's name, and if not, whether State Farm may now regularize the action by continuing it in its own name.

[66] State Farm does not argue it was entitled to commence an action in the name of the Trustee, either under the Homeowner's Policy or, having fully indemnified the Trustee, as the Trustee's subrogee under the common law doctrine of subrogation, but it mistakenly commenced the action in the name of Mr. Douglas.

[67] In my view, given State Farm's position, this appeal raises three broad issues:

1. Had State Farm acquired a property interest in Mr. Douglas's cause of action at the time that he made his assignment, such that the cause of action did not vest in the Trustee?

2. If not, did the subrogation clause in the Homeowners' Policy permit State Farm to commence an action in the name of Mr. Douglas, who is an undischarged bankrupt?

3. If the answer to the first two questions is "no", at this juncture, can the court make an order under ss. 38 or 40 of the BIA to remedy the procedural impediment to State Farm's subrogated action?

[68] As I explain below, I conclude that: Mr. Douglas's cause of action vested in the Trustee as at the date of his assignment into bankruptcy; the subrogation clause in the Homeowners' Policy did not permit State Farm to commence the action in Mr. Douglas's name; and, in the circumstances, the court cannot make an order under the BIA to remedy the procedural impediments to State Farm's subrogated action.

[69] In my view, a different conclusion would require an unprincipled disruption of established principles of bankruptcy law or a substantial change to the doctrine of subrogation. As the appellants submit, State Farm is a sophisticated party and could have included an assignment clause in the Homeowners' Policy. It may also have been entitled to seek a timely order under s. 38 of the BIA, assigning the cause of action to it.

[70] Not having done so, State Farm could, and should, have commenced its subrogated action in the name of the Trustee, as trustee of the estate of Art Douglas, a bankrupt. The court invited supplemental written submissions from the parties on the question of whether, at this late juncture, the court could or should regularize State Farm's subrogated action by substituting the name of the Trustee, as trustee of the estate of Art Douglas, a bankrupt, for that of Art Douglas under r. 5.04(2) of the Rules of Civil Procedure, effective upon the issuance of the statement of claim. Having considered those submissions, in my view, the court neither can nor should do so. State Farm did not seek this relief at either court below or at the hearing before this court, and this court does not have the benefit of full argument on the issue; ordering such relief would fall outside the proper institutional role of this court. I address this issue below, following my analysis of the three broad issues raised on this appeal.

[71] As a result, I would allow the appeal.

1. State Farm had not acquired a property interest in the cause of action at the time that Mr. Douglas made his assignment

(a) Vesting by Operation of Law

[72] In my view, the cause of action did not vest in State Farm before Mr. Douglas's bankruptcy by operation of the common law doctrine of subrogation.

[73] In Mason, relying on Michael Parkington et al., MacGillivray and Parkington on Insurance Law, 8th ed. (London: Sweet and Maxwell, 1998), at p. 496, this court reinforced the proposition that when an insurer is subrogated to the claim of its insured, the claim nonetheless remains that of the insured in whose name and with whose rights the claim must be advanced. Erickson, at para. 24, subsequently applied Mason. In Freudmann-Cohen v. Tran (2004), 70 O.R. (3d) 667, 238 D.L.R. 4th 428, at para. 31, while stating that subrogation has assignment-like aspects to it, this court noted that subrogation is not the equivalent of assignment.

[74] Further, as the appellants argue, in Ballast, the English Chancery Division rejected the proposition that subrogation rights give rise to a property interest in the cause of action itself.

[75] On long-established jurisprudence, Mr. Douglas did not assign his cause of action to State Farm by operation of the common law doctrine of subrogation.

[76] I also reject State Farm's argument that the right to any proceeds of the litigation that might be recovered could not vest in the Trustee by virtue of s. 67(1)(a), and therefore the cause of action to recover those proceeds could not have vested in the Trustee either.

[77] Such a proposition is contrary to Royal Bank of Canada v. North American Life Assurance Co., also reported as Ramgotra (Trustee of) v. North American Life Assurance Co., [1996] 1 S.C.R. 325, at p. 357. Justice Gonthier, writing for the court, noted at para. 62 that although certain categories of property are not divisible among creditors, such property "becomes part of the bankrupt's estate in the possession of the trustee". [Emphasis added.]

