RECENT DEVELOPMENTS IN THE LAW OF STAY OF PROCEEDINGS. Brandon Jaffe Jaffe & Peritz LLP

Transcription

1 RECENT DEVELOPMENTS IN THE LAW OF STAY OF PROCEEDINGS Brandon Jaffe Jaffe & Peritz LLP 1

2 SECTION 69 OF THE BANKRUPTCY AND INSOLVENCY ACT ( BIA ) 2

3 LEGISLATIVE HISTORY OF THE BIA STAY PROVISIONS 1 Since 1923, Canadian insolvency legislation has imposed an automatic stay of proceedings in favour of a debtor who makes an assignment in bankruptcy. The current stay provisions are contained in ss. 69 to S. 69.3(1) states: 69.3 (1) Subject to subsections (1.1) and (2) and sections 69.4 and 69.5, on the bankruptcy of any debtor, no creditor has any remedy against the debtor or the debtor s property, or shall commence or continue any action, execution or other proceedings, for the recovery of a claim provable in bankruptcy. 1 Fiorito v Wiggins, Application for Leave to Appeal of the Applicant at paras Prepared by McCarthy Tétrault [McCarthy Application]

4 However, s of the BIA authorizes a court to lift the stay of proceedings in TWO situations: 1. The creditor or person is likely to be materially prejudiced by the continued operation of those sections; or 2. It is equitable on other grounds to make such a declaration. 4

5 HISTORY OF S S was added to the BIA in 1992, and was subject to minor amendments in Before, s. 69(1) merely provided: On the filing of a proposal made by an insolvent person or upon the bankruptcy of any debtor, no creditor with a claim provable in bankruptcy shall have any remedy against the debtor or his property or shall commence or continue any action, execution or other proceedings for the recovery of a claim provable in bankruptcy until the trustee has been discharged or until the proposal has been refused, unless with the leave of the court and on such terms as the court may impose 2 McCarthy Application at para 13 5

6 HISTORY OF S CONTINUED These provisions reflect the principal policy objective of bankruptcy law, which is to provide for the orderly and fair distribution of the bankrupt s property among his or her creditors on a pari passu basis. 3 By prescribing specific criteria to lift the court s jurisdiction to lift the stay, s avoid[s] a multiplicity of proceedings and prevent[s] any single unsecured creditor from obtaining a priority over any unsecured creditors by bringing an action and executing a judgment against the debtor R v Fitzgibbon, [1990] SCR 1005, as cited in McCarthy Application at para 22 4 Ibid

7 ONTARIO APPROACH TO MATERIAL PREJUDICE In Ontario, courts have recognized five circumstances set out in Advocate Mines Ltd. for when a lift-stay order may be appropriate: 5 1. Actions against the bankrupt for a debt to which a discharge would not be a defence; 2. Actions in respect of a contingent or unliquidated debt, the proof and valuation of which entails a degree of complexity that makes the summary procedure prescribed by the BIA inappropriate; 3. Actions in which the bankrupt is a necessary party for the complete adjudication of the matters at issue involving other parties; 4. Actions brought to establish judgment against the bankrupt to enable the plaintiff to recover under a contract of insurance or indemnity or under compensatory legislation; 5. Actions in Ontario which, at the date of bankruptcy, have progressed to a point where logic dictates that the action be permitted to continue to judgment. 5 Re Advocate Mines Ltd, 1984 CarswellOnt 156, as cited in McCarthy Application at para 27 7

8 ONTARIO APPROACH CONTINUED The list in Advocate Mines is not exhaustive. Ontario courts cite the circumstances described in Advocate Mines as those in which either the creditor would be materially prejudiced or where it would be equitable on other grounds to lift the stay. Reflects statutory provision at issue in Advocate Mines = pre-1992 predecessor to s The factors have proved to be a distraction. Courts have grafted post-1992 statutory language into pre-1992 case law, resulting in a confusing array of interpretations of the material prejudice criterion. 6 6 McCarthy Application at paras 28 and 34 8

