



COURT OF APPEAL FOR ONTARIO

CITATION: Douglas v. Stan Fergusson Fuels Ltd., 2018 ONCA 192

DATE: 20180309

DOCKET: C62079

Hoy A.C.J.O., Rouleau, Hourigan, Benotto and
    Roberts JJ.A.

BETWEEN

Art Douglas and Wendy Douglas

Plaintiffs (Respondents)

and

Stan Fergusson Fuels Ltd., Imperial Oil Limited
    and Imperial Oil, a partnership of Imperial Oil Limited and McColl-Frontenac
    Petroleum Inc.

Defendants (Appellants)

Amy Pressman and Diana Weir, for the appellants

Matthew Gervan, for the respondents

Heard: May 23, 2017

On appeal from the order of the Divisional Court
    (Marrocco A.C.J., Herold and Whitten JJ.), dated January 18, 2016, with reasons
    reported at 2016 ONSC 442.

Hoy A.C.J.O.:

[1]

This appeal involves the intersection of
    bankruptcy law and the doctrine of subrogation. It considers whether an insurer
    was entitled to commence a subrogated claim in the name of its bankrupt
    insured.

[2]

I agree with the appellants that the insurer was
    not entitled to do so in these circumstances. At the time this action was
    commenced, the insureds cause of action had vested in his trustee in
    bankruptcy and the insured was an undischarged bankrupt. As a result, the
    insured lacked capacity to bring the action, and the insurer could not commence
    a subrogated claim in his name. I would allow the appeal, and would grant
    summary judgment to the appellants, dismissing the subrogated action commenced by
    the insurer.

[3]

Below, I provide an overview of the facts leading
    to this appeal, the reasons of the motion judge and the Divisional Court below,
    and the parties positions on this appeal. I then discuss the doctrine of
    subrogation and the relevant provisions of the
Bankruptcy
    and Insolvency Act
, R.S.C. 1985, c. B-3 (the
    BIA) before turning to my analysis of the issues raised.

FACTUAL BACKGROUND

[4]

Art and Wendy Douglas purchased a home in
    Kingston, Ontario and arranged for the appellants to deliver fuel oil to their
    home. On January 9, 2008, fuel oil was delivered to the Douglases external oil
    tank. It is alleged that the fuel oil subsequently escaped and contaminated the
    Douglases property. Mr. Douglas informed the appellants about the oil spill
    and Stan Fergusson Fuels Ltd. alerted an emergency response service provider,
    who in turn engaged an environmental clean-up company.

[5]

The following day, the Douglases insurer, State
    Farm Fire and Casualty Company (State Farm), appointed an adjuster, who
    determined that their Homeowners Policy provided coverage for losses associated
    with the spill.

[6]

At the time of the oil leak, Wendy Douglas had
    no ownership interest in the property. Several months prior, on November 14,
    2007, she had been discharged from bankruptcy subject to the stipulation that
    her interest in the property remained vested in her trustee in bankruptcy (the
    Trustee). The Trustee remained on title to the property, together with Mr.
    Douglas.

[7]

The adjuster for the appellants sent invoices
    from the January clean-up to State Farm on March 17, 2008. State Farm paid the
    invoices, and advised that it intended to recover these and any future clean-up
    costs from the appellants.

[8]

The Homeowners Policy contains a subrogation
    clause that provides (in relevant part) as follows::

We will be entitled to assume all
your
rights
    of recovery against others and bring action in
your
name
to
    enforce these rights when
we
make payment or assume liability
    under this policy. [Emphasis in original.
]

[9]

As the Divisional Court found, by this point it
    was clear that State Farm had assumed liability under the Homeowners Policy and
    was entitled to assume Mr. Douglass right of recovery and sue in his name to
    enforce that right. Over the ensuing months, State Farm continued to make
    payments on the policy.

[10]

On or about June 4, 2009, Mr. Douglas filed an
    assignment in bankruptcy. The Trustee also became Mr. Douglass trustee in
    bankruptcy and replaced him on the title to the property. The Trustee advised
    State Farm of this assignment on June 5, 2009.

[11]

The week before Mr. Douglas filed his assignment,
    the Trustee signed a document entitled the Trustees Limited Disclaimer (the
    Disclaimer). The Disclaimer was addressed to State Farm, and recited the
    Trustees intention to sell the property as soon as it was remediated. It also
    disclaimed interest in insurance claims by the Douglases for loss or damage in
    the oil spill to matrimonial household contents not affixed or enjoyed with the
    residential property or proceeds of personal property exempt under the
Execution
    Act
(Ontario)
which would
    not vest in their Trustee in Bankruptcy.

[12]

State Farm paid out the Douglases personal
    contents claims, totaling $8,760.60, to them directly in July 2009.

[13]

In October 2009, the Trustee sold the remediated
    property and satisfied the creditors.

[14]

State Farm made its final payments under the
    policy in November 2009. In total, State Farm spent over $800,000 to remediate
    the property.

[15]

On January 7, 2010, State Farm commenced this
    action against the appellants in the names of Art Douglas and Wendy Douglas. The
    damages claimed are not restricted to those described in the Disclaimer.

[16]

The action was commenced prior to Mr. Douglass
    discharge from bankruptcy. Art Douglas received an absolute discharge from
    bankruptcy on March 5, 2010, and the Trustee was discharged in respect of his
    bankruptcy on August 24, 2012.

[17]

The issue of the Douglases capacity to bring
    this action came before the court in 2013, when the appellants brought a
    summary judgment motion, arguing that the Douglases lacked capacity to commence
    the action because of their bankruptcies, and accordingly State Farms action
    in their names was a nullity.

[18]

State Farm brought a cross-motion for: (a)
    directions with respect to the continuation of the action in the Douglases or
    its own name; (b) alternatively, for a declaration that it was the
dominus
    litis
and had the right to continue and control the action to pursue its
    subrogated claim; and (c) in the further alternative, an order permitting it to
    amend its statement of claim to plead that the plaintiffs were Art Douglas and
    Wendy Douglas by their Subrogee State Farm Fire & Casualty Company.

THE REASONS BELOW

(a)

The Motion Judges Reasons

[19]

The motion judge granted State Farms request
    for a declaration that it was the
dominus litis
, and dismissed the
    appellants motion to strike the claim. He also ordered that State Farm had the
    right to continue and control the action without needing to amend its statement
    of claim to add State Farm as a party. Reasons for this decision were reported
    at
Douglas v. Stan Ferguson Fuels Ltd.
,
2014 ONSC 4709.

[20]

The motion judge found, at paras. 48-51, that
    State Farms right of subrogation was a contingent right that vested at the
    time the policy was entered into and that State Farm became, at common law, the
dominus litis
once the Douglases were fully indemnified.

[21]

The motion judge wrote, at para. 56, that he was
    not persuaded that the [BIA] extinguishes or trumps the subrogation rights of
    State Farm, which vested at the time that the policy was entered into and which
    remained in place at the date of loss. Further, he was not persuaded that
    permitting the claim to proceed would subvert the bankruptcy scheme. He noted that
    the Trustee had satisfied the claims of creditors by selling the property,
    which could not have been sold but for the remediation paid for by State Farm.
    He concluded that an inequitable result would prevail if State Farm could not
    prosecute its claim and that he had the inherent jurisdiction under ss. 96 and
    97 of the
Courts of Justice Act
, R.S.O. 1990, c. C. 43, to grant
    declaratory relief in the circumstances.

[22]

Finally, at para. 54 of his reasons, the motion
    judge reasoned that to grant the motion to strike would incorrectly emphasize form
    over substance.

(b)

The Divisional Courts Reasons

[23]

Justice Hackland granted the appellants motion
    for leave to appeal to the Divisional Court, with reasons reported at
Douglas
    v. Stan Fergusson Fuels Ltd.
,
2015 ONSC 65. He doubted the
    correctness of the motion judges decision on the basis that it is well-settled
    law that the Douglases lost their right to deal with their property, including
    causes of action arising from the oil spill, upon their bankruptcies
.
At para. 8, he concluded
    that because subrogated claims are derivative in nature and an undischarged
    bankrupt is unable to bring an action to enforce property claims, so too was an
    insurer barred from commencing its derivative subrogation claim. He further commented,
    at para. 9, that State Farm was entitled to insist on an assignment from the
    Trustee so that its subrogation rights could be validly pursued, but had failed
    to do so before the limitation period expired.

