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Insolvency - BIA - Liability of Trustee and Receiver [BIA s.215]

. Flight (Re)

In Flight (Re) (Ont CA, 2022) the Court of Appeal considers s.215 of the BIA, which governs liability of "the Superintendent, an official receiver, an interim receiver or a trustee" under the BIA. In doing so the court considers the distinction between suing someone 'in their personal capacity' as opposed to their 'representative capacity':

[1] Section 215 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”) requires that permission of the court be obtained to bring an action against, among others, a trustee in bankruptcy “with respect to a report made under, or any action taken pursuant to, this Act”. This appeal[1] concerns the type of lawsuit to which s. 215 of the BIA applies.

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(b) Section 215 of the BIA

[36] Section 215 of the BIA states: “Except by leave of the court, no action lies against the Superintendent, an official receiver, an interim receiver or a trustee with respect to any report made under, or any action taken pursuant to, this Act.”

[37] The Supreme Court explained the context in which s. 215 is to be understood, its purpose, and the test that governs whether permission to sue a trustee should be granted, in GMAC Commercial Credit Corporation – Canada v. T.C.T. Logistics Inc., 2006 SCC 35, [2006] 2 S.C.R. 123.

[38] In general, “the duty of the trustee is to protect both the creditors and the public interest in the proper administration of the bankrupt estate”: GMAC, at para. 58. But the BIA does not, except for specific matters, confer immunity from suit on a trustee. Instead, s. 215 serves a gatekeeping function. It allows the bankruptcy court to screen out or prevent actions that are frivolous or vexatious or that do not disclose a cause of action, or for which there is no factual support, so that the trustee need not respond to them. This avoids the cost and distraction of litigation that would make the bankruptcy process unworkable. Section 215 sets a low threshold of review for the bankruptcy court, which does not involve a final determination of the merits of a claim. Rather, the section focuses on screening out only “manifestly unmeritorious claims”, ensuring that legitimate claims can be advanced for adjudication in forums, other than the bankruptcy court, that have jurisdiction over the merits of the claim: GMAC, at paras. 55-61, 66.

(c) Is the Action Against Mr. Adamson in a Personal Capacity and Therefore Outside the Scope of s. 215 of the BIA?

[39] The appellants argue that there is uncertainty about what the motion judge meant when she found that the Action did not require leave under s. 215 of the BIA because it was against the trustee in a personal capacity. They submit that if she meant that s. 215 was not applicable because Mr. Adamson, rather than Adamson Inc., was named as defendant, then she erred.

[40] The appellants submit that when an individual who is a director, officer, or employee of a corporate trustee is sued in relation to the performance of the trustee’s duties, s. 215 is applicable just as it would be if the corporate trustee was sued. They rely on Braich (Re), 2007 BCSC 1604, 41 C.B.R. (5th) 260, a decision of the Supreme Court of British Columbia that stated, at paras. 35-36:

The object of s. 215 is to ensure that the bankruptcy process is not rendered unworkable by the Trustee being hindered by actual or threatened vexatious lawsuits in connection with the administration of the bankruptcy.

In Canada many trustees in bankruptcy are corporations. The BIA imposes on bankruptcy trustees many duties, some of which have been described above. A corporate entity can only discharge its duties through its directors, officers and employees. If the scope of s. 215 were limited to protecting only the corporate trustee in bankruptcy itself, then the trustee’s directors, officers and employees who execute the trustee’s obligations under the BIA could be subjected to vexatious lawsuits without leave of the bankruptcy court. Such a result cannot have been the intention of Parliament when it passed the statute. Such a restriction would undermine the entire purpose of s. 215 as consistently articulated by the courts.

See also Lloyd W. Houlden, Geoffrey B. Morawetz and Janis P. Sarra, Bankruptcy and Insolvency Law of Canada, loose-leaf (2022-Rel. 6), 4th ed. (Toronto: Thomson Reuters, 2009), at para. 10-6.

[41] I agree with the view expressed in Braich. Section 215 applies when an action alleges that the individual was the trustee and the alleged wrongdoing is predicated on the individual having the powers and responsibilities of the trustee.

