COURT FILE NO.: BK-21-02783411-0031
DATE: 20221123
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
B E T W E E N:
Bankruptcy Hanson
Allan Rouben, for Lifeline Litigation Loans Inc.
Brandon Jaffe, for Bridgepoint Financial Services
Tony Antoniou, for LawPRO
HEARD: October 3, 2022
ENDORSEMENT
osborne j.
[1] This motion arises out of the bankruptcy of Dana Bruce Hanson, an Ontario lawyer [”Hanson” or “the Bankrupt”]. It engages the issue of when and in what circumstances a creditor who takes an assignment of a claim from a trustee in bankruptcy pursuant to section 38 of the Bankruptcy and Insolvency Act [“BIA”] can do so to the exclusion of all other creditors, and requires a consideration of whether proceeds of professional liability insurance form part of the estate of a bankrupt.
[2] The moving party, Lifeline Litigation Loans Inc. [“Lifeline”], seeks an order pursuant to section 38 of the BIA granting it leave to commence and prosecute proceedings in its own name, and at its own expense and risk, against the Lawyers’ Professional Indemnity Company [”LawPRO”] seeking payment on a judgment dated January 21, 2022 in favour of Lifeline against the Bankrupt, for matters covered by a LawPRO professional liability insurance policy.
[3] Lifeline also seeks an order compelling the trustee in bankruptcy to assign and transfer to it all right, title and interest in the chose in action or subject matter of the proceedings and, finally, an order that any benefit derived from the proceedings belongs exclusively to Lifeline, and that no other creditor may share in any recovery.
[4] I note that in its prayer for relief, Lifeline also sought an order that no other creditor be permitted to participate in its proposed action. In argument, however, counsel for Lifeline clarified its position that it did not oppose the participation of other creditors [and particularly Bridgepoint] participating in its proceeding, so long as it did not share in any recovery.
Background
[5] The Bankrupt, Hanson, was the law partner of Bradley Duby [”Duby”] in their personal injury law partnership, Hanson Duby Lawyers. Mr. Duby died on January 28, 2021. Loans had been made to clients of their law firm between October 2017 and August 2018, arranged by Duby, but during the period in which the two were partners. These loans were funded by Lifeline.
[6] Subsequent to Duby’s death, Lifeline discovered that many if not most of the client signatures on the loan agreements had apparently been forged and fabricated by Duby as part of a scheme to defraud Lifeline.
[7] Hanson filed an assignment into bankruptcy on November 18, 2021 and a stay of proceedings pursuant to section 69 of the BIA was issued on November 24, 2021.
[8] Lifeline commenced an action in this Court against Hanson and other parties [CV‑21‑657668-0000].
[9] Lifeline obtained a lift stay order on January 11, 2022 to prosecute that action against the Bankrupt, Hanson, and obtained judgment against Hanson on January 21, 2022 in the amount of $1,236,247.20 plus $29,256.19 in costs.
[10] Each of Duby and the Bankrupt was insured by a LawPRO professional liability policy which, Lifeline submits, provides at least $1 million in available coverage to respond to the judgment. LawPRO took the position that it was the policy issued to Duby that ought to respond to the judgment [rather than the policy issued to the Bankrupt], and the available coverage was limited to $250,000 less defence and investigation expenses yielding a net amount payable [and in fact paid] to Lifeline of $214,453.08.
[11] Lifeline now seeks to recover the balance of the judgment against Hanson from LawPRO, and Lifeline therefore requested that the trustee in bankruptcy commence an action against LawPRO.
[12] The trustee in bankruptcy has refused to commence the action on the basis that the estate of the Bankrupt has insufficient funds. The trustee does, however, consent to the relief sought on this motion by Lifeline.
[13] Lifeline asserts that commencing the proceeding against LawPRO would be for the benefit of the estate of the Bankrupt [as required by section 38] since any recovery would reduce the indebtedness of the Bankrupt to Lifeline, and Lifeline is the only judgment creditor of the Bankrupt. The judgment already obtained is in favour of Lifeline and no other creditor of Hanson.
