Ruling notes trustee was unaware of filing of action for damages for loss due to fire
The Ontario Court of Appeal has affirmed the dismissal of an appellant’s action for damages based on loss due to fire, as he lacked the capacity to commence it as an undischarged bankrupt person at the relevant time.
In Phillips v. Kheil, 2026 ONCA 215, the appellant made an assignment in bankruptcy in 2013.
Despite the bankruptcy, the trustee in bankruptcy allowed the appellant to continue possessing property that included his residential home with his family and a commercial building with multiple units.
The appellant also continued managing the property. Specifically, he paid the mortgage and other expenses and leased the commercial building units to earn rental income.
The respondents, as tenants, used one unit for their business of dismantling and repairing automobiles.
In 2016, a fire damaged part of the commercial building. Without notifying the trustee, in 2018, the appellant brought an action alleging that the respondents had caused the fire.
In 2019, the appellant secured a discharge from bankruptcy. Sometime afterward, the trustee learned of the appellant’s action and the underlying fire damage.
In 2023, the respondents discovered that the appellant had been an undischarged bankrupt when he had initiated the action. They moved to dismiss his action under r. 21.01(3)(b) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194.
The respondents alleged that the appellant could not commence or continue a legal proceeding regarding the property under s. 71 of the Bankruptcy and Insolvency Act, 1985 (BIA).
In November 2024, Justice Sandra Antoniani of the Ontario Superior Court of Justice dismissed the appellant’s action against the respondents.
First, the motion judge acknowledged that s. 30(1)(l) of the BIA allowed a trustee to assign a bankrupt person the right to commence a legal proceeding regarding the bankrupt’s property.
However, the judge found that the trustee, who had not known about the action, had made no such assignment and had never granted the appellant the right to commence it.
Second, the judge characterized the appellant’s claim for general damages for his loss of enjoyment and use of the property as proprietary, not personal and thus not excluded from the property vested in the trustee.
The appellant appealed the judgment. The appellant asserted that the trustee had appointed him to deal with his primary asset, the combined commercial and residential property, which gave him the capacity to initiate the action.
Alternatively, the appellant argued that the judge erroneously considered his claim proprietary instead of personal.
The Court of Appeal for Ontario dismissed the appeal upon finding no palpable and overriding error in the motion judge’s dismissal of the action.
First, the appeal court saw no reviewable error in the judge’s finding that the appellant lacked the legal capacity to commence the action, as the trustee did not expressly assign him the authority to do so.
The appeal court ruled that requiring the authorization to be express, not implied, would align with the BIA’s purpose of ensuring the equitable distribution of a bankrupt person’s assets among their creditors.
The appeal court noted that the trustee did not know that the property had undergone a fire and that the appellant had brought a legal action to recover damages for the loss.
The appeal court accepted that the trustee might have acquiesced to the appellant’s continued management of the property. However, the appeal court deemed such acquiescence insufficient to authorize the appellant to file the action under s. 30(1)(l).
Second, the appeal court saw no reviewable error in the judge’s finding that the appellant’s claim for general damages for loss of enjoyment and use of the property was proprietary, rather than personal.
The appeal court explained that the appellant’s possession of the commercial units did not transform the claim into a personal one because the alleged fire-related damage concerned real property, vested in the trustee at the relevant time.
Third, the appeal court saw no reviewable error in the judge’s dismissal of the appellant’s motion to amend his action to add a nuisance claim. The appeal court explained that a nuisance claim could not save the action.
The appeal court acknowledged that a nuisance claim could be personal in other circumstances. However, the appeal court held that the nuisance claim here would clearly arise from the proprietary loss of the estate in bankruptcy.
Lastly, the appeal court ordered no costs, given that the respondents did not participate in the proceeding.