[78] As stated, an insured who makes a recovery from a wrongdoer, and has recouped the costs of recovery, holds the rest in trust for the insurer up to the value of the insurer's payment: Colonial Furniture, at para. 20. Applying the reasoning from Ramgotra, the proceeds of such litigation would constitute trust property in the possession of the Trustee, although not available for distribution to creditors, pursuant to s. 67(1)(a) of the BIA. The cause of action giving rise to those proceeds would similarly be in the possession of the Trustee.

[79] In Mariner Foods Ltd. v. Leo-Progress Enterprises Inc., 2017 ONCA 7, leave to appeal dismissed [2017] S.C.C.A. No. 64, (a short, five-paragraph endorsement disposing of an application to admit fresh evidence on appeal) this court cited the Divisional Court's decision in this proceeding for the principle that a subrogated claim brought by an insurer is not caught by the bankruptcy. Mariner was decided while this appeal was pending, without reference to binding judicial authority or analysis. This five-judge panel was convened to permit the court, if warranted, to over-rule Mariner to the extent that, in reliance on the Divisional Court's decision in this proceeding, it stands for the principle that a subrogated claim brought by an insurer is not caught by a bankruptcy. In my view, the broad principle enunciated in Mariner conflates the concepts of subrogation and assignment and is incorrect in law. The per incuriam exception to stare decisis applies and I would overrule Mariner to the extent it stands for that principle.

(b) Vesting by Assignment

[80] Similarly, I reject the possibility that the subrogation clause in the Homeowners Policy amounted to an assignment of Mr. Douglas's cause of action.

[81] First, any ambiguity in the subrogation clause should be construed in favour of the insured: Somersall, at para. 47. There is a difference between subrogation and assignment. Among other things, an assignment would permit an insurer to recover and keep any damages suffered by the insured in excess of the insurance proceeds paid to him: John Birds, Ben Lynch and Simon Milnes, MacGillivray on Insurance Law, 13th ed. (London: Thomson Reuters (Professional) UK Ltd., 2015), at para. 24-011.

[82] Second, State Farm is a sophisticated insurer. It would have been a simple matter for it to include an assignment clause in the Homeowners Policy if it indeed intended that Mr. Douglas assign his cause of action to it. State Farm does not argue that an assignment provision should be implied and there is no basis to imply such a provision.

(c) The Trustee's Disclaimer

[83] Finally, I agree with the appellants that the Trustee did not disclaim its interest in the cause of action through the Disclaimer. As the appellants argue, the scope of the Disclaimer was limited to "insurance claims … for loss or damage in the oil spill to matrimonial household contents not affixed or enjoyed with the residential property or proceeds of personal property exempt under the Execution Act (Ontario) which would not vest in their Trustee in Bankruptcy".

[84] The Disclaimer is twice removed from an assignment of the cause of action to State Farm: (1) it disclaims insurance claims by the Douglases against State Farm, not tort claims by the Douglases against the appellants; (2) it is limited to matrimonial household contents and personal property exempt from seizure. In my view, the Disclaimer operated as no more than a signal from the Trustee to State Farm that insurance proceeds for damage to excluded property could be paid out directly to the Douglases.

[85] I therefore conclude that at the time Mr. Douglas made his assignment in bankruptcy, State Farm had not acquired any proprietary interest in the cause of action; Mr. Douglas had not assigned his cause of action to State Farm; and the Trustee had not disclaimed its interest in the cause of action by executing the Disclaimer.

[86] Mr. Douglas's cause of action was "property" that passed to and vested in the Trustee pursuant to s. 71 of the BIA at the time he filed his assignment in bankruptcy.

[87] State Farm seeks to characterize the holding of the Divisional Court that Mr. Douglas's cause of action against the appellants had vested in State Farm prior to his bankruptcy as a finding of fact that is immune from review by this court. I do not agree that this is what they found. If that were indeed the proper characterization of their findings, then, as I have said, they are founded on incorrect legal principles. However, in my view, the Divisional Court concluded something different, namely that Mr. Douglas's cause of action passed to the Trustee when he made his assignment in bankruptcy, but did so subject to State Farm's right to bring an action in Mr. Douglas's name. I turn next to that issue.

