Does a bankrupt require leave to sue a trustee in a personal capacity?

The plaintiff had undergone four bankruptcies over the course of 13 years. He claimed that, following his fourth bankruptcy, he discovered that his former bookkeeper misappropriated approximately $206,000 from his sole proprietorship between 2006 and 2018. He subsequently sued the trustee in bankruptcy in his personal capacity.

He argued that the trustee ought to have detected the fraud perpetrated against the plaintiff in the administration of the four bankruptcies. Specifically, the plaintiff argued that the trustee had failed to detect and appropriately respond to fraudulent activities by the plaintiff’s bookkeeper, and then failed to take any meaningful action to address the fraud’s impact on the fourth bankruptcy after its discovery.

The plaintiff brought a motion for directions as to whether he required leave of the court to continue the action against the trustee pursuant to s. 215 of the Bankruptcy and Insolvency Act. The plaintiff argued that leave was not required because his action was against the trustee in his personal capacity and was not captured by the BIA. In the alternative, the plaintiff argued that, if leave was required, it should be given.

The trustee argued that leave was required because the plaintiff’s complaints related to his administration of the estate. Consequently, the trustee submitted that leave should not be given because the claim was frivolous, vexatious and did not disclose a cause of action.

The Ontario Superior Court of Justice began its analysis by noting that the Supreme Court of Canada has held that the leave provision under the BIA is not to be interpreted as though it applies to any action arising out of the administration of the estate. That is not the way the section is worded. To allege that the trustee made an act of omission is not with respect to a report made under or any action taken pursuant to the BIA.

The plaintiff alleged causes of action against the trustee in his personal capacity for negligence, fraud, breach of fiduciary duty, unjust enrichment and conversion. Consequently, the plaintiff did not require leave under s. 215 of the BIA to commence this action.

The Court noted that the decision that leave was not required did not address the merits of the pleading or the causes of actions alleged. Other issues raised by the trustee (the sufficiency of the pleadings, the merits of the claim, whether the claim discloses a reasonable cause of action, etc.) were best left to be addressed on future motions as the trustee saw fit.

Judge: Justice Tranquilli

Counsel: Tara Vasdani of Remote Law Canada for the plaintiff; Haddon Murray of Gowling WLG for the trustee

Fullcase: https://canlii.ca/t/jgg6b