[14] The proposed proceeding by Lifeline would be for the purpose of recovering funds from LawPRO to satisfy the judgment already obtained. Lifeline takes the position, however, that any payment by LawPRO in satisfaction of the judgment [including any proceeds of the proposed action] should not form part of the estate of the Bankrupt, with the result that any such payment should belong exclusively to Lifeline and no other creditor of the Bankrupt.
[15] Bridgepoint Financial Services Limited Partnership I [“Bridgepoint”] opposes part of the relief sought in that it wants to share in the proceeds recovered in the action, if any. Bridgepoint is not a judgment creditor of Hanson. However, it is in the process of requesting leave to issue a claim against Hanson, the law partnership, and the estate of Duby, for damages in the amount of $2,604,386.
[16] Like Lifeline, Bridgepoint alleges that Duby arranged for clients of the firm to execute loan agreements with it. In a manner similar to that alleged in respect of the Lifeline loans referred to above, Bridgepoint alleges that it discovered, subsequent to Duby’s death, that some of the clients never signed the loan agreements and it now alleges that their signatures were forged and the clients never received the loan proceeds.
[17] Bridgepoint takes the position that its claim is in material respects the same as that advanced by Lifeline, save for the obvious difference that it does not yet have a judgment against the Bankrupt.
[18] Bridgepoint wishes to participate in Lifeline’s proposed proceedings against LawPRO. Accordingly, it does not oppose, and indeed supports, the granting of leave to Lifeline to commence the claim pursuant to section 38 of the BIA. It does oppose, however, the requested term of the order that Lifeline, alone and to the exclusion of all other creditors of the Bankrupt, may keep the benefit of any proceeds recovered [up to the outstanding amount of the judgment plus costs].
Analysis
[19] Subsection 38(1) of the BIA provides that a creditor may obtain an order authorizing him to bring a proceeding in his own name and at his own risk and expense, and on such other terms and conditions as the court may direct. A creditor may only obtain such an order, however, where the creditor requests the trustee to take a proceeding that in his opinion would be for the benefit of the estate of a bankrupt and the trustee refuses or neglects to do so.
[20] Subsection 38(2) provides that where such an order is made, the trustee shall assign and transfer to the creditor all right title and interest in the chose in action are subject matter of the proceeding.
[21] Subsection 38(3) provides that any benefit derived from such a proceeding, to the extent of his claim and the costs, belongs exclusively to the creditor instituting the proceeding, and the surplus, if any, belongs to the estate.
[22] The Court of Appeal has clarified the three conditions that an applicant must satisfy to obtain a section 38 order:
i. the applicant must be a creditor of the bankrupt at the date of the bankruptcy;
ii. it must have requested that the trustee commence the proceeding now sought to be commenced; and
iii. the trustee must have refused. (See Indcondo Building Corporation v. Sloan, 2012 ONCA 502 at para. 27).
[23] I am satisfied that Lifeline meets that test and that an order authorizing it to bring the claim against LawPRO pursuant to section 38 should be granted. The issue is whether this Court should impose, as a term and condition of that order, that Bridgepoint should be permitted to join in the action and share in the proceeds.
[24] In practical terms, this motion is a race between two creditors of the same Bankrupt who are pursuing the same source of funds to recover on their respective losses. Without question, Lifeline is further along in its efforts: it has already sought and obtained a judgment and has the consent of the trustee to the section 38 order it seeks.
[25] Bridgepoint does not yet have a judgment, but it is in the process of issuing a claim and seeking a lift stay order. Once those steps are taken, it would be in the same position as is Lifeline, although it will have arrived at that position later in time: both would be judgment creditors of the Bankrupt. Even today, however, both are unsecured creditors.
[26] Indeed, but for timing, the claims are in material respects very similar: both Lifeline and Bridgepoint advanced litigation loans based on alleged fraudulent documents prepared by Duby, and now seek to recover on the professional liability insurance policy or policies of Duby’s law partner, the Bankrupt, Hanson.