[24]

However, the Divisional Court dismissed the
    appellants appeal.

[25]

It found, at para. 29, that State Farm had a
    vested contingent right to assume Mr. Douglass right to recover and to bring
    an action that crystallized when State Farm assumed liability for the loss on or
    about March 17, 2008. As a result, State Farms right to bring the action
    crystallized
before
Mr. Douglass assignment into
    bankruptcy.

[26]

The Divisional Court reasoned, at para. 30, that
    when Arthur Douglas made an assignment in favour of his creditors on June 4,
    2009, and his right to recover against the appellants vested in his Trustee, it
    was a right to recover, which was subject to State Farms vested right to
    assume it and State Farms vested right to commence an action in Mr. Douglass
    name to enforce it.

[27]

With respect to Wendy Douglas, the Divisional
    Court found at para. 27 that, subject to applicable provincial exemptions,
    Wendy Douglas had no right of recovery for damages caused to the property. On
    the effective commencement date of the Homeowners Policy, she had already made
    an assignment in favour of her creditors. And after her subsequent discharge,
    her interest in the property remained vested in the Trustee.

[28]

Additionally, at para. 32, it found that the
    Trustee had disclaimed interest in the insurance claims by Wendy and Art
    Douglas for loss or damage arising from the oil spill by the Disclaimer.

[29]

At para. 33, the Divisional Court concluded that
    State Farm was entitled to commence the action in Mr. Douglass name without
    the consent of his Trustee and the appellants summary judgment motion was
    properly dismissed.

[30]

Finally, it observed, at para. 34, that:
    permitting State Farm to continue the action in the name of Art Douglas would
    not impede the Trustee as the law is clear that an insured receives the
    proceeds of a subrogated claim as trustee for the insurer; trust property is
    not divisible among the bankrupts creditors pursuant to s. 67(1)(a); and a
    trustee may apply to the court pursuant to s. 40(2) of the BIA for directions
    concerning property (including a cause of action) upon which the trustee is
    unable to realize without commencing or continuing litigation.

THE PARTIES POSITIONS

(a)


The Appellants Position

[31]

The appellants effectively make four
    submissions:

[32]

First, the appellants submit that the Divisional
    Court made a palpable and overriding error in concluding that, pursuant to the
    Disclaimer, the Trustee had disclaimed interest in the Douglases insurance
    claims arising out of the oil spill. This is because, in their view, the
    Disclaimer was limited to the personal property claims of the respondents.

[33]

Second, they argue that the Divisional Court erred
    in its application of the principle of subrogation and the law as to the effect
    of a bankruptcy order.

[34]

They say recent English authority has clarified
    that the principle of subrogation only gives an insurer an interest in the
    recovered proceeds of an action, not a proprietary interest in the cause of
    action itself:
Ballast Plc, Re,
[2006]
    E.W.H.C. 3189, [2007] B.C.C. 620 (Eng. Ch. Div.)
. They argue that
    the subrogation clause in the Homeowners Policy did not effect an assignment or
    transfer of Mr. Douglass cause of action to State Farm. It only gave State
    Farm the limited right to commence whatever action was open to Mr. Douglas to
    commence, in his name.

[35]

Accordingly, they argue that Mr. Douglass cause
    of action against them for losses arising out of the oil spill passed to and
    vested in the Trustee, and Mr. Douglas ceased to have capacity to commence an
    action upon his assignment in bankruptcy. In support of this principle, they
    cite this courts decisions in
Meisels v. Lawyers Professional Indemnity Company
,
    2015 ONCA 406, 126 O.R. (3d) 448, at paras. 17 and 19;
Watt v. Beallor Beallor
    Burns Inc.
(2004), 1 C.B.R. (5
th
) 141 (Ont. S.C.), at paras. 2
    and 3, affirmed (2004), 1 C.B.R. (5
th
) 149 (Ont. C.A.); and
McNamara
    v. Pagecorp Inc.
(1989), 76 C.B.R. (N.S.) 97 (Ont. C.A.), at p. 2. Since
    Mr. Douglas did not have capacity to commence an action on January 7, 2010,
    State Farm could not commence an action in his name on that date.

[36]

In sum, they argue that the Divisional Courts
    reasoning implicitly transformed State Farms subrogated interest in any
    damages Wendy and Art Douglas might recover into an assignment of their cause
    of action to State Farm.

[37]

Third, the appellants allege that the Divisional
    Court erred in relying upon ss. 40(2) and 67(1)(a) of the BIA to support its
    decision. Section 40(2), reproduced below, requires a trustee in bankruptcy to
    return the bankrupts unrealizable property before the trustees discharge.
    With respect to s. 40(2), the appellants argue that there is no evidence that
    the Trustee had sought directions with respect to the cause of action, or that
    the Trustee had concluded that the cause of action was incapable of disposition.

[38]

Section 67(1)(a), also reproduced below,
    provides that property held by the bankrupt in trust for any other person is
    not divisible among the bankrupts creditors. With respect to s. 67(1)(a), the
    appellants contend that the property at issue in this case is the cause of
    action, and not the proceeds of recovery of that cause of action, and there is
    no authority for the proposition that the cause of action is held in trust for
    the insurer. They say that even though the net proceeds of that cause of
    action, as trust property, would not be divisible among the creditors of the
    bankrupt, the right to bring the cause of action vested in the Trustee.

[39]

Finally, they submit that striking the claim
    that State Farm commenced in the name of the Douglases is not unjust. State
    Farm could have provided in the Homeowners Policy that the Douglases assigned
    their cause of action to State Farm.

(b)

The Respondents Position

[40]

I understand State Farm to raise five arguments
    in response.

[41]

First, State Farm argues that the Divisional
    Courts conclusion (that it was entitled to commence the action in Mr.
    Douglass name) rests on two key findings of fact: namely, that Mr. Douglass
    right of action vested in State Farm and crystallized prior to his bankruptcy, and
    that the Trustee disclaimed its interest in the cause of action. It argues that
    pursuant to s. 6(1)(a) of the
Courts of Justice Act
, R.S.O. 1990, c. C.43
and
Landmark
    II Inc. v. 1535709 Ontario Ltd.
, 2011 ONCA 567, 283 O.A.C. 239, at para.
    18, no appeal lies to this court on those issues.

[42]

Second, State Farm says the Divisional Court
    correctly concluded that Mr. Douglass assignment in bankruptcy was subject to
    State Farms vested right to commence an action in his name. State Farm relies
    on
Central Mortgage & Housing Corp. v. Dixon
, [1971] 2 W.W.R. 442
    (Q.B.), at paras. 15-20, 22, and 26-28, for the principle that a trustee
    acquires title to the bankrupts assets subject to all the equities existing at
    the date of bankruptcy and is bound by the terms of contracts the bankrupt
    entered into prior to bankruptcy. It argues that when Mr. Douglas made his
    assignment in bankruptcy, under the Homeowners Policy he had already granted
    State Farm the right to commence an action in his name.

[43]

Third, State Farm argues that the Divisional
    Court was correct to rely on ss. 40 and 67(1)(a) of the BIA. In its view, since
    any net proceeds recovered from the appellants would be held in trust for State
    Farm and, it submits, would not vest in the Trustee, it follows that the cause
    of action itself is held in trust for State Farm pursuant to s. 67(1)(a), is
    not divisible among Mr. Douglass creditors, and did not vest in the Trustee. In
    the alternative, the fact that any proceeds from the action would be held in
    trust for State Farm made the property incapable of realization in the hands
    of the Trustee, who was required to return it to Mr. Douglas pursuant to s. 40.