9 APPROACH #1: RE CUMBERLAND TRADING INC. Farley J. held: [M]aterial prejudice is an objective prejudice as opposed to a subjective one i.e., it refers to the degree of the prejudice suffered vis-à-vis the indebtedness and the attendant security and not to the extent that such prejudice may affect the creditor qua person, organization or entity. If it were otherwise then a big creditor may be so financially strong that it could never have the benefit of this clause. 7 7 Re Cumberland Trading Inc, 1994 CanLII 7458 (Ont SC), as cited in McCarthy Application at para 35 9

10 CONTINUED On this view, material prejudice concerns the amount that the creditor will lose as consequence of the stay operation, relative to the amount that the creditor is owed. The materiality of the prejudice does not depend on the adverse impact the stay will have on the creditor s affairs, but rather on the debt or security the creditor holds. Measuring materiality this way requires the court to consider 1) availability of assets in the bankrupt estate to satisfy the claim sought to be advanced; 2) strength of the claim itself. 8 8 McCarthy Application at paras

11 APPROACH #2: GOLDEN GRIDDLE CORP. Material prejudice requires differential treatment: What [applicant creditors] must establish is material prejudice to them in the sense that they will be treated differently or some way unfairly, or they would suffer worse harm than other creditors. 9 Lederman J.: By its nature, a stay creates prejudice for all secured creditors while a reorganization is being contemplated. 10 Applicant creditor must show it will be prejudiced materially in a manner that is distinct from other creditors. 9 Golden Griddle Corp v Fort Erie Truck & Travel Plaza Inc, 2005 CanLII (Ont Sup Ct), as cited in McCarthy Application at para Ibid at para 39 11

12 CONTINUED Approach #2 is consistent with the principle underlying Advocate Mines the factors function to distinguish certain kinds of claims (and creditors) from others. 11 Cases that require differential treatment as an aspect of materiality for the purposes of s. 69.4(a) do so in order to distinguish creditors that should be entitled to a lift-stay order from those that should not. 11 McCarthy Application at para 40 12

13 APPROACH #1 VS. APPROACH #2? These two approaches are not necessarily inconsistent with one another. In Golden Griddle, Lederman J. layered the differential treatment requirement atop the objective prejudice requirement that Farley J. laid out in Cumberland Trading. Nevertheless, courts have had considerable difficulty reconciling them. The Canadian bankruptcy regime has suffered for it as have the people who interact with it daily McCarthy Application at para 41 13

14 SCHREYER V SCHREYER 13 The Supreme Court of Canada has only once addressed, in passing, the equitable on other grounds criterion. FACTS: The wife asserted that her equalization claim survived the husband s bankruptcy. HOLDING: Because the wife had not proven her equalization claim in bankruptcy, the husband had been released from it upon discharge. However, LeBel J noted in obiter that: Since this property is beyond the reach of the ordinary creditors, lifting the stay of proceedings cannot prejudice the estate assets available for distribution. In keeping with the wording of s. 69.4(b) BIA, this is why it would be equitable on other grounds to make such an order. 13 Schreyer v Schreyer, [2011] SCR 605, as cited in McCarthy Application at para 24 14

15 RECENT CASE: FIORITO V WIGGINS Fiorito v Wiggins, 2017 ONCA

16 BACKGROUND FACTS The parties separated on February 8, Following two years of custody and access litigation, Fiorito gained custody of their three daughters with substantial access to the daughters. Fiorito did not comply with the access provisions of the agreed settlement. Wiggins brought a contempt motion, heard together with a custody and access trial. Fiorito was held in contempt and sentenced to six months probation. There must be a review of the custody and access order: F (AM) v W (JR), 2011 ONSC

17 CONTINUED On appeal in October 2015, the Court of Appeal set aside the contempt finding and ordered another access review to be held by February 2016 and reduced costs award to $200,000. After the date of February 1, 2016 was set for the review hearing, Wiggins brought a motion for the purpose of obtaining or ensuring payment of the $200,000 costs award. o He wanted security orders and payment as a condition of proceeding with the review hearing. 17