2. The subrogation clause in the Homeowners' Policy did not permit State Farm to commence an action in the name of Mr. Douglas

[88] The Divisional Court held, at para. 30, that Mr. Douglas's "right to recover against the appellants vested in his Trustee … subject to State Farm's vested right to assume it and State Farm's vested right to commence an action in Mr. Douglas's name to enforce it."

[89] In support of this conclusion, State Farm argues that a trustee acquires title to the bankrupt's assets subject to all the equities existing at the date of bankruptcy and accordingly can only acquire those interests and rights that are available to the bankrupt prior to bankruptcy. In Grobstein v. Kouri, [1936] S.C.R. 264, a dispute arose between a trustee and a third party over the proceeds of a life insurance policy. Justice Rinfret, writing for the majority, stated at para. 23:

Now, under The Bankruptcy Act, a trustee takes the property of the debtor only subject to all the rights and equity to which it was subject while it was held by the debtor. The Trustee is the legal representative of the debtor; and generally speaking succeeds only to such rights as the debtor himself would have had, if not bankrupt, and no other rights. There are, of course, exceptions to that principle, whereby the trustee is vested for the benefit of the creditors with certain additional rights not available to the bankrupt debtor; but this is not a case where these exceptions come in.

See also: Central Mortgage, at paras. 15-20, 22, and 26-28, Engels v. Richard Killen & Associates Ltd. (2002), 60 O.R. (3d) 572, 35 C.B.R. (4th) 77, at para. 42, affirmed on other grounds , 69 O.R. (3d) 183 and Dainty Confections Ltd., Re, [1936] 1 D.L.R. 249, 18 C.B.R. 67, at para. 31.

[90] State Farm says that these principles support the Divisional Court's conclusion that State Farm's subrogation right "vested" when it assumed liability for the loss arising out of the oil spill and that the Trustee acquired the cause of action "subject to State Farm's vested right to assume it and State Farm's vested right to commence an action in Mr. Douglas's name to enforce it."

[91] I agree that the Trustee acquired Mr. Douglas's cause of action subject to State Farm's contractual right of subrogation under the Homeowners' Policy. However, long established bankruptcy law principles prevented the exercise of that right, in the manner that State Farm sought to do so.

[92] As the appellants argue, the jurisprudence is clear that an undischarged bankrupt lacks capacity to commence an action in his name, if his cause of action vested in the trustee on his assignment or at any time before his discharge: Wallace v. United Grain Growers Ltd., [1997] 3 S.C.R. 701, at para. 58; Murphy v. Stefaniak, 2007 ONCA 819, 37 C.B.R. (5th) 6; McNamara v. Pagecorp Inc. (1989), 38 C.P.C. (2d) 117 (Ont. C.A.); Long v. Brisson, 1992 ABCA 184, [1992] 5 W.W.R. 185; Thompson v. Coulombe (1984), 54 C.B.R. (N.S.) 254 (Que. C.A.).

[93] I have explained above that Mr. Douglas's cause of action vested in the Trustee on his assignment. At the time that State Farm commenced the action in Mr. Douglas's name, Mr. Douglas did not have the capacity to commence the action.

[94] In my view, because the Trustee acquired Mr. Douglas's cause of action subject to State Farm's right of subrogation, State Farm was entitled to commence the action in the Trustee's name. This conclusion gives effect to both the objectives and principles of the doctrine of subrogation and established principles of bankruptcy law. The doctrine of subrogation is rooted in the principle of indemnity and State Farm indemnified the Trustee for Mr. Douglas's loss; under bankruptcy law, the Trustee, and not Mr. Douglas, had the capacity to commence the action; and under the doctrine of subrogation, upon becoming the dominus litus, State Farm (and not the Trustee) was entitled to control the litigation. Upon bankruptcy, it makes sense to read the subrogation clause in an insurance policy as if the trustee's name appears in place of that of the bankrupt insured, just as is required to be done for the purposes of entitlement to indemnification under the insurance policy – at least where, as here, the Trustee has taken the benefit of the insurance policy: A. Marquette & Fils Inc. v. Mercure (1975), [1977] 1 S.C.R. 547, at p. 553; s. 24(2) of the BIA.

[95] Therefore, while State Farm was entitled to commence a subrogated action, as I have stated, it was required to commence the action in the name of the Trustee, and not that of Mr. Douglas.

[96] I now turn to the third question: can the court can make any order under the BIA to remedy the procedural impediment to State Farm's subrogated action?

