COURT FILE NO.: 33-1539883/ 33-1539884
DATE: 2019/09/26
ONTARIO
SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY and INSOLVENCY
IN THE MATTER OF THE BANKRUPTCY OF
ROBERT MORRIS JR. MCEWEN AND CAROLINE ELIZABETH MCEWEN, OF THE TOWN OF PERTH, IN THE COUNTY OF LANARK,
IN THE PROVINCE OF ONTARIO
B E T W E E N:
BARBARA LYNN CARROLL BY HER LITIGATION GUARDIAN SHANNON LUKNOWSKY, SHANNON LUKNOWSKY, JEFFREY CARROLL and SHANNON LUKNOWSKY AS EXECUTOR FOR THE ESTATE OF LORNE CARROLL
Plaintiffs
and
ROBERT MCEWEN and CAROLINE MCEWEN
Responding Parties
and
TRADERS GENERAL INSURANCE COMPANY, improperly described in Superior Court of Justice Court File Number CV-17-00073740-0000 as AVIVA CANADA INC.,
Person Affected by an Order obtained on Motion without Notice
BEFORE: Mr. Justice Stanley J. Kershman
HEARD IN OTTAWA: September 21, 2018, with subsequent written submissions having been provided by the parties as late as February 4, 2019.
APPEARANCE: Alan Rachlin, for Traders General Insurance Company – Moving Party
Joseph Obagi, for the Plaintiffs
Robert De Toni for Doyle Salewski Inc., Trustee in Bankruptcy
REASONS FOR DECISION
Introduction
[1] Traders General Insurance Company (“Moving Party” or “Traders”), misnomer, “Aviva Canada Inc.,” seeks the following relief:
an order reversing a decision of Doyle Salewski Inc. to allow a proof of claim filed on behalf of Barbara Lynn Carroll by her litigation guardian, Shannon Luknowsky, Jeffrey Carroll, and Shannon Luknowsky as the executor the estate of Lorne Carroll—the Plaintiffs in the Bankrupt Estates of Robert McEwen and Caroline McEwen (“the Plaintiffs”);
an order setting aside the order of the Honourable Justice Stanley J. Kershman dated December 21, 2016 granting leave to the Plaintiffs to commence proceedings against Traders, improperly named as Aviva, for “bad faith”, pursuant to s. 38 of the Bankruptcy and Insolvency Act (“BIA”); and
an order setting aside the purported assignment of a claim by the Trustee to the Plaintiffs.
Factual Background
[2] On March 28, 2009, Barbara Lynn Carroll, a pedestrian, was injured when she was struck by a motor vehicle operated by Robert McEwen and owned by Caroline McEwen.
[3] The Moving Party, Traders, was the McEwen’s liability insurer. In the pleadings filed with the Court, it was improperly described as Aviva Canada Inc.
[4] On March 25, 2011, the Plaintiffs commenced Action No. 11-50983 in the Superior Court of Justice in Ottawa against the McEwens and against the Plaintiffs’ own insurers, Aviva Canada, and Pilot Insurance Company (“Personal Injury Action”).
[5] On September 15, 2011, the McEwen’s filed for bankruptcy. Doyle Salewski Inc. was appointed as the Trustee in Bankruptcy (“the Trustee”).
[6] On June 18, 2012, the McEwen’s received their automatic absolute discharge from their bankruptcy.
[7] Subsequent to the McEwens’ discharge, the Trustee was discharged.
[8] On October 12, 2012, the Plaintiffs obtained an order to lift the stay of proceedings pursuant to s. 69.4 of the BIA to allow the Personal Injury Action 11-50983 to continue. The order was obtained from Master Roger, as he was then, for the purposes of having the proceeds of any liability insurance policy applied in or towards the satisfaction of the claim in Action 11-50983 (“Order to Lift Stay”).
[9] The Personal Injury Action proceeded to trial in September and October 2015. The jury rendered its verdict on October 30, 2015 following a six-week trial. Post-trial reasons were provided by McLean J. on May 19, 2016. McLean J. found that the McEwens’ personal liability exposure was limited to the amount of $1,000,000—the limit of their insurance policy. This finding was incorporated into a formal judgment (“MacLean J.’s Judgment”), which was endorsed on September 19, 2016. Paragraph 3 of McLean J.’s Judgment reads as follows:
This Court Orders and Adjudges that the Judgment against the Defendants, Robert McEwen and Caroline McEwen, personally, is limited to the limits of their insurance policy with Aviva Insurance Company of Canada in the amount of $1,000,000.
[10] A Notice of Appeal was filed by the Plaintiffs on June 16, 2016. They also filed a proof of claim in the McEwen’s estates on October 11, 2016, which was accepted by the Trustee. The claim was for the amount of the damages award in the Personal Injury Action in excess of the limits of the McEwens’ insurance policy.
[11] After the Plaintiffs’ proof of claim was filed, the Trustee wrote to the Plaintiffs on October 27, 2016 indicating that it would accept the proof of claim as filed. It also advised that it would not proceed to take any action against the McEwen’s insurers regarding any bad faith claims held by the McEwens against Traders arising out of the Personal Injury Action. The Trustee indicated that it would consent to a s. 38 BIA order allowing the Plaintiffs to take the action in their own name.
[12] The appeal of McLean, J.’s Judgement was argued in the Court of Appeal in September 2017, and the Court of Appeal’s decision was reserved. In the interim, the Court of Appeal released a decision in another matter, which resulted in a determination being made to reargue the appeal in the original matter and another matter before a five-judge panel. The argument was heard on May 1, 2018. According to the Plaintiffs, the bankruptcy issue was not argued on the appeal. This was not disputed by the Moving Party. The decision remained on reserve until December 4, 2018 when the Court of Appeal released its judgement: Caroll v. McEwen, 2018 ONCA 902, 143 O.R. (3d) 641.
[13] The Caroll v. McEwen decision sheds light on the settlement negotiations of certain parties involved in the Personal Injury Action leading up to trial in September 2015. In essence, the Court of Appeal notes that the Plaintiffs in the present case accepted a settlement offer that Aviva and Pilot, their own insurers, understood as resolving all claims against them. However, the Plaintiffs then turned around and filed a bad faith claim regarding settlement negotiations against their insurers literally minutes later. They then attempted to enforce the settlement offer exclusive of the bad faith claim. The Court of Appeal agreed with the findings of the judgment in the Personal Injury Action that the Plaintiffs had engaged in trickery, and agreed with the resulting cost award reduction.
