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Insolvency - BIA - Creditor Standing for Proceeding [BIA s.38]. AssessNet Inc. v. Ferro Estate
In AssessNet Inc. v. Ferro Estate (Ont CA, 2023) the Court of Appeal considered, and allowed, a limitations appeal by a successor creditor acting under court authority [under s.38 BIA, where "the trustee refuses or neglects to take the proceeding"]:[32] Section 12 of the Limitations Act applies to proceedings where the claimant has taken an assignment of a claim from another person or is otherwise claiming through a predecessor in right, title or interest. Subsections 12(1) and (3) provide:12(1) For the purpose of clause 5(1)(a), in the case of a proceeding commenced by a person claiming through a predecessor in right, title or interest, the person shall be deemed to have knowledge of the matters referred to in that clause on the earlier of the following:
1. The day the predecessor first knew or ought to have known of those matters.
2. The day the person claiming first knew or ought to have known of them.
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(3) The day on which a predecessor ... first ought to have known of the matters referred to in clause 5(1)(a) is the day on which a reasonable person in the predecessor’s … circumstances and with the predecessor’s … abilities first ought to have known of them. [33] Claims that have been assigned under s. 38 of the BIA engage s. 12 of the Limitations Act because the assignor of a claim is a predecessor in right, title or interest: Ridel v. Goldberg, 2019 ONCA 636, 147 O.R. (3d) 23, at para. 31. In such cases, the two-year limitation period runs from the earlier of when the predecessor or the person claiming through the predecessor knew or ought reasonably to have known of the elements of s. 5(1)(a) in relation to the claim: Ridel, at para. 14; Indcondo Building Corporation. v. Sloan, 2010 ONCA 890, 103 O.R. (3d) 445, at paras. 17-18.
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(b) The Bankruptcy Context Required Findings of Fact under Section 12 of the Limitations Act
[43] The motion judge’s second error was in failing to consider the limitation period defence within the bankruptcy context. While the reasons make it clear that the motion judge recognized that AssessNet’s claim was in respect of loss or damage to the bankrupt estate, and was a claim it had acquired by assignment from the replacement trustee, her analysis of the limitation period defence did not address the issues under s. 12, as required, or take into consideration the fact that AssessNet was only entitled to pursue the bankrupt’s claim after it obtained orders under s. 38 of the BIA (assigning a claim) and under s. 215 of the BIA (granting leave to sue a trustee).[2] The motion judge approached the matters referred to in ss. 5(1)(a)(i) to (iv) without regard to the dual roles of Persi as principal of AssessNet, a creditor, and as an inspector of the bankrupt estate.
[44] Section 12 of the Limitations Act applies to the determination of when a limitation period has expired where a claim has been assigned under s. 38 of the BIA: Indcondo Building Corporation, at paras. 17-18; Ridel, at paras. 14, 31. Section 12 recognizes that, in relation to an assigned claim, the limitation period begins to run from the earlier of when the predecessor or the assignee first had actual or presumed knowledge of the s. 5(1)(a) elements in relation to the claim: (i) that injury, loss or damage had occurred; (ii) that it was caused by an act or omission; (iii) that the act or omission was that of the respondents; and (iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek a remedy.
[45] The first step is to identify the “predecessor” for the purpose of s. 12, and then to determine when that party had or ought reasonably to have had knowledge of the matters listed in ss. 5(1)(a)(i) to (iv).
[46] The claim asserted in the Bankruptcy Trustee Action is a claim by the bankrupt against the former trustee in respect of various causes of action that are alleged to have arisen during the administration of the bankruptcy. In particular, the claim is for the respondents’ negligence in failing to prevent losses to the bankrupt estate by not supervising or controlling the conduct of Helden, 131 Ontario and the Lawyer Defendants.
[47] At the time the alleged acts and omissions took place (between March 12 and December 22, 2015) the respondents had charge of the bankrupt estate. Indeed, any cause of action the bankrupt had vested in Taylor Leibow under s. 71 of the BIA because, on bankruptcy, the property of the bankrupt vests in the trustee, and includes the bankrupt’s rights to sue: Douglas v. Stan Fergusson Fuels Ltd., 2018 ONCA 192, 139 O.R. (3d) 721, at para. 60, leave to appeal refused, [2018] S.C.C.A. 141; Ridel, at para. 29. Accordingly, the party with control over the claim before it was assigned − the “predecessor” for the purpose of s. 12, was, until April 29, 2016 − when the trustee was replaced, the respondent Taylor Leibow.
