Asserting Limitation Period Defences in the Bankruptcy Context
A Case Comment on AssessNet Inc. v. Ferro Estate, 2023 ONCA 577
The Court of Appeal for Ontario in AssessNet Inc. v. Ferro Estate, 2023 ONCA 577 recently considered when an action commenced in respect of a claim that has been assigned pursuant to s. 38 of the Bankruptcy and Insolvency Act (the “BIA”) will be statute-barred under the Limitations Act, 2002 (the “Limitations Act”). Being a creditor of the bankruptcy estate of Lucio Anthony Ferro, AssessNet Inc. (the “Appellant”) asserted a claim against an accounting firm and an employee thereof (the “Respondents”), collectively being the former bankruptcy trustee of Ferro’s estate (the “Original Trustee”), for their alleged acts and omissions in the administration of Ferro’s bankruptcy.
Ferro made an assignment in bankruptcy in March 2015. He was the principal of a law firm to whom AssessNet supplied medical reports for its clients’ personal injury claims. The principal of AssessNet was appointed as one of two inspectors of the bankrupt estate. In November 2015, the Original Trustee obtained an order approving the sale of the law firm’s client files to another law firm for a percentage of the fees generated by the files. Months later, on February 22, 2016, the Original Trustee was advised by the purchaser law firm that many of the client files it had purchased had already been settled and, by March 2016, inspectors of the estate discussed with the Original Trustee certain potential claims by the bankrupt estate against the individuals who had been responsible for operating and overseeing the financial and administrative functions of the law firm (the “Administrators”). At the second meeting of creditors, the Original Trustee was removed as bankruptcy trustee and replaced with a new trustee. On March 13, 2018, the Appellant sought an order under s. 38 of the BIA for an assignment of the bankrupt’s claim against the Respondents and was granted leave to commence proceedings in its own name and at its own expense against the Respondents. The Appellant’s action against the Respondents was commenced on that same day. The Appellant asserted, inter alia, negligence and breach of fiduciary duties by the Respondents in failing to supervise or control the conduct of the Administrators.
The Respondents moved for summary dismissal on the ground that the action was statute-barred, and the motion judge granted summary judgment dismissing the action. The motion judge found that the Appellant had sufficient knowledge from which to draw a plausible inference of liability of the Respondents by February 22, 2016 (i.e., the date on which the Respondents informed the inspectors of the bankruptcy estate that the purchaser law firm had advised that many of the files it had purchased had been settled).
On appeal, the Court of Appeal allowed the appeal and set aside the dismissal of the Appellant’s action against the Respondents. In so doing, the Court provided important guidance on the interplay between s. 38 of the BIA and the provisions of the Limitations Act.
1. Claims Assigned Under S. 38 of the BIA Engage S. 12 of the Limitations Act
Section 4 of the Limitations Act provides for a basic limitation period of two years from the date of discovery of a claim. Section 5 sets out the framework for determining when a claim is discoverable. The overarching question is whether the claimant knew or, exercising reasonable diligence, ought to have known of the material facts stipulated under s. 5(1)(a) that give rise to a claim.
When a claimant advances its claim through a predecessor in right, title or interest, the s. 5 analysis must be conducted with regard to s. 12 of the Limitations Act. Section 12 provides that, for the purpose of s. 5(1)(a), the claimant advancing an action shall be deemed to have knowledge of the matters referred to in s. 5(1)(a) on the earlier of: (a) the day on which the predecessor first knew or ought to have known of those matters; or (b) the day on which the claimant first knew or ought to have known of those matters.
In the bankruptcy context, claims of a bankrupt may be assigned to a creditor from a trustee in bankruptcy pursuant to an order under s. 38 of the BIA. Subsection 38(1) provides that “where a creditor requests a trustee to take any proceeding that in the creditor’s opinion would be for the benefit of the estate of a bankrupt and the trustee refuses or neglects to take the proceeding, the creditor may obtain from the court an order authorizing it to take the proceeding in its own name and at its own expense and risk, on notice being given the other creditors of the contemplated proceeding, and on such other terms and conditions as the court may direct.” Subsection 38(2) provides: “On an order under subsection (1) being made, the trustee shall assign and transfer to the creditor all his right, title and interest in the chose in action or subject-matter of the proceeding.”
Accordingly, the Court of Appeal confirmed that when, as in this case, claims have been assigned under s. 38 of the BIA, the discoverability analysis under s. 5 of the Limitations Act to determine whether the assigned claim is statute-barred must be informed by s. 12 of the Limitations Act. The knowledge of the predecessor must feature into the discoverability analysis, not simply that of the claimant.