[14] In their written submissions subsequent to the September 21, 2018 motion hearing before this Court, the Moving Party argues that the events preceding the Personal Injury Action described in Caroll v. McEwen should be accepted by this Court as similar fact evidence weighing in and shedding light on the merits of the Bad Faith Claim held by the bankrupt estate of the McEwens against Traders.
[15] The Plaintiffs and Trustee deny that the findings in Caroll v. McEwen decision have any impact on the Bad Faith Claim, noting that this is a separate claim arising from a different negotiation involving different parties. The Plaintiffs specifically assert in their supplementary submissions that it was stated by all counsel at the September 21, 2018 hearing before this Court that there was nothing in the appeal of Justice McLean’s Judgement that touched upon the substantive issues underlying this motion.
[16] The record before the Court at that s. 38 motion hearing contained several pieces of evidence supporting the Bad Faith Claim. Notably, there was an affidavit from one of the Plaintiffs’ lawyers, Elizabeth Quigley, dated November 14, 2016 alleging that Traders acted in bad faith leading up to trial in the Personal Injury Action in refusing to settle the personal injury claim within the policy limits. Also submitted to the Court at the hearing was an offer to settle from the Plaintiffs to Traders. This Court found that evidence to be credible and to be a sufficient basis for the Bad Faith Claim.
[17] Without further evidence beyond that on record with respect to the negotiations giving rise to the Bad Faith Claim against Traders, the request by the Moving Party in their supplementary written submissions that those negotiations preceding the Personal Injury Action between the Plaintiffs and its own insurers be given weight with regard to the merits of the present Bad Faith Claim must be dismissed out of hand.
[18] Returning now to the origins of the Plaintiffs’ claim in the McEwens’ bankruptcy: on October 11, 2016, the Plaintiffs filed a proof of claim in the McEwens’ bankruptcy estate in the amount of $624,349.01—the amount awarded in the Personal Injury Action in excess of the McEwens’ insurance policy. The Plaintiffs requested that the Trustee pursue the Bad Faith Claim, which it declined to do.
[19] On that basis, a s. 38 BIA motion was then brought by the Plaintiffs for an order allowing them to pursue the Bad Faith Claim that arose within the context of the settling of the Personal Injury Action.
[20] On December 21, 2016, the Plaintiffs obtained a s. 38 BIA order from Kershman J. On December 22, 2016, the Trustee assigned all of its rights, title, and interest in any Bad Faith Claim against Traders to the Plaintiffs.
[21] On August 25, 2017, the Plaintiffs issued a Statement of Claim in the Superior Court of Justice, Court File No. CV-17-00073740-000, against the misnomered Aviva Canada Inc. seeking damages for the breach of a duty of good faith in its dealings with the McEwens in the amount of $624,349.01, and punitive and exemplary damages of $1,000,000.
[22] The sworn Statement of Affairs filed by the McEwens in their bankruptcy listed the personal injury claim as an unsecured claim for $375,000.
[23] The Moving Party acknowledges that there is no suggestion of fraud or impropriety on the part of the Trustee, and that there were no intentional omissions on the part of the Plaintiffs.
Issues
[24] There are several issues that are determinative of whether the orders requested by the Moving Party may be granted:
Does the Moving Party have standing to bring this motion?
Was the s. 38 BIA order obtained properly?
What effect does the discharge of the Trustee have on the obtaining of the s. 38 BIA order?
Does the Plaintiffs’ proof of claim violate McLean J.’s Judgement?
Was the assignment of the chose in action by the Trustee to the Plaintiffs proper?
Issue #1: Does the Moving Party Have Standing to Bring this Motion?
Moving Party’s Position
[25] The Moving Party relies on Rules 37.07 and 37.14 of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194 (“the Rules”) to assert that it has standing to request that this Court vary or set aside an order obtained without due notice, this being the s. 38 BIA order:
37.07 (1) The notice of motion shall be served on any party or other person who will be affected by the order sought, unless these rules provide otherwise.
37.14 A party or other person who,
(a) is affected by an order obtained on motion without notice; […]
may move to set aside or vary the order, by a notice of motion that is served forthwith after the order comes to the person’s attention and names the first available hearing date that is at least three days after service of the notice of motion.
(Emphasis Added)
[26] The Moving Party attempts to do so via Rule 3 of the Bankruptcy and Insolvency General Rules, C.R.C., c. 368 (“the General Rules”), which it argues provides an avenue for the application for a remedy similar to that in s. 187(5) BIA.
[27] Rule 3 of the General Rules states that “[i]n cases not provided for in the Act or these Rules, the courts shall apply, within their respective jurisdictions, their ordinary procedure to the extent that that procedure is not inconsistent with the Act or these Rules.”
[28] The Moving Party argues that r. 37.07 of the Rules applies via Rule 3 of the General Rules, and a party may therefore have standing to access remedies akin to s. 187(5) BIA; this being a setting aside of the s. 38 BIA order pursuant to r. 37.14.
[29] This position assumes that the BIA and General Rules do not provide for adequate notice requirements in the circumstances and, as a consequence, the Rules supplement the General Rules. The result is that the Moving Party was purportedly entitled to receive notice.
[30] The Moving Party also seems to have implicitly submitted that it has standing under s. 37 BIA to challenge the Trustee’s acceptance of the Proof of Claim. However, it did not provide written arguments as to how the provision provides it with standing (i.e. how it is an aggrieved party).
Plaintiffs’ Position
[31] The Plaintiffs argue that the Rules do not apply to the aspects of the s. 38 BIA proceedings in question because the BIA provides the requisite pre-conditions for a challenge to a s. 38 BIA order. They cite as support for this proposition the Ontario Court of Appeal’s ruling in Shaw Estate (Trustee of) v. Nicol Island Development Inc., 2009 ONCA 276, [2009] O.J. No. 1333, wherein the court states at paragraph 46:
[I]f a proposed or named defendant seeks to challenge the validity of a s. 38 order, the appropriate practice is to bring an application for review under s. 187(5) of the Act. To proceed otherwise — for example, by bringing a motion under the Rules of Civil Procedure as the appellants did here — will generally constitute an improper collateral attack on the s. 38.