[44]

Fourth, and in the alternative, State Farm says
    that the subrogation clause in the Homeowners Policy amounted to an assignment
    of Mr. Douglass cause of action to State Farm and State Farm should be
    permitted to continue the action in its own name.

[45]

Finally, State Farm seeks relief from this court
    not sought at first instance. It submits that if an assignment of the cause of
    action from the Trustee were required, its failure to obtain an assignment
    under s. 38 of the BIA is an irregularity, not a nullity, and therefore can be
    cured by an order transferring the cause in action to State Farm,
nunc pro
    tunc
.

A LEGAL OVERVIEW

[46]

Given the technical nature of this appeal, I
    will provide an overview of the relevant aspects of the doctrine of subrogation
    and the applicable provisions of the BIA before turning to my analysis.

(a) The
    Doctrine of Subrogation

[47]

The common law doctrine of subrogation is one of
    the cornerstones of insurance law. The objectives of the doctrine are to ensure
    that (i) the insured receives no more and no less than a full indemnity, and
    (ii) the loss falls on the person who is legally responsible for causing it:
Somersall
    v. Friedman
, 2002 SCC 59, [2002] 3 S.C.R. 109, at para. 50.

[48]

The doctrine of subrogation is related to the
    principle of indemnity. It mandates that, having indemnified the insured for a
    loss caused by a third party, the insurer may bring an action against the third
    party in the insureds name. The insurer is said to be subrogated to the
    insureds rights and is entitled to exercise those rights in the name of the
    insured:
Zurich Insurance Co. v. Ison T.H. Auto Sales Inc.
, 2011 ONSC
    1870, 333 D.L.R. (4th) 696, at paras. 27 and 32, affirmed 2011 ONCA 663, 342 D.L.R.
    (4th) 501.

[49]

Key principles of the doctrine of subrogation include
    the following.

(i)

At common law, the insurers right of subrogation arises upon full indemnification
    of the insured.

[50]

In the absence of statutory
[1]
or contractual terms to the
    contrary, the insurers right of subrogation does not arise until the insured
    has been fully indemnified. Fully indemnified means indemnified for both
    insured and uninsured losses, such as losses that exceed policy limits or
    losses that are not covered by the policy:
Somersall
,
at paras.
    34-36 and 53-54
;
Zurich
(S.C.),
at paras. 27 and 32.

[51]

Before the point of full indemnification, the
    insured is obligated to pursue any claim it has against the third party in good
    faith:
Somersall
, at para. 54;
Zurich
(S.C.), at para. 37.

[52]

In this case, State Farm does not rely solely on
    its common law right of subrogation. It relies on the subrogation clause in the
    Homeowners Policy which permits State Farm to subrogate before its insured is
    fully indemnified.
[2]


(ii)

At common law, the insurer becomes the
dominus litis
upon full
    indemnification of the insured.

[53]

The insured is in control of the litigation, or the
dominus litis
, until it has been fully indemnified for its insured and
    uninsured losses:
Zurich
(S.C.), at para. 70.

[54]

An entitlement to control the litigation does
    not follow by necessary implication from an insurers contractual right to be
    subrogated to the rights of the insured and to bring action in the name of the
    insured before the insured is fully indemnified:
Zurich
(S.C.), at
    para. 72. Put another way, the right of subrogation and the right to control
    the litigation may not necessarily be coincident rights.

(iii)

Subrogated claims are derivative in nature.

[55]

Because the right of subrogation is derivative,
    the insurer can be in no better position as against the third party than the
    insured would be. Expressed otherwise, the insurer stands in the shoes of the
    insured. Any restriction or limit on the insureds right of recovery against
    the third party applies equally to the insurer:
Matt (Litigation Guardian
    of) v. Barber
(2002), 216 D.L.R. (4th) 574 (Ont. C.A.), at para. 25.

[56]

Where an insurer is subrogated to the claim of
    its insured, the claim nonetheless remains that of the insured in whose name
    and with whose rights the claim must be advanced:
Mason (Litigation Guardian
    of) v. Ontario (Ministry of Community & Social Services)
(1998), 39
    O.R. (3d) 225 (Ont. C.A.), at p. 231;
Erickson & Partners v. Ontario
    (Ministry of Health and Long-Term Care)
, 2015 ONCA 285, 125 O.R. (3d) 762,
    at para. 24.

(iv)

Recoveries by the insurer beyond the indemnified losses are payable to
    the insured.

[57]

The right of subrogation gives the insurer the
    right to recover from the third party the amount that the insurer has paid out
    under the insurance contract to its insured. Any recovery in excess of the
    amount paid out by the insurer is payable to the insured: Craig Brown and
    Thomas Donnelly,
Insurance Law in Canada
,
loose-leaf (2017-Rel. 4), (Toronto: Thomson Reuters Canada Ltd.,
    2002), vol. 2, at p. 13-2.

(v)

Recoveries by the insured for indemnified losses are held in trust for
    the insurer.

[58]

Where the insured commences an action against a
    third party and recovers in respect of an indemnified loss, the insurer is entitled
    to seek reimbursement from the insured: Craig Brown and Thomas Donnelly,
Insurance
    Law in Canada
,
loose-leaf
    (2017-Rel. 4), (Toronto: Thomson Reuters Canada Ltd., 2002), vol. 2, at pp.
    13-2 to 13-3. In such cases, money received by the insured (in excess of his or
    her cost of recovery) is subject to a trust in favour of the insurer:
Ledingham
    v. Ontario (Hospital Services Commission)
, [1975] 1 S.C.R. 332, 46 D.L.R.
    (3d) 699 (S.C.C.), at p. 337;
Colonial Furniture Company (Ottawa) Limited
    v. Saul Tanner Realty Limited et al.
(2001), 52 O.R. (3d) 539, 196 D.L.R.
    (4th) 1 (C.A.), at paras. 20-22, and

Re Northward Airlines Limited
(1981), 39 C.B.R. (N.S.) 153 (Alta. Q.B.), at para. 15.
[3]

(b) The
    Relevant Provisions of the BIA

[59]

Section 71 of the BIA provides that upon an
    assignment in bankruptcy being filed, the bankrupt ceases to have any capacity
    to deal with his property, which, subject to the BIA and the rights of secured
    creditors, immediately passes to and vests in his trustee. The section provides
    as follows:

71. On a bankruptcy order being made or an assignment being
    filed with an official receiver, a bankrupt ceases to have any capacity to
    dispose of or otherwise deal with their property, which shall, subject to this
    Act and to the rights of secured creditors, immediately pass to and vest in the
    trustee named in the bankruptcy order or assignment, and in any case of change
    of trustee the property shall pass from trustee to trustee without any
    assignment or transfer.

[60]

Property is broadly defined in s. 2 of the BIA
    and includes things in action like Mr. Douglass cause of action in this
    case. The Act states:

Property means any type of property, whether situated in Canada
    or elsewhere, and
includes
money, goods,
things in action
, land and every description of
    property, whether real or personal, legal or equitable, as well as obligations,
    easements and every description of estate, interest and profit, present or
    future, vested or contingent, in, arising out of or incident to property;
    [Emphasis added.]

[61]

Notwithstanding the operation of s. 71, s. 67(1)
    of the BIA provides that certain property of a bankrupt is not divisible among
    the bankrupts creditors. As mentioned above, property held in trust is one
    such type of non-divisible property. That section provides, in relevant part,
    as follows:

67(1) The property of a bankrupt divisible
    among his creditors shall not comprise:

(a) property held by the bankrupt in trust
    for any other person;

[62]

Where a cause of action vests in a trustee in
    bankruptcy, and the trustee refuses or neglects to pursue the action, s. 38 of
    the BIA permits a creditor to seek an assignment from the trustee of the cause
    of action. It provides, in relevant part, as follows:

38(1) Where a creditor requests the trustee to
    take any proceeding that in his 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 him to take the
    proceeding in his own name and at his 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.

(2) 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,
    including any document in support thereof.