3. State Farm is not entitled to a remedial order under ss. 38 or 40 of the BIA

(a) Section 40 of the BIA

[97] Section 40(2) permits the court to grant an order disposing of any property that is incapable of realization where the trustee has been unable to dispose of such property. Orders pursuant to s. 40 can be granted on a nunc pro tunc basis in the appropriate case: Stefaniak, at paras. 29-31. The suggestion is that an order under s. 40 re-vesting the property in Mr. Douglas nunc pro tunc could normalize these proceedings.

[98] Although the Divisional Court referred to s. 40(2) in its reasons, State Farm never actually sought relief under s. 40(2). In my view the Divisional Court did not purport to grant an order under s. 40(2), re-vesting Mr. Douglas's action in him, effective before State Farm commenced the action in his name. In any event, assuming that this cause of action could be seen as unrealizable property in the hands of the Trustee, there are two reasons why an order under s. 40(2) cannot normalize these proceedings.

[99] First, an order under s. 40(2) re-conveying a cause of action to an undischarged bankrupt does not provide the bankrupt with capacity to commence the claim: Stefaniak, paras. 27 and 28. To normalize this cause of action, State Farm would require an order under s. 40(2) effective on January 6, 2010, which is the day before it commenced the action in Mr. Douglas's name. But Mr. Douglas did not receive an absolute discharge from bankruptcy until March 5, 2010. Although the court can vary a bankrupt's date of discharge in certain circumstances, it cannot do so here. Therefore, it cannot grant an order under s. 40(2) re-conveying this cause of action to Mr. Douglas, effective January 6, 2010.

[100] In Stefaniak, the motion judge purported to grant an order under s. 40(2), conveying an interest in a lawsuit to the bankrupt effective from the date he commenced his claim, even though he was an undischarged bankrupt. This court cautioned, at para. 31, that commencing proceedings before the bankrupt has obtained an order of absolute discharge "will ordinarily be fatal." However, having regard to what it described as the "unusual circumstances" of the case, this court varied the order of discharge pursuant to s. 187(5) of the BIA, by dating the discharge the day before the bankrupt commenced the action, thereby justifying the order granted under s. 40(2) by the motion judge. Section 187(5) of the BIA provides that "[e]very court may review, rescind or vary any order made by it under its bankruptcy jurisdiction."

[101] In Stefaniak, the bankrupt had received a conditional discharge before commencing the action. It was undisputed that before he commenced the action he had satisfied all the conditions of the conditional order and had "every reason to believe" that he had been discharged from bankruptcy. The order had been prepared, and all that remained was for the order to be "stamped and issued". The only thing that stood between him and absolute discharge was administrative delay and backlog in the bankruptcy court office.

[102] This case is very different from Stefaniak. Mr. Douglas appears to have obtained an automatic discharge on the expiry of 9 months after the date of bankruptcy under s. 168.1(1) of the BIA. The basis on which this court might vary his date of discharge under s. 187(5) of the BIA is not apparent from the record.

[103] Second, a nunc pro tunc order cannot be made in this case because of the passage of the relevant limitations period.

[104] In Canadian Imperial Bank of Commerce v. Green, 2015 SCC 60, [2015] 3 S.C.R. 801, a majority of the Supreme Court held that a court has no authority to make a nunc pro tunc order if the party did not seek such an order before the relevant limitation period expired. It is important to note that the Supreme Court cited Montego Forest Products Ltd., (Re) (1998), 37 O.R. (3d) 651, as an example where an order under the BIA (in that case an order pursuant to s. 38) was properly granted on a nunc pro tunc basis. In Montego Forest Products, the order was sought within the limitation period, but not obtained until after the period had expired.

[105] It appears to be common ground that, by virtue of s. 4 of the Limitations Act, 2002, S.O. 2002, c. 24, Sched. B, the limitation period in the present case expired on January 9, 2010. Accordingly, Green prevents this court from granting a nunc pro tunc order pursuant to s. 40(2) of the BIA at this stage of the proceedings.

(b) Section 38 of the BIA and Section 21(2) of the Limitations Act, 2002

[106] On this appeal, State Farm requests alternate relief. If the court finds that State Farm had no right to commence the claim in Mr. Douglas's name because of his bankruptcy, it requests an order under s. 38 of the BIA assigning the cause of action to State Farm on a nunc pro tunc basis. Although State Farm did not file and serve a notice of cross-appeal, as required by r. 61.07(1) of the Rules of Civil Procedure, R.R.O. 1990, Reg.194, I nonetheless consider its request for alternate relief.