[32] The Court also held, however, that abuses of process, non-disclosure, procedural irregularities, fraud, and misrepresentation are exceptions to this general rule. This is with a view to ensuring that the administration of justice and the integrity of the bankruptcy process are not undermined: see para. 48.
[33] The Plaintiffs further assert that the Moving Party does not having standing to bring a challenge to the Trustee’s acceptance of the Proof of Claim. Most notably, they argue that the Moving Party is not an “aggrieved party” within the meaning of s. 37 BIA.
[34] In support of this submission, the Plaintiffs cite the case of Global Royalties Ltd. v. Brook, 2016 ONSC 6277, 273 A.C.W.S. (3d) 26. The Court in this decision notes that, for a party to have standing as an aggrieved under s. 37 BIA, the trustee’s decision must have affected or deprived them of something. In the circumstances of that case, there was no deprivation found, in part because the parties to the litigation were not affected in their ability to defend themselves against the allegations constituting the cause of action: see paras. 13-17.
The Trustee’s Position
[35] The Trustee’s position on this matter is similar to that of the Plaintiffs’.
Analysis
[36] It is apparent to this Court that most of the authorities cited by the Moving Party do not support the proposition that the Moving Party has standing to bring this motion. The only exception is with regard to the allegations made by the Moving Party that there were misrepresentations made and/or non-disclosure on the Plaintiffs’ part as to the material facts underlying the Bad Faith Claim in their s. 38 BIA motion. Specifically, the Moving Party asserts that the Plaintiffs misrepresented and/or failed to disclose to the Court the scope of the restriction of the McEwens’ liability to the Plaintiffs as a result of McLean J.’s Judgement, their questionable creditor status, and the Moving Party’s obligations towards the McEwens.
[37] In Shaw Estate, the Ontario Court of Appeal held that mere allegations of this nature constitute an exception to the general s. 38 BIA standing rule (para. 48):
[T]he appellants' objection to the s. 38 Order rested on allegations of abuse of process, non-disclosure, procedural irregularities, fraud and misrepresentation to the court. These serious claims triggered the exceptions to the restriction on standing that generally applies to challenges of s. 38 orders. They required the scrutiny of the court to ensure that the administration of justice and the integrity of the bankruptcy process had not been undermined.
[38] Nevertheless, for reasons set out in this Court’s analysis under Issue #2, the Court finds that there has been no abuse of process, non-disclosure, procedural irregularity, fraud, or misrepresentation on the Plaintiffs’ part in obtaining the s. 38 BIA order.
[39] Regarding the Moving Party’s other submissions as to standing: as discussed in-depth in Issue #2, the Rules do not apply to grant some type of exception that would have required that the Moving Party be served. The scheme provided by the BIA for s. 38 BIA orders is clear and exhaustive, and therefore Rule 3 of the General Rules need not apply.
[40] Thus, pursuant to the BIA, standing to access the remedies sought—a review of the decisions of the Trustee and this Court—is only available to creditors, debtors, and aggrieved parties.
[41] The Moving Party is neither a creditor nor a bankrupt and, although s. 37 BIA is cited in the Moving Party’s materials, the Moving Party does not make specific submissions as to how it is an aggrieved party.
[42] A party alleging it is aggrieved must put forward some evidence that demonstrates that it is aggrieved; otherwise, the action will be dismissed: Cirillo v. Royal Bank (1996), 1996 CanLII 8254 (ON SC), 39 C.B.R. (3d) 22 (Gen. Div.). The Moving Party did not make specific submissions in this regard. Therefore, the Court has no specific basis upon which to determine its status as an aggrieved party, and its potential standing under s. 37 BIA fails on this ground alone.
[43] Thus, notwithstanding the misrepresentation and non-disclosure standing exceptions, if the Moving Party does not occupy any of the enumerated positions that grant standing, this motion was presumably brought without standing. The remaining issues would therefore not appear to require consideration to dispose of the request for the orders sought by the Moving party, as the Court would have no jurisdiction to grant a party without standing any of the orders sought.
[44] Denial of standing in the present circumstances is consistent with the principle that courts are charged with guarding against improper and frivolous proceedings against a trustee and a bankrupt estate as guardians of the latter: Re Walsh (1924), 5 C.B.R. 27 (Ont. S.C.); Re Pelee Motor Inn Ltd. (No. 2) (1979), 30 C.B.R. (N.S.) 216 (Ont. S.C.).
[45] Even if the Moving Party could be properly defined as aggrieved, s. 37 BIA gives this Court residual discretion to refuse an application against a trustee if it finds that the trustee’s decision was reasonable in the circumstances: Re David Brook, 2017 ONSC 4918, 52 C.B.R. (6th) 110. Given the subsequent findings discussed in Issues #4 and 5 regarding the propriety of the Trustee’s impugned decisions, this Court would exercise such discretion, find that the Trustee’s acceptance of the Proof of Claim and assignment of the Bad Faith Claim were reasonable, and refuse the relief sought on this motion.
[46] There are further policy reasons to deny the Moving Party’s motion for lack of standing. If the Moving Party’s position on the threshold for the existence of a lack of procedural guidance that invites the application of Rule 3 of the General Rules were to be adopted, the many other BIA procedures that are similarly clear regarding who must be provided notice and who has standing to participate in proceedings would be shrouded with uncertainty. Many BIA provisions specifically state to whom notice must be given to when applying for various orders. The plain meaning of these and other provisions would be thrown into flux if the Moving Party’s interpretation of s. 38 BIA were to be adopted.
[47] Further, it must be kept in mind that the s. 38 BIA process is designed for the benefit of creditors. As Houlden & Morawetz note:
By means of s. 38, creditors’ interests may be independently investigated and adjudicated upon without risk or cost to the bankrupt estate: Penfold v. Provenzano (1996), 1996 CanLII 8035 (ON SC), 42 C.B.R. (3d) 148, 30 O.R. (3d) 230, 1996 CarswellOnt 3113 (Gen. Div.). Section 38 is not designed to protect potential debtors of a bankrupt from the claims of a trustee or of a creditor acting pursuant to s. 38: Jaguar Asset Management Corp. v. Amalco Credit Services Ltd. (1997), 1997 CanLII 11112 (SK QB), 47 C.B.R. (3d) 271, 1997 CarswellSask 312 (Sask. Q.B.).