[27] Lifeline argues that it already has judgment, and is not required [and nor should it be] to wait for other creditors of the Bankrupt to bring an action and obtain judgment if they choose to do so. Moreover, it argues that while leave for Lifeline to bring the action against LawPRO would be for the benefit of the estate of the Bankrupt in that recovery would largely satisfy its claim, and therefore reduce the claims to be made against the estate of the Bankrupt, this case is unusual in that the insurance proceeds sought to be recovered in the proposed action are not assets of the Bankrupt on which Lifeline is attempting to exclusively recover.
[28] It argues that the Bankrupt himself has no entitlement to the insurance proceeds, and as such those proceeds are not an asset of the Bankrupt. They are claimed through the Bankrupt in that he is the insured on the policy, but recovery on the policy is available to creditors of the Bankrupt since the insurance policy would respond to those claims according to its terms, and not the Bankrupt himself. In no case, Lifeline argues, would the amount of the coverage limit under the LawPRO professional negligence insurance policy or policies be payable to the Bankrupt, with the result that it cannot and does not form part of his estate.
[29] Bridgepoint takes the position that it is, or soon will be, no less entitled to recover on the insurance policy than is Lifeline, and it would be unjust and inequitable to grant the relief sought by Lifeline which will exhaust the insurance proceeds and render its [Bridgepoint’s] action effectively moot, in that there will be nothing left to recover.
[30] Lifeline relies on two principal authorities. In Adler, (Re), 2008 CanLII 47017, the Registrar in Bankruptcy permitted the former client of a bankrupt lawyer to bring an action against LawPRO pursuant to section 38, finding 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.” (para. 31)
[31] The Registrar in Adler went on to conclude, as is argued by Lifeline here, that no other creditors ought to be permitted to join in the proceeding or share in any recovery:
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. (para. 32)
[32] It seems to me, however, that the present case is somewhat more nuanced. In my view, the decision to exclude other creditors in Adler was made, as stated by the Registrar, on the basis that the creditor claiming under the policy ought not to have to share insurance proceeds with other creditors who never bargained in their dealings with the Bankrupt to have insurance available for their claims.
[33] That is accurate, perhaps, for general creditors. It does not help me here, however, because the other creditor in the present case, Bridgepoint, is also a creditor of the Bankrupt who wishes to claim under any and all applicable and responsive professional liability insurance claims. In that sense, Bridgepoint is in fact another creditor who bargained to have insurance available, just as did Lifeline.
[34] In Meisels v. Lawyers Professional Indemnity Company, 2015 ONCA 406, the Court of Appeal concluded that proceeds of a LawPRO policy that insured a bankrupt lawyer do not form part of the estate of the bankrupt that vest in the trustee. However, the right to bring an action to enforce the terms of the policy do vest in the trustee and can be assigned by the trustee. (see para. 19).
[35] The Court observed that, pursuant to section 71 of the BIA, the property of a bankrupt passes to the trustee once a bankruptcy order is made, and the bankrupt ceases to have any capacity to deal with his property and an action commenced by an undischarged bankrupt is a nullity. (see para. 12].
[36] The Court went on to consider the definition of “property” in section 2 of the BIA, and concluded that “the right to receive an indemnity under an insurance contract is a “chose in action” or a ‘thing in action”: Ernst & Young Inc. v. Chartis Insurance Co. of Canada, [2012] O.J. No. 4399, 2012 ONSC 5020, 14 C.C.L.I. (5th) 270 (S.C.J.), at para. 54, varied on other grounds (2014), 118 O.R. (3d) 740, [2014] O.J. No. 416, 2014 ONCA 78”. (see para. 12).
[37] The Court held that the exceptions to section 71 of the BIA recognized in earlier cases [i.e., such as where the claim or loss is personal rather than proprietary in nature] did not apply since the claim for indemnification under the insurance policy was a claim in breach of contract that was solely about money and vests in the trustee. (see para. 15).