(3) Any benefit derived from a proceeding
    taken pursuant to subsection (1), to the extent of his claim and the costs,
    belongs exclusively to the creditor instituting the proceeding, and the
    surplus, if any, belongs to the
estate.

[63]

Finally, as discussed above, s. 40 of the BIA requires
    the trustee to return the bankrupts unrealizable property before the trustees
    discharge. That section provides as follows:

40(1) Any property of a bankrupt that is
    listed in the statement of affairs referred to in paragraph 158(d) or otherwise
    disclosed to the trustee before the bankrupts discharge and that is found
    incapable of realization must be returned to the bankrupt before the trustees
    application for discharge, but if inspectors have been appointed, the trustee
    may do so only with their permission.

(2) Where a trustee is unable to dispose of
    any property as provided in this section, the court may make such order as it
    may consider necessary.


[64]

However, the BIA makes no provision for the
    automatic re-vesting of the property of a bankrupt in the bankrupt either on
    his or her discharge or on the discharge of the trustee: L.W. Houlden, G.B.
    Morawetz, and J. Sarra,
Bankruptcy and Insolvency Law of Canada
,
loose-leaf,
    4th ed. (Toronto: Carswell, 2013), vol. 1, at pp. 292-293.

ANALYSIS

[65]

State Farm does not cross-appeal the Divisional
    Courts finding that Wendy Douglas had no right of recovery for damages caused
    to the Douglases property. Therefore, the question raised on this appeal is
    whether State Farm was entitled to commence the action in Mr. Douglass name,
    and if not, whether State Farm may now regularize the action by continuing it
    in its own name.

[66]

State Farm does not argue it was entitled to
    commence an action in the name of the Trustee, either under the Homeowner's
    Policy or, having fully indemnified the Trustee, as the Trustee's subrogee
    under the common law doctrine of subrogation, but it mistakenly commenced the
    action in the name of Mr. Douglas.

[67]

In my view, given State Farms position, this
    appeal raises three broad issues:

1.

Had State Farm acquired a property interest in Mr. Douglass cause of
    action at the time that he made his assignment, such that the cause of action
    did not vest in the Trustee?

2.

If not, did the subrogation clause in the Homeowners Policy permit
    State Farm to commence an action in the name of Mr. Douglas, who is an
    undischarged bankrupt?

3.

If the answer to the first two questions is no, at this juncture, can
    the court make an order under ss. 38 or 40 of the BIA to remedy the procedural
    impediment to State Farms subrogated action?

[68]

As I explain below, I conclude that: Mr.
    Douglass cause of action vested in the Trustee as at the date of his
    assignment into bankruptcy; the subrogation clause in the Homeowners Policy
    did not permit State Farm to commence the action in Mr. Douglass name; and, in
    the circumstances, the court cannot make an order under the BIA to remedy the
    procedural impediments to State Farms subrogated action.

[69]

In my view, a different conclusion would require
    an unprincipled disruption of established principles of bankruptcy law or a
    substantial change to the doctrine of subrogation. As the appellants submit,
    State Farm is a sophisticated party and could have included an assignment
    clause in the Homeowners Policy. It may also have been entitled to seek a
    timely order under s. 38 of the BIA, assigning the cause of action to it.

[70]

Not having done so, State Farm could, and
    should, have commenced its subrogated action in the name of the Trustee, as
    trustee of the estate of Art Douglas, a bankrupt. The court invited
    supplemental written submissions from the parties on the question of whether, at
    this late juncture, the court could or should regularize State Farms
    subrogated action by
substituting the name of the Trustee, as trustee of
    the estate of Art Douglas, a bankrupt, for that of Art Douglas under r. 5.04(2)
    of the
Rules of Civil Procedure
, effective
    upon the issuance of the statement of claim. Having considered those
    submissions, in my view, the court neither can nor should do so. State Farm did
    not seek this relief at either court below or at the hearing before this court,
    and this court does not have the benefit of full argument on the issue;
    ordering such relief would fall outside the proper institutional role of this
    court. I address this issue below, following my analysis of the three broad
    issues raised on this appeal.

[71]

As a result, I would allow the appeal.

1. State Farm had not acquired a property interest in the cause of
    action at the time that Mr. Douglas made his assignment

(a)


Vesting
    by Operation of Law

[72]

In my view, the cause of action did not vest in
    State Farm before Mr. Douglass bankruptcy by operation of the common law
    doctrine of subrogation.

[73]

In
Mason
, relying on Michael
    Parkington
et al.
,
MacGillivray and Parkington on Insurance Law
,
    8th ed. (London: Sweet and Maxwell, 1998), at p. 496, this court reinforced the
    proposition that when an insurer is subrogated to the claim of its insured, the
    claim nonetheless remains that of the insured in whose name and with whose
    rights the claim must be advanced.
Erickson
, at para. 24, subsequently
    applied
Mason
.

In
Freudmann-Cohen v. Tran
(2004), 70
    O.R. (3d) 667, 238 D.L.R. 4th 428 (Ont. C.A.) at para. 31, while stating that
    subrogation has assignment-like aspects to it, this court noted that
    subrogation is not the equivalent of assignment.

[74]

Further, as the appellants argue, in
Ballast
,
the English Chancery Division rejected the proposition that subrogation rights
    give rise to a property interest in the cause of action itself.

[75]

On long-established jurisprudence, Mr. Douglas
    did not assign his cause of action to State Farm by operation of the common law
    doctrine of subrogation.

[76]

I also reject State Farms argument that the
    right to any proceeds of the litigation that might be recovered could not vest
    in the Trustee by virtue of s. 67(1)(a), and therefore the cause of action to
    recover those proceeds could not have vested in the Trustee either.

[77]

Such a proposition is contrary to
Royal Bank
    of Canada v. North American Life Assurance Co.
,
also reported as
Ramgotra
    (Trustee of) v. North American Life Assurance Co.
,
[1996] 1 S.C.R.
    325, at p. 357. Justice Gonthier, writing for the court, noted at
para. 62 that although certain categories of
    property are not divisible among creditors, such property 
becomes part of the bankrupts estate in the possession of the
    trustee
.
[4]
(Emphasis added).

[78]

As stated, an insured who makes a recovery from
    a wrongdoer, and has recouped the costs of recovery, holds the rest in trust
    for the insurer up to the value of the insurers payment:
Colonial
    Furniture
, at para. 20. Applying the reasoning from
Ramgotra
, the
    proceeds of such litigation would constitute trust property in the possession
    of the Trustee, although not available for distribution to creditors, pursuant
    to s. 67(1)(a) of the BIA. The cause of action giving rise to those proceeds
    would similarly be in the possession of the Trustee.

[79]

In
Mariner Foods Ltd. v. Leo-Progress
    Enterprises Inc.
,
2017
    ONCA 7, leave to appeal dismissed
[
2017] S.C.C.A. No. 64
, (a short, five-paragraph
    endorsement disposing of an application to admit fresh evidence on appeal) this
    court cited the Divisional Courts decision in this proceeding for the
    principle that a subrogated claim brought by an insurer is not caught by the
    bankruptcy.
Mariner
was decided while this appeal was pending, without
    reference to binding judicial authority or analysis. This five-judge panel was
    convened to permit the court, if warranted, to over-rule
Mariner
to the
    extent that, in reliance on the Divisional Courts decision in this proceeding,
    it stands for the principle that a subrogated claim brought by an insurer is
    not caught by a bankruptcy. In my view, the broad principle enunciated in
Mariner

conflates the concepts of subrogation and assignment and is incorrect in
    law. The
per incuriam
exception to
stare decisis
applies and
    I would overrule
Mariner
to the extent it stands for that principle.

(b)

Vesting by
    Assignment

[80]

Similarly, I reject the possibility that the
    subrogation clause in the Homeowners Policy amounted to an assignment of Mr.
    Douglass cause of action.

