Re IPLANCORP., 2013 ONSC 5945

COURT FILE NO.: 31-1643308 RELATED ACTION NUMBER: CV-10-403423 MOTION HEARD: 20121017 Amended REASONS RELEASED: 20130722

ONTARIO SUPERIOR COURT OF JUSTICE IN BANKRUPTCY AND INSOLVENCY

IN THE MATTER OF THE BANKRUPTCY OF IPLAN CORP. (FORMERLY KNOWN AS 1222340 ONTARIO LIMITED) in the Town of Newmarket, in the Province of Ontario

APPEARANCES: Larry Levine, Fax: 416-224-2408

• for the moving plaintiff in pending action

Sean Dewart/Tim Gleason Fax: 416-971-8001

• for opposing third parties

Nicole Godfrey Fax: 416-596-7562

• for the bankrupt, defendant in pending action

BEFORE: MASTER D. E. SHORT, Registrar in Bankruptcy HEARD: October 17, 2012

Amended REASONS FOR DECISION

Finally, I heartily endorse the view of MacKinnon A.C.J.O. that immediate action should be taken by the Law Society or the Legislature, or both, so that the present unfairness to innocent clients of insured solicitors can be ended.

Arnup, J.A. Perry et al. v. General Security Insurance Co. of Canada [1984]

Any legal system which has a judicial appeals process inherently creates a pecking order for the judiciary regarding where judicial decisions stand on the legal ladder.

Master Funduk South Side Woodwork v. R.C. Contracting [1989]

I. Preamble

[1] In 2012 the Ontario legal community lost a very special member. His obituary read:

THE HONOURABLE MR. LLOYD W. HOULDEN, J.D.. Passed on August 7, 2012 in his 90th year. He graduated from Osgoode Hall in 1948,and received his Q.C. in 1962. Lloyd was the first head of the Creditors' Rights Section of the Bar Admission Course of the Law Society of Upper Canada. He was co-author with Carl Morawetz of The Canadian Bankruptcy Reports and Insolvency Act and the textbook Bankruptcy and Insolvency Law of Canada. In 1969 he was appointed to the Supreme Court of Ontario. In 1974 he was appointed to the Ontario Court of Appeal, where he served until 1997. He was recognized in 1998 by the Insolvency Institute of Canada for his contributions to bankruptcy law.

[2] Later that year I had occasion to reflect on one of his decisions in the 1984 case referred to above. In that case Justice Houlden wrote a dissent that is pivotal in the resolution of the motion before me.

[3] The bankrupt is a limited Ontario company named iPLANcorp. (herein “IPLAN”) Prior to its bankruptcy, the company was sued in the normal civil courts for negligence relating to a land development. That defendant made a third party claim for contribution and indemnity against their lawyer and his firm. The defendant then went into bankruptcy. The moving plaintiffs now seek an Order lifting the resulting stay of proceedings in Superior Court of Justice. Counsel for the insurer of the third parties opposes the lifting of the stay flowing from the bankruptcy, on the basis that, by virtue of the law of Ontario, recovery for alleged negligence from insurance that the bankrupt held, is not available. Thus, they assert that since no claim can succeed against the bankrupt, there can be no potential for contribution from the lawyers being required and the action should remain stayed.

[4] That complex situation gives rise to this decision.

II. Background

[5] The plaintiff Mademont Investments Inc. and two of its principals were the owners of a parcel of land in Newmarket Ontario which they proposed to develop. They engaged a land use consulting company called IPLAN to provide services concerning the proposed redevelopment on the lands which were located on the Oak Ridges Moraine.

[6] In May of 2010, the plaintiffs commenced an action against IPLAN for alleged professional negligence, and in particular, alleged that IPLAN provided negligent advice concerning an application for approval of the development.

[7] The plaintiffs do not seek to recover a judgment for alleged injury or damage to a person or property. Their claim, in its entirety, consists of an allegation that as a consequence of IPLAN's negligent advice, they incurred litigation and consulting fees and lost an opportunity to negotiate with a municipal government, which they allege would have resulted in approval or partial approval of their development applications.

[8] In March 2012, IPLAN issued a third party claim against their lawyer and his firm, seeking contribution and indemnity.

[9] IPLAN at all material times had insurance coverage with respect to the Plaintiff’s claim and the claim against IPLAN was defended under the policy.

[10] IPLAN filed an assignment in bankruptcy on July 9, 2012. Mademont's action against it is thus stayed pursuant to s. 69.3 of the Bankruptcy and Insolvency Act (the “BIA”).

[11] Mademont and its principals now seek to lift the stay in order that they may, in their words "have access to" the bankrupt's insurance policy.

[12] Counsel for that insurer took no position on the motion before me. Rather the challenge to the availability of the policy held by IPLAN was led by counsel for the third-partied lawyers who will continue to be involved in the litigation at the instance of IPLAN and its insurer, if the action is allowed to proceed.

[13] Counsel for the lawyers (and their insurer) asserts that there is no legal basis on which Mademont can "have access to" the bankrupt's insurance. It is asserted:

They are not parties to the contract of insurance and have no rights under it. The policy requires the insurer to pay on behalf of the insured (i.e. the bankrupt) all sums the insured becomes "legally obligated to pay" as damages because of a claim resulting from its negligence. That is, the insurer has agreed to indemnify its insured for certain of the insured's legal obligations. By virtue of its bankruptcy, iPLANcorp has no legal obligation to make any payments to any of its creditors. [my emphasis]

[14] In the third parties’ factum the issue is summarized thus:

The moving parties identify no basis in law upon which they could recover from the bankrupt's insurer. The court is left to infer that the moving parties rely on s. 132 of the Insurance Act, however s. 132 has no application to the case at bar. Section 132 provides that plaintiffs can have direct recourse to an insolvent defendant's insurer in certain circumstances. The Court of Appeal has held that the section does not apply to claims for pure economic loss, such as the moving parties' claim against the bankrupt. [my emphasis]

[15] Counsel for Mademont submitted that there is ample authority for the principle that, in circumstances such as those that prevail here, the Court will lift the stay of proceedings imposed by the BIA so that the Plaintiff, if successful, will have access to the insurance coverage enjoyed by the bankrupt Defendant. Their counsel asserts that “the bankruptcy of the insured does not relieve the insurer from its obligation to pay a successful Plaintiff under the third party liability insurance coverage contained in the policy.”

