Douglas et al. v. Stan Fergusson Fuels Ltd. et al.

[Indexed as: Douglas v. Stan Fergusson Fuels Ltd.]

Ontario Reports

Ontario Superior Court of Justice,

Hackland J.

January 6, 2015

124 O.R. (3d) 715 | 2015 ONSC 65

Case Summary

Bankruptcy and insolvency — Actions by bankrupt — Subrogated claim — Motion judge finding that insurer could pursue subrogated claim in name of its insured despite fact that insured was undischarged bankrupt when action was commenced — Defendants granted leave to appeal — Decision raising important issues of insurance and insolvency law which merited appellate review — Decision conflicting with established jurisprudence — Good reason existing to doubt its correctness.

Insurance — Subrogation — Motion judge finding that insurer could pursue subrogated claim in name of its insured despite fact that insured was undischarged bankrupt when action was commenced — Defendants granted leave to appeal — Decision raising important issues of insurance and insolvency law which merited appellate review — Decision conflicting with established jurisprudence — Good reason existing to doubt its correctness. [page716]

The insurer indemnified its insured for repairs and remediation expenses arising from a leaking external oil tank serviced by the defendants and commenced a subrogated action against the defendants. When the action was commenced, the insured was an undischarged bankrupt. The defendants brought a motion for summary judgment dismissing the action on the basis that, as an undischarged bankrupt, the plaintiff/insured lacked the capacity to bring the action. The motion judge dismissed the motion. He was concerned that to find that the subrogated claim failed due to the insured's lack of capacity to sue would be to incorrectly emphasize form over substance. He concluded that the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 did not extinguish or trump the insurer's subrogation rights, which vested at the time the policy was entered into and which remained in place at the date of loss. The defendants brought an application for leave to appeal.

Held, the application should be allowed.

The motion judge's decision raised important issues of insurance and insolvency law which warranted appellate review. The decision conflicted with the established jurisprudence, and its correctness was therefore open to doubt. The law is well settled that on the making of a bankruptcy order, the plaintiff lost his right to deal with the property (including any right of action arising from the oil spill) because such rights vested in the trustee in bankruptcy. A subrogating insurer stands wholly in the shoes of the subrogated insured and is only entitled to assert those rights available to the insured. The application of the bankruptcy legislation would not defeat or trump the insurer's subrogation rights. The insurer was entitled to insist on an assignment of the insured's rights from the trustee so that its subrogation rights could validly be pursued. It failed to do so.

Cases referred to

Ballast plc St Paul Travellers Insurance Co. v. Dargan, [2006] EWHC 3189 (Eng. Ch.); Douglas v. Stan Fergusson Fuels Ltd. (2014), 122 O.R. (3d) 86, [2014] O.J. No. 3741, 2014 ONSC 4709, 17 C.B.R. (6th) 140, [2014] I.L.R. I-5660, 35 C.C.L.I. (5th) 331, 243 A.C.W.S. (3d) 441 (S.C.J.); Freudmann-Cohen v. Tran (2004), 2004 CanLII 34765 (ON CA), 70 O.R. (3d) 667, [2004] O.J. No. 1699, 238 D.L.R. (4th) 428, 186 O.A.C. 9, 9 C.C.L.I. (4th) 1, 47 C.P.C. (5th) 222, [2004] I.L.R. I-4316, 50 M.V.R. (4th) 41, 130 A.C.W.S. (3d) 716 (C.A.); McNamara v. Pagecorp Inc., [1989] O.J. No. 1461, 76 C.B.R. (N.S.) 97, 38 C.P.C. (2d) 117, 17 A.C.W.S. (3d) 256 (C.A.); Watt v. Beallor Beallor Burns Inc., 2004 CanLII 19821 (ON CA), [2004] O.J. No. 2347, 1 C.B.R. (5th) 149, 131 A.C.W.S. (3d) 624 (C.A.), affg 2004 CanLII 18877 (ON SC), [2004] O.J. No. 450, 1 C.B.R. (5th) 141, 128 A.C.W.S. (3d) 683 (S.C.J.)

Statutes referred to

Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 71 [as am.]

Insurance Act, R.S.O. 1990, c. I.8., s. 152(1) [as am.]

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 62.02(4), (a), (b)

APPLICATION for leave to appeal an order dismissing a motion for summary judgment.

Matthew J. Gervin, for plaintiff(s)/respondent.

