Defendant lacked standing to challenge s. 38 order under Bankruptcy and Insolvency Act: ruling

Act allows creditor to obtain court order letting it take over a proceeding at its own risk

Defendant lacked standing to challenge s. 38 order under Bankruptcy and Insolvency Act: ruling

The Ontario Court of Appeal has rejected the appeal of an insurance company that allegedly refused to accept the plaintiffs’ offer to settle a personal injury action within policy limits before the trial.

In McEwen (Re), 2021 ONCA 566, the plaintiffs filed a personal injury action in March 2011 against the McEwens, who were insured with the appellant insurance company for $1 million, and against their own insurers, in relation to a 2009 motor vehicle accident.

The McEwens filed for bankruptcy in September 2011. The plaintiffs’ personal injury action was automatically stayed and was listed as an unsecured claim for $375,000 in the sworn statement of affairs for the bankruptcy.

The plaintiffs obtained an order in October 2012 which lifted the stay of proceedings and which granted them leave to continue prosecuting the personal injury claims. After the trial, the jury found the McEwens liable to the plaintiffs for a total amount of $2,610,744.32, inclusive of damages for pain and suffering and for future care, plus costs and interest. However, this amount was subject to the insurance policy’s limit of $1 million.

In October 2016, the plaintiffs filed a proof of claim in the McEwens’ estate for $624,349.01 and asked the trustee in bankruptcy to initiate a bad faith claim against the appellant insurer. But the trustee refused to take action, on the basis that the estate had no funds.

With the trustee’s consent, the plaintiff applied for an order under s. 38 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3, seeking to be assigned to the action instead. The plaintiffs alleged that the appellant was acting in bad faith when it refused to accept the plaintiffs’ offer, before the trial, to settle the personal injury action within policy limits.

After the Ontario Superior Court of Justice granted the s. 38 order, the trustee assigned its interest in the action to the plaintiffs, pursuant to s. 38(2). In September 2019, the Superior Court dismissed the appellant’s motion to set aside the s. 38 order. The appellant insurer thus appealed, with leave.

The Court of Appeal for Ontario, which agreed with the motion judge’s finding that the appellant lacked standing to challenge the s. 38 order, dismissed the appeal. The appellate court cited the general rule that a proposed defendant has no right to standing to challenge the motion judge’s grant of the s. 38 order, subject to certain limited exceptions aiming to ensure that the administration of justice and the integrity of the bankruptcy process will be respected.

The appellant argued that a defendant would have standing to review an issued s. 38 order under s. 187(5) of the Bankruptcy and Insolvency Act because Isabelle v. The Royal Bank of Canada, 2008 NBCA 69, provided an additional exception for a determinative discrete and genuine issue of law.

The appellate court disagreed, stating that the appellant had misconstrued Isabelle, which did not mean to create a new exception to the general rule that a proposed defendant lacks standing to assail a s. 38 order. According to the appellate court, the New Brunswick Court of Appeal in Isabelle addressed standing at the s. 38 motion itself, and not standing to challenge an issued s. 38 order. Isabelle applies to a proposed defendant who is present at the s. 38 hearing because of its status as a creditor.

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