Legal Blog

Depends

No, we are not talking about incontinence aids. We are referring to a situation in which a bankrupt has improperly given a preference or fraudulently conveyed property to a third party. When does the limitations period start to run: from the date that a creditor knows that there is a claim or from the date that the trustee knows of it? It seems that the answer depends on the section of the Bankruptcy and Insolvency Act under which the transaction is being attacked. Examples are set out in Re Edwards, a 2010 decision of the Registrar in Bankruptcy of the Ontario Superior Court of Justice and Indcondo Building Corporation v. Sloan, a 2010 decision of the Ontario Court of Appeal.

Edwards

Three days before a bankrupt’s assignment into bankruptcy, a credit union had collapsed the bankrupt’s RSP and applied it to the bankrupt’s debt to the credit union. The trustee brought a motion to set aside the transaction under section 95 of the BIA, which prohibits preferences to arms’ length creditors made within three months of bankruptcy.

Section 95 itself contains no limitations period in which to bring a proceeding. Does that mean that there is none? No. The Registrar quickly decided that, when the BIA is silent, the applicable provincial limitations statute applies.

Timing

The relevant times follow:

Apr. 4, 2006	–	Credit union scoops RSP money.
Apr. 7, 2006	–	Assignment into bankruptcy.
Apr. 19, 2006	–	Trustee writes to credit union demanding that it collapse the bankrupt’s RSP and send money to trustee.
Apr. 21, 2006	–	Credit union writes to trustee and notifies it that by April 4, 2006 it had transferred all of the funds.
May 4, 2006	–	Trustee writes to credit union and requests details as to whom the funds were transferred.
May 10, 2006	–	Credit union acknowledges that it scooped the funds as payment for its own loan.
May 15 2006	–	Some time before then, trustee receives the May 10 letter.
Jul. 2006	–	Credit union acknowledges that it had no security agreement on which it could rely for its seizure of the funds.
May 20, 2008	–	Trustee serves its section 95 motion on credit union.
May 26, 2008	–	Trustee files the motion with the Bankruptcy Court.

Issues

The issues that the Registrar had to decide, and his decisions, are set out below:

1.   From when did the limitations period start to run and how long was it?

–    The limitations period was 2 years because the trustee knew of the claim after 2004. Accordingly, the Limitations Act 2002 applied.

–    The trustee knew by May 15, 2006, when it received the credit union’s letter, that it had a claim against the credit union and the limitations period started then.

–    The subsequent correspondence relating to security was irrelevant. That correspondence was merely evidence gathering, which did not postpone the commencement of the limitations period. The trustee still had 2 years to commence its claim.

–    Quiet contemplation does not postpone the limitations period. If the trustee felt it needed more time to decide what to do, that additional time was included in the 2-year period.

2.   Did the trustee commence its proceedings by May 15, 2008?

–    A served motion does not “commence” proceedings. There must be the imprimatur of the court, which, in this case, does not occur until May 26, 2008, 11 days after the final limitations date.

The Registrar therefore dismissed the trustee’s motion.

Indcondo

A creditor had commenced a fraudulent conveyance action against a debtor in 2001. The debtor went bankrupt in 2004 and the action was therefore stayed. The bankrupt was discharged in 2005. In 2006, presumably before the trustee was discharged, the creditor brought a section 38 application and obtained an order allowing it to commence another FCA action against the bankrupt. The creditor finally brought its action in 2008. Why the creditor dallied for so long at each step of the process and why it did not re-activate the old action was never explained.

The bankrupt claimed that the action was statute barred. It reasoned that, since a section 38 action was, in effect, an assignment of the trustee’s cause of action against a bankrupt, then the creditor was in the same position as the trustee and the trustee’s knowledge was the creditor’s knowledge. Since the trustee discovered its claim in 2004, the two-year limitations period terminated in 2006.

The motions judge agreed with the bankrupt and the creditor appealed to the Ontario Court of Appeal.

Irony

The irony of the appeal was that the creditor argued that the claim was discovered in 2001. Normally a plaintiff in an action wants the claim to be discovered later, not earlier. However, for a claim that was discovered before 2004, the applicable law was the old Limitations Act. That statute had no limitations period for an FCA action. Accordingly, if the claim was discovered in 2001, then there was no limitations period and the action would continue.

Earlier

The court referenced the normal 2-year limitations section of the new Act, but also referenced section 12 of it. Under section 12, when a person claims under the rights of a predecessor, the person is deemed to have knowledge of a claim at the earlier of the day when the predecessor first knew or ought to have known of the claim and the day when the person claiming first knew or ought to have known.

Since the creditor, who had claimed through the rights of the trustee as predecessor, knew of the claim before 2004, the claim was deemed to have been discovered in 2001 and no limitations period applied. The Court of Appeal allowed the action to continue.

Strategy

The facts under Indcondo and Edwards differed. In Edwards, the trustee was suing in its own right and therefore only its knowledge was relevant; in Indcondo, the creditor was suing based on rights that the trustee had and therefore the timing of the acquisition of knowledge of both it and the trustee was relevant.

As time passes, it will become less likely that a creditor will know of a claim before 2004. Accordingly, it is more likely that the 2-year limitations period will apply and will be based on a creditor’s knowledge. If a creditor wants to obtain a section 38 order and realises that it has been too tardy to do so, it would be better if another creditor, who had no knowledge of the fraudulent conveyance, obtained the order and the knowledgeable creditor, whose claim has otherwise been extinguished, agrees under section 38 to pay its proportionate cost and receive the proportionate fruits of the action. In that way, until a court rules against this end run, an action may still be commenced against the bankrupt.