Amy Pressman, for defendant(s)/appellant(s). [page717]

[1] Endorsement of HACKLAND J.: — The appellants (defendants in this action) seek leave to appeal the order of Abrams J. dated August 13, 2014 by which he refused the appellants' motion seeking an order that the plaintiffs lacked the capacity to bring this action due to their respective bankruptcies and seeking summary judgment dismissing their claim on that basis. The motion judge's reasons are reported at (2014), 122 O.R. (3d) 86, [2014] O.J. No. 3741, 2014 ONSC 4709 (S.C.J.).

[2] This action poses the following question: can an insurer pursue a subrogated claim in the name of its insured when the insured is an undischarged bankrupt when the action is begun? The motion judge was of the opinion that this question could be answered in the affirmative in the circumstances of this case, having regard to the principles underlying the law of subrogation and notwithstanding the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA"), s. 71.

[3] I accept the appellants' submission that this decision raises important issues of insurance and insolvency law which warrant appellate review. I am also persuaded, for the reasons which follow, that the motion judge's decision conflicts with the established jurisprudence and is therefore open to doubt as to its correctness. I therefore grant leave to appeal under both subsections (a) and (b) of rule 62.02(4) [of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194].

[4] The motion judge concisely summarized the material facts, which are not in dispute, as follows [at paras. 44-50]:

There is no dispute between the parties about the following facts, which I find as facts:

(a) This claim arises from a leaking external oil tank situated at the loss location;

(b) The Defendants delivered 622.6 litres of fuel oil to the Plaintiffs external tank on January 9, 2008, pursuant to a service contract. The Defendants had previously inspected the same oil tank, under the same service contract;

(c) The escape of fuel oil was discovered on January 9, 2008;

(d) The Plaintiffs were insured, at the material time, by State Farm under a valid homeowners insurance policy;

(e) The Defendants were notified and responded to the escape of fuel oil prior to State Farm being advised of the event;

(f) The Defendants retained oil remediation specialists to attend at the loss location prior to State Farm being notified of event;

(g) State Farm eventually paid for those initial services incurred by the Defendants at a cost of more than $140,000; [page718]

(h) By correspondence dated March 17, 2008, State Farm put the Defendants on notice of its intention to pursue its subrogate interests with respect to the loss;

(i) State Farm ultimately indemnified the Plaintiffs in full and paid for repairs, remediation, additional living expenses of Mr. Douglas, personal property and related damages totaling more than $800,000;

(j) Pursuant to the terms of the policy, State Farm is subrogated to all rights of recovery of the Plaintiffs as against any third parties;

(k) In or about February of 2007, Ms. Douglas made an assignment in bankruptcy. She was discharged on November 14, 2007 but remained a named insured on the policy that was in good standing at the date of loss.

(l) On or about June 4, 2009, Mr. Douglas made an assignment in bankruptcy. He was an undischarged bankrupt when the action was commenced against the Defendant. He, too, was a named insured on the policy that was in good standing at the date of loss;

(m) In or about October of 2009, the trustee sold the property following its remediation and thus satisfied the creditors; and

(n) The Statement of Claim was issued on January 7, 2010, listing the Douglas as the Plaintiffs.

The Plaintiffs were insured under a policy with State Farm at the date of loss.

The policy was in good standing.

The policy provided for subrogation in circumstances such as those alleged in the State of Claim.

The right of subrogation was a contingent right that vested at the time the policy was entered into.

Both of the Plaintiffs remained named insureds under the policy notwithstanding the issues arising from the breakdown of their relationship, including their respective bankruptcy proceedings.

The Plaintiffs have been fully indemnified under the policy. This action is a fully subrogated claim by State Farm for the recovery of payments made under the policy.

[5] The plaintiffs' claim as pleaded is based on tort, breach of contract and certain alleged statutory breaches. At the time this subrogated action was commenced, the plaintiffs' insurer, State Farm, knew that the plaintiff Art Douglas had filed for bankruptcy some seven months previously and was an undischarged bankrupt. They were also aware that Mrs. Douglas had no insurable interest in the property. State Farm did not seek or obtain an assignment of the trustees' interest in the right of action against the defendants. The subrogated claim was issued [page719] several days before the expiration of the two-year limitation period. The defendants were aware State Farm had paid for the costs of remediating the oil spill.