[81]

First, any ambiguity in the subrogation clause
    should be construed in favour of the insured:
Somersall
, at para. 47. There
    is a difference between subrogation and assignment. Among other things, an
    assignment would permit an insurer to recover and keep any damages suffered by
    the insured in excess of the insurance proceeds paid to him:
John Birds, Ben Lynch and Simon Milnes,
MacGillivray on Insurance Law
,

13
th
ed. (London: Thomson
    Reuters (Professional) UK Ltd., 2015), at para. 24-011
.


[82]

Second, State Farm is a sophisticated insurer.
    It would have been a simple matter for it to include an assignment clause in
    the Homeowners Policy if it indeed intended that Mr. Douglas assign his cause
    of action to it. State Farm does not argue that an assignment provision should
    be implied and there is no basis to imply such a provision.

(c)  The
    Trustees Disclaimer

[83]

Finally, I agree with the appellants that the
    Trustee did not disclaim its interest in the cause of action through the
    Disclaimer. As the appellants argue, the scope of the Disclaimer was limited to
    insurance claims  for loss or damage in the oil spill to matrimonial
    household contents not affixed or enjoyed with the residential property or
    proceeds of personal property exempt under the
Execution Act
(Ontario)
which would not vest in their
    Trustee in Bankruptcy.

[84]

The Disclaimer is twice removed from an
    assignment of the cause of action to State Farm: (1) it disclaims insurance
    claims by the Douglases against State Farm, not tort claims by the Douglases
    against the appellants; (2) it is limited to matrimonial household contents and
    personal property exempt from seizure. In my view, the Disclaimer operated as
    no more than a signal from the Trustee to State Farm that insurance proceeds
    for damage to excluded property could be paid out directly to the Douglases.

[85]

I therefore conclude that at the time Mr.
    Douglas made his assignment in bankruptcy, State Farm had not acquired any
    proprietary interest in the cause of action; Mr. Douglas had not assigned his
    cause of action to State Farm; and the Trustee had not disclaimed its interest
    in the cause of action by executing the Disclaimer.

[86]

Mr. Douglass cause of action was property that
    passed to and vested in the Trustee pursuant to s. 71 of the BIA at the time he
    filed his assignment in bankruptcy.

[87]

State Farm seeks to characterize the holding of
    the Divisional Court that Mr. Douglass cause of action against the appellants had
    vested in State Farm prior to his bankruptcy as a finding of fact that is immune
    from review by this court. I do not agree that this is what they found. If that
    were indeed the proper characterization of their findings, then, as I have
    said, they are founded on incorrect legal principles. However, in my view, the
    Divisional Court concluded something different, namely that Mr. Douglass cause
    of action passed to the Trustee when he made his assignment in bankruptcy, but
    did so subject to State Farms right to bring an action in Mr. Douglass name. I
    turn next to that issue.

2.  The subrogation clause in the Homeowners Policy did not permit
    State Farm to commence an action in the name of Mr. Douglas

[88]

The Divisional Court held, at para. 30, that Mr.
    Douglass right to recover against the appellants vested in his Trustee 
    subject to State Farms vested right to assume it and State Farms vested right
    to commence an action in Mr. Douglass name to enforce it.

[89]

In support of this conclusion, State Farm argues
    that a trustee acquires title to the bankrupts assets subject to all the
    equities existing at the date of bankruptcy and accordingly can only acquire
    those interests and rights that are available to the bankrupt prior to
    bankruptcy. In
Grobstein v. Kouri
, [1936] S.C.R. 264, a dispute arose
    between a trustee and a third party over the proceeds of a life insurance
    policy. Justice Rinfret, writing for the majority, stated at para. 23:

Now, under
The Bankruptcy Act
,
a trustee takes
    the property of the debtor only subject to all the rights and equity to which
    it was subject while it was held by the debtor. The Trustee is the legal
    representative of the debtor; and generally speaking succeeds only to such
    rights as the debtor himself would have had, if not bankrupt, and no other
    rights. There are, of course, exceptions to that principle, whereby the trustee
    is vested for the benefit of the creditors with certain additional rights not
    available to the bankrupt debtor; but this is not a case where these exceptions
    come in.

See also:
Central Mortgage
,

at paras. 15-20, 22, and 26-28,
Engels
    v. Richard Killen & Associates Ltd.
(2002), 60 O.R. (3d) 572, 35
    C.B.R. (4th) 77 (Ont. S.C.), at para. 42, affirmed on other grounds (2004), 69
    O.R. (3d) 183 (C.A.) and
Dainty Confections Ltd., Re
, [1936] 1 D.L.R. 249, 18 C.B.R.
    67
(Ont. C.A.), at para. 31.

[90]

State Farm says that these principles support
    the Divisional Courts conclusion that State Farms subrogation right vested
    when it assumed liability for the loss arising out of the oil spill and that
    the Trustee acquired the cause of action subject to State Farms vested right
    to assume it and State Farms vested right to commence an action in Mr.
    Douglass name to enforce it.

[91]

I agree that the Trustee acquired Mr. Douglass
    cause of action subject to State Farms contractual right of subrogation under
    the Homeowners Policy. However, long established bankruptcy law principles
    prevented the exercise of that right, in the manner that State Farm sought to
    do so.

[92]

As the appellants argue, the jurisprudence is
    clear that an undischarged bankrupt lacks capacity to commence an action in his
    name, if his cause of action vested in the trustee on his assignment or at any
    time before his discharge:
Wallace v. United Grain Growers Ltd.
,
[1997]
    3 S.C.R. 701 (S.C.C.) at para. 58;
Murphy v. Stefaniak
, 2007 ONCA 819,
    37 C.B.R. (5th) 6;
McNamara v. Pagecorp Inc.

(1989), 38 C.P.C.
    (2d) 117 (Ont. C.A.);
Long v. Brisson
,
[1992] 5 W.W.R. 185 (Alta. C.A.);
Thompson v. Coulombe
(1984), 54 C.B.R. (N.S.) 254
(Que. C.A.)
.
[5]

[93]

I have explained above that Mr. Douglass cause
    of action vested in the Trustee on his assignment. At the time that State Farm
    commenced the action in Mr. Douglass name, Mr. Douglas did not have the capacity
    to commence the action.

[94]

In my view, because the Trustee acquired Mr.
    Douglass cause of action subject to State Farms right of subrogation, State
    Farm was entitled to commence the action in the Trustees name
.
This
    conclusion gives effect to both the objectives and principles of the doctrine
    of subrogation and established principles of bankruptcy law. The doctrine of
    subrogation is rooted in the principle of indemnity and State Farm indemnified
    the Trustee for Mr. Douglass loss; under bankruptcy law, the Trustee, and not
    Mr. Douglas, had the capacity to commence the action; and under the doctrine of
    subrogation, upon becoming the
dominus litus
,
State Farm (and
    not the Trustee) was entitled to control the litigation. Upon bankruptcy, it
    makes sense to read the subrogation clause in an insurance policy as if the
    trustees name appears in place of that of the bankrupt insured, just as is
    required to be done for the purposes of entitlement to indemnification under
    the insurance policy  at least where, as here, the Trustee has taken the
    benefit of the insurance policy:
A. Marquette & Fils Inc. v. Mercure
(1975), [1977] 1 S.C.R. 547 at p. 553; s. 24(2) of the BIA.
[6]

[95]

Therefore, while State Farm was entitled to
    commence a subrogated action, as I have stated, it was required to commence the
    action in the name of the Trustee, and not that of Mr. Douglas.

[96]

I now turn to the third question: can the court
    can make any order under the BIA to remedy the procedural impediment to State
    Farms subrogated action?

3. State
    Farm is not entitled to a remedial order under ss. 38 or 40 of the BIA

(a) Section
    40 of the BIA

[97]

Section 40(2) permits the court to grant an
    order disposing of any property that is incapable of realization where the
    trustee has been unable to dispose of such property. Orders pursuant to s. 40
    can be granted on a
nunc pro tunc
basis in the appropriate case:
Stefaniak
,
at paras. 29-31. The suggestion is that an order under s. 40 re-vesting the
    property in Mr. Douglas
nunc pro tunc
could normalize these
    proceedings.

