COURT FILE NO.: 31-1265789

DATE: 2012-01-06

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: IN THE MATTER OF THE BANKRUPTCY OF VINCENZO FRANCESCO CONFORTI, of the Town of Newmarket in the Region of York, Province of Ontario, Unemployed

BEFORE: Mr. Justice H.J. Wilton-Siegel

COUNSEL: Howard F. Manis, for the Trustee in Bankruptcy, Pat Robinson Inc.

Robert Klotz, for the Bankrupt

Elizabeth Tinker and Peter Majecek, for the Superintendant of Bankruptcy, Intervenor

HEARD: November 28, 2011

ENDORSEMENT

[1] On this motion, the trustee in bankruptcy of Vincenzo Francesco Conforti (“Conforti”) (the “Trustee”) seeks directions as to the entitlement to certain proceeds of settlement of litigation in the amount of $275,000. The issue is whether a receipt of settlement funds in respect of a motor vehicle accident on account of “loss of future competitive advantage” is property of the bankrupt to be dealt with under section 67 of the BIA or is income to be dealt with under 68 of that statute.

Background

[2] Conforti filed an assignment in bankruptcy on September 24, 2009 naming the Trustee as trustee of the bankrupt estate (the “Assignment”).

[3] Prior to the Assignment, on December 11, 2007, Conforti commenced a legal action in respect of a motor vehicle accident that occurred on January 31, 2007.

[4] The action was settled for $275,000 pursuant to minutes of settlement dated February 10, 2010. Counsel for the parties to the litigation agreed that, of this amount, $100,000 was allocated in respect of “future loss of competitive advantage”. This amount is herein referred to as the “Award”. It was also expressly agreed that no amount was paid on account of past loss of income.

[5] Conforti did not advise the Trustee of the litigation at the time of the Assignment. It came to light when his lawyer in the litigation advised the Trustee of the settlement on or about March 3, 2010, because the Trustee’s release was required in respect of the funds to be paid pursuant to the minutes of settlement.

[6] It is undisputed that Conforti is subject to significant physical limitations that prevent him from continuing in his previous employment as an international truck driver. He is currently working at a significantly diminished income level delivering pizza. There is no evidence on the record of any prospects for a return to his previous income level in any occupation, even taking into consideration his retraining in computer graphics.

Position of the Trustee

[7] The Trustee takes the position that the Award represents compensation for the loss of a capital asset. As such, the Trustee says that Conforti’s claim constitutes “property of the bankrupt” for purposes of s. 67 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, (the “BIA”).

[8] The Trustee relies on a number of decisions that have found particular litigation awards to constitute property of a bankrupt based on the decision of the Supreme Court in Andrews v. Grand & Toy Alberta Ltd., 1978 CanLII 1 (SCC), [1978] 2 S.C.R. 229. In Andrews, at p. 251, Dickson J. stated: “It is not loss of earnings but, rather, loss of earning capacity for which compensation must be made: The Queen v. Jennings, supra. A capital asset has been lost: what was its value?” On the basis of this short statement, certain bankruptcy courts have held that a capitalized loss of future earnings is property of a bankrupt governed by s. 67 of the BIA. The Trustee submits that an award for loss of a competitive advantage should be treated in the same manner. This is addressed in greater detail below.

Analysis of the Applicable Law

[9] The issue in this motion is whether the Award is property of the bankrupt to be dealt with under section 67 of the BIA or is included in “total income” for purposes of para. 68(2)(a) of the BIA and therefore to be dealt with under section 68 of the BIA.

[10] Paragraph 68(2)(a) defines “total income” for the purposes of the regime in section 68 to include “ … a bankrupt's revenues of whatever nature or from whatever source that are earned or received by the bankrupt between the date of the bankruptcy and the date of the bankrupt's discharge, including those received as damages for wrongful dismissal, received as a pay equity settlement or received under an Act of Parliament, or of the legislature of a province, that relates to workers' compensation.”

[11] I propose to address this question in three parts. First, I will address the approach to be used in determining whether a particular receipt falls within the definition of “total income” in para. 68(2)(a) of the BIA. I will then address whether, on such basis, the Award constitutes “total income” for such purposes. Lastly, I will address two arguments raised by the Trustee.