2. Defendants Raising a Limitation Period Defence Bear the Burden of Proof
The expiry of a limitation period is an affirmative defence, and the defendant raising it has the burden of proving that defence. A defendant may rely on the presumption in s. 5(2) of the Limitations Act that the claim was discovered on the day that the act or omission on which the claim is based took place. In order to rebut the presumption in s. 5(2), a plaintiff need only prove that its actual discovery of the claim within the meaning of s. 5(1)(a) was not on the date of the events giving rise to the claim.
If a plaintiff rebuts the presumption, the onus stays with the defendant to prove that the plaintiff knew or ought reasonably to have known the elements of s. 5(1)(a) more than two years prior to the commencement of the proceeding.
The Court of Appeal held that the motion judge erred when she stated that the effect of s. 5(2) of the Limitations Act is that the plaintiff bears the onus of showing that it lacked the requisite knowledge and ought not to have known the requisite facts prior to the expiry of the limitation period. In so stating, the motion judge effectively reversed the onus of proof.
The claims concerned the post-bankruptcy period between March 12 and December 22, 2015. Once the Appellant established that neither it nor its predecessor in right knew about the claim between March 12 and December 22, 2015, its evidentiary burden under s. 5(2) of the Limitations Act was discharged, and the burden fell on the Defendants to prove that the Appellant or its predecessor in right knew or ought to have known of the matters set out in s. 5(1)(a) at least two years before the action was commenced.
The Court of Appeal confirmed that the onus is on defendants to establish the affirmative defence that the limitation period has expired and, further, as the moving party in a summary judgment motion to dismiss the claim on the basis that it is statute-barred, the defendants likewise bear the onus of proving that there is no issue requiring a trial.
3. Bankruptcy Context Requires Findings of Fact Under S. 12 of Limitations Act
In determining whether a bankrupt’s claim that has been assigned is statute-barred, a court must take into consideration the fact that the plaintiff advancing the claim was only entitled to pursue the claim after obtaining the requisite order under s. 38 of the BIA and, where the claim is advanced against a trustee, the requisite order under s. 215 of the BIA.
The court must make specific findings of fact to (1) identify the “predecessor” for the purpose of s. 12 of the Limitations Act, (2) determine when that predecessor had or ought reasonably to have had knowledge of the matters listed in s. 5(1)(a) of the Limitations Act and (3) determine when the assignee of the claim, as the “person with the claim,” knew or ought reasonably to have known of the matters listed in s. 5(1)(a).
The Court of Appeal held that the motion judge erred in failing to consider when the Appellant, in the particular circumstances, became or ought to have become the “person with the claim.” Instead, the motion judge considered the issue of knowledge of the various matters under s. 5(1)(a) as though the Appellant was a claimant in its own right. The motion judge ignored that the Appellant could not simply commence an action against the Original Trustee without first obtaining an assignment of the claim under s. 38 and an order under s. 215 authorizing the commencement of the action. She ignored that the Appellant, who served as an inspector of the bankruptcy estate, was—in addition to a creditor in its own right—a representative of the general body of creditors with statutory duties to oversee the administration of the estate. Accordingly, the motion judge failed to make findings of fact about when the Appellant ought reasonably to have known that the action was appropriate, having regard to its abilities and circumstances.
The decision is not the first time that the Court of Appeal has held that a BIA s. 38 assignment engages s. 12 of the Limitations Act, but it is unique in that the claim at issue arose after the bankruptcy filing against the Original Trustee itself. It will be interesting to see how, at the trial directed by the Court of Appeal, the question of knowledge of the predecessor is addressed. Since the claim initially arose against the Original Trustee and was vested (by operation of the BIA) in that same trustee, and since the claim then passed (again by operation of the BIA) from the Original Trustee to the replacement trustee without assignment or transfer, the question will have to asked as to which trustee’s knowledge is the relevant knowledge of the predecessor for the purpose of s. 12 of the Limitations Act. It will also be interesting to see if any trial decision has broader application to a BIA s. 38 assigned claim against a trustee where there has been no substitution of the trustee, such that the knowledge of the predecessor for the purpose of s. 12 of the Limitations Act is also the knowledge of the defendant.
The appellate decision in AssessNet Inc. v. Ferro Estate serves as a reminder that the bankruptcy context from which an action originates must inform any analysis regarding whether such action is statute-barred under the Limitations Act. Defendants asserting an affirmative defence that the action was not brought on time bear the evidentiary burden of proving that either the claimant or its predecessor in right knew or ought to have reasonably known that the action was appropriate sooner than when it was ultimately commenced.
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