[98]

Although the Divisional Court referred to s. 40(2)
    in its reasons, State Farm never actually sought relief under s. 40(2). In my
    view the Divisional Court did not purport to grant an order under s. 40(2),
    re-vesting Mr. Douglass action in him, effective before State Farm commenced
    the action in his name. In any event, assuming that this cause of action could
    be seen as unrealizable property in the hands of the Trustee,
[7]
there are two reasons why an
    order under s. 40(2) cannot normalize these proceedings.

[99]

First, an order under s. 40(2) re-conveying a
    cause of action to an undischarged bankrupt does not provide the bankrupt with
    capacity to commence the claim:
Stefaniak
, paras. 27 and 28. To
    normalize this cause of action, State Farm would require an order under s.
    40(2) effective on January 6, 2010, which is the day before it commenced the
    action in Mr. Douglass name. But Mr. Douglas did not receive an absolute
    discharge from bankruptcy until March 5, 2010. Although the court can vary a
    bankrupts date of discharge in certain circumstances, it cannot do so here. Therefore,
    it cannot grant an order under s. 40(2) re-conveying this cause of action to
    Mr. Douglas, effective January 6, 2010.

[100]

In
Stefaniak
, the motion judge purported to grant an order
    under s. 40(2), conveying an interest in a lawsuit to the bankrupt effective
    from the date he commenced his claim, even though he was an undischarged
    bankrupt. This court cautioned, at para. 31, that commencing proceedings before
    the bankrupt has obtained an order of absolute discharge will ordinarily be
    fatal. However, having regard to what it described as the unusual
    circumstances of the case, this court varied the order of discharge pursuant
    to s. 187(5) of the BIA, by dating the discharge the day before the bankrupt
    commenced the action, thereby justifying the order granted under s. 40(2) by
    the motion judge. Section 187(5) of the BIA provides that [e]very court may
    review, rescind or vary any order made by it under its bankruptcy
    jurisdiction.

[101]

In
Stefaniak
, the bankrupt had received a conditional
    discharge before commencing the action. It was undisputed that before he
    commenced the action he had satisfied all the conditions of the conditional
    order and had every reason to believe that he had been discharged from
    bankruptcy. The order had been prepared, and all that remained was for the
    order to be stamped and issued. The only thing that stood between him and
    absolute discharge was administrative delay and backlog in the bankruptcy court
    office.

[102]

This case is very different from
Stefaniak
. Mr. Douglas
    appears to have obtained an automatic discharge on the expiry of 9 months after
    the date of bankruptcy under s. 168.1(1) of the BIA. The basis on which this
    court might vary his date of discharge under s. 187(5) of the BIA is not
    apparent from the record.

[103]

Second, a
nunc pro tunc
order cannot be made in this case
    because of the passage of the relevant limitations period.

[104]

In
Canadian Imperial Bank of Commerce v. Green
, 2015 SCC
    60, [2015] 3 S.C.R. 801, a majority of the Supreme Court held that a court has
    no authority to make a
nunc pro tunc
order if the party did not seek
    such an order before the relevant limitation period expired. It is important to
    note that the Supreme Court cited
Montego Forest Products Ltd., (Re)

(1998), 37 O.R. (3d) 651 (C.A.), as an example where an order under the BIA
    (in that case an order pursuant to s. 38) was properly granted on a
nunc
    pro tunc
basis. In
Montego Forest Products
, the order was sought
    within the limitation period, but not obtained until after the period had
    expired.

[105]

It appears to be common ground that, by virtue of s. 4 of the
Limitations
    Act, 2002
, S.O. 2002, c. 24, Sched. B, the limitation period in the
    present case expired on January 9, 2010. Accordingly,
Green
prevents
    this court from granting a
nunc
pro tunc
order pursuant to s.
    40(2) of the BIA at this stage of the proceedings.

(b) Section 38 of the BIA and Section 21(2) of the
Limitations
    Act, 2002

[106]

On this appeal, State Farm requests alternate relief. If the court
    finds that State Farm had no right to commence the claim in Mr. Douglass name because
    of his bankruptcy, it requests an order under s. 38 of the BIA assigning the
    cause of action to State Farm on a
nunc pro tunc
basis. Although State
    Farm did not file and serve a notice of cross-appeal, as required by r. 61.07(1)
    of the
Rules of Civil Procedure
,
R.R.O. 1990, Reg.194, I
    nonetheless consider its request for alternate relief.

[107]

I agree with the appellants that such an order cannot be granted.

[108]

State Farm did not comply with the procedure required by s. 38. It did
    not request the Trustee to take a proceeding against the appellants and did not
    bring a motion for an order authorizing State Farm to take the proceeding in its
    own name and at its expense and risk. Most significantly, the Trustee is not a
    party to this action. Indeed, there is no indication that the Trustee, who is
    now discharged, was even given notice that State Farm would seek an order against
    the Trustee on appeal under s. 38 of the BIA.

[109]

In their Supplementary Factum, the appellants also argue that a
    subrogated insurer is not a creditor of its bankrupt insureds estate within
    the meaning of s. 1 of the BIA, and therefore is not entitled to an order under
    s. 38. While raised, this point was not argued. Indeed, in further written
    submissions invited after the appeal was heard, they submit (albeit without
    reference to s. 38) that State Farm could and should have sought an assignment
    from the Trustee before commencing its subrogated action. I leave whether a
    subrogated insurer is a creditor for another day. I only note that, in light
    of
Ramgotra
,
which held that property of a bankrupt not
    divisible among his creditors becomes part of the bankrupts estate, and the effective
    inability of a trustee to return property to a bankrupt under s. 40(2) of the BIA
    before the bankrupts discharge, a narrow interpretation of creditor might
    create practical difficulties in the administration of a bankrupts estate.

[110]

Further, unlike the situation in
Montego Forest Products
,
    no request for an order pursuant to s. 38 was sought before the limitation
    period had expired. In fact, the first request for such an order was made
    almost seven years after the limitation period had expired. As a result, in the
    circumstances,
Green
also prevents this court from granting a
nunc
    pro tunc
order under s. 38 of the BIA.

[111]

While my conclusion that an order under s. 38 is not available to
    State Farm in these circumstances does not turn on
Green
,
I
    agree with the appellants that s. 21(2) of the
Limitations Act, 2002

would not assist State Farm in overcoming the hurdle it presents. That
    section

permits a claim to be amended after the expiry of a limitation
    period to correct a misnaming or misdescription of a party.

The
    suggestion is that an order assigning the cause of action to State Farm,
    combined with an order under r. 5.04(2) of the
Rules of Civil Procedure
granting
    leave to amend the statement of claim to name State Farm as plaintiff, would
    normalize these proceedings. Rule 5.04(2) provides as follows:

(2) Adding, deleting or substituting parties  At any stage of
    a proceeding the court may by order add, delete or substitute a party or
    correct the name of a party incorrectly named, on such terms as are just,
    unless prejudice would result that could not be compensated for by costs or an
    adjournment.

[112]

In my view, while the test for misnomer may be broad enough to embrace
    a mistake as to the identity of the person who should have brought a suit
    (rather than a misdescription of the person suing),
[8]
it cannot do so in this case.
    This is because, as I have explained above, at the time State Farm chose to
    commence a claim, it did not have capacity to do so in its own name. As a
    result, it cannot be said that State Farm made a mistake in naming the
    Douglases as plaintiffs instead of itself.

[113]

I therefore agree with the appellants that the
    naming of the Douglases as plaintiffs instead of State Farm was not a
    misnaming or misdescription of a party. Section 21(2) of the
Limitations
    Act, 2002

does not assist State Farm in overcoming the hurdle in
Green.

4.

This court cannot and should not regularize State Farms
    subrogated action by substituting the Trustee as plaintiff

[114]

I indicate above that State Farm could have commenced the action in
    the name of the Trustee, as trustee of the estate of Art Douglas, a bankrupt. 
    The final question is whether, at this juncture, the court can and should
    regularize State Farms subrogated action by substituting the name of the
    Trustee, as trustee of the estate of Art Douglas, a bankrupt, for that of Mr.
    Douglas in the style of cause under r. 5.04(2) of the
Rules of Civil
    Procedure
, effective upon issuance of the statement of claim.