(Bankruptcy and Insolvency Law of Canada, 4th Edition, C§84 — Actions by Creditors Where a Trustee Refuses to Take Proceedings)
[48] In the Court’s view, a finding that the types of notice standards sought by the Moving Party are required of creditors in s. 38 BIA applications would risk imposing on them an undue burden that is misaligned with the goals of the provision. Indeed, parties not mentioned in s. 38 BIA must only be served with notice if the granting of the s. 38 BIA order would impose an obligation upon them: Royal Bank v. Profor Kedgwick Ltée/Ltd., 2008 NBCA 69, 336 N.B.R. (2d) 332, para. 32. As noted by the Plaintiffs’ submitted authority, no obligation is imposed on a potential defendant merely by grace of a s. 38 BIA order if the potential defendant retains their ability to defend against the claim in question: Global Royalties Ltd., paras. 13-17.
[49] Therefore, based on the foregoing analysis, and excepting the standing created by the misrepresentation and non-disclosure allegations, the Court finds that the Moving party does not have standing to bring this motion, and the motion therefore generally fails on this ground alone.
[50] The Court will now move on to address the misrepresentation and non-disclosure allegations. Furthermore, in consideration of the possibility that this Court is found to have otherwise erred in its standing analysis, it will also address the Moving Party’s other arguments in support of this motion.
Issue #2: Was a s. 38 Order properly obtained?
Moving Party’s Position
[51] The Moving Party submits that the s. 38 BIA motion was improperly brought on an ex parte basis because neither the Moving Party nor the bankrupts were served with the s. 38 BIA motion materials. The Moving Party submits that, had it been served with the materials, it would have opposed the motion.
[52] The Moving Party also argues that the Plaintiffs failed to disclose a list of material items to the Court at the December 21, 2016 hearing where the s. 38 BIA order was granted. Specifically, the Plaintiffs misrepresented and/or failed to disclose to the Court the scope of the restriction of the McEwens’ liability to the Plaintiffs resulting from McLean J.’s Judgement, their questionable creditor status, and the scope of the Moving Party’s obligations towards the McEwens.
[53] The Moving Party relies on s. 187(5) of the BIA, which provides that “every court may review, rescind or vary any order made by it under its bankruptcy jurisdiction.”
[54] The Moving Party submits that the BIA and General Rules provide only limited guidelines with respect to the formalities applicable to the presently impugned motion. Rule 3 of the General Rules and the Rules should thus be found to apply.
[55] The Moving Party therefore argues that the motion record should have been served on Traders pursuant to r. 37.07 of the Rules, and that to grant a s. 38 BIA order without hearing from Traders requires the Plaintiffs to adduce clear and compelling evidence as to why notice of the motion is “impractical or unnecessary”: see Resch v. Hamilton Civic Hospitals, [1996] O.J. No. 1625 (Gen. Div.), para 25. This, they note, was not done.
[56] As such, according to the Moving Party, the s. 38 BIA order was improperly obtained.
Plaintiffs’ Position
[57] The Plaintiffs submit that they provided notice to all required parties and made full disclosure of all material facts in their application for a s. 38 BIA order. As such, the order was properly obtained.
[58] According to the Plaintiffs, the Trustee is the only party entitled to receive notice upon a s. 38 BIA motion. They cite Shaw Estate, discussed further below, for the proposition that the proposed defendant and the bankrupt are not entitled to notice of the motion.
[59] Furthermore, given that the procedure for s. 38 BIA orders is provided by the BIA itself, the Plaintiffs argue that r. 3 of the General Rules, and the Rules more generally, have no application and impose no additional notice obligations on the moving creditor in these types of proceedings. To use the provisions in the Rules as grounds to challenge a s. 38 BIA order would constitute an impermissible collateral attack, they submit. Indeed, according to the Plaintiffs, Shaw Estate stands for the proposition that s. 38 BIA orders may only be challenged via review applications pursuant to s. 187(5) BIA.
[60] Finally, the Plaintiffs submit that, in the circumstances, there have been no abuses of process, non-disclosure, procedural irregularities, fraud, or misrepresentations that would provide grounds for an exception to the general rule as enunciated regarding notice. While the Moving Party alleges that misrepresentation occurred in the present case, the Plaintiffs submit that none has been made out in the record before the Court.
The Trustee’s Position
[61] The Trustee argues that the motion was brought in accordance with the BIA and that no notice was required to be given to Traders or the Bankrupts.
Analysis
[62] The relevant portions of s. 38 BIA read as follows:
- (1) Where a creditor requests the trustee to take any proceeding that in his opinion would be for the benefit of the estate of a bankrupt and the trustee refuses or neglects to take the proceeding, the creditor may obtain from the court an order authorizing him to take the proceeding in his own name and at his own expense and risk, on notice being given the other creditors of the contemplated proceeding, and on such other terms and conditions as the court may direct.
(2) On an order under subsection (1) being made, the trustee shall assign and transfer to the creditor all his right, title and interest in the chose in action or subject-matter of the proceeding, including any document in support thereof.
[63] The creditors in the present case (the Plaintiffs) requested that the Trustee pursue an action, the Bad Faith Claim, in the McEwens’ bankruptcy, via a letter sent by Mr. Obagi dated July 28, 2016.
[64] Mr. Obagi advised the Trustee that his clients had obtained a jury verdict of approximately $2.6 million dollars against the Bankrupts on October 30, 2015. He advised the Trustee that an issue had arisen as to whether sufficient insurance monies were available to pay the award. Mr. Obagi requested that the Trustee consent, subject to clarification of certain portions of McLean J.’s Judgement, to reopening the McEwens’ bankruptcy, which would allow the Plaintiffs to file a proof of claim for the unsatisfied portion of the judgment and to pursue remedies available to the Plaintiffs as creditors in the bankrupt estates.