[48] The motion judge did not make a finding about whether the predecessor knew or ought to have known about the matters set out in ss. 5(1)(a)(i) to (iv). Her failure to do so however is not material, as there is nothing to suggest that the limitation period began to run in respect of the claim when it was in Taylor Leibow’s control, that is prior to April 29, 2016. The evidence before the motion judge was that Taylor Leibow did not believe it had done anything wrong. In fact, the respondents relied on an expert report on the summary judgment motion expressing the opinion there was no breach of a duty of care in the administration of the bankruptcy. And, while the alleged acts and omissions cover a period both before and after the bankrupt’s death, no one argued that the claim was discoverable within the meaning of s. 5(1)(a) by anyone, including the bankrupt, before the bankrupt’s death.[3]
[49] The second question under s. 12 is when AssessNet, as the assignee of the claim or the “person with the claim”, knew or ought to have known of the matters referred to in s. 5(1)(a).
[50] In Ridel, this court stated that it was an error for the motion judge to have considered the Ridels’ knowledge of the matters referred to in s. 5(1)(a) in relation to a claim against the bankrupt’s principal as creditors, and not as persons taking an assignment of a claim from the bankruptcy trustee. Their knowledge of the matters covered by s. 5(1)(a) did not become relevant “until they had or ought reasonably to have had the authority to pursue the claim”: at para. 52.
[51] Similarly, in considering AssessNet’s knowledge of the s. 5(1)(a) elements, the motion judge did not take into consideration Persi’s role as an inspector, the fact that the proposed defendants were the trustee that the creditors had appointed and that the inspectors were charged with instructing, and the fact that AssessNet could not simply commence an action against the trustee without first obtaining an assignment of the claim under s. 38, and an order under s. 215 authorizing the commencement of an action. In other words, the motion judge did not consider when AssessNet, in the particular circumstances, became, or ought to have become “the person with the claim” to whom s. 5(1) applied: Ridel, at paras. 48, 53. Instead, the motion judge considered the issue of knowledge of the various matters under s. 5(1)(a) as though AssessNet was a claimant in its own right, and not as a party who had obtained the assignment of a claim in a bankruptcy.
[52] The motion judge relied on the exchange of communications between the inspectors and the respondents as evidence that AssessNet knew as early as February 22, 2016, that there was negligence by the respondents in the conduct of the bankruptcy that had caused harm to the bankrupt estate. With respect to s. 5(1)(a)(iv), placing the onus on the appellant, she stated that AssessNet had not satisfied her that the first time it actually knew a legal proceeding would be an appropriate means to seek a remedy against the trustee was not until after the trustee had been replaced: at para. 68; and that “further AssessNet [pointed] to no authority for the proposition that it would not have been appropriate to ask the Trustee to commence proceedings against itself”: at para. 69.
[53] I am not persuaded that the motion judge’s findings concerning s. 5(1)(a), in particular in relation to s. 5(1)(a)(iv), would have been the same if she had considered the issues in the context of s. 12 of the Limitations Act and Persi’s dual role as inspector of the bankrupt and principal of a creditor that ultimately took an assignment of the claim asserted in the Bankruptcy Trustee Action, and if she had applied the correct burden of proof.
[54] The question under s. 5(1)(a)(iv) is when the “person with the claim” knew that the proceeding would have been an appropriate means to seek to remedy the injury, loss or damage caused by the defendant. The “appropriate means” analysis “depends upon the specific factual or statutory setting of each individual case”: Nasr Hospitality Services Inc., at para. 46; see also Dass v. Kay, 2021 ONCA 565, at para. 26, leave to appeal refused, [2021] S.C.C.A. No. 379. Whether a proceeding is an appropriate means to remedy a claimant’s damage, injury or loss “turn[s] on the facts of each case and the abilities and circumstances of the particular claimant”: Fercan Developments Inc. v. Canada (Attorney General), 2021 ONCA 251, 157 O.R. (3d) 81, at para. 16.