[115]

After deliberating for several months, the court invited further
    written submissions from the parties on this topic. With the benefit of those
    submissions, I conclude that this court cannot and should not grant this relief.

[116]

In its written submissions, State Farm maintains its assertion that
    Mr. Douglass cause of action did not vest in the Trustee. However, if this
    court were to determine that the action could and should have been commenced in
    the name of the Trustee, then, in the alternative, it argues that its failure
    to commence its subrogated action in the name of the Trustee was a misnomer,
    and seeks an order under r. 5.04(2) permitting it to amend the style of cause,
    effective upon the issuance of the statement of claim, by substituting the
    Trustees name for that of Mr. Douglas.

[117]

State Farm also argues that its notice of motion cites r. 5.04 and
    contains a basket clause, requesting [s]uch further and other relief as this
    Honourable Court deems appropriate. It says that this entitled the motion
    judge to grant an order under r. 5.04 amending the style of cause, effective
    upon the issuance of the statement of claim, by substituting the Trustees name
    for that of Mr. Douglas. It further argues that ss. 134(1) and 134(5) of the
Courts
    of Justice Act
, in turn, permit this court to do so, even though it did
    not properly cross-appeal the motion judges or the Divisional Courts orders.

[118]

Those
    sections provide, in relevant part, as follows:

134(1) Unless otherwise
    provided, a court to which an appeal is taken may,

(a) make any order or
    decision that ought to or could have been made by the court or tribunal
    appealed from;

(b) order a new trial;

(c) make any other
    order or decision that is considered just.

(5) The powers conferred by
    this section  may be exercised in favour of a party even though the party did
    not appeal.

[119]

If this court
    were to determine that, notwithstanding s. 134(5), a cross-appeal specifically
    requesting an order substituting the name of the Trustee for that of Mr.
    Douglas in the style of cause is required for this court to grant such relief,
    then State Farm seeks leave to cross-appeal under r. 61.07(3).

[120]

State Farm argues
    that if Mr. Douglass cause of action vested in the Trustee, State Farms
    failure to commence the action in the Trustees name is simply a technical
    deficiency that has no impact on the substance of its subrogated action against
    the appellants, and therefore is a misnomer, and that it would be appropriate
    and equitable in the circumstances to permit the amendment.

[121]

It further
    argues that the Trustees discharge is not an impediment to this relief: s.
    41(10) of the BIA provides that [n]otwithstanding his discharge, the trustee
    remains the trustee of the estate for the performance of such duties as may be
    incidental to the full administration of the estate. It submits that acting as
    the nominal plaintiff would be an incidental duty of the Trustee within the
    meaning of s. 41(10) and, therefore, that it would not be necessary to
    re-appoint the Trustee to grant the order,
nunc pro tunc
, under r.
    5.04(2).

[122]

I am not
    persuaded by State Farms submissions.

[123]

In my view, even
    if State Farms naming of Art Douglas as the plaintiff could be considered a
    misnomer and s. 41(10) of the BIA would permit the court to amend the style
    of cause after the Trustees discharge to substitute the name of the Trustee,
    as trustee of the estate of Art Douglas, a bankrupt, for that of Mr. Douglas,
    the court cannot, or if it can should not, grant this relief at this juncture.

[124]

First, an order
    under r. 5.04(2) substituting the name of the Trustee for that of Mr. Douglas,
    effective upon the issuance of the statement of claim, was not an order that
    ought to or could have been made by the motion judge, and therefore is not an
    order that this court can make under s. 134(1)(a). While State Farm referenced
    r. 5.04 in its notice of motion, it did so because it sought an alternative order
    to amend the statement of claim to correct the name of the plaintiff to read
    Art Douglas and Wendy Douglas by their subrogee State Farm Fire & Casualty
    Company. The relief now sought was not argued before the motion judge, and it
    would not have been open to him to grant it:
Saadati v.
    Moorhead
,
2017 SCC 28, [2017] 1 S.C.R. 543, at para. 9,
    citing
Canada Trustco Mortgage Co. v. Renard
,
2008 BCCA 343, 298 D.L.R. (4th) 216, at paras. 38-39. The inclusion of a
    basket clause in a notice of motion is not a basis for a motion judge to
    grant relief that was not sought by the moving party, on a basis not argued by
    it.

[125]

Second, such an
    order would not be just in the circumstances, and thus this court cannot and
    should not grant such relief under s. 134(1)(c). Section 134(1)(c) is broader
    than s. 134(1)(a), and permits the court to make any order that it considers
    just. But this is not a case in which the court can or should permit a
    cross-appeal or exercise its inherent jurisdiction to grant an order
nunc
    pro tunc
. There are a number of reasons for this.

1.

It is not appropriate for an appellate court, twice removed from
    the parties initiating motion, to grant this relief. It does not lie within
    the proper institutional role of this court to act as a lawyer for a party who
    erred in naming the correct plaintiff. It would be inappropriate in these
    circumstances to suggest and then grant relief unsought by the parties. State
    Farm only proposes to substitute the name of the Trustee for that of Mr.
    Douglas, in the alternative, in response to a request from the court for
    further submissions on the issue.

2.

Relatedly, while the appellants were provided the opportunity to deliver
    brief written submissions, they have not had the opportunity to make full
    submissions on this new issue. They have incurred substantial legal expenses
    over more than four years in responding to State Farms flawed legal position
    that it was entitled to commence its subrogated action in the name of Art
    Douglas. It would be unfair to resolve this appeal against them on an issue
    never raised below.

3.

The irregularity that State Farm seeks to correct was intentional.
    State Farm chose to commence its subrogated action in Mr. Douglass name, knowing
    that Mr. Douglas had filed an assignment in bankruptcy, and continues to assert
    that it was entitled to do so.

4.

The request for this alternative relief is made more than four years
    after the appellants brought their summary judgment motion and State Farm
    brought its cross-motion. The delay is entirely attributable to State Farm. The
    defendants are entitled to a degree of certainty and finality.

5.

Even if this court were to grant such relief, the pleadings would be
    deficient and unable to support an ongoing action by the Trustee without
    further amendments. The statement of claim does not plead that Mr. Douglass
    interest in the property or his cause of action vested in the Trustee. Instead,
    it pleads that Mr. Douglas was an owner of the property at all material times.

6.

State Farm is a sophisticated party. It has previously drawn
    distinctions and shown an understanding of the nuances between claims that vest
    in a trustee in bankruptcy and those which remain in the hands of the bankrupt:
Future Health Inc. (Trustee of) v. State
Farm Mutual Automobile Insurance Co. of Canada
, 2013 ONSC 2941, at paras. 4, 11,
    12, leave to appeal to Div. Ct. refused, 2014 ONSC 356.


DISPOSITION

[126]

For these reasons, I would allow the appeal, and would grant summary
    judgment to the appellants, dismissing the subrogated action commenced by State
    Farm in the name of Art Douglas.

[127]

I would order State Farm to pay the appellants their costs of the
    appeal, fixed in the agreed upon amount of $25,000, inclusive of HST and
    disbursements, set aside the costs awards of the motion judge and the
    Divisional Court, and would order State Farm to pay the appellants their costs
    before the motion judge and the Divisional Court, fixed in the amounts of
    $8,500 and $50,000, respectively, again inclusive of HST and disbursements.

Alexandra Hoy
    A.C.J.O.

I agree C.W. Hourigan
    J.A.

I agree M.L. Benotto
    J.A.

Rouleau and Roberts JJ.A. (Dissenting in part):

[128]

We have had the benefit of reading our colleagues careful and
    thorough reasons. We agree with the legal analysis and basis for concluding
    that the dismissal of the appellants motion should be set aside. We do not,
    however, agree that this court should substitute a dismissal of the claim. In
    our view, the appropriate result is to remit the matter back to the Superior
    Court.