[16] The cases relied upon in support of this position will to a degree be addressed later in these reasons; however I note that the decisions are for the most part from the courts of other provinces:

Buchanan, Re (Nova Scotia Court of Appeal) 68, 2007 NSCA 68, [2007] I.L.R. I-4601, 32 C.B.R. (5th) 1, 50 C.C.L.I. (4^th) 17, 814 A.P.R. 286, 255 N.S.R. (2d) 286, 284 D.L.R. (4^th) 113

Genge v. Parrill (Nfld and Labrador Court of Appeal) 2007 NLCA 77, [2008] I.L.R. I-4665, 56 C.C.L.I. (4^th) 161, 38 C.B.R. (5^th) 224, 830 A.P.R. 199, 272 Nfld. & P.E.I.R. 199

Duvall, Re (British Columbia Supreme Court) 485, 1992 CanLII 1917 (BC SC), 11 C.B.R. (3d) 264

Major, Re (British Columbia Supreme Court) 588, 1984 CanLII 730 (BC SC), 54, C.B.R. (N.S.) 28, 56 B.C.L.R. 342 [1984] 6 W.W.R. 435

[17] My predecessor Master Ferron did accept this position in Ontario, in Re Cravit, 54 C.B.R. (N.S.) 214, a decision released on December 3, 1984. However the Ontario Court of Appeal was almost simultaneously also addressing this issue in Perry v. General Security Insurance Co. of Canada, infra.

III. Transmission and Other Issues

[18] The resisting parties’ factum raises additional issues and concerns with respect to the plaintiffs’ position (my emphasis):

• iPLANcorp is an unnamed insured under a professional liability insurance policy. The insurer has agreed to pay on iPLANcorp's behalf all amounts it is legally obligated to pay as damages because of a claim resulting from an error, omission or negligent misrepresentation. The insuring agreement is triggered by the insured's obligation to pay, and nothing in the policy provides that the insurer is required to pay claims being made against a bankrupt insured, as a bankrupt is not legally required to pay anything to anybody.

• After issuing their claim, the plaintiffs took no steps to conduct discoveries or move their action forward for more than two years. By order dated September 13, 2012 the Registrar of the Superior Court of Justice dismissed the plaintiffs' action as abandoned. The plaintiffs have brought a motion to set aside the dismissal of their action, but have otherwise taken no steps to move their action forward.”

[19] The factum also notes:

Quite apart from the stay of the claim by the moving parties against the bankrupt pursuant to section 69.3 of the BIA, the claim by bankrupt against the third parties is stayed pursuant to Rule 11 (Transmission of Interest) of the Rules of Civil Procedure. An order to continue can be obtained on requisition to the Local Registrar of the Superior Court of Justice. The trustee has not taken steps to obtain such an order.

[20] I do not regard this step as being any addition impediment if the stay ought otherwise to be removed. Further, with respect to the argument highlighted above, I feel it would be unjust and premature to resolve that issue by refusing to lift the stay at this stage.

[21] The resisting parties further submit that plaintiffs have provided no grounds for seeking such an order, except that "it is just and proper". Their argument posits that this not the test for lifting a stay imposed under the Bankruptcy and Insolvency Act. Rather, they assert that the appropriate test was articulated by the Ontario Court of Appeal in Re Ma, 2001 CanLII 24076, as follows:

[L]ifting the automatic stay is far from a routine matter. There is an onus on the applicant to establish a basis for the order within the meaning of s. 69.4. As stated in Re Francisco, the role of the court is to ensure that there are "sound reasons, consistent with the scheme of the Bankruptcy and Insolvency Act" to relieve against the automatic stay. While the test is not whether there is a prima facie case, that does not, in our view, preclude any consideration of the merits of the proposed action where relevant to the issue of whether there are "sound reasons" for lifting the stay. For example, if it were apparent that the proposed action had little prospect of success, it would be difficult to find that there were sound reasons for lifting the stay.

[22] The resisting parties further assert:

The plaintiffs are required to establish that there are sound reasons, consistent with the scheme of the BIA to relieve against the stay. They cannot obtain an order lifting the stay if there is no purpose to be served by doing so.

In this case, the plaintiffs offers no reason for lifting the stay apart from their desire to "have access to the insurance coverage enjoyed by the bankrupt", however they have not advanced any explanation about how they might do so. Specifically, the moving parties do not set out any statutory, contractual or other legal basis by which they might enjoy rights under the contract of insurance, or against the insurer.

[23] That position is primarily grounded on the Court of Appeal’s decision in Perry v. General Security Insurance Co. of Canada, 1984 CanLII 2146 (ON CA), 47 O.R. (2d) 472; 11 D.L.R. (4th) 516.

[24] As a consequence of my position in the judicial pecking order I am left, to a large extent to assess whether there is any other basis that would provide more that a “little prospect of success” if leave were granted in this case.

IV. Perry v. General Security Insurance

[25] Section 132 of The Insurance Act, under the heading “Right of claimant against insurer where execution against insured returned unsatisfied”, provides as follows:

132. (1) Where a person incurs a liability for injury or damage to the person or property of another, and is insured against such liability, and fails to satisfy a judgment awarding damages against the person in respect of the person’s liability, and an execution against the person in respect thereof is returned unsatisfied, the person entitled to the damages may recover by action against the insurer the amount of the judgment up to the face value of the policy, but subject to the same equities as the insurer would have if the judgment had been satisfied.

(2) This section does not apply to motor vehicle liability policies. [emphasis added]

[26] Counsel asserts that there is no other statutory provision that provides plaintiffs or judgment creditors with recourse against a defendant's liability insurer and succinctly asserts that sub-section 132(1) applies “only where there has been injury or damage to a person or property. Neither is alleged in the plaintiffs' claim, and the provision therefore has no application.”

[27] In 1984 in Perry, (supra), a majority the Ontario Court of Appeal held that this provision cannot be interpreted to mean that recovery for economic loss unrelated to physical damage to property.

[28] In that case, the plaintiffs sued their solicitor for negligence and breach of contract in connection with his failure to register a mortgage on their behalf. The solicitor became bankrupt, and the plaintiffs sought to recover from his liability insurer pursuant to what is now s. 132 (then s. 109) of the Insurance Act.

[29] The Court of Appeal considered the interpretation by the Supreme Court of Canada of a similarly worded provision in a different Act, and concluded:

... to interpret the word "property" in s. 109 of the Insurance Act to cover the present claim would be, in the words of Laskin J., "[an] attempt to read the word 'property' in a sense which is entirely foreign to its ordinary meaning as well as to the context in which it is used ...".

[30] Now before me it is forcefully asserted that in Ontario, in a case where there are only economic damages, it has been settled law since 1984 that there can be no recovery for such a loss against a bankrupt as a result of s. 132 of the Insurance Act. However, I note that the section arguably addresses specific circumstances where recovery can clearly be made if “a person incurs a liability for injury or damage to the person or property of another, and is insured against such liability”. Counsel have pointed to no section that otherwise prevents recovery under other insurance policies where, prior to bankruptcy, damages incurred would have had effective insurance coverage available.

[31] Moreover, perhaps it is time for an appellate court to consider whether the changes to the rules of practice and decisions of various courts dictate a reconsideration of this issue.

[32] Justice Houlden’s dissent in Perry contains a helpful historical perspective:

“37. At common law, an injured party had no cause of action against an insurer for damages awarded to him against an insured. The right of the insured to be indemnified by his insurer was personal to the insured, and there was no privity between the injured person and the insurer: MacGillivray & Parkington on Insurance Law, 6th ed. (1975), pp. 934-5, paras. 2246-8.

