• Post category:Court Cases

Flight (Re), 2022 ONCA 526

Is leave required to sue a trustee in bankruptcy in a personal capacity?

The Debtor made assignments in bankruptcy on four occasions: in 2004, 2006, 2011, and 2016. The appellant firm, Adamson Inc., was the trustee in respect of each of these bankruptcies. The individual appellant, Adamson, was the person at the firm with carriage of the Debtor’s bankruptcies. In 2018, during his fourth bankruptcy, the Debtor discovered that between 2003 and 2018, LeBlanc—his former spouse, bookkeeper, and power of attorney—had misappropriated substantial sums from his business.

The Debtor recovered about $30,300 from LeBlanc, which he did not turn over to the trustee. In April 2018, he complained to the Office of the Superintendent of Bankruptcy about the trustee’s failure to detect what LeBlanc had done. As a result of that complaint, the appellants learned of LeBlanc’s activities and the payments that the Debtor recovered from her.

In September 2019, the Debtor and his current spouse commenced an action against Adamson, seeking declaratory and monetary relief. The action did not name, or refer to, Adamson Inc., but treated Adamson as though he were the trustee. The central allegation was that Adamson, as the “Licensed Insolvency Trustee” for each of the bankruptcies, ought to have detected LeBlanc’s misappropriations and, once told about them, ought to have, among other things, sued LeBlanc.

Adamson and Adamson Inc. objected to the action on the basis that at the time of its commencement, (i) the Debtor had not been discharged from bankruptcy, and (ii) no permission was obtained under s. 215 of the Bankruptcy and Insolvency Act to bring the action. The Debtor brought a motion seeking directions with respect to whether he had the right to commence the action as an undischarged bankrupt and, if required, seeking leave to do so under s. 215 of the BIA.

The motion judge, sitting in the bankruptcy court, determined that permission to commence the action under s. 215 was not required for two reasons. First, in her view, actions against trustees in their personal capacity do not require permission. Second, actions that allege omissions do not require permission.

On appeal, the Court of Appeal confirmed that s. 215 serves a gatekeeping function. It allows the bankruptcy court to screen out or prevent actions that are frivolous or vexatious or that do not disclose a cause of action, or for which there is no factual support, so that the trustee need not respond to them. This avoids the cost and distraction of litigation that would make the bankruptcy process unworkable.

Section 215 requires a relationship between the substance of the action and the role of the defendant as trustee. The phrase “suing the trustee in its personal capacity” is intended to describe an action where the required connection is lacking, while the phrase “suing the trustee in its representative capacity” is intended to describe an action where the required connection is made. The central question in deciding whether s. 215 applies is whether the connection contemplated by the section is present, and this question is answered by examining the relationship between the alleged wrongdoing complained of in the action and the role of a trustee.

Here, Adamson’s alleged involvement in the trustee’s administration of the Debtor’s bankruptcies formed the basis of the negligence claim. It was the basis on which Adamson was alleged to have owed a duty to the respondents, and it set the standard of care he was alleged to have breached. The misfeasance alleged was misfeasance in his role as trustee. Even the allegation of fraud was in respect of statements made to creditors, the court, and the CRA in his role as trustee.

Where a person sued was involved in the acts complained of as a trustee in a bankruptcy, is alleged to have been performing duties incidental to the administration of the estate, and is alleged to have owed the plaintiff duties as a trustee, the claim falls within s. 215. The motion judge erred in finding that because the action alleged that Adamson was sued in “his personal capacity”, the action was outside of the scope of s. 215.

Accordingly, the Court of Appeal granted leave to appeal, allowed the appeal and returned the matter to the bankruptcy court to determine whether the respondents should be granted permission to sue Adamson.

Judges: LauwersNordheimer and Zarnett JJ.A.

Counsel: Haddon Murray of Gowling WLG for the appellants Adamson & Associates Inc. and John Adamson; Tara Vasdani of Remote Law Canada for the respondents Brian Wayne Flight and Amber Nicole Flight; and Jacob Pollice and Jennifer L. Caruso of the Department of Justice for the intervener the Superintendent of Bankruptcy

Fullcase: https://canlii.ca/t/jqfmm

By Matilda Lici