Purposive Approach to Interpretation of “Total Income” in Paragraph 68(2)(a)

[12] The Supreme Court has indicated that the court should adopt a purposive approach in determining whether a particular receipt is income for the purposes of s. 68 of the BIA. This approach is reflected in the decision in Wallace v. United Grain Growers Ltd., 1997 CanLII 332 (SCC), [1997] 3 S.C.R. 701 at paras. 65 and 66, in which the Supreme Court held that a payment on account of a wrongful termination was income for the purposes of s. 68(1). In reaching that decision, Iacobucci J. stated that an award that is akin to income does not lose that characterization because the award takes the form of a lump sum award.

[13] As Iacobucci J. noted in para. 68 of Wallace, policy considerations favour a wide interpretation of the wording in s. 68. In particular, Iacobucci J. referred by incorporation to the need to have “regard to the family responsibilities and personal situation of the bankrupt”, which demonstrates an “overriding concern for the support of families”: see Wallace, at para. 68, citing Marzetti v. Marzetti, 1994 CanLII 50 (SCC), [1994] 2 S.C.R. 765, at p. 801. Further, para. 68(2)(a) should be interpreted in a manner that is consistent with the “fresh start” principle referred to in Re Anderson, 2004 ABQB 349, [2004] A.J. No. 521, at para. 23. In Wallace, at para. 70, Iaccobucci J. also noted that s. 68 of the BIA provides protection to creditors against the possibility of abuse associated with this approach to interpretation of s. 68(1) by providing for a procedure for the determination of any surplus income to be paid to the bankrupt estate. Lastly, it is also relevant that issues going to the integrity of the bankruptcy process can be addressed by the court at the time of an application for a discharge from bankruptcy.

[14] This approach to the interpretation of “total income” in para. 68(2)(a) of the BIA has been followed in two recent decisions.

[15] In Re Julyan, 2009 SKQB 321, [2009] S.J. No. 554, Registrar Schwann found that a Workers’ Compensation Board income replacement benefit was a substitute for lost wages and by its nature income that retained that character for the purpose of s. 68 of the BIA. In reaching his decision, the Bankruptcy Registrar observed, at para. 16, that the courts have decided whether a particular receipt is income for the purposes of s. 68 of the Act by examining the nature or character of the relevant receipt to determine the treatment of such receipt under the BIA. The Registrar went on to note that, in order to fall within the definition of “total income” for purposes of para. 68(2)(a), the relevant funds must be “a substitution for income, akin to income, or in the nature of income or … have retained their previous character of income” (Julyan, at para. 16, citing Houlden & Morawetz, Bankruptcy & Insolvency Law of Canada, vol. 2, 4th ed., looseleaf (Toronto: Carswell, 2009), ff. 111(3), p. 3-324). The Registrar also referred to the types of payments that were found to be ‘income’ for purposes of s. 68: Julyan, at para. 17.

[16] Mesbur J. adopted a similar approach in Re Snow, 20 ONSC 5062 (Ont.S.C.), at para. 26, in respect of income replacement benefits under the statutory accident benefit provisions of an automobile insurance policy. In that decision, Mesbur J. stated that the essential nature of the payment should determine whether it is income or not, rather than its source ─ it is what the payments replace that is critical.

[17] As mentioned, the Trustee relies upon a number of cases that refer to the earlier decision of the Supreme Court in Andrews in support of its position that the court should apply the principle articulated by Dickson J. in that decision.