38. In 1924, a section was added to the Ontario Insurance Act to remedy this situation. Section 80 of the Ontario Insurance Act, 1924 (Ont.), c. 50, provided:

39. In any case in which a person insured against liability for injury or damage to persons or property of others has failed to satisfy a judgment obtained by a claimant for such injury or damage and an execution against the insured in respect thereof is returned unsatisfied, such execution creditor shall have a right of action against the insurer to recover an amount not exceeding the face amount of the policy or the amount of the judgment in the same manner and subject to the same equities as the insured would have if the said judgment had been satisfied.

[33] That provision became section 109(1) and ultimately the present section 132(1).

[34] Dealing with the facts in the case before the court, Justice Houlden noted:

42. The issue is: Did Kopinak incur a liability for damage to the property of the plaintiffs within the meaning of s. 109(1) when he failed to register the second mortgage for them against the property in Waterloo?

43 The plaintiffs suffered a substantial pecuniary loss as a result of Kopinak's negligence. In support of his contention that "property" in s. 109(1) includes such a loss, Mr. Reisler, who argued this portion of the appeal, relied on the definition of property in s. 1, para. 54 of the Insurance Act, which is to this effect:

54. "property" includes profits, earnings and other pecuniary interests, and expenditure for rents, interest, taxes and other outgoings and charges and in respect of inability to occupy the insured premises, but only to the extent of express provision in the contract;

This definition was added to the Act by the Insurance Act, 1934 (Ont.), c. 22, s. 2. If the definition of "property" applies to "property" in s. 109(1), then the damage sustained by the plaintiffs comes within the section, since s. 1, para. 54 states that "property" includes "other pecuniary interests".

[35] Houlden J. also addressed what I regard as an important and continuing factor in seeking the most just and equitable approach to be taken in this case:

54. In Ontario, the Law Society has taken an active role with respect to professional liability insurance. It has entered into a policy with the defendant insurers which provides coverage for all lawyers practising in Ontario. The prime purpose of obtaining this coverage was, I believe, to protect members of the public who suffer damage by acts or omissions of members of the society in the performance of their professional duties. If s. 109(1) does not extend to solicitors' liability insurance, then part of that protection is, of course, lost.

"Property" has no fixed legal meaning. As Crossley Vaines' Personal Property, 5th ed. (1973), points out at p. 3:

"Property" is a word of different meanings. ….

In English law, therefore, "property" comprehends tangibles and intangibles, movables and immovables; it means a tangible thing (land or a chattel) itself, or rights in respect of that thing, or rights, such as a debt, in relation to which no tangible thing exists.

"…. If damage to property in s. 109(1) is restricted to damage to physical property, then a claim against an insurer pursuant to a solicitor's professional liability insurance policy would not be covered. If the draftsman uses an abstract word, such as "property", without defining it, I believe that the court should give the word the meaning which best carries out the purpose and intent of the statute: s. 10 of the Interpretation Act, R.S.O. 1980, c. 219. Section 109(1), as I have pointed out, was intended to overcome the defect in the common law which prevented an injured party from taking action directly against an insurer for damage caused by an insured. The intention of the Legislature is, I believe, best achieved by giving a wide interpretation to the word "property".

[36] With respect to the majority in Perry, I too believe, the intention of the Legislature is best achieved either by giving a wide interpretation to the word "property" or by finding another route that will permit a more fair result to be achieved.

V. Lifting a Stay to Pursue a Liability Insurer

[37] The Third Parties submit:

“The proper approach is that articulated in Re Adler, 2008 CanLII 47017 (ONSC).which is directly on point, and which properly sets out the development of the law in this province. In that case, the Registrar in Bankruptcy considered a motion to lift stays in two actions so that the moving party could pursue a solicitor's liability insurer:

Perry stands for the proposition that s. 132 of the Act cannot be used by a victim to claim directly against her tortfeasor’s insurer if she has not suffered injury or damage to property, and that, accordingly, the section has no application to policies of insurance for professional liability, such as the LPIC policy for Ontario lawyers.”

[38] With respect to an allegation that unfairness could result from such a finding, my predecessor, Registrar Nettie noted that:

7. The Court of Appeal went on to exhort the Law Society and the Provincial Parliament to take action to remediate this unfairness. It would appear that for nearly a quarter of a century, nothing has been done by the Legislative Assembly, and Perry remains the settled law of our Province. So found Fedak J., and I, regretfully, concur.

[39] In applying the judgment in Perry to the question of whether the stay should be lifted, the Registrar considered the argument advanced in Re Miller [2001] O.J. No. 3244that the availability of professional liability insurance could be a compelling reason to lift the stay. The Registrar found, however, that the Court in Miller had not had the benefit of submissions on the Court of Appeal's judgment in Perry, and that in the face of Perry, there was no sound reason to lift the stay to pursue a professional liability insurer:

“In such a case, is there any sound policy reason to lift the stay? I find not. The only reason for lifting the stay in such cases, as in motor vehicle accidents and slip and fall claims, is to permit the tort victim to get at the insurance funds. In Ontario, this is not possible when a tort victim is trying to access a professional liability policy. Therefore, what possible reason could there be to lift the stay based on there being such a policy? In due course, the Bankrupt will either receive his discharge, and be released from the negligence claim, or the Trustee will be discharged, without the Bankrupt being discharged, and Westpark may pursue its claims at that point. However, even then, Perry will make such a pursuit a hollow and pointless exercise.”

[40] In the present case the insuring agreement requires the insurer to pay on the bankrupt's behalf, all amounts it is "legally obligated" to pay with respect to a claim for professional negligence. Under the BIA upon filing an assignment, a bankrupt "ceases to have any capacity to dispose of or otherwise deal with" its property, which immediately passes to and vests in the trustee:

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.

[41] It is argued that not only is a bankrupt debtor not "legally obligated" to pay damages to a creditor or claimant, it is prohibited from doing so by the BIA so that “the insuring agreement can never be triggered.”

[42] An assignment in bankruptcy takes precedence over "all judicial or other attachments, ... [and all] executions or other process against the property of the bankrupt":

70. (1) Every bankruptcy order and every assignment made under this Act takes precedence over all judicial or other attachments, garnishments, certificates having the effect of judgments, judgments, certificates of judgment, legal hypothecs of judgment creditors, executions or other process against the property of a bankrupt, except those that have been completely executed by payment to the creditor or the creditor’s representative, and except the rights of a secured creditor.

[43] However this does not end the matter, nor the actual decision of Registrar Nettie. The portion of the decision not addressed in the written argument before me, I believe provides guidance to a method of recovery that may well be available in this case.

VI. The Actual Result in Adler

[44] Registrar Nettie’s decision in re Adler can be found at [2008] I.L.R. I-4740; 2008 CanLII 47017 (ON SC), 47 C.B.R. (5th) 77 and 2008 CarswellOnt 5478. After addressing issues in a 2005 action largely unrelated to the matter before me, he dealt with a 2006 action relating to an insured claim. The following headnote extract summarizes his determination in that case:

…Westpark alleged it was in either or both of a solicitor-and-client relationship or a fiduciary relationship with the bankrupt barrister and solicitor. Westpark alleged it paid over to him $1.5 million which the bankrupt disbursed inappropriately.