[65] Upon receipt of Mr. Obagi’s letter, the Trustee, having been previously discharged, contacted Mr. Nicholas Millen, a senior bankruptcy analyst at the Office of the Superintendent of Bankruptcy (“the OSB”), inquiring as to whether the Trustee needed to be reappointed to deal with the matters set out in Mr. Obagi’s letter.
[66] In a reply letter, Mr. Millen indicated that the Trustee did not need to be reappointed pursuant to s. 41(11) BIA to deal with the matter. He stated that, pursuant to s. 41(10) BIA, the Trustee could continue administering the bankrupt estate even though the Trustee was discharged—in as far as this constituted the performance of such duties as might be incidental to the full administration of the estate. Mr. Millen considered that informing a creditor that the Trustee would refuse to pursue a proceeding, pursuant to s. 38 BIA, would constitute the performance of a duty that was incidental to the full administration of the estate.
[67] With the benefit of the information from Mr. Millen, the Trustee responded to Mr. Obagi in a letter dated August 4, 2016, stating that, pursuant to s. 41(10) BIA, the Trustee was allowed to complete the administration of the estates in question without being reappointed and reopening the estates. Thereafter, the Trustee indicated that it would allow the Plaintiffs to file their proof of claim.
[68] The Trustee also advised Mr. Obagi that the estates were without funds, and that the Trustee would therefore not be in a position to take any action with respect to pursuing any claim against the McEwens’ insurers. The Trustee stated that it would consent to the Plaintiffs’ request pursuant to s. 38 BIA for an order to bring an action in their own names.
[69] After consulting with McLean J. and receiving a clarification regarding how His Honour’s Judgement affected the Plaintiffs’ rights in the McEwens’ bankruptcy, Mr. Obagi wrote to the Trustee on September 21, 2016, enclosing a copy of McLean J.’s Judgment.
[70] The Plaintiffs filed their proof of claim on October 12, 2016. Mr. Obagi requested that the Trustee accept the Judgment and other documentation as representing his client’s provable claim in bankruptcy. He requested that any rights of action against the McEwens’ motor vehicle insurer be assigned to the Plaintiffs pursuant to s. 38 BIA.
[71] A s. 38 BIA motion was then brought by the Plaintiffs based on the Trustee’s affirmative response. The motion materials were served on the Trustee as well as the creditors of the McEwens’ estate on December 1, 2016.
[72] The motion was set and heard December 21, 2016 at 2:15 p.m. No creditors appeared at the motion. The Court reviewed the materials provided to it, which included: the Notice of Motion; the affidavit of Elizabeth Quigley sworn November 14, 2016, together with the exhibits attached thereto, which included the Order to Continue granted by Master Roger, as he was then, on October 12, 2012; the offer to settle made to the Moving Parties in Action No. 11-50985; the McLean J. Judgement dated October 30, 2015; the Plaintiffs’ proof of claim; and the letter from Doyle Salewski dated October 27, 2016 wherein the Trustee acknowledged receipt of the proof of claim, that the proof of claim could be accepted pursuant to s. 40(10) BIA to complete the administration of the estates, and that the Trustee would consent to the Plaintiffs’ obtaining a s. 38 BIA order to take the action in the Plaintiffs’ names.
[73] After reviewing the materials and having heard the submissions of counsel for the Plaintiffs, the Court granted the order.
[74] The Moving Party submits that the motion for the s. 38 BIA order was brought on an ex parte basis, as no notice was provided either to the McEwens or to the Moving Party. The Moving Party argues that, pursuant to the Rules, the motion should not have been brought as it was, allegedly ex parte, since there was no urgency requiring that the motion be brought on that basis. It argues that the s. 38 BIA motion should have been brought with notice to the Moving Party. For this proposition, it relies on r. 3 of the General Rules, and r. 37.07 and r. 37.14 of the Rules.
[75] Rule 3 of the General Rules states that where the BIA or the General Rules do not provide a clear procedure, courts shall apply their ordinary procedure to the extent that the procedure is not inconsistent with the BIA or the General Rules.
[76] This Court has reviewed the wording of s. 38 BIA, and finds that the procedure set out therein is clear and complete. Section 38 BIA does not provide for service on either the bankrupts or the potential defendants to any s. 38 BIA related motion.
[77] Notice was required to be given to the other creditors. The affidavit of service of Sherrie Blinkie, which was included with the motion materials, is evidence that the other creditors of the estate were served with the motion materials. There is no evidence to the contrary.
[78] The formalities for bringing a s. 38 BIA motion also include that the trustee had refused or neglected to take up the proposed proceedings: Points of Call Airlines Ltd., Re (1990), 1990 CanLII 464 (BC SC), 80 C.B.R. N.S. 157 (BC. S.C.). The evidence shows that the Trustee wrote to Plaintiffs’ counsel on October 27, 2016 stating that it was not in a position to bring the Bad Faith Claim and would consent to the Plaintiffs bringing it in their own name.
[79] Another requirement in obtaining a s. 38 BIA order is that person bringing the application must be a creditor: J.P. Capital Corp. (Trustee of) v. Perez (1995), 34 C.B.R. (3d) 66 (Gen. Div.), aff’d (1995), 34 C.B.R. 3d 67 (Ont. C.A.). In the present case, the Plaintiffs were listed as creditors in the McEwens’ sworn Statement of Affairs, notwithstanding when their proof of claim was actually filed.
[80] Another formality applicable to s. 38 BIA motions relates the contents of the motion. The materials supporting a s. 38 BIA motion and service of these materials must include an affidavit in support of the motion showing that the applicable statutory requirements have been complied with. The affidavit should, amongst other things, set out the date of the bankruptcy, the creditor’s request to the trustee to bring the action, and the trustee’s refusal to proceed: Re: Dominion TrustcoCorp., (1997), 1997 CanLII 12398 (ON SC), 45 C.B.R. 3d 25, affirmed (1997), 50 C.B.R .(3d) 84 (Ont. C.A.). Only the trustee needs to be served with the notice of application: Swerdlow, Re, [1985] O.J. No. 1341 (Ont. S.C.). There is no need to serve the proposed defendant with a notice of application under s. 38 BIA. The creditor need only show that the trustee has refused or neglected to take the proceeding: Wagon Stop Inc., Re (1979), 30 C.B.R. (N.S.) 63 (Ont. S.C.). Even if the bankrupt has been discharged, there is no need to serve him or her with a notice of a s. 38 application: Salloum, Re (1990), 1990 CanLII 2260 (BC CA), 51 B.C.L.R. (2d) 336 (BC. C.A.).
