Bankruptcy and Insolvency Act

Ontario: a statute-barred debt is unprovable in bankruptcy

In In re: John Trevor Eyton, Master Mills held that a statute-barred debt is unenforceable at law and is therefore unprovable in bankruptcy:

[11]           A debt which is statute barred is unenforceable at law and therefore may not be a provable claim in bankruptcy.  A creditor ought not enjoy a windfall on an otherwise unenforceable debt simply because the debtor was assigned, voluntarily or otherwise, into bankruptcy.  To allow the statute barred debt to be proven would permit the creditor to receive dividends on a pari passu basis with all other properly proven creditors who, but for the bankruptcy, would have been able to legally enforce their debts.  Creditors must not be permitted to use the provisions of the BIA to effectively revive their enforcement rights and collect on statute barred debts.  This is not the intention of the BIA which provides for the fair and orderly distribution of the bankrupt’s property among the creditors with proven and enforceable claims.

[12]           The statute barred debt is not extinguished.  Its existence and the failure to voluntarily pay the debt may constitute an act of bankruptcy to support an application for a bankruptcy order, but contrary to the obiter of Newbould, J., the debt may not stand as a provable claim in bankruptcy.

Ontario: Court of Appeal on the interaction of s. 5(1)(a)(iv) and s. 18 of the Limitations Act

Two aspects of the Court of Appeal’s decision in Ridel v. Goldberg are noteworthy.

First, the court held that a contribution and indemnity proceeding does not become an appropriate remedy for a loss only when the main action resolves.  Section 5(1)(a)(iv) will not suspend the limitation period as against a second defendant where a plaintiff has commenced a legal proceeding against another defendant for the same wrong:

[70]      The appellants rely on s. 5(1)(a)(iv) of the Limitations Act to argue that the appeal of the 2013 Judgment postponed the running of the limitation period against e3m. They say that, because the appeal may have eliminated e3m’s liability to the Ridels and hence e3m’s claim against Goldberg, they would not reasonably have known that an action was “an appropriate means” to seek to remedy e3m’s losses until the appeal was dismissed.

[72]      The appellants rely on this court’s decision in Independence Plaza 1 Associates, L.L.C. v. Figliolini, 2017 ONCA 44, 136 O.R. (3d) 202, a case involving an action in Ontario to enforce a foreign judgment, in support of their argument that it was not legally appropriate to commence a claim against Goldberg until the appeal of the 2013 Judgment was determined. In Figliolini, this court held, at para. 77:

 In the usual case, it will not be legally appropriate to commence a legal proceeding on a foreign judgment in Ontario until the time to appeal the judgment in the foreign jurisdiction has expired or all appeal remedies have been exhausted. The foreign appeal process has the potential to resolve the dispute between the parties. If the judgment is overturned, the debt obligation underlying the judgment creditor’s proceeding on the foreign judgment disappears.

[73]      The appellants say that, just as this court held that the basic limitation period for an action to enforce a foreign judgment in Ontario runs from the date of exhaustion of all appeals (subject to discoverability principles), the same should apply to a claim that, as here, is based on a domestic judgment. In either case, the debt obligation underlying the claimant’s proceeding would disappear if the judgment were overturned.

