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Insolvency - BIA III

. 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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