[38] The Court of Appeal agreed with the respondent in that case that the insurance proceeds do not form part of the estate of a bankrupt since the insurance policy provided that the [insurer] was to pay out an indemnity on behalf of the insured, rather than directly to the insured. (See para. 16, citing with approval Adelaide Capital Corp. v. Sethi, [1996] O.J. No. 26, 6 C.B.R. (4th) 22 (Gen. Div.), at para. 7; Eurasia Auto Ltd. v. M & M Welding and Supply (1985) Inc., 1991 CanLII 6227 (AB KB), [1991] A.J. No. 400, 5 C.B.R. (3d) 227 (Q.B.); Major (Re), 1984 CanLII 452 (BC SC), [1984] B.C.J. No. 2712, 54 C.B.R. (N.S.) 28 (S.C.), at pp. 34-35 C.B.R. (N.S.)).
[39] The Court agreed with the conclusion of the Registrar in Adler that the right to claim an indemnity and enforce that claim by bringing an action is the right of the trustee in bankruptcy, and that right belongs to the trustee whether the indemnity is payable directly to the insured bankrupt or to a third party. The court stated:
“this is so because, even though the proceeds do not form part of the bankrupt estate, if the claim is successful, all the creditors of the bankrupt may benefit from the reduction of another creditor’s claim.” (see para. 17).
[40] I agree with the reasoning of the Court of Appeal in Meisels and the Registrar in Adler, and I am satisfied that, notwithstanding that the proceeds of the professional liability insurance would not be payable to the insured Bankrupt himself, the right to claim under that insurance policy is capable of an assignment under section 38. This is so, notwithstanding the fact that the proceeds payable pursuant to that insurance policy would not be property of the Bankrupt nor form part of his estate.
[41] I pause to observe that, in my view, this flows in part from the nature of this insurance policy, providing coverage for professional negligence. The conclusion might be different for other types of insurance policies, such as recovery of proceeds pursuant to a fire insurance policy, for example, which could form part of the estate of a bankrupt.
[42] As noted, Bridgepoint does not challenge this conclusion. However, it argues that that the submission by Lifeline that it should be granted the exclusive right to prosecute the LawPRO claim on the basis that recovery under the policy would benefit the estate of the Bankrupt and increase recovery to other creditors, including Bridgepoint, is false. The Trustee Report dated May 18, 2022 [Barafaro Affidavit, Ex. “K”] states that there is only $12,000 available to distribute to unsecured creditors, representing some 0.9% of the unsecured claims.
[43] Bridgepoint further submits that the effect of granting the exclusivity aspect of the relief sought is to elevate the position of Lifeline in priority to that of Bridgepoint when in reality both are unsecured creditors. Judgement creditors, submits Bridgepoint, are still unsecured creditors in the same class and with the same priority as other unsecured creditors. It submits that LawPRO should determine, according to the terms of the policy or policies responsive to the claims, which creditors are entitled to recover and in what amount.
[44] Bridgepoint also argues that what it essentially styles as procedural irregularities in the chronology of the filing of its proof of claim with the trustee in this bankruptcy resulted in the delay in the prosecution of its claim, while the claim of Lifeline advanced more expeditiously. In my view, and given the conclusions I have reached below, I do not need to set out in further detail the particulars of this chronology and nor do I need to address Bridgepoint’s assertion that the Trustee perhaps advanced some claims more quickly than others.
[45] Boiled down, I understand Bridgepoint’s argument to be that there is no legal basis upon which it ought to be prejudiced [i.e., disentitled to share in the LawPRO insurance proceeds] because its claim is not as far advanced as is that of Lifeline.
[46] Bridgepoint relies upon the decision in Lo Faso v. Ferracuti, 2018 ONSC 5380, at paragraphs 27-28, quoting with approval the Indcondo case referred to above (in turn citing Shaw Estate (Trustee of) v. Nicol Island Development Inc., 2009 ONCA 276 at paragraph 23-24), as authority for the proposition that the purpose of a section 38 assignment is to ensure that the bankrupt’s assets are preserved for the benefit of creditors by providing a “mechanism for creditors to proceed with an action when the trustee refuses or fails to act; thereby ensuring that the assets of the bankrupt [which may otherwise go one recovered] are available to creditors willing to finance the litigation.”
