Can a trustee lay claim to insurance proceeds payable to a bankrupt?
The Bankrupt filed an assignment in bankruptcy in September 2015. The total sum of unsecured claims of the creditors of the Bankrupt was $46,170.94. The Bankrupt had a mortgage estimated at approximately $51,000. The Trustee concluded that there was very little equity in the Bankrupt’s home.
The Trustee first opposed the discharge of the Bankrupt pending determination of whether the Bankrupt had surplus income that could be paid to the estate for distribution amongst the unsecured creditors. Following two counselling sessions with the Trustee, the Trustee calculated that the Bankrupt had a surplus income obligation amounting to $13,121, which was to be dealt with over a period of 21 months by remitting payments of $624.82 to the Trustee each month. The Bankrupt remitted $1,050 towards the surplus income obligation, and $12,071 remains outstanding.
In May 2017, the Bankrupt’s home and all of its contents were destroyed by fire. The Bankrupt notified the Trustee of this and the fact that he had a home fire insurance policy with Aviva Canada Inc. (the “Insurer”). The Insurer initially paid to him the sum of $10,000 to cover living expenses and the cost of replacing some of the home’s content.
In August 2017, the Trustee made a motion for a conditional order of discharge. Although the Trustee was notified about the house fire, it did not seek to adjourn the motion to permit it to assess whether the Bankrupt received payment in compensation for his and his family’s losses arising from the fire. No provision was made for any potential insurance payment for the losses sustained by the Bankrupt. The Court ordered the Bankrupt to pay the sum of $12,071 by way of 20 monthly payments, after which an absolute order of discharge would be granted. The Bankrupt did not make the required payments as per the terms of the conditional order of discharge.
In May 2018, the Bankrupt, through his lawyer, received two additional payments from the Insurer—$128,021.11 for building loss and $68,804.57 for loss of contents. Upon receiving notice of these additional payments, the Trustee sought an Order to vary the terms of the conditional order of discharge, requiring a total payment of $58,073.80. The Bankrupt opposed the Trustee’s application, arguing res judicata and issue estoppel. He submitted that it will cost more than $200,000 to replace his home, and if the initial conditional order of discharge is varied, the amount that he would receive would not be enough to cover the entire cost of rebuilding.
The Court referenced s. 68 of the Bankruptcy and Insolvency Act (the “BIA”), which provides a definition of “surplus income”. The definition makes it clear that a gift, a legacy or an inheritance, or any other windfall is not included in the determination of surplus income. While there is no definition of “windfall” in the BIA, insurance proceeds for an asset that was deemed by the Trustee to have little, if any, equity constitute a windfall. The proceeds are not an asset that should now be made available to the unsecured creditors.
The Trustee made the proper determination that there was no appreciable equity in the Bankrupt’s house and property at the time that the assignment in bankruptcy was made. The intervening event resulting in the complete destruction of the home did nothing to change that. The insurance proceeds merely put the Bankrupt back in the position he was in prior to the house fire.
The Court denied the Trustee’s application to vary the terms of the conditional discharge order, and ordered the Bankrupt to pay—out of the insurance proceeds—the balance of $12,071.22.
Counsel: Vincent Gillis of Vincent A. Gillis Inc. for Arthur James Wadden