18 CONTINUED During the review hearing, Wiggins brought a motion requesting assistance in enforcing the costs award by garnishment against the financial institutions where the mother had registered assets. o This motion was never heard as Fiorito made an assignment in bankruptcy on February 22, during the review hearing. In the bankruptcy, Fiorito claimed exempt assets of $295,600 (RRSPs) with no other assets with any value. 18

19 CONTINUED The legal effects of Fiorito s assignment in bankruptcy on Wiggins: o o o He was no longer able to enforce the costs award; Upon Fiorito s discharge, that award would be unenforceable; and Fiorito would be able to keep her RRSPs. Although RRSPs are exempt assets in bankruptcy, under Ontario law they are not exempt from creditors outside of bankruptcy, as they are not a class of property specified under the Execution Act, R.S.O 1990, c. E24. 19

20 DECISION OF THE MOTION JUDGE Wiggins brought a motion for an order annulling the bankruptcy or lifting the stay under s of the BIA, and authorizing him to continue his enforcement of the costs award against Fiorito s registered assets. The motion judge considered case law regarding lifting stays to allow a spouse to enforce an equalization claim against exempt assets, including: o Schreyer v Schreyer, 2011 SCC 35, [2011] 2 SCR 605 o Scott (Re), 2014 ONSC 5566, 51 RFL (7th) 233 o Shirkie v Shirkie, 2015 SKQB 303, 67 RFL (7th) 274 Where a bankruptcy stay was lifted to allow a spouse to pursue a family property claim against exempt assets. 20

21 CONTINUED The judge determined that Wiggins was entitled to have the stay lifted based on three factual findings: 1. This was an extreme case of one parent undermining the other parent with the children during 8 years of litigation; 2. The Court of Appeal determined that the mother should pay the father $200,000 in costs for the two trials, but she had paid nothing; and 3. When the court restrained Fiorito from disposing of her RRSPs or dissipating assets and allowed the review hearing to proceed without the payment of the costs award, the court and Wiggins relied on Fiorito s representations in her affidavits that she intended to pay the costs and did not intend to thwart that payment by making an assignment into bankruptcy. 21

22 CONTINUED The judge found that: Wiggins was likely to be materially prejudiced by the continued operation of the stay because Wiggins was likely to receive nothing towards his costs award unless the stay was lifted; Allowing Wiggins to enforce that award against Fiorito s bankruptcy-exempt assets would not affect the other creditors. 14 The difficulty with this articulation is that it describes the situation in which all of Fiorito s unsecured creditors find themselves. o Wiggins is in no different or worse a position than any other unsecured creditor. The BIA confers no special entitlement upon him McCarthy Application at para Ibid at para 43

23 CONTINUED On the alternate ground, it was equitable to grant the declaration. Because the costs debt would be released on Fiorito s discharge from bankruptcy, the discharge was to be stayed for a reasonable period of time to allow Wiggins to take the appropriate enforcement steps. 23

24 TWO MAIN ISSUES BEFORE THE COURT OF APPEAL 1. Did the motion judge err in law by lifting the stay under s of the BIA in order to allow the enforcement of a family law costs award? 2. Did the motion judge err in law by misapprehending the meaning of material prejudice and of equitable on other grounds under s of the BIA? 24

25 COURT OF APPEAL Feldman J.A. rejected Fiorito s submission that differential treatment is a requirement for material prejudice. HOLDING: Material prejudice can either arise when the bankruptcy would treat a creditor unfairly, differently or in some way worse than other creditors, or from the size of the debt and the expected loss. This case satisfied the first test: The motion judge made three factual findings that differentiated [Mr. Wiggins] s position from that of other creditors and demonstrated the unfairness he faced: (i) the need for [Mr. Wiggins] to pursue lengthy custody and access litigation in order to have any relationship with his children; (ii) [Ms. Fiorito] s failure to pay anything toward the costs ordered by the Court of Appeal; and (iii) the fact that [Ms. Fiorito] thwarted the enforcement of the costs award by reneging on assurances she made to the court about her intent to pay the costs and not use bankruptcy to thwart that payment McCarthy Application at para 43 25