[42] However, it is not clear that the motion judge was relying on the distinction between Mr. Adamson and Adamson Inc. when she referred to the Action as having been brought against the trustee in its personal capacity. She nowhere makes that distinction, and the distinction is not made in the amended statement of claim in the Action. The motion judge analysed the claim as one against the trustee, and the claim itself refers to Mr. Adamson as though he was the trustee.

[43] As illuminated by the cases she cited, the motion judge might have been relying on a different distinction, one that juxtaposes an action against a trustee in a representative capacity with one complaining that the trustee’s conduct was in a personal capacity. The distinction is made in a case referred to by the motion judge, Environmental Metal Works Ltd. v. Murray, Faber & Associates Inc., 2013 ABQB 479, 568 A.R. 198, at para. 48, in these terms:

Had the legislature not enacted s. 215, the bankrupt’s creditors would have the right to commence an action and obtain a judgment against the trustee in its representative capacity for actions taken pursuant to the BIA. Such creditors would thereby subvert the bankruptcy process by suing the trustee as representative instead of proving their claims in bankruptcy. Therefore, a plaintiff must only apply for leave when suing the trustee in its representative capacity not when suing the trustee in its personal capacity. [Emphasis added.]

[44] With respect, I doubt the analytical utility of this distinction in identifying what s. 215 covers.

[45] Section 215 requires a relationship between the substance of the action and the role of the defendant as trustee. The text of the section specifies that it applies to an action “with respect to any report made under, or any action taken pursuant to, this Act”. The words “with respect to” connote the broadest possible connection between two subject matters: R. v. Nowegijick, 1983 CanLII 18 (SCC), [1983] 1 S.C.R. 29, at p. 39; R. v. Penunsi, 2019 SCC 39, [2019] 3 S.C.R. 91, at para. 41. And the section clearly contemplates that in the course of an “action taken pursuant to” the BIA, an actionable wrong may be committed; otherwise, there would be no point in providing that the court may grant permission to bring such an action.

[46] The phrase “suing the trustee in its personal capacity” is intended to describe an action where the required connection is lacking, while the phrase “suing the trustee in its representative capacity” is intended to describe an action where the required connection is made. The problem is that the phrases simply reflect a conclusion without explaining how that conclusion is reached.

[47] The central question in deciding whether s. 215 applies is whether the connection contemplated by the section is present, and this question is answered by examining the relationship between the alleged wrongdoing complained of in the Action and the role of a trustee. Neither the descriptive tags applied to the causes of action, such as negligence or breach of fiduciary duty, nor the assertion in the statement of claim that those causes of action are advanced against Mr. Adamson in a personal capacity are determinative.

[48] Here, Mr. Adamson’s alleged involvement in the trustee’s administration of Mr. Flight’s bankruptcies forms the basis of the negligence claim. It is the basis on which Mr. Adamson is alleged to have owed a duty to the respondents, and it sets the standard of care he is alleged to have breached. It undergirds the fiduciary duty claim, as it forms the basis on which he is alleged to have owed, and breached, his fiduciary duties. Each of his alleged failures is of something he is said to have been required to do, and failed to do, and in some cases had the sole power to do, as trustee. The misfeasance alleged is misfeasance in his role as trustee. Even the allegation of fraud is in respect of statements made to creditors, the court, and the CRA in his role as trustee.

[49] Where a person sued was involved in the acts complained of as a trustee in a bankruptcy, is alleged to have been performing duties incidental to the administration of the estate, and is alleged to have owed the plaintiff duties as a trustee, the claim falls within s. 215: Grimanis v. Harris & Partners Inc., 2009 CanLII 10673 (Ont. S.C.), at paras. 31-34, per Morawetz J. That is the situation here.

[50] It follows that the motion judge erred in finding that because the Action alleged that Mr. Adamson was sued in “his personal capacity”, the Action was outside the scope of s. 215.

At paras 51-61 the court considers whether s.215 applies the allegations of omission.