[107] I agree with the appellants that such an order cannot be granted.

[108] State Farm did not comply with the procedure required by s. 38. It did not request the Trustee to take a proceeding against the appellants and did not bring a motion for an order authorizing State Farm to take the proceeding in its own name and at its expense and risk. Most significantly, the Trustee is not a party to this action. Indeed, there is no indication that the Trustee, who is now discharged, was even given notice that State Farm would seek an order against the Trustee on appeal under s. 38 of the BIA.

[109] In their Supplementary Factum, the appellants also argue that a subrogated insurer is not a "creditor" of its bankrupt insured's estate within the meaning of s. 1 of the BIA, and therefore is not entitled to an order under s. 38. While raised, this point was not argued. Indeed, in further written submissions invited after the appeal was heard, they submit (albeit without reference to s. 38) that State Farm could and should have sought an assignment from the Trustee before commencing its subrogated action. I leave whether a subrogated insurer is a "creditor" for another day. I only note that, in light of Ramgotra, which held that property of a bankrupt not divisible among his creditors becomes part of the bankrupt's estate, and the effective inability of a trustee to return property to a bankrupt under s. 40(2) of the BIA before the bankrupt's discharge, a narrow interpretation of "creditor" might create practical difficulties in the administration of a bankrupt's estate.

[110] Further, unlike the situation in Montego Forest Products, no request for an order pursuant to s. 38 was sought before the limitation period had expired. In fact, the first request for such an order was made almost seven years after the limitation period had expired. As a result, in the circumstances, Green also prevents this court from granting a nunc pro tunc order under s. 38 of the BIA.

[111] While my conclusion that an order under s. 38 is not available to State Farm in these circumstances does not turn on Green, I agree with the appellants that s. 21(2) of the Limitations Act, 2002 would not assist State Farm in overcoming the hurdle it presents. That section permits a claim to be amended after the expiry of a limitation period to correct a "misnaming or misdescription of a party". The suggestion is that an order assigning the cause of action to State Farm, combined with an order under r. 5.04(2) of the Rules of Civil Procedure granting leave to amend the statement of claim to name State Farm as plaintiff, would normalize these proceedings. Rule 5.04(2) provides as follows:

(2) Adding, deleting or substituting parties – At any stage of a proceeding the court may by order add, delete or substitute a party or correct the name of a party incorrectly named, on such terms as are just, unless prejudice would result that could not be compensated for by costs or an adjournment.

[112] In my view, while the test for misnomer may be broad enough to embrace a mistake as to the identity of the person who should have brought a suit (rather than a misdescription of the person suing), it cannot do so in this case. This is because, as I have explained above, at the time State Farm chose to commence a claim, it did not have capacity to do so in its own name. As a result, it cannot be said that State Farm made a "mistake" in naming the Douglases as plaintiffs instead of itself.

[113] I therefore agree with the appellants that the naming of the Douglases as plaintiffs instead of State Farm was not a "misnaming or misdescription" of a party. Section 21(2) of the Limitations Act, 2002 does not assist State Farm in overcoming the hurdle in Green.

4. This court cannot and should not regularize State Farm's subrogated action by substituting the Trustee as plaintiff

[114] I indicate above that State Farm could have commenced the action in the name of the Trustee, as trustee of the estate of Art Douglas, a bankrupt. The final question is whether, at this juncture, the court can and should regularize State Farm's subrogated action by substituting the name of the Trustee, as trustee of the estate of Art Douglas, a bankrupt, for that of Mr. Douglas in the style of cause under r. 5.04(2) of the Rules of Civil Procedure, effective upon issuance of the statement of claim.

[115] After deliberating for several months, the court invited further written submissions from the parties on this topic. With the benefit of those submissions, I conclude that this court cannot and should not grant this relief.

[116] In its written submissions, State Farm maintains its assertion that Mr. Douglas's cause of action did not vest in the Trustee. However, if this court were to determine that the action could and should have been commenced in the name of the Trustee, then, in the alternative, it argues that its failure to commence its subrogated action in the name of the Trustee was a misnomer, and seeks an order under r. 5.04(2) permitting it to amend the style of cause, effective upon the issuance of the statement of claim, by substituting the Trustee's name for that of Mr. Douglas.