[55] In the present case there are a number of factors that are relevant to the “appropriate means” analysis that would need to be considered. At the time Persi was not only the principal of AssessNet, but an inspector who had statutory duties to oversee the administration of the estate, to instruct the trustee and to authorize the trustee to commence legal proceedings relating to the property of the bankrupt: see BIA, s. 30(1). At the time that he and the other inspector became aware of a possible claim against the respondents, as the creditors’ representatives they owed fiduciary duties to the general body of creditors: Impact Tool & Mould Inc. (Estate Trustee of) v. Impact Tool & Mould Inc. (Interim Receiver of) (2006), 2006 CanLII 7498 (ON CA), 79 O.R. (3d) 241 (C.A.), at para. 28. Among other things, Persi’s reliance on the lawyer Jackson’s advice that Savage was doing a good job, and the steps taken by the respondents against Helden, 131 Ontario and the Lawyer Defendants, including obtaining several orders at the insistence of the inspectors, ought to have been considered in the context of such duties. And, before commencing the action asserting the bankrupt’s claim against the respondents in its own name, AssessNet would have had to obtain an order under s. 38 of the BIA and leave of the court under s. 215. In these circumstances, when would it have been legally appropriate to have commenced the proceeding – that is to assert a claim by AssessNet in the name of the bankrupt?
[56] The respondents contend that, under s. 5(1)(a)(iv), AssessNet could have avoided the expiry of the limitation period by commencing the Bankruptcy Trustee Action without complying with s. 38 or s. 215 of the BIA, and later seeking an order nunc pro tunc to validate the action. This argument is misplaced. The issue is not what AssessNet could have done to avoid the running of the limitation period, but whether, on the facts of the case and considering its abilities and circumstances AssessNet ought reasonably to have known that the proceeding was appropriate.
[57] In my view, in any event, encouraging creditors to commence lawsuits and then seek nunc pro tunc orders to cure procedural irregularities is inconsistent with the BIA’s purpose of providing for the orderly administration of the bankrupt’s affairs. There is good reason for not wanting to encourage creditors, acting as inspectors, to be required to prematurely institute a proceeding because of knowledge gained in their roles as inspectors. In 407 ETR Concession Company Limited v. Day, 2016 ONCA 709, 133 O.R. (3d) 762, at para. 48, leave to appeal refused, [2016] S.C.C.A. No. 509, Laskin J.A. observed that it seemed to him that “one reason why the legislature added ‘appropriate means’ as an element of discoverability was to enable courts to function more efficiently by deterring needless litigation”: see also Tracy v. Iran (Information and Security), 2017 ONCA 549, 415 D.L.R. (4th) 314, at para. 79, leave to appeal refused, [2017] S.C.C.A. No. 359. . McEwen (Re)
In McEwen (Re) (Ont CA, 2021) the Court of Appeal considered the rule that a defendant in an assigned lawsuit does not have standing to challenge the assignment:(1) Traders had no standing to challenge the s. 38 order
[27] In order for Traders to advance its second and third issues, it must establish that the motion judge erred in holding that it had no standing to challenge the s. 38 order.
(a) The general rule is that a proposed defendant has no standing to challenge a s. 38 order
[28] The established and strict rule, subject to “certain limited exceptions”, is that a defendant to an action assigned under s. 38 has no standing to contest the assignment: Shaw Estate v. Nicol Island Development Incorporated, 2009 ONCA 276, 248 O.A.C. 35, at paras. 44-45. But for the exceptions, the proposed defendant to an intended action has no right to notice of the application for a s. 38 order, no right to be heard at the application, and no right to review or appeal the order if it is made: Coroban Plastics Ltd., Re (1994), 1994 CanLII 1135 (BC CA), 10 B.C.L.R. (3d) 52 (C.A.) (sub nom Formula Atlantic Financial Corp. v. Attorney General of Canada), at para. 8. The motion judge in Formula Atlantic, in explaining the defendant’s lack of standing, noted that a proposed defendant’s rights are not adversely affected by the transfer from trustee to creditor of whatever right of action may exist: “[t]he order … imposes no liability on the [proposed defendant] which did not previously exist, and leaves it free to assert in the action every defence it ever had”: at para. 8.