[18] Three of these decisions do not, in my opinion, address the issue in this motion and therefore do not assist the Trustee. In Re Berridge, 2002 ABQB 884, 351 A.R. 6, Bankruptcy Registrar Alberstat addressed the allocation of a global award between general damages and loss of income. While the Bankruptcy Registrar proceeded on the basis that the portion allocated to the loss of income was payable to the trustee in bankruptcy, he did not address whether such amount was to be treated as property of the bankrupt under s. 67 or as income under s. 68. Insofar as the Bankruptcy Registrar may be taken as assuming that the loss of income portion of the claim was property, there is no analysis of the basis for this conclusion. In Re Hogg, 2005 MBQB 109, 199 Man.R. (2d) 1, a decision of Bankruptcy Registrar Lee, the issue was the treatment of a lump sum payment for the loss of ability to complete an educational programme. Such an award does not constitute income for the purposes of the BIA. The comments of the Bankruptcy Registrar to the effect that the loss of earning capacity is to be equated to the loss of a capital asset are, therefore, clearly obiter dicta. Similarly, the statement in Julyan that settlement funds for future loss of earnings and loss of earning capacity have been found to be property and not income (Julyan, at para. 18), is not actually applied in that decision and should be regarded as obiter dicta. Moreover, as mentioned, the approach of the Bankruptcy Registrar, as well as the result in that decision, supports the conclusion reached in the present proceeding rather than the Trustee’s position.

[19] However, the three remaining decisions relied upon by the Trustee directly address the issue in this proceeding. The Trustee argues that these decisions properly concluded, based on Andrews, that awards on account of future income loss, including awards in respect of a loss of competitive advantage, are to be treated as awards on account of a loss of a capital asset and, therefore, as property of the bankrupt for purposes of the BIA. In reaching the conclusion above, I have rejected this submission for the following reasons.

[20] Andrews was not a bankruptcy case. It is abundantly clear at p. 251 of Andrews that Dickson J. is relying on the capitalized nature of the foregone income stream to distinguish the award as so determined from income in order that the award will not be taxable as income. In doing so, he relied on the earlier decision of the Supreme Court in R. v. Jennings, 1966 CanLII 11 (SCC), [1966] S.C.R. 532, where the issue was the liability for tax in respect of an award for future income loss. Indeed, it might be argued that, in this different context, the approach of the Supreme Court also reflects a purposive approach. In any event, Andrews did not directly address the issue in the present proceedings.

[21] Therefore, in my opinion, Andrews has been superseded by Wallace, which specifically addressed a bankruptcy situation and mandated a broad and purposive interpretation of the wording in s. 68 of the BIA when addressing whether a lump sum award should be treated as income for the purposes of that provision. Accordingly, I consider that Wallace should govern the approach of the court in the present proceedings.

[22] The remaining three decisions upon which the Trustee relies that refer to Andrews do not properly apply the analysis required by Wallace in reaching the conclusion that particular awards were property of the bankrupt under s. 67 of the BIA rather than “total income” for purposes of para. 68(2)(a). In Re Bell (1996), 1996 CanLII 3016 (BC SC), 39 C.B.R. (3d) 236 (B.C.S.C.), the only analysis provided is a reference to the statement of Dickson J. in Andrews described above, which Warren J. appears to assume applies to insolvency cases. I note that this case preceded Wallace. In Re Mostajo (2006), 2006 CanLII 35001 (ON SC), 26 C.B.R. (5th) 45 (Ont. C.A.), Registrar Nettie referred to Berridge, Hogg and, in particular, Bell which, for the reasons set out above, I do not think are authority for the proposition that the loss of the ability to earn income in the future is the loss of a capital asset and that damages for such a loss therefore vest in the trustee as property. Insofar as the decision is based on the Registrar’s rationale that the ability of the trustee to determine the proper amount to be paid to the creditors as surplus income implies that “the loss must also be compensated for to the creditors”, I think the Registrar erred. If any intention is to be inferred from the existence of the regime dealing with surplus income in section 68, it should be inferred that any such award should be treated as income rather than property. Lastly, insofar as the decision in Re MacLeod (2008), 2008 CanLII 32835 (ON SC), 45 C.B.R. (5th) 214, (Ont. S.C.) was made on the same basis, there is no analysis of the issue that addresses Wallace. The only analysis is a reference to Mostajo which I would not follow for the reasons set out above. In addition, the decision is, in my opinion, properly decided on the Registrar’s alternative ground as an exercise of the court’s authority to impose conditions in a discharge order, which is more consistent with the policy of the BIA in the context of treatment of the award as income rather than property.