[117] State Farm also argues that its notice of motion cites r. 5.04 and contains a "basket clause", requesting "[s]uch further and other relief as this Honourable Court deems appropriate". It says that this entitled the motion judge to grant an order under r. 5.04 amending the style of cause, effective upon the issuance of the statement of claim, by substituting the Trustee's name for that of Mr. Douglas. It further argues that ss. 134(1) and 134(5) of the Courts of Justice Act, in turn, permit this court to do so, even though it did not properly cross-appeal the motion judge's or the Divisional Court's orders.

[118] Those sections provide, in relevant part, as follows:

134(1) Unless otherwise provided, a court to which an appeal is taken may,

(a) make any order or decision that ought to or could have been made by the court or tribunal appealed from;

(b) order a new trial;

(c) make any other order or decision that is considered just.

(5) The powers conferred by this section … may be exercised in favour of a party even though the party did not appeal.

[119] If this court were to determine that, notwithstanding s. 134(5), a cross-appeal specifically requesting an order substituting the name of the Trustee for that of Mr. Douglas in the style of cause is required for this court to grant such relief, then State Farm seeks leave to cross-appeal under r. 61.07(3).

[120] State Farm argues that if Mr. Douglas's cause of action vested in the Trustee, State Farm's failure to commence the action in the Trustee's name is simply a technical deficiency that has no impact on the substance of its subrogated action against the appellants, and therefore is a "misnomer", and that it would be appropriate and equitable in the circumstances to permit the amendment.

[121] It further argues that the Trustee's discharge is not an impediment to this relief: s. 41(10) of the BIA provides that "[n]otwithstanding his discharge, the trustee remains the trustee of the estate for the performance of such duties as may be incidental to the full administration of the estate". It submits that acting as the nominal plaintiff would be an "incidental duty" of the Trustee within the meaning of s. 41(10) and, therefore, that it would not be necessary to re-appoint the Trustee to grant the order, nunc pro tunc, under r. 5.04(2).

[122] I am not persuaded by State Farm's submissions.

[123] In my view, even if State Farm's naming of Art Douglas as the plaintiff could be considered a "misnomer" and s. 41(10) of the BIA would permit the court to amend the style of cause after the Trustee's discharge to substitute the name of the Trustee, as trustee of the estate of Art Douglas, a bankrupt, for that of Mr. Douglas, the court cannot, or if it can should not, grant this relief at this juncture.

[124] First, an order under r. 5.04(2) substituting the name of the Trustee for that of Mr. Douglas, effective upon the issuance of the statement of claim, was not an order that ought to or could have been made by the motion judge, and therefore is not an order that this court can make under s. 134(1)(a). While State Farm referenced r. 5.04 in its notice of motion, it did so because it sought an alternative order to amend the statement of claim to correct the name of the plaintiff to read "Art Douglas and Wendy Douglas by their subrogee State Farm Fire & Casualty Company". The relief now sought was not argued before the motion judge, and it would not have been open to him to grant it: Saadati v. Moorhead, 2017 SCC 28, [2017] 1 S.C.R. 543, at para. 9, citing Canada Trustco Mortgage Co. v. Renard, 2008 BCCA 343, 298 D.L.R. (4th) 216, at paras. 38-39. The inclusion of a "basket clause" in a notice of motion is not a basis for a motion judge to grant relief that was not sought by the moving party, on a basis not argued by it.

[125] Second, such an order would not be "just" in the circumstances, and thus this court cannot and should not grant such relief under s. 134(1)(c). Section 134(1)(c) is broader than s. 134(1)(a), and permits the court to make any order that it considers "just". But this is not a case in which the court can or should permit a cross-appeal or exercise its inherent jurisdiction to grant an order nunc pro tunc. There are a number of reasons for this.

1. It is not appropriate for an appellate court, twice removed from the parties' initiating motion, to grant this relief. It does not lie within the proper institutional role of this court to act as a lawyer for a party who erred in naming the correct plaintiff. It would be inappropriate in these circumstances to suggest and then grant relief unsought by the parties. State Farm only proposes to substitute the name of the Trustee for that of Mr. Douglas, in the alternative, in response to a request from the court for further submissions on the issue.