HELD: ….Stay of 06 action lifted to permit the further amendment of the statement of claim therein to remove any claim against the bankrupt for damages and to include a claim for a declaration that he was a trustee of the LPIC policy for the benefit of Westpark…. As for the 06 action, the court was not convinced that s. 69.3 would have applied to it, had it been amended more carefully. The trustee was to forthwith assign to Westpark all the bankrupt's rights under the LPIC policy, and notice of this order was to be given to all creditors. Since it is quite foreseeable that LPIC might deny the claim to be advanced by Westpark on behalf of the bankrupt, it was foreseeable that Westpark might need to commence an action, similar to the 05 Action, to liquidate its claim, or to litigate the denial of the policy claim. Such an action would necessarily be against the bankrupt, and it was appropriate to lift the s. 69.3 stay for that purpose. As the court had declined to lift the stay in the 05 Action, the two results combined would serve to place Westpark in the position it expected when dealing with a solicitor: if the solicitor was negligent, there would be a claim on LPIC, and the opportunity to litigate that claim if necessary.

[45] Registrar Nettie lays out a plan of action to allow the claim against the insurer to be brought before the court in these extracts from the latter parts of his reasons:

27 …. As pleaded, the 06 Action is stayed, as it does claim money damages against the Bankrupt, which claim is a claim provable in bankruptcy. I find it appropriate to lift the stay, to permit Westpark to further amend the Statement of Claim, in full compliance with the RCP, [Rules of Civil Procedure] to remove any claims for damages on account of a claim provable in bankruptcy, and to add a prayer for relief of a declaration that the Bankrupt is a trustee of the policy. I further find it equitable to lift the stay in the 06 Action, after said amendment. Although a remedy against the Bankrupt's property will still be being sought, by way of a declaration that his interest in the LPIC policy is that of a trustee, thereby triggering s. 69.3 BIA, the Trustee has evinced no interest in the property, and the outcome of that declaration, if obtained, will have little if any, impact on the Bankrupt. Morally, he should support every reasonable effort by Westpark to properly obtain any compensation to which it may be entitled.

28 Arguably, the seeking of a determination of the Bankrupt's status under the policy of insurance ought to be determined in the Bankruptcy Court, by way of a property proof of claim by Westpark, and litigation of the denial or allowance of that claim by the Trustee. The ordinary civil Court has jurisdiction as framed, and the only interested parties (the Trustee apparently not opposing the s. 38 BIA motion) have already joined battle in the civil Courts.

29 Finally, Westpark sought an Order under s. 38 BIA that it have the right to exercise the Bankrupt's rights under the LPIC insurance policy to make a claim on the policy, and to require a defence by LPIC to any action brought against the Bankrupt for damages covered by the policy.

30 I am satisfied, and so find, that this is the proper subject matter of a s. 38 BIA Order. Section 38 BIA provides that where a creditor requests a trustee to take an action for the general benefit of the creditors, and the trustee refuses, the Court may order that the trustee assign to that creditor the right to take said action in its own name, and expense, on notice to the other creditors, and on such terms and conditions as the Court imposes.

31 Westpark has asked the Trustee to make a claim, in the Bankrupt's stead, on the LPIC policy with respect to Westpark's allegation of damages flowing from alleged negligent acts of the Bankrupt. The Trustee declines. I find that it is in the interest of the creditors generally for Westpark to be able to advance its claim on LPIC, as any monies recovered by Westpark under the LPIC policy will reduce its claims as an ordinary unsecured creditor in the Estate, thereby necessarily benefiting the other creditors.

32 I am not, however, satisfied that the usual conditions of allowing any other creditors to join into such a claim, and any proceedings which might flow from litigation of a denial of the claim, is appropriate. Westpark should not have to share any insurance proceeds with creditors who never bargained in their dealings with the Bankrupt to have insurance available for their claims. Thus, I find it appropriate to order that while the Trustee is to forthwith assign to Westpark all of the Bankrupt's rights under the LPIC policy, and that notice of this Order is to be given to all creditors, no other creditors may join into the claim, or any litigation flowing therefrom. The claim is to be prosecuted at Westpark's sole expense, and for its sole benefit, subject only to further Order of this Court.

33 Since it is quite foreseeable that LPIC may deny the claim to be advanced by Westpark on behalf of the Bankrupt, it is foreseeable that Westpark may need to commence an action, similar to the 05 Action, to liquidate its claim, or to litigate the denial of the policy claim. Such an action would necessarily be against the Bankrupt, and I find it appropriate to lift the s. 69.3 BIA stay for that purpose. As I have declined to lift the stay in the 05 Action, the two results combined will serve to place Westpark in the position it expected when dealing with a solicitor: if the solicitor was negligent, there would be a claim on LPIC, and the opportunity to litigate that claim if necessary. …[my emphasis throughout]

[46] This path seems to me to be reasonable and in keeping with the expectation of the parties prior to the bankruptcy occurring in this case. It also is consistent with the approach taken in other provinces in their assessment of the appropriate public policy to apply in such cases.

VII. Public Policy

[47] Different insurers may take different approaches to their responsibilities (if any) to persons who deal with their insureds. The present form of the insurance policy provided to Ontario’s licenced lawyers provides that the insurer will pay "on behalf of the insured all sums…"

[48] Less than two months after the release of the Ontario Court of Appeal’s reasons in Perry, a British Columbia court addressed this area as well. In Re Major, supra, Justice Wood considered the approach to be taken to professional liability insurance which is compulsory for those practicing the profession. He held in such circumstances the court should endeavour to find a path that will provide access to the mandated protection to those retaining the professional’s services.

[49] In particular Justice Wood considered the continuing contractual obligations in such cases:

19 This agreement obligates the insurer to pay, on the insured's behalf, any claim which he may become legally liable to pay. It thus secures a benefit for third persons, such as the applicants in this case, for whom the insured performs professional services in his capacity as both a lawyer and a member of the Law Society of British Columbia.

20 A similar contract of insurance was in effect in Employer's Liability Assur. Corp. v. Lefaivre, 1929 CanLII 59 (SCC), [1930] S.C.R. 1. In that case the Supreme Court of Canada addressed the question of who was entitled to the proceeds of a policy of insurance taken out by an employer for the benefit of employees who were injured on the job, when that employer had made an assignment in bankruptcy after an employee was injured. The employee obtained judgment against the trustee who, in turn, brought action against the insurer, who had refused to pay anyone for reasons that do not concern the issues in this case.