[23] These three cases are not binding on this court. I decline to follow them as I consider that, as set out above, they err in failing to apply a purposive analysis to the issue of whether the particular payments constituted “total income” for the purposes of para. 68(2)(a) of the BIA. I would also note that Mostajo and Bell do not address the treatment of an award or receipt in compensation for a loss of competitive advantage and are therefore also distinguishable on this additional basis.

[24] In summary, I do not see any basis for distinguishing the task of the court in Wallace, Julyan and Snow from the present circumstances. Accordingly, I conclude that the court should look to the essential nature of the Award to determine whether it is income or not despite the characterization of the Award provided by the parties in the minutes of settlement.

Application to the Present Circumstances

[25] Applying the purposive approach described above to the issue in this proceeding, I conclude that the Award is income for purposes of s. 68 of the BIA for the following reasons.

[26] In this case, while the minutes of settlement refer to a “future loss of competitive advantage”, it is abundantly clear that this payment is on account of the loss of future income. As a result of his injuries, Conforti is unable to continue to earn income at his previous level. His probable future income has been permanently reduced. There is no other component of the settlement between the parties that compensates Conforti for such probable loss.

[27] Because it is unreasonable to assume that no compensation is being paid for the loss of future income in the present circumstances, I conclude that the essential nature of the Award is compensation for lost future income. The fact that the Award is a capital sum does not change the character of the payment, which is to replace or compensate for lost income. Similarly, the fact that Conforti continues to earn some income is not inconsistent with the Award being, essentially, replacement income for the difference between what he could have earned and what he is earning presently and likely to earn in the future.

[28] Based on the foregoing, I conclude that the Award is “akin to income”. It replaces the income in the future that Conforti will never make. It therefore falls within the definition of “total income” in para. 68(2)(a) and is subject to the regime in s. 68 of the BIA.

Arguments of the Trustee

[29] The Trustee makes two separate arguments based on application of the principle in Andrews to the present circumstances.

Payments for Loss of Future Income as Awards for Loss of Future Income

[30] The first argument is that a payment for loss of competitive advantage should be treated as a payment for a loss of future income and, following Andrews, should therefore be treated as an award for a loss of a capital asset.

[31] I agree that the Award constitutes compensation for future income loss despite being labelled an award in respect of a future loss of competitive advantage. However, I do not accept the argument that Andrews should govern the treatment of the Award for the purposes of the BIA for the reasons set out above.

Payments for Loss of Competitive Advantage are Awards for Loss of a Capital Asset

[32] The second argument of the Trustee is that, regardless of whether or not the treatment of an award for loss of future income is governed by Andrews, the nature of an award for loss of competitive advantage is understood to be an award for the loss of a capital asset and, therefore, should be treated as property of the bankrupt. As Mr. Manis puts it, the term “loss of competitive advantage” has a specific meaning in the case law that should be respected in the BIA context. This submission of the Trustee requires an analysis of the nature or character of an award for loss of competitive advantage.

The Concept of a Loss of Competitive Advantage

[33] The Trustee refers to six cases in which courts have awarded damages for a loss of competitive advantage. Most of these cases address the situation in which, while currently earning income at the plaintiff’s pre-accident level, the plaintiff has a higher risk of being unemployed in the future as a result of the accident. The award for loss of competitive advantage is expressed as damages in recognition of the fact that the plaintiff’s competitive position in the open labour market has been compromised as a result of the plaintiff’s injuries in the accident: see Kobzey v. Pazuik, 2009 ABQB 695, 17 Alta. L.R. (5th) 297, at paras. 52 and 74; O’Day v. Facoetti Estate, [2002] O.J. No. 2374 (S.C.), at para. 67; Thiessen v. Selke, 2007 ABQB 217, 17 Alta. L.R. (5th) 297, at paras. 89 and 96; Rosvold v. Dunlop, 2001 BCCA 1, [2001] B.C.J. No. 4, at para. 17 (in which there was, however, no return to the pre-accident level of income at the time of the trial); and Pallos v. Insurance Corp. of British Columbia (1995), 1995 CanLII 2871 (BC CA), 100 B.C.L.R. (2d) 260, [1995] B.C.J. No. 2 (B.C.C.A.), at paras. 41 and 42. In other decisions, where the plaintiff had not yet established an income record, the loss of competitive advantage is expressed as a diminution in the capacity to earn income in the future: see, for example, Newman (Guardian ad litem of) v. LaMarche (1994), 1994 NSCA 193, 134 N.S.R. (2d) 127, [1994] N.S.J. No. 457 (N.S.C.A.), at paras. 22 and 23.