[81] Further, on a routine s. 38 BIA motion, the applicant need only demonstrate the existence of a serious issue to be tried: Coroban Plastics Ltd., Re, [1994] B.C.J. No. 2025. To also allow the potential defendant to argue on the motion that a prima facie case had not been established would undermine the purpose of s. 38 BIA, as outlined in Issue #1, and would offend the understanding that the right to intervene is a limited one: see Royal Bank, para. 43.
[82] In the case of Coroban Plastics, a creditor of the bankrupt obtained leave from a master under s. 38 BIA to bring a fraudulent conveyance action. The creditor then sued the bankrupt and the transferee seeking to set aside the alleged fraudulent conveyances. The transferee sought to challenge the s. 38 BIA order. The chambers judge held that the transferee had no standing. The transferee applied for leave to appeal and for a stay of proceedings.
[83] The Court dismissed the application. It held that the applicant had no status to challenge the order under s. 38 BIA in the bankruptcy action and nothing suggested to the Court the validity of the order could be properly be subject to collateral challenge in the action commenced pursuant to the order (para 12). At paragraph 13, the Court stated: “I would note that the proposition that a prima facie case must be established on a s. 38 application was not supported by any authority referred to before me.”
[84] There may be limited circumstances, however, in which a potential defendant can be granted intervenor status on a s. 38 BIA motion. This includes where there is a discrete issue of the law that, if decided in favour of the potential defendant, might avoid the need to defend a lawsuit that should never have been commenced.
[85] There are further exceptions to the general s. 38 BIA standing rule where standing may be granted to prevent the Court’s proceedings from being used to perpetrate a fraud, or to ensure that the administration of justice and the integrity of the bankruptcy process is not undermined.
[86] In the Shaw Estate case, the defendants, Nicol, appealed an order obtained by the plaintiff, Northern Lights Credit Union, striking certain paragraphs from a statement of defence. The plaintiff was a creditor that held a default judgment against Shaw. It obtained an assignment of the trustee’s rights in an order under s. 38 BIA allowing it to continue the litigation of the trustee’s place. The defendants’ statement of defence alleged that the plaintiff had no status as a creditor to bring a s. 38 BIA application, as its claim against Shaw was settled prior to obtaining a s. 38 BIA order. The motions judge struck the provisions in question, as a default judgment was subsumed in the Shaw’s bankruptcy and there was no status to settle the case. In any case, settlement was irrelevant as to a s. 38 BIA application.
[87] The defendants appealed, and the appeal was allowed. The court held that the motion judge erred in holding that the defendants did not have standing to challenge the plaintiff’s status. It held that allegations of fraud, abuse of process, non-disclosure, and misrepresentation triggered exceptions to the stranding restrictions in s. 38 BIA applications.
[88] In the present proceedings, the Court finds that there was appropriate disclosure by the Plaintiffs to the extent required by the BIA. In addition, the Court finds that there were no misrepresentations notwithstanding the arguments put forward by the Moving Party. Lastly, the Court finds that there was no abuse of process in this matter.
[89] This was not a case where court proceedings were used to perpetrate a fraud. There was no evidence that the administration of justice or the integrity of the bankruptcy process were undermined by the Plaintiffs by doing what they did to obtain the s. 38 BIA order. The Court finds that the Plaintiffs’ s. 38 BIA motion provided full and fair disclosure of the material facts.
[90] Therefore, the s. 38 order was properly obtained.
Issue #3: Does the Plaintiffs’ Proof of Claim Violate McLean J.’s Judgement?
Moving Party’s Position
[91] The Moving Party asserts that McLean, J.’s Judgement in the Personal Injury Action precluded the Trustee from accepting the Proof of Claim filed by the Plaintiffs in the amount of $624,349.01—the balance of the Personal Injury Action award in excess of what was paid out under the available insurance policies. This is essentially because the Judgement mentions at several points that the McEwens’ liability is limited to the limits of their insurance policy.
Plaintiffs’ Position
[92] The Plaintiffs respond to this allegation by noting the clarification to the Judgement provided by McLean, J. during a subsequent appointment on September 19th, 2016, wherein he clearly states that his order pursuant to the Judgement only limits the personal liability of the Plaintiffs to the amount in the insurance policy and does not limit the Plaintiffs’ rights in bankruptcy.
Trustee’s Position
[93] The Trustee agrees with the Plaintiffs on this issue, and submits that the Judgement’s only bearing on the present matter is that MacLean, J. wished to ensure that the personal liability of the McEwens did not survive bankruptcy.
Analysis
[94] A copy of the Judgment of Justice McLean dated October 30, 2015 was referred to and included as an exhibit. Paragraph 3 of the order therein is set out as follows:
this Court Orders and Judges that the judgment against defendant Robert McEwen and Carolyn McEwen, personally, is limited to their insurance policy with Aviva Insurance Company of Canada in the amount of $1M.
[95] This Court was fully aware of this paragraph when it granted the s. 38 BIA order. The Court finds that the McLean J.’s Judgment does not prohibit the Plaintiff from filing a claim in the McEwens’ bankruptcy.
[96] The Trustee correctly notes that the language of McLean, J.’s Judgement does not preclude a proof of claim in bankruptcy for the amount owed to the Plaintiffs by the Bankrupts’ estates, and that this amount forms the basis for the Plaintiffs’ continued creditor status. To reiterate, it appears that McLean, J.’s Judgement sought only to ensure that the personal liability assigned to the Bankrupts was not one that survived bankruptcy.
[97] The Court therefore finds that the Proof of Claim does not violate the orders of McLean J.’s Judgement.
Issue #4: What Effect does the Discharge of the Trustee Have on the Obtaining of the s. 38 Order?
Moving Party’s Position
[98] The Moving Party asserts—without providing reasons—that the discharge of the Trustee precluded the Trustee from facilitating a s. 38 BIA order. Their chief concern in this regard, however, seems not to be whether the discharged Trustee had the capacity to choose not to deal with the claim, but whether there was a claim at all (i.e. whether the claim had vested in the Bankrupts’ estates despite the discharge).