[47] Bridgepoint relies upon the statement by Cronk, J.A. [para. 23] to the effect that:
“the secondary purpose, relating to notice, is to make sure the section operates fairly. While it is fair that those parties willing to accept the risks and costs of litigation receive a preference in terms of recovering their losses, the right to that preference must be shared with all creditors” [emphasis added].
[48] In contrast, Lifeline relies on general authorities standing for the proposition that an insurer otherwise liable under a policy cannot delay paying out the entire policy limit to a plaintiff who had obtained judgement simply because a second claimant has advanced a claim to which the policy may respond but did not have judgment. see, for example, Solway v. Lloyd’s Underwriters, [2005 CanLII 10650](https://www.canlii.org/en/on/onsc/doc/2005/2005canlii10650/2005canlii10650.html) (ONSC) at para. [64-65](https://www.canlii.org/en/on/onsc/doc/2005/2005canlii10650/2005canlii10650.html#par64); and Abuzour v. Heydary, [2014 ONSC 6229](https://www.canlii.org/en/on/onsc/doc/2014/2014onsc6229/2014onsc6229.html) at para. [36‑37].
[49] I accept the general proposition in those authorities that, in the absence of a stay, a judgment creditor is entitled to enforce its judgment as soon as it is given according to the “first past the post” principle consistent with the interests of overall fairness.
[50] However, in my view, I must balance that concept as against the overarching objectives of the bankruptcy regime of efficiency, equitable treatment of like claims, and fairness. While I am satisfied that an order ought to be made pursuant to section 38 of the BIA in this case authorizing Lifeline to proceed with its claim against LawPRO, I am also satisfied that the terms of that order required to make it just include a term permitting Bridgepoint to participate in the action and also participating in recovery under the applicable policy or policies of insurance.
[51] To be clear, Lifeline has already proven the quantum of its claim; it argues that Bridgepoint has not. In concluding that Bridgepoint is entitled to participate in claims against the insurance policy or policies responsive according to their terms, Bridgepoint must still prove its claim, including the quantum thereof: see Polar Products Inc. v. Hong Kong Bank of Canada, 1992 CanLII 1321 (BCSC), followed in Ontario in Maple City Ford Sales (1986) Ltd., Re, (1998), 39 O.R. (3d) 702, 1998 CanLII 14833.
[52] Bridgepoint takes the position that it has already proven the quantum of its claim and such has been recognized by the trustee in bankruptcy in the claims register. I am not prepared on the record before me to determine whether the quantum of Bridgepoint's claim has been proven or not. It has filed a proof of claim, and is in the process of issuing its statement of claim.
[53] Moreover, I cannot determine on the basis of the record before me, and nor in my view should I determine in disposing of this motion, which LawPRO policy or policies [there may be different policies applicable to losses incurred or sustained in different years] apply or respond to which claims of which creditors.
[54] Those issues should be determined, if not resolved on the consent of all parties, in the action against LawPRO in respect of which authority pursuant to section 38 is now granted. LawPRO, whose counsel attended as an observer on this motion but took no position, would be, it would seem to me, a proper party to any proceeding in which a determination was sought as to the quantum of proven claims as against the applicable insurance policies.
[55] What I am doing today is determining whether authority should be granted pursuant to section 38 of the BIA to bring a proceeding against LawPRO, and if so on what terms.
[56] For the reasons stated above, Lifeline is entitled to advance its claim, but on terms such that Bridgepoint is entitled to participate, and, subject to the quantification issue I have noted above, share in the proceeds payable by LawPRO pursuant to the responsive policy or policies.
[57] Neither counsel was in a position at the conclusion of argument to make submissions regarding costs. Both parties shall submit to me through the Commercial List Office a bill of costs and submissions on costs not to exceed three pages in length, within 10 days of this endorsement.
Osborne J.
Released: November 23, 2022