[34] The essential elements comprising the concept of a loss of competitive advantage are expressed in Pallos, at para. 24, citing an excerpt from Kwei v. Boisclair (1991), 1991 CanLII 645 (BC CA), 60 B.C.L.R. (2d) 393 (C.A.), at p. 399, where in turn Mr. Justice Taggart quoted with approval from Brown v. Golaiy, 1985 CanLII 149 (BC SC), [1985] B.C.J. No. 31, at para. 8:

The means by which the value of the lost, or impaired, asset is to be assessed varies of course from case to case. Some of the considerations to take into account in making that assessment include whether:

1. The plaintiff has been rendered less capable overall from earning income from all types of employment;

2. The plaintiff is less marketable or attractive as an employee to potential employers;

3. The plaintiff has lost the ability to take advantage of all job opportunities which might otherwise have been open to him, had he not been injured; and

4. The plaintiff is less valuable to himself as a person capable of earning income in a competitive labour market.

Substantially similar statements appear in most of the cases cited above.

[35] The important point to be taken from these cases is that the loss of competitive advantage relates to a contingency that is additional to the customarily recognized contingencies that might affect an injured party’s future earnings, such as those set out by Dickson J. in Andrews, at p. 232: unemployment, illness, accidents and business depression, to which should be added mortality. The concept is directed toward the contingent loss of an individual’s future marketability ─ it may never occur but, if it does, it will do so in a manner that results in diminished income in the future. This raises the question of the relationship of the two concepts: loss of future earnings and loss of competitive advantage.

Relationship of a Loss of Competitive Advantage to a Loss of Future Income

[36] As described in the case law cited above, these concepts are distinct but related. An award for loss of future income relates to a probable loss of future earnings. On the other hand, a loss of competitive advantage, as demonstrated by the excerpt from Pallos, relates to a future contingency that could result in probable future income being more contingent than it otherwise would have been. Both concepts are addressed in the calculation of an injured party’s loss of future earnings, or diminished earning capacity, but in different ways.

Calculation of an Award for Both Loss of Future Income and Loss of Competitive Advantage

[37] I propose to describe my understanding of the relationship between the two concepts by reference to a calculation for a loss of earning capacity that involves both a loss of future income and a loss of competitive advantage. I will then address the manner in which an award for loss of competitive advantage is addressed in the common circumstance where an injured party returns to his or her pre-accident level of income and receives compensation that is stated to be for a loss of competitive advantage but not for loss of future income.

[38] The calculation of a loss of future income typically proceeds as a calculation of the difference between the net present value of probable earnings before the accident and the net present value of probable earnings after the accident.

[39] The calculation of each such net present value is conducted based on a discounting of probable future income in each year to retirement using either: (1) a discount factor applied against forecast income in each such year that takes into consideration both the time value of money and all relevant contingencies (a “normal discount factor”); or, alternatively, (2) a combination of a discount factor applied in each such year representing the time value of money and a further percentage discount applied against the resulting difference in net present values that takes into consideration all relevant contingencies. For ease of reference, I will refer only to the former approach (a normal discount factor), there being no difference between these two approaches that is relevant for this proceeding.

[40] Any such net present value calculation conceptually can include both an amount for loss of future income and an amount for loss of competitive advantage, if any. However, they are incorporated into the calculation in different ways.

[41] The net present value of the loss of future income is, in effect, the net present value of the probable foregone future income in each year discounted by a normal discount factor, for clarity not including any amount in the normal discount factor for a loss of competitive advantage. If an award is also made for a loss of competitive advantage, the value of such award conceptually (although I do not suggest that it is necessarily calculated in this manner) is the amount of the reduction in the net present value of the probable future income stream after the accident that results from the application of an additional i.e., an incremental, discount factor in each year that takes into account the additional risk to the party’s ability to earn income in that year resulting from his injuries (the “competitive advantage discount factor”).

