Leave Required To Sue Representative Of Trustee In Bankruptcy

• Published date: 19 July 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Gardiner Roberts LLP
• Author: Mr James R.G. Cook

Trustees in bankruptcy are granted protection from civil claims for acts and omissions under the Bankruptcy and Insolvency Act (" BIA"), as the statute requires that a plaintiff obtain leave of the court to pursue some types of claims.

In Flight (Re), 2022 ONCA 526 (CanLII), the Ontario Court of Appeal determined that a motion judge erred in allowing a civil action for damages to be pursued against an individual representative of a trustee in bankruptcy without first obtaining leave to do so.

The respondent (Flight) made four assignments into bankruptcy in 2004, 2006, 2011, and 2016. The appellant trustee (Adamson Inc.) was the trustee in respect of each of these bankruptcies. The individual appellant (JA) was the representative of Adamson Inc. with carriage of Flight's bankruptcies.

In 2018, during his fourth bankruptcy, Flight discovered that between 2003 and 2018, his former spouse (LeBlanc), who was also his bookkeeper and power of attorney, had misappropriated approximately $206,000 from his business. Flight was able to recover about $30,300 from LeBlanc, which he did not turn over to the trustee.

In April 2018, Flight complained to the Office of the Superintendent of Bankruptcy about the trustee's failure to detect what LeBlanc had done. Disputes then arose between Flight and the trustee concerning the terms upon which he could be discharged from bankruptcy and how the payments from LeBlanc should be treated.

In October 2020, Flight filed a Consumer Proposal under section 66.11 of the BIA. In February 2021, the proposal was accepted by Flight's sole significant creditor, and his bankruptcy was deemed annulled.

Prior to his discharge from bankruptcy, Flight had commenced an action against JA seeking declaratory and monetary relief. The central allegation was that JA, as the "Licensed Insolvency Trustee" for each of the bankruptcies, failed to detect and prevent LeBlanc's fraudulent conduct and then failed to sue her. The action did not name, or refer to, Adamson Inc., but it treated JA as though he were the trustee.

Adamson Inc. and JA objected to the action commenced by Flight against JA on the basis that at the time of its commencement, (i) Flight had not been discharged from bankruptcy, and (ii) no permission was obtained under section 215 of the BIA to bring the action against them.

Section 215 of the BIA states:

Except by leave of the court, no action lies against the Superintendent, an official receiver, an interim receiver or a trustee...