In the case of Bankruptcy Hanson, 2022 ONSC 6591,1 the
1. whether proceeds of professional liability insurance were subject to relief under section 38 the Bankruptcy and Insolvency Act (“BIA”), which allows a creditor of a bankrupt estate to pursue estate litigation in place of the estate trustee; and
2. when and in what circumstances a creditor who takes an assignment of a claim from a trustee in bankruptcy can do so to the exclusion of all other creditors.
The Court found that the proceeds of professional liability insurance were subject to section 38 relief, but that other creditors (even those who had not yet obtained judgment against the estate) were entitled to participate and share in the proceeds payable by the insurer.
The motion arose out of the bankruptcy of an
Loans had been made to clients of their law firm, which were funded by
Hanson filed an assignment into bankruptcy on
Lifeline obtained a lift stay order on
The trustee consented to the relief sought by Lifeline under section 38 of the BIA.
However, the latter part of the motion was opposed by
Also of relevance to the issues before the Court was the generally accepted “first-past-the-post” principle – holding that an insurer otherwise liable under a policy cannot delay paying out the entire policy limit to a plaintiff who had obtained judgement simply because a second claimant has advanced a claim to which the policy may respond, but did not have judgment.2
Under section 38 of the BIA, a creditor of the bankrupt estate can obtain the trustee’s right to pursue estate litigation where the trustee refuses or fails to pursue such litigation. A creditor may obtain an order authorizing them to bring a proceeding in their own name and at their own risk and expense, and on such other terms and conditions as the Court may direct. A creditor may only obtain such an order, however, where the creditor requests the trustee to take a proceeding that in their opinion would be for the benefit of the estate of a bankrupt and the trustee refuses or neglects to do so.3 Where such an order is made, the trustee shall assign and transfer to the creditor all right title and interest in the chose in action which is the subject matter of the proceeding.4 However, any benefit derived from such a proceeding, to the extent of his claim and the costs, belongs exclusively to the creditor instituting the proceeding, and the surplus, if any, belongs to the estate.5
The Court of Appeal has clarified the three conditions that an applicant must satisfy to obtain a section 38 order:
i. the applicant must be a creditor of the bankrupt at the date of the bankruptcy;
ii. the applicant must have requested that the trustee commence the proceeding now sought to be commenced; and
iii. the trustee must have refused.6
Lifeline relied on
In Meisels, the
Bridgepoint argued that the purpose of a section 38 assignment is to ensure that the bankrupt’s assets are preserved for the benefit of creditors by providing a mechanism for creditors to proceed with an action when the trustee refuses or fails to act. In response to the first-past-the-post point, Bridgepoint argued that in a bankruptcy setting, judgment creditors remain unsecured creditors in the same class and with the same priority as other unsecured creditors.
On the first issue, the Court agreed with the reasoning in Meisels and
The Court held that Lifeline met the test and that an order authorizing it to bring the claim against LawPRO pursuant to section 38 should be granted.
The second issue was whether the Court should impose, as a term and condition of the order, that Bridgepoint should be permitted to join in the action and share in the proceeds. Although Bridgepoint did not yet have a judgment, it was in the process of issuing a claim and seeking a lift stay order. The Court explained that once those steps are taken, it will be in the same position as is Lifeline, although it will have arrived at that position later in time: both will be judgment creditors of the Bankrupt, and both are unsecured creditors.
The Court cited “the overarching objectives of the bankruptcy regime of efficiency, equitable treatment of like claims and fairness”12 in finding that Bridgepoint is entitled to participate and share in the proceeds payable by LawPRO pursuant to the responsive policy or policies.
The key takeaways from this decision are:
- A creditors right to claim under a professional liability insurance policy is capable of an assignment under section 38 of the BIA;
- Where certain types of insurance (largely first-party insurance) may form part of a bankrupt’s estate, third party liability policies likely do not; and
- Unsecured creditors, in an equal position, may be afforded the same opportunity to advance their claims, even where one party is not yet a judgment creditor.
1 Bankruptcy Hanson, 2022 ONSC 6591.
2 Solway v Lloyd’s Underwriters, 2005 CanLII 10650 (ONSC) at paras 64-65; and Abuzour v Heydary, 2014 ONSC 6229 at paras 36-37.
3 Bankruptcy Hanson, 2022 ONSC 6591 at para 19; Bankruptcy and Insolvency Act, RSC, 1985, c B-3, ss. 38(1) (“BIA”).
4 BIA ss. 38(2)
5 BIA ss. 38(3)
9 Meisels v
10 Meisels at para 16.
11 Meisels at para 17.
12 Bankruptcy Hanson, 2022 ONSC 6591 at para 50.
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