2. Relatedly, while the appellants were provided the opportunity to deliver brief written submissions, they have not had the opportunity to make full submissions on this new issue. They have incurred substantial legal expenses over more than four years in responding to State Farm's flawed legal position that it was entitled to commence its subrogated action in the name of Art Douglas. It would be unfair to resolve this appeal against them on an issue never raised below.

3. The "irregularity" that State Farm seeks to correct was intentional. State Farm chose to commence its subrogated action in Mr. Douglas's name, knowing that Mr. Douglas had filed an assignment in bankruptcy, and continues to assert that it was entitled to do so.

4. The request for this alternative relief is made more than four years after the appellants brought their summary judgment motion and State Farm brought its cross-motion. The delay is entirely attributable to State Farm. The defendants are entitled to a degree of certainty and finality.

5. Even if this court were to grant such relief, the pleadings would be deficient and unable to support an ongoing action by the Trustee without further amendments. The statement of claim does not plead that Mr. Douglas's interest in the property or his cause of action vested in the Trustee. Instead, it pleads that Mr. Douglas was an owner of the property at all material times.

6. State Farm is a sophisticated party. It has previously drawn distinctions and shown an understanding of the nuances between claims that vest in a trustee in bankruptcy and those which remain in the hands of the bankrupt: Future Health Inc. (Trustee of) v. State Farm Mutual Automobile Insurance Co. of Canada, 2013 ONSC 2941, at paras. 4, 11, 12, leave to appeal to Div. Ct. refused, 2014 ONSC 356.

Disposition

[126] For these reasons, I would allow the appeal, and would grant summary judgment to the appellants, dismissing the subrogated action commenced by State Farm in the name of Art Douglas.

[127] I would order State Farm to pay the appellants their costs of the appeal, fixed in the agreed upon amount of $25,000, inclusive of HST and disbursements, set aside the costs awards of the motion judge and the Divisional Court, and would order State Farm to pay the appellants their costs before the motion judge and the Divisional Court, fixed in the amounts of $8,500 and $50,000, respectively, again inclusive of HST and disbursements.

Alexandra Hoy A.C.J.O.

I agree C.W. Hourigan J.A.

I agree M.L. Benotto J.A.

Dissenting Opinion

Rouleau and Roberts JJ.A. (Dissenting in part):

[128] We have had the benefit of reading our colleague's careful and thorough reasons. We agree with the legal analysis and basis for concluding that the dismissal of the appellants' motion should be set aside. We do not, however, agree that this court should substitute a dismissal of the claim. In our view, the appropriate result is to remit the matter back to the Superior Court.

[129] For the reasons that follow, we have concluded that it should remain open to State Farm to pursue the issue as to whether its subrogated action should be regularized by substituting the Trustee, as trustee of the estate of Art Douglas, a bankrupt, as plaintiff. While we agree that this court should not make that order because it was not an issue determined by the courts below and we lack a full argument on it, the justice of the case requires this court to remit the issue back to first instance for determination.

[130] In our view, the effective issue for determination at the original motion was the name in which the claim ought to be brought. While arguing that it was entitled to commence an action in the Douglases' name, State Farm sought directions from the court and submitted that, if the Douglases were not the proper plaintiffs, its name should be substituted for theirs as plaintiff. The appellants maintained that the Douglases had no capacity to start or continue the action in their own names and took the position that, although an action may have been commenced by the Douglases' Trustee, the applicable limitation period expired over four years ago and, for that reason, it was not possible to simply amend the claim and add the Trustee.

[131] The motion judge made it clear that an equitable result should prevail and that he would draw on his inherent jurisdiction, including ss. 96 and 97 of the Courts of Justice Act, R.S.O. 1990, c. C.43, to ensure that it did. In the unusual circumstances presented by this case, the motion judge unfortunately adopted an incorrect approach to achieving the equitable result.

[132] For its part, the Divisional Court also sought to achieve an equitable result. It correctly found that State Farm had the right to bring the claim in the name of the insured but erred in not finding that, for the property damage claim, the Trustee was the insured in whose name the action had to be brought.

