Legal Blog

Sword

Live by the sword; die by the sword. Bad things can happen when a plaintiff decides to commence an action while still an undischarged bankrupt and, worse yet, does not notify his trustee in bankruptcy of his claim. The plaintiff in Little v. Bramcan Investments Limited, a 2025 decision of the Ontario Court of Appeal, learned this the hard way.

Complaint

Tenant started an action against his former landlord and two of the landlord’s officers and directors. In the action, tenant claimed the value of personal property that landlord converted (by disposition). All of the assets arose out of a fitness and strength building business that tenant ran. The statement of claim alleged that the value of the assets was approximately $250,000, but tenant later claimed that the assets were worth $430,000. Presumably, landlord had taken possession of the leased premises upon tenant’s default and, deciding the assets had no real sale value that would have exceeded the costs of disposition, pitched them.

Timing

Tenant had made an assignment into bankruptcy under the Bankruptcy and Insolvency Act (BIA) on April 13, 2018. He did not inform his trustee in bankruptcy about the existence of landlord’s disposition of the assets. On September 10, 2020, while still an undischarged bankrupt, tenant commenced his action. Landlord discovered the bankruptcy when conducting a cross-examination of tenant in August 2023 in response to a summary judgment motion that tenant had brought.

Landlord then brought a motion to dismiss the claim pursuant to Rule 21.01(3)(b). The rule allows a defendant to move to have an action stayed or dismissed on the ground that the plaintiff is without legal capacity to commence or continue an action. Landlord argued that when tenant made his assignment into bankruptcy, he ceased having any capacity to commence an action for conversion of property; that capacity vested in the trustee in bankruptcy only.

BIA

When making an assignment into bankruptcy, an insolvent person must provide a sworn statement “showing the debtor’s property that is divisible among” his creditors. Further, a bankrupt has the duty to make “discovery of and deliver all his property that is under his possession or control to the trustee.”

The BIA defines property very widely. It includes money, goods, things in action, land, and every description of property, whether real or personal. “Things in action” includes tort and contract claims in relation to property, but not claims for personal injury.

Under the BIA, upon filing of an assignment into bankruptcy, all property of the bankrupt vests in the trustee in bankruptcy, and the bankrupt has no capacity to deal with his or her property.

Property that is exempt from execution or seizure under provincial law is an exception to these rules. In Ontario, exempt property includes “tools and other personal property of the debtor,” currently with a value not exceeding $14,405. Tenant had already claimed that the value of his assets was $430,000 so this exemption was of little use to him.

Given the claimed value of the assets, tenant had to disclose his cause of action in conversion in his statement of affairs and, regardless of disclosure, that cause of action vested in the trustee in bankruptcy. Under the BIA rules, tenant had no capacity to maintain his action against landlord for conversion of his assets.

Misnomer

The law was very clear – so that tenant had to devise an argument to keep his action alive. Tenant therefore argued that the action was not a nullity; it was merely a misnomer (defined generally as an “incorrect, inappropriate, or misleading name or term applied to a person, place, or thing“).

Tenant relied on Rule 5.04(2) that allows a party to a proceeding to add, delete, or substitute a party or correct the name of a party incorrectly named on terms that are just, unless prejudice would result that could not be compensated in costs or by an adjournment. Tenant therefore requested to substitute his trustee in bankruptcy as the plaintiff in the action in his stead.

The motion judge noted that naming tenant as the plaintiff was not merely a formal irregularity. Tenant had a duty to disclose the property to his trustee in bankruptcy, and failed to do so. He also did not reference the bankruptcy in his statement of claim. Accordingly, even if the rule applied, the judge was not inclined to grant the relief claimed because of tenant’s failure to disclose to his trustee in bankruptcy the substantial assets that were the subject of the action.

The judge also held that the rule did not apply. A trustee in bankruptcy is a distinct party from bankrupt, not just a different name for the same party. Further, the trustee in bankruptcy had been discharged, did not participate in the proceedings, and had not requested to be named as a plaintiff in the action.

Appeal

Tenant appealed to the Court of Appeal. In the appeal, Tenant abandoned the misnomer argument. He realised that the lack of consent of his trustee in bankruptcy to be substituted in his stead undercut that argument.

It seems that tenant’s main argument at the appeal hearing was that the equipment and other items, for which he claimed damages in the action, were exempted under the BIA and the Ontario Execution Act.

The Court dealt with this argument with little difficulty. Even if the argument were persuasive, tenant’s claim would be limited to $11,300 (the limit at the time of the action), an amount within Small Claims Court jurisdiction.

Since this was not what the tenant wanted, tenant argued for the first time that he was seeking the return of the equipment rather than damages for its improper disposal – except that the statement of claim did not request this relief and only sought damages.

Finally, tenant argued that his statement of claim included a claim for damages for mental distress, which, as a  personal injury, is also exempt under the BIA. The problem with this argument was that the damages for the claim for mental distress did not arise out of a stand-alone claim. They were directly linked to damages arising from the lost property. The Court held that if the action arising out of the lost property was a nullity, the related claim for mental distress fell with it. The Court quoted with approval from another decision that stated, “The plaintiffs are not advancing a claim that is clearly a personal one; rather, they have threaded a personal claim into the fabric of a cloth of a claim that belongs to the estate in bankruptcy.”

The Court dismissed the appeal.

Limitations

Assume (i) a bankrupt does what he is supposed to do and discloses to his trustee in bankruptcy the action that he wants to commence or, if already started, continue, and (ii) the trustee in bankruptcy does not want to commence or continue the action. Then, once the bankrupt is discharged from bankruptcy, there are circumstances in which the bankrupt can commence or continue his action.

In this case, tenant had learned of the disposition of his property in the fall of 2019 so that the limitation period would have expired in the fall of 2021. He was discharged from bankruptcy on October 21, 2021 so that, perhaps, he could have commenced his action at that point. However, by the time of the February 2024 motion, the motion judge noted that tenant’s time for commencing the action was long gone. The motion judge noted this as an aside with no analysis. It merely explained why tenant was fighting so hard to keep his action alive. However, the interplay between the Limitations Act and the BIA is a complicated one and we suggest that this comment be taken with significant reservations.

 

Image courtesy of HPDorn.

Written by Jonathan Speigel, the founding partner of Speigel Nichols Fox LLP, leads the litigation and construction practices.