[42] The loss of competitive advantage is therefore also compensated for by an amount that is a net present value calculation. Conceptually, it is the reduction in the net present value otherwise determined that results when the normal discount rate applied against probable post-accident income is increased to reflect the additional or incremental contingency constituting the loss of competitive advantage. Because any given net present value calculation will be reduced as the discount rate used is increased, any incremental increase in the normal discount factor to include an amount on account of the loss of competitive advantage will increase the difference between the net present value of the future income before and after the accident and, therefore, the amount of the compensation to be paid to the injured party.

[43] Viewed in this manner, a loss of competitive advantage is incorporated into a net present value calculation of the loss of future earnings to the extent that a court finds not only that there has been a probable loss of future earnings, but also that the injured party has suffered an increased likelihood of being unemployed in the future as a result of his or her injuries, i.e. a possible decrease in marketability.

[44] A logical deduction from the foregoing analysis is that the concept of loss of competitive advantage is distinct from the concept of foregone future income that is probable as of the date of the calculation. To the extent that a court concludes that a party’s post-accident income will, on a balance of probabilities, be reduced to a specific level, the calculation of the present value of the loss of earning capacity is to be undertaken without regard to any loss of competitive advantage. A further contingency factor should only be introduced into the calculation of the party’s loss to address the loss of competitive advantage if the risk that the party will fail to earn income at that post-accident level, whatever that may be, is increased by the party’s injuries.

Calculation of an Award Solely for Loss of Competitive Advantage

[45] In many, if not most, cases of an award of loss of competitive advantage, the injured party has returned to the pre-accident level of income. In these circumstances, the only difference between the present values of the pre-accident probable income and the post-accident probable income will be the amount of the award for loss of competitive advantage. This amount is calculated simply as the net present value of the difference between a present value calculation applying a normal discount factor to the party’s probable future income (in this case, the party’s pre-accident income expectations) and a present value calculation applying the competitive advantage discount factor to the same probable future income, representing the new contingent risk of unemployment resulting from the accident i.e., the inability to earn that future income stream. This is not, however, conceptually different from the first calculation described above.

Conclusion Regarding the Relationship Between the Two Concepts

[46] Based on the foregoing analysis, I conclude that an award for loss of competitive advantage constitutes compensation for a component of a loss of future income. As such, it is conceptually indistinguishable from an award for a loss of future earnings or loss of earning capacity in a bankruptcy context. While the award is triggored by a determination that a party’s injuries have resulted in the introduction of a further contingency into the ability to earn the party’s probable future income, the award is calculated by reference to, and provides compensation for, the capitalized amount of a future contingent loss of income.

[47] Accordingly, I conclude that, even if the Award were characterized as damages for a loss of competitive advantage, there is nothing in the nature or character of an award for loss of competitive advantage that alters the conclusion reached above that the essential nature of such an award is income for purposes of para. 68(2)(a) of the BIA rather than property.

Conclusion

[48] Based on the foregoing, I conclude that the Award is to be treated as “income” for purposes of para. 68(2)(a) of the BIA.

Constitutional Issue

[49] Conforti also raises a constitutional issue that has prompted the Superintendent of Bankruptcy to intervene in this proceeding. Conforti says that para. 68(2)(a) of the BIA contravenes s. 15 of the Canadian Charter of Rights and Freedoms, Part I of the Constitution Act, 1982, being Schedule B to the Canada Act 1982 (U.K.), 1982, c.11 insofar as a bankrupt who receives an award in a personal injury action as compensation for a loss of future earning capacity will be treated differently from a bankrupt who receives post-discharge income in the future. There is a preliminary issue regarding Conforti’s ability to assert this claim insofar as it turns on a finding that he is disabled. However, in any event, it is agreed that this issue does not arise given the determination above. Accordingly, it is unnecessary to address the constitutional issue raised by Conforti and I decline to do so.

Costs

[50] The parties shall have thirty days from the date of release of this Endorsement to provide written submissions, including a costs outline, with respect to costs of this motion.

Wilton-Siegel J.

Date: January 6, 2012