22 The trustee's action against the insurer succeeded at trial and was upheld on appeal. In the Supreme Court of Canada, where he also succeeded, the trustee argued that the proceeds of the policy should be paid to the benefit of the bankrupt's estate. The court disagreed. Speaking for the majority, Rinfret J., as he then was, said at pp. 700-701 (translation):

The injured Levesque was not paid. As the policy in question is one of guaranty, we believe that the intention of the contract is that the amount of the insurance should be for the benefit of the victim of the accident. We do not share the fear of the company that it may be forced to pay a second time. We believe that the right to sue, given to the employee in the case we have discussed, creates only an alternative obligation and that the company is freed from it by doing one of the two things which were the object to that contract (Civil Code, art. 1093). But the interests of justice and the spirit of the agreement in question demand that the amount of the insurance due be paid to the victim of the accident. The two parties have recognized this.

[50] Justice Wood follows the direction of the Supreme Court and concludes:

24 To permit the estate of the bankrupt to receive the proceeds of the policy of insurance in this case would result in an injustice to the applicants, for whose benefit one would have expected that the policy was intended. The other creditors of the estate would gain a windfall from the misfortune of the applicants as a result of a policy of insurance from which no one ever intended them to benefit.

25 Fortunately, such an undesirable result is avoided by the express wording of the insuring agreement in this case. I conclude that, as in the Employer's Liability case, supra, this policy is worded in such a way as to evidence its intention that the proceeds of the insurance should be for the benefit of those who suffer a loss or damage as a result of the culpable acts or omissions of the insured. That being the case, I am bound to get effect to the conclusion of the court in the Employer's Liability case. To paraphrase Rinfret J., the interests of justice and the spirit of the agreement in question demand that the applicants have the declaration which they seek. [my emphasis throughout]

[51] The guidance of the Supreme Court in this regard does not appear to have been placed before the Ontario Court in Perry.

[52] In this regard I have also considered the reasons of Justice Rowe of the Newfoundland and Labrador Court of Appeal in Genge v. Parrill,2007 NLCA 77; [2008] I.L.R. I-4665; 2007 CarswellNfld 383; 38 C.B.R. (5th) 224 (Leave To Appeal To SCC refused, 2008 CarswellNfld 133). There the respondents sought to continue their action for damages for injuries sustained in a motor vehicle accident against the uninsured appellants, so that they could recover pursuant to the Judgment Recovery (Nfld.) Act. They claimed that the scheme was, in effect, a form of uninsured driver liability insurance. The appellants had made an assignment into bankruptcy following a trial on the issue of liability and following the receipt of the claim in respect of quantum of damages. The issue was whether the province's former scheme for compensating victims of uninsured motorists under that act came within the meaning of "liability insurance policy" in s. 145 of the BIA.

[53] While addressing a motor vehicle related claim, the judgment is nevertheless useful here by virtue of the Court’s holding that the discharge from bankruptcy of the appellants would not prevent the respondents from continuing their action. Although the bankrupt appellants had been released from paying the debt, the Act did not extinguish the underlying legal obligation, which survived for the purpose of the insurance policy.

[54] Those reasons include in an appendix, the otherwise unreported decision of Green, C.J.T.D. at first instance wherein he observed:

In any event, while it may not be strictly necessary, I believe it would be appropriate to order, pursuant to Section 97 of the Judicature Act and the inherent power of the Court to control its own process to prevent an abuse of process, that the plaintiffs may not proceed to execute on any judgment as to quantum that may be obtained as against the defendants but will be limited to making a claim under the Judgment Recovery (Nfld.) Ltd. Act. …. If this issue had arisen before the defendants' discharge, the plaintiffs would have had a strong case to lift any statutory stay and proceed against the defendants with a view to accessing the Judgment Recovery fund on the basis of cases like Re Major, Eurasia Auto Limited, and Re Duvall. In such circumstances there would be no question that Judgment Recovery would nevertheless not be able to recoup its losses. Likewise, if the plaintiff had obtained judgment, made a claim to Judgment Recovery, and received payment before the defendants' assignment into bankruptcy, and the defendants thereafter made an assignment, Judgment Recovery's right to recovery would also have been frustrated. It should not be placed in a better position simply because the issue had arisen at a different time. [my emphasis]

[55] Rowe J.A. upheld the lower court decision and discussed the appropriate approach to such claims with reference to a decision of the Nova Scotia Court of Appeal in a non-motor vehicle situation [my emphasis added]:

“13 I would add only that the Nova Scotia Court of Appeal's decision in Buchanan et al. v. Superline Fuels Inc., 2007 NSCA 68, 255 N.S.R. (2d) 286, leave to appeal to S.C.C. refused, [2007] S.C.C.A. No. 410 is further authority for the Applications Judge's interpretation of s. 145 of the Bankruptcy and Insolvency Act. There the defendant Buchanan (who had installed a leaky oil tank) had made an assignment in bankruptcy and been discharged after the plaintiff had brought action against Buchanan and his third party liability insurer. The Nova Scotia Court of Appeal held the discharge did not prevent the plaintiff from continuing the action. Oland J.A., for the Court, stated at para. 58:

... although s. 178(2) [of the Bankruptcy and Insolvency Act] releases the bankrupt from claims provable in bankruptcy, it does not extinguish the debts that form the basis for such claims. In the appeal before us, this means that s. 178(2) releases Buchanan from having to satisfy the debt, but it does not extinguish the underlying legal obligation. ... [T]hat underlying obligation survives for the purpose of the insurance policy ..., whether the extent of the obligation is crystallized by settlement or judicial determination before or after the order for discharge issues.

I agree with this reasoning.”

[56] As do I. The highlighted comment by Justice Oland I believe points to a method of avoiding the long standing barrier to recovery erected by the majority decision in Perry.

[57] Here, I note that to date that the bankrupt’s insurer chose to take no position on this motion. Rather the third parties’ insurer seeks to avoid liability but raising a potential defence not yet raised by the bankrupt’s insurer.

[58] In my view in such circumstances, at this stage in the litigation, it is preferable to grant leave to proceed rather than bring the plaintiff’s possibility of recovery to an abrupt conclusion.

[59] My opinion in this regard is supported by the view Lord Denning M.R., in Post Office v. Norwich Union Fire Ins. Soc., [1967] 2 Q.B. 363, said at p. 373:

In the days before the Act of 1930, when an injured person got judgment against a wrongdoer who was insured, and the wrongdoer then went bankrupt, the injured person had no direct claim against the insurance moneys. He could only prove in the bankruptcy. The insurance moneys went into the pool for the benefit of the general body of creditors:… That was so obviously unjust that Parliament intervened. In the Act of 1930 the injured person was given a right against the insurance company. Section 1 says that: "Where under any contract of insurance a person . . . is insured against liabilities to third parties which he may incur," then in the event of the insured becoming bankrupt if he is an individual, or, in the case of the insured being a company, in the event of a winding-up.

"if, either before or after that event, any such liability as aforesaid is incurred by the insured, his rights against the insurer under the contract in respect of the liability shall, notwithstanding anything in any Act or rule of law to the contrary, be transferred to and vest in the third party to whom the liability was so incurred."

[60] In coming to what might at first blush appear to be coming to a conclusion contrary to the Court of Appeal’s decision at a level higher than Registrar Nettie and I in the “pecking order”, I am encouraged by a decision reached by an Ontario Superior Court justice exactly one month before this matter was heard by me.