Plaintiffs’ Position
[99] The Plaintiffs did not take a specific position on this matter in their written submissions.
Trustee’s Position
[100] The Trustee submits that its acceptance of the Plaintiffs’ claim, as well as its assignment of the Bad Faith Claim, were incidental to the administration of the estates, as is permitted by s. 41(10) BIA. It concedes that there are no authorities shedding light on the legality of the acceptance of the Proof of Claim, but notes that assignments by a discharged trustee have been allowed previously: see Re Coulter.
Analysis
[101] As a matter of form, and notwithstanding the merits of the Proof of Claim, the s. 38 BIA order was able to be lawfully obtained with participation of the discharged Trustee.
[102] Re Coulter is the leading authority in this regard. As Houlden and Morawetz note:
Notwithstanding a trustee’s discharge, the trustee remains the trustee of the estate for the performance of duties that may be incidental to the full administration of the estate: s. 41(10).
Under the power conferred by s. 41(10), a trustee has the authority to give an assignment of its interest in property in accordance with s. 38: Re Coulter (1968), 11 C.B.R. (N.S.) 250 (Ont. S.C.).
The execution of the assignment of a chose in action after the discharge of the trustee is purely an administrative act and can be performed under the authority conferred by s. 41(10).
(Bankruptcy and Insolvency Law of Canada, 4th Edition, C§131 — Authority of Trustee After Discharge)
[103] The letter provided by the OSB in this matter only reinforces this position. The Trustee took the prudent step of contacting OSB to receive guidance as to whether it should be reappointed as a Trustee in the estates. A senior analyst, Mr. Nicholas Millen, indicated that it would not be necessary to have the Trustee reappointed and that the Trustee could act in accordance with s. 41(10) BIA and provide the necessary documentation to the Plaintiffs as required.
[104] In terms of whether the Trustee may accept a new proof of claim post-discharge, there does not appear to be a specific authority on the matter—as noted by the Trustee.
[105] However, the letter of the OSB suggests that this should indeed be possible. Further, this proposition seems to align with the BIA’s purpose of providing for the orderly distribution of property amongst creditors.
[106] In Re Coulter, the court noted that the predecessor section to s. 41(10) BIA allowed for the completion of administrative tasks by the trustee. If reviewing and accepting a proof of claim can be characterized as akin to determining that a claim should be assigned, then it would certainly fall within a discharged trustee’s purview.
[107] It could also perhaps be argued that the BIA has already provided for such a situation in s. 41(11), which allows a court to reappoint a trustee if there are assets that have not been realized or distributed. Re Coulter distinguished this provision, as it was then, however, from the previous iteration of s. 41(10) BIA on the ground that s. 41(11) BIA’s previous iteration was meant for duties beyond those such as the filing of documents, which is of a purely administrative order.
[108] Therefore, in light of the foregoing analysis, the Court concludes that the Trustee’s discharge does not preclude the Plaintiffs from obtaining a s. 38 BIA order in these circumstances.
Issue #5: Was the Assignment of the Chose in Action by the Trustee to the Plaintiffs Proper?
Moving Party’s Position
[109] The Moving Party argues that the assignment of the Bad Faith Claim was not lawful because their duty of good faith was extinguished by the bankruptcy, precluding any bad faith claim arising in subsequent negotiations, and because, in the alternative, the claim did not crystalize until after the Bankrupts and the Trustee were discharged. Therefore, either a duty of good faith in settlement negotiations did not exist during the Personal Injury Action, or the Bad Faith Claim did not vest in the Trustee, who had no right to assign the claim.
[110] The Moving Party provides no authority for the first argument that a duty of good faith is extinguished upon bankruptcy.
[111] In their second argument—that the claim did not crystalize until after the Trustee’s discharge—the Moving Party relies on Dundas v. Zurich Canada, 2012 ONCA 181, 109 O.R. (3d) 521, wherein the Ontario Court of Appeal held that a cause of action related to failing to settle a claim under an insurance policy did not arise until the liability to indemnify under the insurance policy arose. This occurred only after the liability against the assignor had been determined in judgement.
[112] In the present case, McLean, J.’s Judgement, which found the Bankrupts liable, was delivered more than three years after the Bankrupts and the Trustee were discharged. The Moving Party argues that the Bad Faith Claim therefore arose subsequently to their discharge as it did not crystalize until after the bankrupt estates were closed, and therefore did not vest in the Trustee. The Trustee was thus unable to assign the claim.
Plaintiffs’ Position
[113] The Plaintiffs argue that Dundas does not appear to support the Moving Party’s claim, as the Court readily distinguishes between claims under the policy and claims for breach of duty of good faith: see para 46. The Court’s decision regarding crystallization appears to have only applied to the former claim.
[114] The Plaintiffs further respond with Ernst & Young Inc. v. Chartis Insurance Co. of Canada, 2014 ONCA 78, 118 O.R. (3d) 740—a more recent case than Dundas from the Court of Appeal, whose factual matrix more closely resembles that in the present circumstances.
[115] Chartis includes a brief discussion about the breach of a duty of good faith on the part of an insurer in defence of an action. The Plaintiffs incorrectly assert that the debtor in that case had made an assignment in bankruptcy. Rather, the debtor had been subject to a receivership and was in the process of being wound up under the Winding-up & Restructuring Act, R.S.C. 1985, c. W-11. The dispute concerned the liability of the insurer to pay the award from a previous judgement against the debtor. The insurer had failed to do so. In obiter, the court noted that it was “open to E & Y to move for appropriate relief, including perhaps…an assignment of CGT's cause of action for a breach of the duty of good faith”: see para. 83.
Trustee’s Position
[116] The Trustee’s position mirrors that of the Plaintiffs’. It notes that choses in action like the Bad Faith Claim are included in the definition of property under s. 2 BIA. It submits that the right to pursue any actions arising out of the policy was vested in the Trustee as property upon the assignment in bankruptcy. The Trustee therefore argues that the Bad Faith Claim was assignable by the Trustee.
Analysis
[117] As mentioned previously, the Moving Party cites no authority for its first argument that an insurer’s duty to settle claims arising under an insurance policy in good faith extinguishes upon bankruptcy.