 [74]      In my view, Figliolini does not apply by analogy or otherwise. The main issue in Figliolini was whether s. 16(1)(b) of the Limitations Act (which provides that there is no limitation period in respect of, among other things, “a proceeding to enforce an order of a court, or any other order that may be enforced in the same way as an order of a court”) would apply to an action to enforce a foreign judgment. The court rejected that argument, and then went on to determine when the basic two-year limitation period for an action to enforce a foreign judgment would begin to run.
 [75]      Figliolini dealt only with actions to enforce foreign judgments. Strathy C.J.O. noted that “a judgment creditor who brings an Ontario proceeding on a foreign judgment must show that the foreign court had jurisdiction and that the judgment is final and for the payment of money”: at para. 51. An action to enforce a domestic judgment is, by s. 16(1)(b) of the Limitations Act, not subject to any limitation period. And, importantly, actions such as the present action – which are not to enforce a judgment, but to claim indemnity – are governed by their own provisions in the Limitations Act that would be entirely undermined if the appellants’ argument were given effect. This is the fatal flaw in the appellants’ reliance on Figliolini.
 [76]      Unlike proceedings to enforce a foreign judgment, which require finality, there is no requirement that in order to effectively claim contribution and indemnity there must be a final judgment against the claimant. To the contrary, the two-year limitation period runs from the date the claim is made against the first wrongdoer, subject to the discoverability rules in s. 5(1)(a): Mega International, at para. 74. In Canaccord, this court noted that s. 18 of the Limitations Act specifically departs from the previous law for contribution claims between tortfeasors, where the limitation period ran against the party claiming indemnity from the date of judgment: at para. 20.
 [77]      While not determinative, this court’s decision in Tapak v. Non-Marine Underwriters, Lloyd’s of London, 2018 ONCA 168, 76 C.C.L.I. (5th) 197, leave to appeal refused, [2018] S.C.C.A. No. 157, is instructive. In that case, the appellants relied on s. 5(1)(a)(iv) to argue that an appeal against other parties, if successful, might have eliminated their losses and that they therefore did not know that their action for contribution and indemnity was “an appropriate means” to seek to remedy their losses until the appeal was dismissed. At para. 13, the court rejected this argument, stating:
 [Section] 5(1)(a)(iv) is not intended to be used to parse claims as between different defendants and thus permit one defendant to be pursued before turning to another defendant. Rather, it is intended to address the situation where there may be an avenue of relief outside of a court proceeding that a party can use to remedy their ‘injury, loss or damage’….

I agree with the latter observation that s. 5(1)(a)(iv) is not intended to operate in the manner proposed by the appellants.

[78]      In the present appeal, the appellants assert that it was legally appropriate for e3m to delay an action against Goldberg until the Prior Action was finally disposed of on appeal. This is precisely the sort of litigation in stages which will not delay the commencement of a limitation period for purposes of s. 5(1)(a)(iv). In the usual case, s. 5(1)(a)(iv) will not suspend the limitation period as against a second defendant where a plaintiff has commenced a legal proceeding against another defendant for the same wrong: Presley, at para. 31. This general principle is buttressed by the specific and certain rules for the commencement of claims for contribution and indemnity ushered in by s. 18 of the Limitations Act. Sharpe J.A., in Canaccord, carefully described the legislative history in concluding that s. 18 provided a “marked departure from” and “significant reforms to” the previous regime governing limitation periods for claims for contribution and indemnity: at para. 27. Under the previous law, a tort claimant seeking contribution and indemnity could wait for judgment in the main action before commencing a claim for indemnification. In contrast, “s. 18 significantly shortens the limitation period governing contribution and indemnity claims to two years from the date the first alleged wrongdoer was served with the underlying claim, thereby encouraging resolution of all claims arising from the wrong at the same time”: Canaccord, at para. 20.

This is the first time the court has confronted the tension between s. 18 and its recent appropriateness jurisprudence.  It is settled that an alternative process with the potential to eliminate the plaintiff’s loss can suspend the discovery of a claim.  In a claim for contribution and indemnity, if the main action results in the dismissal of the claim, the defendant will have no loss for which to claim contribution and indemnity.  The main action will have eliminated the plaintiff’s loss.

However, this is clearly at odds with the intent of s. 18, which the court notes.  I think the court resolved this problem as best it could: the main action is not an alternative process, but the same litigation.

Secondly, the court reiterated that s. 12 of the Limitations Act applies to claims asserted by a creditor who has taken an assignment of a claim of a bankrupt under s. 38 of the BIA. The applicable date of discovery is the earlier of the predecessor’s discovery of the claim, or the person claiming through the predecessor’s discovery of the claim.  The assignment does not restart the limitation period.

The court’s analysis is well-reasoned and instructive:

[44]      In this case, by contrast, the appellants are pursuing a claim that initially belonged to e3m and that vested in the trustee on e3m’s bankruptcy. The claim for breach of Goldberg’s fiduciary and other duties to e3m is not one that the appellants could have pursued before e3m’s bankruptcy. Indcondo did not address the question of when the limitation period under s. 12 would run in respect of a creditor who may well have known of the potential claim by the bankrupt, but had no way to enforce it until the bankruptcy.