[133] The errors in the courts below are understandable. State Farm's uncontested right is to bring a subrogated action to recover its remediation costs from the appellants. In whose name the claim is to be brought when a bankruptcy intervenes is a somewhat novel issue. The parties were unable to find any specific guidance from the courts on this issue. State Farm determined that it should bring the action in the name of the originally named insured and it did so within the limitation period. The courts below confirmed, albeit in error, that this was the proper procedure.

[134] Our colleague correctly explains that the proper procedure required State Farm to bring the action in the name of the Trustee and not the Douglases. Relying on the cases of Saadati v. Moorhead, 2017 SCC 28, [2017] 1 S.C.R. 543, and Canada Trust Co. Mortgage Co. v. Renard, 2008 BCCA 343, 298 D.L.R. (4th) 216, our colleague argues, however, that it would be unfair to the appellants to grant relief not sought or argued before the motion judge.

[135] This is the point at which we disagree. In our view, those decisions have no application to the present case. They involve the appropriateness of a court granting relief that was neither pleaded nor sought at trial. In the present case, we are dealing with the appropriateness of granting relief on a motion heard prior to trial. Granting relief on appeal or following the remitting of the motion for a new hearing does not raise the same issues. This is particularly so in circumstances such as existed here where the motion judge had before him the appellants' motion to dismiss the claim and State Farm's cross-motion seeking directions.

[136] In the present case, the equities clearly favour State Farm, and the appellants would suffer no non-compensable prejudice should the misnomer issue be considered and resolved prior to trial either on appeal or by way of a fresh motion. State Farm's right to bring a subrogated action to recover its remediation costs from the appellants is uncontested. State Farm clearly intended to exercise its contractual rights to bring the action "in the name of the insured". State Farm's erroneous view (a view shared by the motion judge and the Divisional Court) that the insured for purposes of the claim were the Douglases and not their Trustee arguably constitutes a misnomer that is a procedural irregularity.

[137] There can be no dispute that the appellants understood that the action commenced in January 2010 was a subrogated action brought in the name of the insured under the Policy which responded to the claimed loss. No party was mistaken about what this action was about. The appellants have known since at least March 2008 that State Farm was expending substantial amounts to remediate the Douglases' property and that State Farm intended to claim its remediation costs from the appellants pursuant to its contractual right of subrogation.

[138] The appellants did not learn about the bankruptcy of Mr. Douglas until January 2012 upon receipt of the Douglases' affidavit of documents, which contained documents related to their bankruptcy. In February 2012, they conducted an examination for discovery of State Farm's representative. They raised the issue of the Douglases' capacity to commence their action in the fall of 2012 and January 2013; however, the appellants did not bring their motion to dismiss the Douglases' action or amend their statement of defence to allege their incapacity until October 2013. While the appellants were entitled to raise the issue of the Douglases' capacity at any stage of the litigation, including at trial, their delay in putting forward this issue works against any suggestion that they would be prejudiced if the action were continued in the Trustee's name.

[139] State Farm should be given the opportunity to argue misnomer. State Farm fulfilled all of its obligations under the Policy. It immediately responded to the Douglases' claim. It provided funding for Mr. Douglas's personal expenses. It thoroughly remediated the property. There is no evidence that State Farm did anything but act in good faith, just as consumers trust all insurers will. And State Farm commenced the subrogated action within the two-year limitation period.

[140] In our view, to foreclose State Farm in this appeal from having the misnomer issue determined would potentially grant a windfall to the appellants and be contrary to the well-established principle underlying subrogation as articulated in Somersall v. Friedman, 2002 SCC 59, [2002] 3 S.C.R. 109, at para. 50, that "the loss falls on the person who is legally responsible for causing it".

Conclusion

[141] As a result, we would set aside the dismissal of the appellants' motion and remit the matter to the Superior Court to permit State Farm to seek to regularize its subrogated action by bringing a motion under rr. 5.04 and 26.01 to substitute the Trustee, as trustee of the estate of Art Douglas, a bankrupt, as plaintiff, and to amend the pleadings as necessary to reflect the Douglases' bankruptcy. We would direct that the Trustee be served with the motion materials. In the event that State Farm does not serve this motion within 90 days of the release of these reasons, or if State Farm is ultimately unsuccessful in that motion, including any appeal, the action will be dismissed.

[142] With respect to costs, the appellants prevailed on the appeal and are entitled to their costs in accordance with our colleague's disposition of them.

Released: March 9, 2018

Paul Rouleau J.A.

Lois Roberts J.A.