[118] Absent specific language in the parties’ contract or a legislative exception, the rights and obligations attached to the debtor’s property generally vest in the Trustee upon bankruptcy. The Court finds that there is no sound reason for an exception in this case.
[119] Furthermore, one of the purposes of the BIA is to maximize the value of a bankrupt’s estate for the benefit of the creditors. The notion that an assignment in bankruptcy would automatically extinguish duties conducive to this goal seems contradictory.
[120] Therefore, the Court finds that this first argument is unconvincing, and it is rejected.
[121] Regarding the applicability of Chartis: despite the fact that the court therein was discussing a hypothetical bad faith claim assignment by a company in receivership that was being liquidated under the Winding-up & Restructuring Act, it is perhaps nonetheless appropriate to see a bad faith claim held by a bankrupt estate as being similarly assignable.
[122] It has previously been held that a trustee’s discharge is not an automatic impediment to the assignment of property. Courts have found that some flexibility should be allowed in terms of when assets cease to vest in a trustee after discharge. In Shelson, Re, 2004 CanLII 19412 (ON CA), [2004] O.J. No. 850. (Ont. C.A.), for instance, the Court of Appeal for Ontario noted in obiter (para. 30) that there should not be a bright-line rule whereby an asset would automatically return to the discharged bankrupt:
In my view, the proposition cannot be framed as a "bright-line" rule that admits of no exceptions. Even the court in Zemlak qualified its statement of the proposition by the introductory phrase "[I]n the circumstances of this case": see para. 24, above. This court distinguished Zemlak and permitted a trustee in bankruptcy, following his discharge and that of the bankrupts, to take proceedings to pursue two properties, the values of which had been misrepresented by the bankrupts in their statements of affairs: Rocher v. H. & M. Diamond & Associates (2003), 2003 CanLII 29646 (ON CA), 43 C.B.R. (4th) 134, [2003] O.J. No. 1049 (QL) (C.A.). Even in instances short of misrepresentation or other misconduct by the bankrupt, it is not difficult to think of examples where an exception to the proposition would be appropriate. One is where an asset previously unknown to the trustee is discovered within a reasonable time of his application for discharge. Another is where the trustee learns within a reasonable time of his application for discharge that an asset previously considered to be unrealizable in fact had realizable value. In both examples, assuming that the asset is one which should, in the interests of the creditors of the estate, be realized, the court must retain some discretion to decide whether the proposition does or does not apply [see Note 4 at the end of the document]. Failure to imbue the rule with some measure of flexibility renders a trustee's application for discharge a trap for the unwary.
(Emphasis Added)
[123] The Court goes on to note that, in such circumstances, the former trustee would be able to realize on those claims pursuant to s. 41(10) BIA (para. 30, n 4).
[124] Ultimately, Chartis, Shelson, and the aforementioned Re Coulter seem to be partially applicable to the question at hand. While Chartis dealt with a different legislative framework, the case suggests by analogy that some latitude exists regarding how and when bad faith claims are assignable. Shelson stands for the proposition that realizable choses in action that the trustee was unable to deal with during the administration of the bankrupt’s estate do not necessarily automatically return to the discharged bankrupt, and that the trustee may sometimes access them by virtue of the powers conferred under s. 41(10) BIA. Finally, Re Coulter provides that a discharged trustee may indeed assign property interests to a creditor by virtue of the same provision.
[125] Applying these authorities to the present case: if Chartis can be found, by analogy, to stand for the proposition that bad faith claims in the bankrupt estate are assignable by the trustee, and Shelson provides that such property would not automatically vest in the discharged bankrupt should the property be for the benefit of the creditors, then the discharged trustee could lawfully assign its interest in the property pursuant to their s. 38 BIA powers and their s. 41(10) powers as defined in Re Coulter.
[126] The underlying implication of this finding would be that the Bad Faith Claim was property of the bankrupt that devolved before discharge: s. 67 BIA.
[127] Claims for breach of contract are assignable choses in action: see Wallace v. United Grain Growers Ltd. (1995), 1995 CanLII 6262 (MB CA), 34 C.B.R. (3d) 153 (Man. C.A.). Furthermore, foreign authorities have previously recognized that a chose in action does not have to be recoverable during bankruptcy for the asset to vest as property in the bankrupt’s estate: see Re Landau, [1998] Ch. 223. This suggests, therefore, that claims against third parties for breach of contract need not be immediately pursuable for the claim to vest as property in a bankrupt’s estate.
[128] This Court finds the aforesaid authorities persuasive, and they further support the Plaintiffs’ and Trustee’s position that the Bad Faith Claim did not have to ‘crystalize’ through a judgement as to underlying liability before becoming vested in the Trustee.
[129] Therefore, the Court accepts the position of the Plaintiffs and Trustee on this issue. The Court finds that, as a chose in action, the Bad Faith Claim was property that devolved to the bankrupt’s estate and was therefore assignable and properly assigned.
Conclusion
[130] For the reasons set out above, the Moving Party’s motion fails and is dismissed.
Costs
[131] Costs outlines have been provided by the parties. The parties shall have 14 days to resolve the issue of costs. If they are unable to do so, they shall contact the trial coordinator and obtain a date and time to argue the issue of costs. Each party shall have 15 minutes to make their arguments if needed. In the event that Rule 49 Offers to Settle were made, a copy of the same shall be provided to the Court at least five days prior to the hearing of argument. Traders’ counsel, who is from Toronto, may appear by telephone if they wish.
[132] Order to issue accordingly.
Mr. Justice Stanley J. Kershman
Date: September 26, 2019
COURT FILE NO.: 33-1539883/ 33-1539884
DATE: 2019/09/26
ONTARIO
SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY and INSOLVENCY
IN THE MATTER OF THE BANKRUPTCY OF
ROBERT MORRIS JR. MCEWEN AND CAROLINE ELIZABETH MCEWEN, OF THE TOWN OF PERTH, IN THE COUNTY OF LANARK,
IN THE PROVINCE OF ONTARIO
BEFORE: Mr. Justice Stanley J. Kershman
HEARD IN OTTAWA: September 21, 2018
APPEARANCE: September 21, 2018, with subsequent written submissions having been provided by the parties as late as February 4, 2019.
REASONS FOR DECISION
Kershman J.
Released: September 26, 2019