VIII. Chartis: a new course

[61] That case, decided by T.R. Lederer J., was Ernst & Young Inc. v. Chartis Insurance Co. of Canada ,2012 ONSC 5020; [2012] I.L.R. I-5341; 81 E.T.R. (3d) 209; 2012 CarswellOnt 11614; 14 C.C.L.I. (5th) 270. In that case, Ernst and Young having been authorized by an order made coincidentally by Justice Houlden, sought to look to a policy of insurance purchased by Central Guaranty Trust, which was insolvent.

[62] Perry was again relied upon before Justice Lederer in an insolvency situation involving the Winding-up Act and an insured claim. He undertakes an intense analysis in search of a way to respect Perry but come to a different ultimate result.

[63] Counsel for Chartis asserted in that case that the ability of a third party, without privity of contract with the insurer, to sue relying on a policy of insurance is constrained by s. 132(1) of the Insurance Act, I rely upon his Honour’s guidance throughout his reasons but specifically note a variety of observations and conclusions in the following extracts [my emphasis throughout]:

33 It is in these circumstances that counsel for Chartis submits that Ernst & Young Inc. has no standing to bring this action, which is in furtherance of collecting whatever may be owed under the policy. Without going further, one has to wonder how this could be seen as reasonable or appropriate. The holders of the MPA's, the true beneficiaries under the trusts, and the automobile manufacturers who had, by agreement and court order, stepped in to take over responsibility for at least some of the agreements, would be left without the possibility of recourse to any insurance that was held by and could have benefited Central Guaranty Trust. The order of Mr. Justice Houlden would be largely meaningless in that there would have been little purpose in the receiver proceeding and none in suggesting that, if successful, it could look to the insurer to make good on the judgment. There would be no reason for the insurer to have defended the Alberta action. It could have stood by and waited, in any subsequent action relying on insurance, to argue that Ernst & Young Inc. was without standing.

39 There is a feature which distinguishes Perry from the case to be decided. The concern in Perry was that it would have been wrong to allow the claimants (those seeking recovery from the insurance company) to recover against the insurer without any procedural protections or rights being afforded to the insurer (see: Perry v. General Security Insurance Co. of Canada, at para. 20, per MacKinnon A.C.J.O.). In that case, the solicitor failed to notify his insurer. It was counsel to the clients who advised the insurer of the problem and informed it as the matter progressed. The insurer advised counsel to the clients that it would be unable to intervene without the solicitor reporting the claim in accordance with the policy of insurance. This had not happened by the time default judgment was awarded. Some months later, the solicitor agreed to provide information to the insurer, but did not do so. In this case, it could hardly be said that Chartis was denied reasonable protections. To the contrary, the order of Mr. Justice Houlden allowed that it could, and it did, take over the defence of Central Guaranty Trust, its insured, in the Alberta action. As I have already noted, it is being alleged that Chartis steered this defence to its own interest when the counsel it retained to defend its insured directed that defence to the issue of coverage rather than the substance of the breaches of trust that were said to have occurred.

40 Nonetheless, there is nothing uncertain or ambiguous about the interpretation the Court of Appeal has placed on the definition of "property", as found in the Insurance Act and as utilized in s. 132(1) of that legislation. In the circumstances, I am required to abide by its findings. If there is to be a change, it will have to come from the Court of Appeal. As it is, s. 132(1) of the Insurance Act does not provide Ernst & Young Inc. with the standing necessary to bring this action.

45 This leaves open the question of whether s. 132(1) of the Insurance Act is the only means by which Ernst & Young Inc. can acquire the standing necessary to bring this action. On this, the parties sharply disagree.

[64] Justice Lederer outlines the arguments of both sides on that disagreement in detail. Ultimately he adopts the submissions of the claimant to come to a finding of status to pursue the action. Given the weight of the historical resistance to accepting this position I set out below a large portion of his reasons on this issue:

51. The difficulty with the position taken by Chartis is that it would create a circumstance where those representing the purchasers of the MPA's, the ultimate beneficiaries of any insurance that might be available, would be unable to proceed to attempt to realize on the judgment that has been obtained. In this way, they, through Ernst & Young Inc., would be prejudiced.

52. Counsel for Ernst & Young Inc. takes a decidedly different approach. In his submission, there is another route by which his client can be seen to have the standing necessary to bring this action. In short, counsel says that the ability to sue the insurer is a chose in action and that, as such, it can be assigned. The effect of the order of Mr. Justice Houlden was to assign the right to sue the insurer of Central Guaranty Trust to Ernst & Young Inc.

53. A "chose in action" is described in Halsbury's Laws of England, 4th Edition, Volume 6, Paragraph 1, as follows:

The expression 'chose in action' or 'thing in action' in the literal sense means a thing recoverable by action, as contrasted with a chose in possession which is a thing of which a person may have not only ownership but also actual physical possession. The meaning of the expression 'chose in action' has varied from time to time, but is now used to describe all personal rights of property which can only be claimed or enforced by action and not by taking physical possession. It is used in respect of both corporeal and incorporeal personal property which is not in possession.

(quoted in: Gosse v. Juany Inc. 1995 CanLII 9892 (NL CA), 1995 CarswellNfld 308, 134 Nfld. & P.E.I.R. 15, at para. 30)

54. The right to receive an indemnity under an insurance contract is a "chose in action" and, as such, is capable of being assigned. McGillivray and Parkington on Insurance Law, 11th Edition, para. 20-005, at p. 560, states:

... the assured may wish merely to transfer the right to recover under the policy. This is a chose in action and can be effectively assigned at common law provided that the requirements of s. 136 of the Law of Property Act 1925 are fulfilled.

55. This was given effect in 1124980 Ontario Inc. v. Liberty Mutual Insurance Co. 2003 CarswellOnt 1474; 2003 CanLII 45266 (ON SC), 33 B.L.R. (3d) 206. In that case, employees and retirees of Inco Ltd. were to receive certain benefits, including payment for prescription drugs. Inco Ltd. financed the plan itself, but it was administered by the respondent insurance company. The applicant owned and operated a pharmacy. The applicant refused to enter into a letter of understanding with Inco Ltd. to limit its dispensing fee charged under the Inco Ltd. benefit plan. In response, Inco Ltd. instructed the respondent to refuse to recognize assignments of benefits made by individuals covered under the plan in favour of the applicant. Inco Ltd. acknowledged the obligation to pay the cost of prescriptions and dispensing fees the applicant charged to those entitled to benefits, but it refused to allow the right of assignment to be exercised in favour of the applicant to enable direct payment to the pharmacy. In part, the question was whether the assignments were valid. In concluding that they were, Madam Justice Epstein observed:

... Where an insurer receives a notice of an assignment of proceeds payable under an insurance policy, the insurer is obliged to pay the proceeds to the assignee and, although this may be pursuant to the contract with the assignor, the insurer pays out the assignor at its peril.

This right to receive an indemnity under an insurance contract is a chose in action and is capable of being assigned.