[29] In Shaw, at paras. 43-45, Cronk J.A. reviewed the jurisprudence that establishes the general rule against standing and the limited exceptions. Cronk J.A. explained that the reason for the limited exceptions is “to ensure that the administration of justice and the integrity of the bankruptcy process had not been undermined”: at para. 48. Thus, the defendant will be granted standing to contest a s. 38 order when there are allegations of “abuse of process, non-disclosure, procedural irregularities, fraud and misrepresentation to the court”: at para. 48. As well, where the s. 38 order imposes obligations on the defendant to the assigned action, directs it to take specific steps in the litigation, or subjects it to costs, it will have standing to move to vary the order: Shaw, at para. 45.
[30] The appropriate practice for a defendant claiming standing under the exceptions is to challenge the s. 38 order by bringing an application for review under s. 187(5) of the Act: Shaw, at para. 46. Section 187(5), however, does not give the defendant standing it does not otherwise have: Formula Atlantic, at para. 11. Unless an exception applies, the defendant to an action assigned under s. 38 cannot resort to s. 187(5) to attempt to review and rescind a s. 38 order authorizing a creditor to proceed with an action against it.
[31] As noted already, in this court Traders does not contest the motion judge’s finding that there was no misrepresentation or lack of disclosure that would allow Traders standing. In this court Traders submits that the Shaw exceptions are not exhaustive. It submits the New Brunswick Court of Appeal recognized a different exception in Isabelle v. Royal Bank of Canada, 2008 NBCA 69, 336 N.B.R. (2d) 332. Traders submits that Isabelle stands for the proposition that a defendant has standing to challenge a s. 38 order on the basis of a “discrete and genuine issue of law that if decided in favour of the potential defendant would avoid the need to defend a lawsuit that never should have been commenced in the first place”: Isabelle, at para. 39.
(b) Isabelle does not change the law
[32] In my view Traders misconstrues what was said in Isabelle. On my reading, the New Brunswick Court of Appeal did not intend to create a new exception to the general rule that a proposed defendant has no standing to challenge a s. 38 order. Isabelle had nothing to do with standing to challenge a s. 38 order that has been issued. Isabelle addressed standing at the s. 38 motion itself. Isabelle established that where a proposed defendant is also a creditor, and thus has notice of another creditor’s s. 38 motion, a motion judge has a narrow discretion to grant that proposed defendant standing on the s. 38 motion if it “raises a discrete and genuine issue of law that if decided in favour of the potential defendant might well avoid the need to defend a lawsuit that should never have been commenced in the first place”: at para. 39 The circumstances of this case are different.
[33] The issue in Isabelle was whether a bank, which was both the proposed defendant to the s. 38 assigned action and a creditor, should have been granted intervener status to oppose another creditor’s s. 38 motion. The proposed defendant had received the notice of motion because it was also a creditor. The court said a proposed defendant that is also a creditor was entitled to participate in the s. 38 proceedings “for the limited purpose of preserving his or her right to share rateably in the spoils of the action”: at para. 33. The court also recognized that a motion judge, when hearing a s. 38 motion, retained a narrow discretion to grant a proposed defendant who is also a creditor standing to raise a determinative discrete and genuine of law: at paras. 5, 39.
[34] In my view, it is a mistake to divorce the court's comments from the context of the case and understand them as generally applicable. The court’s comment in Isabelle applies only to a proposed defendant who happens to be at the s. 38 hearing because it is also a creditor. The court was not suggesting that a party named as a defendant in a s. 38 order could be granted standing to move to set aside the order after it had been made.
[35] It may well be more efficient to allow a defendant, who is participating in the s. 38 motion as a creditor, to raise a decisive discrete and genuine issue of law in opposing the motion, but there is no economy in allowing a defendant to commence a s. 187(5) process to review and rescind the s. 38 order after it has been made rather than raising the alleged decisive issues on a summary judgment motion in the assigned lawsuit itself. Isabelle alluded to the situation in which the proposed defendant had not been given notice of the s. 38 motion and suggested, “then presumably the potential defendant has the right to raise the issue on a preliminary motion once the lawsuit is filed”: at para. 38.
[36] In my view, Isabelle provides no support for the contention that a defendant has the right to standing to review an issued s. 38 order, under s. 187(5), on the basis of a determinative discrete and genuine issue of law.
[37] I conclude that Traders, having abandoned its allegations of misrepresentation and lack of disclosure, does not have standing to challenge the motion judge’s grant of the s. 38 order.
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