[6] The motion judge's reasons reflect a concern that a finding that the subrogated claim failed due to the named insured's lack of capacity to sue would be "to incorrectly emphasize form over substance" and would preclude State Farm from passing the loss to the alleged tortfeasors. He stated [at paras. 53 and 56]:

The Defendants, who, having allegedly caused the loss, retained the oil remediation specialists and thereafter handed over the total costs for remediation of the property to the Plaintiffs' insurer, seek to avoid a trial of the action on the merits by asserting that the Bankruptcy and Insolvency Act extinguishes or trumps the subrogation rights of an insurer that is subrogated to recover from a potential tortfeasor. In short, to grant the order requested by the Defendants would be to allow the potential wrong-doer to profit from the fact that the Plaintiffs were insured.

In all of the circumstances, I am not persuaded that the Bankruptcy and Insolvency Act extinguishes or trumps the subrogation rights of State Farm, which vested at the time the policy was entered into and which remained in place at the date of loss. Nor am I persuaded that to permit this claim to proceed would subvert the fundamental tenet of the bankruptcy scheme, as the Defendants contend. The Plaintiffs have been fully indemnified under the policy and the trustee has satisfied the creditors through the sale of the property, which could not have been sold but for the remediation paid for by State Farm. No subversion will result if the claim proceeds. Rather, an inequitable result may prevail in the event that State Farm is prohibited from prosecuting this claim. Why? Because neither the Plaintiffs nor the Trustee, at this juncture, have any motivation or obligation to maintain or preserve the viability of this action to protect State Farm's subrogated claim. Pursuant to the Courts of Justice Act, R.S.O. 1990, c. C.43, ss. 96 and 97, this court has the inherent jurisdiction to grant declaratory relief in circumstances such as these.

[7] The appellants raise two significant arguments, both of which I consider to be correct. Firstly, they submit that the law is well settled that on the making of a bankruptcy order, the defendants immediately lost their right to deal with their property (including any rights of action arising from the oil spill) because such rights vested in the trustee in bankruptcy (s. 71 of the BIA). Simply put, the respondents had no capacity to bring the claim.

[8] Secondly, subrogated claims are derivative in nature. A subrogating insurer (in this case, State Farm) stands wholly in the shoes of the subrogated insureds and is only entitled to assert those rights available to the underlying parties. The jurisprudence establishes that an insurer who steps into the shoes of the insured is in no better position as against a third party than would be the insured. The Ontario Court of Appeal has stated: "The scheme of the Bankruptcy Act is that [page720] all property of the bankrupt owned at the date of bankruptcy and which is acquired by the bankrupt prior to his discharge vests in the trustee. There is no doubt that an undischarged bankrupt cannot bring action to enforce property claims." See McNamara v. Pagecorp Inc., [1989] O.J. No. 1461, 76 C.B.R. (N.S.) 97 (C.A.). To the same effect are two other Ontario decisions, Watt v. Beallor Beallor Burns Inc., 2004 CanLII 18877 (ON SC), [2004] O.J. No. 450, 1 C.B.R. (5th) 141 (S.C.J.), affd 2004 CanLII 19821 (ON CA), [2004] O.J. No. 2347, 1 C.B.R. (5th) 149 (C.A.) and Freudmann-Cohen v. Tran (2004), 2004 CanLII 34765 (ON CA), 70 O.R. (3d) 667, [2004] O.J. No. 1699 (C.A.) at para. 43.

[9] Unlike the motion judge, I do not think the application of the bankruptcy legislation would defeat or trump the subrogation rights which State Farm was undoubtedly entitled to assert in the names of its insured under s. 152(1) of the Insurance Act, R.S.O. 1990, c. I.8. State Farm was entitled to insist on an assignment of the insureds' rights from the trustee so that their subrogation rights could validly be pursued. Unfortunately, they failed to take any steps in this regard before the limitation period expired.

[10] I would add this observation. State Farm could pursue this action if they had acquired a valid basis for doing so apart from the derivative subrogated claim, i.e., if State Farm itself acquired a valid proprietary interest in the cause of action. What was not argued before the motion judges or before this court was any aspect of the law of unjust enrichment or the doctrine of equitable assignment. Accordingly, I will say nothing further on that point. The English jurisprudence, referred to in argument by the appellants, has rejected the position that an insurer asserting a subrogated claim has a proprietary interest in the insured's cause of action. See Re Ballast plc St Paul Travellers Insurance Co. v. Dargan, [2006] EWHC 3189 (Eng Ch.).

[11] As noted, this is a case of some importance, justifying appellate review and I am satisfied that leave to appeal should be granted under rule 62.02(4)(a) and (b) of the Rules of Civil Procedure. Costs are reserved to the panel hearing the appeal.

Application allowed.

End of Document