 [45]      The appellants characterize the motions judge’s error here as a failure to consider s. 5(1)(a)(iv) of the Limitations Act in relation to the claim against Goldberg. Whether a proceeding was an appropriate means to remedy a claim is an essential element in the discoverability analysis and the failure to consider s. 5(1)(a)(iv) is an error of law: Presley, at para. 15.
 [46]      I agree with the appellants that, because they lacked capacity to bring a claim in the name of e3m against Goldberg, any personal knowledge they might have had before e3m’s bankruptcy respecting a claim did not cause the limitation period to run against them pursuant to s. 12(1). In my view, however, this result does not flow from the application of s. 5(1)(a)(iv).
 [47]      In determining when the limitation period began to run in respect of the appellants’ claim, the question is when they, as “claimants” – that is, as persons who reasonably had the claim in question – knew or ought to have known of the matters referred to in s. 5(1)(a). The application of the test in s. 5(1)(a) requires first that the claims at issue be defined or identified: Morrison, at paras. 33, 49.
 [48]      In this case, the claim advanced in the appellants’ action is not a claim by them personally, or one that they could have advanced personally (as was the case in Indcondo), but a claim they are asserting on behalf of the bankrupt, e3m, against its former principal, Goldberg. Section 5(1) applies to “the person with the claim”. When they were litigating against e3m in the Prior Action, the appellants may well have known of the various matters under s. 5(1)(a) in the general sense, but because they were not and could not have been “the persons with the claim” at that stage, any such knowledge was immaterial.
 [49]      Until e3m was bankrupt, any claim against Goldberg for breach of his duties as a director could only be pursued by e3m. The appellants had no right, title or interest in the claim. They had no ability to bring the claim while the claim continued to belong to e3m.

[51]      Similarly, in this case, the appellants could not have asserted a claim against Goldberg for wrongs done to e3m until they obtained the s. 38 order. In other words, until they obtained the s. 38 order, they had no standing to claim for e3m’s losses. Any knowledge of Goldberg’s wrongdoing in relation to e3m, whether by virtue of what they themselves had pleaded in the Prior Action, or when they received Pepall J.’s reasons in the 2013 Judgment, was not sufficient for them to be able to act.

 [52]      The motions judge’s conclusion that, because of their personal knowledge of the material facts in relation to e3m’s claim against Goldberg, the limitation period began to run against the appellants as early as July 2006 and as late as April 2013, was therefore in error. Their knowledge of those matters did not become relevant until they had or ought reasonably to have had the authority to pursue the claim, which was, at the very earliest, upon the bankruptcy of e3m in January 2015.
 [53]      Under this analysis, s. 5(1)(a)(iv) is not engaged. The question is not whether the appellants knew or ought to have known that a proceeding by the company would be an appropriate remedy for Goldberg’s alleged wrongs. Until they had control over the claim, or the means to obtain such control (by moving promptly in e3m’s bankruptcy), they were not “claimants” for the purpose of s. 5(1)(a) and therefore their knowledge was not the knowledge of claimants under the section.

Ontario: s. 36 of the BIA has no impact on the limitation period

Section 38 of the Bankruptcy and Insolvency Act permits a creditor to obtain the court’s authorisation to commence a proceeding in the creditor’s own name.  The need for the court’s authorisation doesn’t operate to extend the limitation period.

In King Insurance Finance (Wines) Inc. v. Byers, the court in a bankruptcy proceeding issued an order authorising the plaintiff to commence proceedings in its own name to recover assets the bankrupt may have transferred.  The plaintiff argued that the limitation applicable to this claim didn’t commence until the date of the order.

Justice Faieta correctly rejected the argument as baseless:

[34]           In my view, the need for approval under section 38 of the BIA does not operate to extend the limitation period under the LA, 2002.

[35]           There is nothing under the LA, 2002 or the BIA which supports the Plaintiff’s submission.

[36]           The interaction of the BIA and the LA, 2002 was resolved by the Ontario Court of Appeal in in Indcondo Building Corp.v Sloan, 2010 ONCA 890 (CanLII), 103 O.R. (3d) 445 where the Court found that a creditor commencing an action under section 38 of the BIA acquired no higher right than the Trustee.  The Court ruled, at paragraph 20, that:

The application of s. 12(1) [of the LA, 2002]  to a creditor claiming through the trustee will be to make effective the earlier discoverability date of either the assignor or the assignee, so that an assignment cannot have the effect of re-starting the running of a limitation period. Ordinarily, this would operate to the benefit of the defendant. If the creditor were aware of the underlying facts under s. 5(1)(a) of the LA, 2002 and failed to bring a proceeding within the limitation period, the creditor would be statute barred from taking advantage of enhanced recovery under a s. 38 order.