Summaries Sunday: OnPoint Legal Research

One Sunday each month OnPoint Legal Research provides Slaw with an extended summary of, and counsel’s commentary on, an important case from the British Columbia, Alberta, or Ontario court of appeal.

BDO Canada Limited v Dorais, 2015 ABCA 137

Areas of Law: Bankruptcy; Trustees; Prosecution by trustee

~ Trustees in bankruptcy may pursue claims on behalf of the bankrupt estate, including those brought by creditors that accrue to the benefit of all creditors, but may not pursue the claims of individual creditors that benefit them individually.~

BACKGROUND: The deceased Michel Dorais and a number of companies previously controlled by him were declared bankrupt. While the companies were still operating, they took funds from investors who subsequently alleged that they made their investments based on negligent or fraudulent misrepresentations. There were also allegations that one of the Dorais companies purchased a significant amount of life insurance on the deceased’s life, the proceeds of which were improperly diverted to the Respondent Shauna Dorais, or to the Respondent, Grant Dewar, who was one of the deceased’s creditors. It was further alleged that real estate bought with funds from the Dorais companies was placed in the name of Ms. Dorais. Two groups of creditors started actions seeking personal remedies including rescission of their investment contracts, and damages. They also alleged a fraudulent preference in the transfer of an insurance policy to Mr. Dewar, and alleged that property in the name of Ms. Dorais was impressed with a constructive trust. After Mr. Dorais died, a receiver was appointed for many of his companies. In May 2011, the receiver commenced an action alleging fraudulent preferences with respect to the dealings in the insurance policies. In December 2011 the creditors’ and receiver’s actions were stayed during case management, and the receiver was directed to assign the estate and the Dorais companies into bankruptcy. The Appellant Trustee, BDO Canada Limited, was appointed in January 2012. The Respondents took the position that they were never served with the receiver’s statement of claim, and there were potential limitation problems with respect to any new action by the trustee in bankruptcy. In early 2014, the creditors assigned their actions to the Appellant, who proposed to prosecute them on behalf of the bankrupt estates. The Appellant applied to lift the stays that had been imposed during case management. The Respondents took the position that a trustee in bankruptcy has no capacity to prosecute claims of individual creditors. The case management judge agreed and refused to lift the stays.

APPELLATE DECISION: 

The appeal was allowed in part. The Court of Appeal found that the case law establishes that a trustee may pursue claims on behalf of the bankrupt estate, but may not pursue the claims of individual creditors. The Appellant argued that claims for fraudulent preferences are advanced on behalf of all the creditors, not just any individual plaintiff creditor. The Court considered the claims of the groups of creditors that had assigned their actions to the Appellant, and found that to the extent those claims were personal – alleging misrepresentations to themselves personally, investments they made in reliance on those misrepresentations, and resulting personal loss – the Appellant could not pursue the claims on their behalf. The Appellant conceded this point. However, the Appellant argued that the collective components of the creditors’ claims, such as the assignation of one of the insurance policies to Mr. Dewar at a time when the assignor was bankrupt, and the use of the bankrupt companies’ funds to purchase property for Ms. Dorais and life insurance accruing to her benefit, benefit all the creditors and not just the individual named plaintiffs. The Appellant argued that the case management judge should have lifted the stay with respect to these collective components of the creditors’ actions. The Court of Appeal considered that should those claims succeed the assets would revert back to the original owner, not to the individual plaintiffs seeking the declaration. None of the creditors would receive any preferential payment or treatment. Furthermore, if the Respondents do hold property in trust for one or more of the bankrupt companies, the Appellant has a duty to attempt to recover it. The Court went on to consider whether the stay could be lifted only with respect to the collective components of the creditors’ claims. The Court found that it could be, and that the stay should be lifted to the extent of permitting the Appellant to pursue the fraudulent preference and constructive trust claims.

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Counsel Comments provided by G. James Thorlakson,
Counsel for the Appellant:

“Trustees in bankruptcy have an obligation to seek out and recover assets that have been concealed or put beyond the reach of the creditors by improper preferences, conveyances or settlements or by invalid security. The courts have recognized that such actions by Trustees benefit the creditors of the bankrupt, and also serve as a deterrent to abuse and frustration of the legislative scheme.

In pursuing such claims, care must be taken to distinguish between claims of individual creditors and claims for the benefit of creditors generally. In Principal Group Ltd. (Trustee of) v Principal Savings & Trust Co., 111 A.R. 81, 80 C.B.R. 313 (Alta Q.B.), the Trustee alleged that the bankrupt and investors in the bankrupt were victims of fraudulent investment schemes and sought leave to bring proceedings. If successful, the recovered property would have accrued to the benefit of the creditors of the bankrupt. However, the Trustee’s application was dismissed on the basis that the Trustee could not pursue claims that the investors were victims of a fraudulent scheme. In BDO Canada Limited v Dorais, the Chambers judge had applied the reasoning in Principal Group and subsequent authorities to conclude that the Trustee would merely be “stepping into the shoes” of the individual plaintiffs to pursue their causes of action.

In allowing the appeal as it related to “collective” claims by creditors, the Court of Appeal observed that there are no policy reasons for artificially limiting the procedural options open to a Trustee in fulfilling its core obligation of bringing in the assets of the bankrupt.

This decision emphasizes the importance of distinguishing between claims of individual creditors and claims brought for the benefit of the general body of creditors. In a bankruptcy where allegations of fraud and diversion of assets are made against the bankrupt company, the claims by individual creditors will be dealt with through the ordinary bankruptcy process. However, “collective” claims, such as allegations of constructive trust and preferential payments can be pursued by the Trustee. There may be considerable factual overlap between the individual creditors’ allegations of fraudulent conduct and allegations that assets were put beyond reach of the creditors generally. The pleadings should make it clear that the Trustee’s action is to recover a collective claim to avoid any characterization that the claim is merely a private action, as such claims cannot be pursued by the Trustee.”