(1124980 Ontario Inc. v. Liberty Mutual Insurance Co., supra, at paras. 45 and 46)

56. Unlike 1124980 Ontario Inc. v. Liberty Mutual Insurance Co., in the case I am asked to decide, there is no assignment from Central Guaranty Trust to Ernst & Young Inc. There is, however, the order of Mr. Justice Houlden. It specified that Ernst & Young Inc. can continue the action and, if successful, look to any applicable policy of insurance to satisfy the judgment. By his order, Mr. Justice Houlden reserved any proceeds from insurance to satisfy any judgment or settlement of the action, free of any claims by the Provisional Liquidator of Central Guaranty Trust. The order also made clear that Ernst & Young Inc., if successful in the action, was to have no right to issue execution against the estate of Central Guaranty Trust. In this way, the proceeds from any applicable insurance policy would be available to satisfy any judgment made in favour of Ernst & Young Inc. Other creditors would not be prejudiced by the continuation of the action. The estate of Central Guaranty Trust would be available in the liquidation. This is consistent with the approach taken in Algoma Steel Corp. v. Royal Bank of Canada. Nonetheless, counsel for Chartis submitted that Mr. Justice Houlden did not have the jurisdiction to make the order.

57. This submission is based on the premise that the jurisdiction of the judge was limited by s. 132(1) of the Insurance Act. "The Superior Court of Ontario has all the jurisdiction, power and authority historically exercised by courts of common law and equity in England and Ontario" (see: Courts of Justice Act R.S.O. 1990 c. C. 43, s. 11 (2)). That jurisdiction may be limited by statute, but in order to do so, the Legislature must divest the Court of its general jurisdiction in unequivocal terms:

The court's jurisdiction, however, is not fixed. It has long been settled that the jurisdiction of a superior court may be limited by statute. In Board v. Board (1919), 1919 CanLII 546 (UK JCPC), 48 D.L.R. 13 (Alberta P.C.), at p. 18, Viscount Haldane in reviewing cases dating as far back as 1774, said that 'nothing shall be intended to be out of the jurisdiction of a superior court, but that which specially appears to be so.' In Michie v. Toronto (City) (1967), 1967 CanLII 202 (ON SC), [1968] 1 O.R. 266 (Ont. H.C.) at p. 268, Stark J. wrote that '... the Supreme Court of Ontario has broad universal jurisdiction over all matters of substantive law unless the Legislature divests from this universal jurisdiction by legislation in unequivocal terms.' Brooke J.A. speaking for this court in 80 Wellesley St. East Ltd. v. Fundy Bay Builders Ltd., 1972 CanLII 535 (ON CA), [1972] 2 O.R. 280 (Ont. C.A.) stated at page 282, 'As a superior court of general jurisdiction, the Supreme Court of Ontario has all the powers that are necessary to do justice between the parties. Except where provided specially to the contrary, the court's jurisdiction is unlimited and unrestricted in substantive law in civil matters.'

(Beach v. Moffat 2005 CanLII 14309 (ON CA), 2005 CarswellOnt 1693, 75 O.R. (3d) 383, at para. 8)

58 The same point is made in Sullivan on Construction of Statutes, as follows:

Although legislation is paramount, it is presumed that legislatures respect the common law. It is also presumed that legislatures do not intend to interfere with common law rights, to oust the jurisdiction of common law courts, or generally to change the policy of the common law.

Those presumptions permit the courts to insist on precise and explicit direction from the legislature before accepting any change. The common law is thus shielded from inadvertent legislative encroachment.

(Ruth Sullivan, Sullivan on the Construction of Statutes, 5th ed. (Markham: LexisNexis, 2008) at 431-432)

59. There is nothing in s. 132(1) of the Insurance Act which would serve to limit the common law authority of the court to order that a third-party may look to the proceeds under a policy of insurance held to the benefit of the person or company against whom it has obtained a judgment which has not otherwise been satisfied. Following Perry, the limitation that an action commenced under s. 132(1) can only deal with liability for injury or damage to person or property may restrict the proceedings that rely on that section, but does not serve to limit what can be done under the auspices of the common law or the general jurisdiction of the court.

[65] Justice Lederer’s practical and persuasive analysis concludes with a much more recent Court of Appeal decision:

60. In Thibodeau v. Thibodeau 2011 ONCA 110, 2011 CarswellOnt 686, 104 O.R. (3d) 161, the Court of Appeal considered whether the motions judge erred in granting priority to the claim of a wife for equalization payments, following the breakup of a marriage, over the claims of the unsecured creditors of her bankrupt husband. The judge had ordered that the husband was to make the equalization payment using his share of the proceeds from the sale of the matrimonial home. The court said:

I accept at the outset that an agreement between spouses transferring or agreeing to transfer property from one to another - in a fashion analogous to an agreement of purchase and sale - transfers an equitable interest in the property to the transferee spouse. There is no reason why a court order for the transfer of property in the same way should not have the same effect from the date the order is made. The upshot of such an agreement or order is to impose a trust or trust-like condition on the property rendering the payee spouse's claim enforceable against the payor's trustee in bankruptcy.

(Thibodeau v.Thibodeau, supra, at para. 26)

61. This explains that, where the parties are able to effect a change like transferring property or assigning a chose in action, the court has the jurisdiction to make an order that has the same result. Looked at from this perspective, s. 132(1) of the Insurance Act does not limit the jurisdiction of the court so much as it broadens it to allow for third parties, without privity of contract, to collect from the insurers of those they have judgments against if, for some reason, an assignment is unavailable.

62. This situation is quite different. The Insurance Act, s. 132(1) does not foreclose a third party seeking to satisfy a judgment, relying on an assignment or corresponding order of the court, from proceeding against the insurer of the party against whom it has obtained judgment. The Winding-up Act, s. 131 makes clear that the authority provided under that legislation is not to be taken to detract from any other authority the court may have.

63. Based on the analysis I have reviewed, I would find that Ernst & Young Inc. has standing to commence this action naming as the defendant, Chartis.

IX. Equitable Principles

[66] In 2005 the Law Reform Commission of Hong Kong released its report on Privity of Contract. This report can be found on the Internet at: http://www.hkreform.gov.hk.

[67] The Commission considered the approach of Canadian courts dealing with equitable principles relating to issues concerning privity of contract. The direction from the Supreme Court of Canada provides support for a decision in the matter before me that might at first glance appear contrary to binding precedents. The Law Reform Commission observed [my emphasis throughout] :

“Canada

Two recent judgments of the Supreme Court of Canada have

modified the law relating to privity: London Drugs Ltd v Kuehne & Nagel International Ltd and Fraser River Pile & Dredge Ltd v Can-Dive Services Ltd. In the Fraser River case, a third party beneficiary sought to rely on a contractual provision so as to defend against an action brought by one of contractual parties (the insurer). The court held that the third party beneficiary was entitled to rely on the waiver of subrogation clause whereby the insurer expressly waived any right of subrogation against the third party beneficiary. Iacobucci J emphasised that in appropriate circumstances the courts should not abdicate their judicial duty to decide on incremental changes to the common law which were necessary to address emerging needs and values in society.

