Legal Blog

Role Reversal

Sometimes the positions of various parties to an action appear to be the opposite of what you might expect. Of course, there are reasons for the seeming role reversal; you simply have to analyse the situation more closely to find out what they are. Re Fields, a 2002 decision of the Ontario Superior Court of Justice, was one such case. 

Policy

Once a bankrupt assigns into bankruptcy, all of the bankrupt’s property becomes the property of the trustee in bankruptcy, who then has to distribute the assets under the provisions of the Bankruptcy and Insolvency Act (BIA). The BIA exempts from this result the property that is barred from ordinary seizure under the Execution Acts of each province. In essence, if an unsecured creditor cannot seize the property of a debtor before the debtor is bankrupt, then the same property is not transferred to the trustee upon bankruptcy. In each case, the policy behind the legislation is to allow the debtor to retain a minimum amount of assets to continue to meet the exigencies of life.

One of the permitted exemptions under the Ontario Execution Act is a motor vehicle not exceeding $5,000 in value. Another is an exemption for chattels, used in the debtor’s business, not exceeding $10,000 in value. Section 3(1) of the Execution Act states that if a business chattel exceeds $10,000, then the chattel can be seized and sold but the first $10,000 of the sale price must be paid to the debtor.

What Happened

The creditor of the bankrupt had a security interest in the bankrupt’s car. The bankrupt owed the creditor $22,000. The car was worth $11,000. The creditor did not register under the Personal Property Security Act (PPSA). Accordingly, it was in the same position as all of the other unsecured creditors of the bankrupt if the car formed part of the assets of the bankrupt’s estate. If the car was exempted, then the security interest would continue to apply.

The debtor did not claim the exemption for the car. The creditor then took an anomalous position by claiming the exemption on behalf of the debtor for whose benefit the exemptions were created.

The creditor asserted that the first $5,000 of the value of the car was exempted and the remaining value of the car formed part of the bankrupt’s estate. The creditor was therefore able to claim that it should receive the first $5,000 by virtue of its unregistered security interest. The trustee in bankruptcy took the position that it owned all of the property in the car.

We now have a fight over the grand sum of $5,000, although we assume that the precedent was important to the institutional creditor.

Exemption 

The judge reviewed the Execution Act and the various sections in it dealing with exemptions. She noted that the legislature allowed for a scheme by which a business chattel could be sold for an amount greater than the exemption amount with the debtor receiving the first proceeds up to the exemption amount. She also noted that the legislature did not set up the same type of scheme for the sale of a car. Accordingly, she decided that the Execution Act meant what it said. There was no implied scheme; a car was either worth $5,000 or less or it was not. Since the car in this case was worth more than $5,000, it was not exempt.

The judge presumed that, when it enacted the Execution Act, the legislature knew that most automobiles have a value greater than $5,000. Presumably, the legislature intended to exempt old clunkers because it was not worthwhile to sell them. It was not giving the debtor an amount of $5,000 towards transportation. This contrasts with the policy of allowing the debtor up to $10,000 towards tools necessary to continue to earn a living.

Since there was no exemption for the car, the creditor lost and the trustee won.

Who Claims Exemption 

In case the judge was wrong in her first ruling, she also ruled on the creditor’s claim that it could claim the exemption on behalf of the debtor. Again, she looked at the policy of the BIA and the Execution Act. The policy behind the provisions was to allow the debtor/bankrupt to get on with financial life. The provisions were not enacted to allow a creditor, who had failed to secure its position under the PPSA, to secure an advantage over other unsecured creditors.

The judge was able to support this position by reviewing the Execution Act. She noted that under section 3, a debtor could elect to receive proceeds of sale up to the exemption amount and could choose, in other provisions under the Execution Act, which of the chattels to keep. Clearly, these sections were enacted for the benefit of the debtor and could not be overridden by a creditor choosing on behalf of the debtor.

Accordingly, the judge held that if a debtor does not choose to take advantage of an exemption, a creditor cannot. We assume that in the present case, the bankrupt preferred that all of the creditors be treated equally, without any preference going to the one creditor. Alternatively, the bankrupt disliked that creditor more than he disliked the others.