[68] The footnote to this sentence reads:

“[2000] 1 Lloyds Rep 199, at 208 (para 44). "[T]he Courts may…,bound by both common sense and commercial reality, … determine whether the doctrine of privity… should be relaxed in the given circumstances" (See The Canadian Encyclopedic Digest: Ontario, 3rd Edition, at Title 32 Contracts, para 58.1).

[69] The annotation, (citing S. Waddams, The Law of Contracts, 4th Edition, 1999, Canada Law Book Inc, at 202) sets out the position enunciated by the Supreme Court of Canada as follows:

In the London Drugs Ltd case, employees of a warehouseman sought to rely on the limitation of liability clause in the contract between their employer and the client (the bailor) when the employees were sued by the bailor. The Supreme Court held that the privity rule could be relaxed where the parties to the contract had, expressly or by implication, intended the relevant provision to confer a benefit on the third parties (the employees), and the action taken out by the third parties came within the scope of the agreement between the initial parties. The employees fulfilled these two conditions, and thus could benefit from the limitation clause, despite the privity doctrine. The court recognised a limited exception to the doctrine in the circumstances of the case so as to conform to "commercial reality and justice".[my emphasis]

[70] In my view “commercial reality and justice” dictate that in this case it would be contrary to the available principles of equity to refuse to lift the stay otherwise imposed by the BIA.

[71] I am further encouraged in coming to this conclusion by the analysis of Justice Wood in Major when he considered this further ground to justify allowing such a claim to proceed:

26. I am reinforced in this conclusion by those cases which hold that a third person who is not a party to a contract of indemnity or guaranty, but who has a beneficial interest thereunder as a cestui que trust, can sue in a court of equity to enforce such contract to his benefit. The rule in this regard was stated by Cotton L.J. in Gandy v. Gandy (1885), 30 Ch. D. 57 at 66-67 (C.A.):

Now, of course, as a general rule, a contract cannot be enforced except by a party to the contract; and either of two persons contracting together can sue the other, if the other is guilty of a breach of or does not perform the obligation of that contract. But a third person - a person who is not a party to the contract - cannot do so. That rule, however, is subject to this exception: if the contract, although in form it is with A., is intended to secure a benefit to B., so that B. is entitled to say he has a beneficial right as cestui que trust under that contract; then B. would, in a Court of Equity, be allowed to insist upon and enforce the contract. That, in my opinion, is the way in which the law may be stated.

27. This statement of the law was approved by the Supreme Court of Canada in Prov. Treas. for Man. v. Min. of Fin. for Can.; A.G. Man. v. Min. of Fin. for Can., 1943 CanLII 29 (SCC), [1943] S.C.R. 370, per Hudson J. at p. 378.

28. It follows that the beneficial interest of a third party under a policy of insurance, which can be enforced against an insurer in a court of equity, cannot be affected by the assignment into bankruptcy of the insured who has no proprietary interest in the proceeds of that insurance.

[72] The judge in Major was in a position to make this declaration :

The applicants will have a declaration that they are entitled to the benefit of any moneys which may become payable, as a consequence of the pursuit of their action. No. C821214 against the bankrupt Gerald Alan Major, pursuant to a certain contract of insurance, being policy No. 077-020-477, between the Gestas Corporation as managers for the insurers named therein and the Law Society of British Columbia, as the named insured.

X. [Bankruptcy and Insolvency Act](https://www.canlii.org/en/ca/laws/stat/rsc-1985-c-b-3/latest/rsc-1985-c-b-3.html)

[73] The operative sections read:

69.3(1) Subject to subsections (1.1) and (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor’s property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy.

69.4 A creditor who is affected by the operation of sections 69 to 69.31 or any other person affected by the operation of section 69.31 may apply to the court for a declaration that those sections no longer operate in respect of that creditor or person, and the court may make such a declaration, subject to any qualifications that the court considers proper, if it is satisfied

(a) that the creditor or person is likely to be materially prejudiced by the continued operation of those sections; or

(b) that it is equitable on other grounds to make such a declaration.

[74] I find based on the foregoing analysis that based on the qualifications set out below that it equitable and appropriate to declare that section 69.3 no longer applies to the subject action.

XI. Disposition

[75] I am only asked to grant a lift of the stay otherwise imposed by the BIA. I am satisfied that notwithstanding the decision in Perry, which in my view still ought to be reversed by legislation, the plaintiffs ought to be placed in a position to endeavour to prove their entitlement to the insurance which was purchased by the bankrupt specifically to provide recovery in the event of a proven negligent act.

[76] For the reasons aforesaid, an Order is to go that the stay of proceedings created by the Bankruptcy and Insolvency Act is hereby lifted so that Actions CV-10-403423 and CV-10-403423-00A1 may proceed once the pleadings are amended as outlined passim above.

[77] Applying Rule 2.01 and Rule 1.04, in response to the request for further and other relief, I am granting leave permit the amendment of the Statement of Claim therein ____to include a claim for a declaration that he is a trustee of the chose in action represented by the policy of liability insurance for the benefit of the plaintiff, all to be effected in compliance with the Rules of Civil Procedure, without prejudice to any right to move against the resulting amendment.

[78] Unless good reason is established to the contrary I would anticipate that the rights of the Bankrupt under the insurance policy are to be assigned to the plaintiffs by the Trustee, on notice to the other creditors, and that only the plaintiffs may pursue those rights, including any litigation to enforce those rights.

[79] The plaintiff’s motion to lift the stay imposed by section 68 of the Bankruptcy and Insolvency Act is thus granted.

[80] The Third Parties having brought this motion and their resistance having proved unsuccessful I might normally award partial indemnity costs against them.

[81] However, notwithstanding the view of the full panel of the Court of Appeal in Perry almost 30 years ago that immediate action should be taken by the Law Society or the Legislature, or both, so that the “ present unfairness to innocent clients of insured solicitors can be ended” no amendment has been forthcoming. Thus this is a case where I understand why the third parties could feel justified in relying upon what appears to have been a long standing and generally accepted position regarding the law in this area.

[82] Justice Houlden observed that the prime purpose of obtaining errors and omissions coverage was to protect members of the public who suffer damage from the acts or omissions of professionals. He sought to justify a means of enforcing that coverage in Perry. Although I am at a lower level in our courts, I feel we have waited long enough for correction of this inequitable situation by other institutions. It is my hope that by approaching the problem from a new perspective, utilizing the court’s inherent jurisdiction, it is now possible to properly achieve a realization of Justice Houlden’s desire for making available, meaningful professional negligence insurance coverage in insolvency situations in Ontario.

[83] In all the circumstances I am satisfied that the fairest disposition is to award partial indemnity costs to the plaintiffs against the third parties; but, in the cause of the main action.

Master D. E. Short Registrar in Bankruptcy

DS/ B7

June 28, 2013

Amended July 22, 2013 in paragraph 77 to clarify original reasons.