[129]

For the reasons that follow, we have concluded that it should remain
    open to State Farm to pursue the issue as to whether its subrogated action
    should be regularized by substituting the Trustee, as trustee of the estate of
    Art Douglas, a bankrupt, as plaintiff. While we agree that this court should
    not make that order because it was not an issue determined by the courts below
    and we lack a full argument on it, the justice of the case requires this court
    to remit the issue back to first instance for determination.

[130]

In our view, the effective issue for determination at the original
    motion was the name in which the claim ought to be brought. While arguing that
    it was entitled to commence an action in the Douglases name, State Farm sought
    directions from the court and submitted that, if the Douglases were not the
    proper plaintiffs, its name should be substituted for theirs as plaintiff. The
    appellants maintained that the Douglases had no capacity to start or continue
    the action in their own names and took the position that, although an action
    may have been commenced by the Douglases Trustee, the applicable limitation
    period expired over four years ago and, for that reason, it was not possible to
    simply amend the claim and add the Trustee.

[131]

The motion judge made it clear that an equitable result should
    prevail and that he would draw on his inherent jurisdiction, including ss. 96
    and 97 of the
Courts of Justice Act
, R.S.O. 1990, c. C.43, to ensure
    that it did. In the unusual circumstances presented by this case, the motion
    judge unfortunately adopted an incorrect approach to achieving the equitable
    result.

[132]

For its part, the Divisional Court also sought to achieve an
    equitable result. It correctly found that State Farm had the right to bring the
    claim in the name of the insured but erred in not finding that, for the
    property damage claim, the Trustee was the insured in whose name the action had
    to be brought.

[133]

The errors in the courts below are understandable. State Farms
    uncontested right is to bring a subrogated action to recover its remediation
    costs from the appellants. In whose name the claim is to be brought when a
    bankruptcy intervenes is a somewhat novel issue. The parties were unable to
    find any specific guidance from the courts on this issue. State Farm determined
    that it should bring the action in the name of the originally named insured and
    it did so within the limitation period. The courts below confirmed, albeit in
    error, that this was the proper procedure.

[134]

Our colleague correctly explains that the proper procedure required
    State Farm to bring the action in the name of the Trustee and not the
    Douglases. Relying on the cases of
Saadati v. Moorhead
, 2017 SCC 28,
    [2017] 1 S.C.R. 543, and
Canada Trust Co. Mortgage Co. v. Renard
, 2008
    BCCA 343, 298 D.L.R. (4th) 216, our colleague argues, however, that it would be
    unfair to the appellants to grant relief not sought or argued before the motion
    judge.

[135]

This is the point at which we disagree. In our view, those decisions
    have no application to the present case. They involve the appropriateness of a
    court granting relief that was neither pleaded nor sought at trial. In the
    present case, we are dealing with the appropriateness of granting relief on a
    motion heard prior to trial. Granting relief on appeal or following the
    remitting of the motion for a new hearing does not raise the same issues. This
    is particularly so in circumstances such as existed here where the motion judge
    had before him the appellants motion to dismiss the claim and State Farms
    cross-motion seeking directions.

[136]

In the present case, the equities clearly favour State Farm, and the
    appellants would suffer no non-compensable prejudice should the misnomer issue
    be considered and resolved prior to trial either on appeal or by way of a fresh
    motion. State Farms right to bring a subrogated action to recover its
    remediation costs from the appellants is uncontested. State Farm clearly
    intended to exercise its contractual rights to bring the action in the name of
    the insured. State Farms erroneous view (a view shared by the motion judge
    and the Divisional Court) that the insured for purposes of the claim were the
    Douglases and not their Trustee arguably constitutes a misnomer that is a
    procedural irregularity.

[137]

There can be no dispute that the appellants understood that the
    action commenced in January 2010 was a subrogated action brought in the name of
    the insured under the Policy which responded to the claimed loss. No party was
    mistaken about what this action was about. The appellants have known since at
    least March 2008 that State Farm was expending substantial amounts to remediate
    the Douglases property and that State Farm intended to claim its remediation
    costs from the appellants pursuant to its contractual right of subrogation.

[138]

The appellants did not learn about the bankruptcy of Mr. Douglas
    until January 2012 upon receipt of the Douglases affidavit of documents, which
    contained documents related to their bankruptcy. In February 2012, they
    conducted an examination for discovery of State Farms representative. They
    raised the issue of the Douglases capacity to commence their action in the
    fall of 2012 and January 2013; however, the appellants did not bring their
    motion to dismiss the Douglases action or amend their statement of defence to
    allege their incapacity until October 2013. While the appellants were entitled
    to raise the issue of the Douglases capacity at any stage of the litigation,
    including at trial, their delay in putting forward this issue works against any
    suggestion that they would be prejudiced if the action were continued in the
    Trustees name.

[139]

State Farm should be given the opportunity to argue misnomer. State
    Farm fulfilled all of its obligations under the Policy. It immediately
    responded to the Douglases claim. It provided funding for Mr. Douglass
    personal expenses. It thoroughly remediated the property. There is no evidence
    that State Farm did anything but act in good faith, just as consumers trust all
    insurers will. And State Farm commenced the subrogated action within the
    two-year limitation period.

[140]

In our view, to foreclose State Farm in this appeal from having the
    misnomer issue determined would potentially grant a windfall to the appellants
    and be contrary to the well-established principle underlying subrogation as
    articulated in
Somersall v. Friedman
, 2002 SCC 59, [2002] 3 S.C.R.
    109, at para. 50, that the loss falls on the person who is legally responsible
    for causing it.

Conclusion

[141]

As a result, we would set aside the dismissal of the appellants motion
    and remit the matter to the Superior Court to permit State Farm to seek to
    regularize its subrogated action by bringing a motion under rr. 5.04 and 26.01
    to substitute the Trustee, as trustee of the estate of Art Douglas, a bankrupt,
    as plaintiff, and to amend the pleadings as necessary to reflect the Douglases
    bankruptcy.  We would direct that the Trustee be served with the motion
    materials.  In the event that State Farm does not serve this motion within 90
    days of the release of these reasons, or if State Farm is ultimately
    unsuccessful in that motion, including any appeal, the action will be
    dismissed.

[142]

With respect to costs, the appellants prevailed on the appeal and
    are entitled to their costs in accordance with our colleagues disposition of
    them.

Released: AH MAR 09 2018

Paul Rouleau J.A.

Lois Roberts J.A.





[1]

Section 278(1) of the
Insurance Act
, R.S.O. 1990, c.
    I.8 provides an insurer with rights of subrogation before an insured has been
    fully indemnified in the case of contracts of automobile insurance. Subject to
    certain exceptions, s.152(1) of the
Insurance Act
similarly provides
    insurers with rights of subrogation before an insured has been fully
    indemnified in the case of contracts of insurance against loss of or damage to
    property arising from the peril of fire.



[2]

The motion judge and the parties, in their factums, also
    reference s. 152 of the
Insurance Act
. That section falls within Part
    IV: Fire Insurance of the Act, and it is unclear that s. 152(1) applies to the
    Homeowners Policy in this case.

Section 143(1) of the Act defines the
    scope of Part IVs application:

This Part applies to insurance
    against loss of or damage to property arising from the peril of fire in any
    contract made in Ontario except,



(c ) where the peril
    of fire is an incidental peril to the coverage provided;

The Homeowners Policy is a
    comprehensive general liability policy, and fire is one of the many insured
    perils. The Supreme Court of Canada has held that comprehensive insurance
    policies like the Homeowners Policy do not qualify as contracts of fire
    insurance under British Columbias
Insurance Act
, R.S.B.C. 1996, c.
    226:
KP Pacific Holdings Ltd. v. Guardian Insurance Co. of Canada
, 2003
    SCC 25, [2003] 1 S.C.R. 433.

Lower courts in Ontario, applying
KP
    Pacific
, have determined that Part IV of Ontarios Act does not apply to
    multi-peril policies:
Boyce v. Co-operators General Insurance Co.
, 2012
    ONSC 6381, revd on other grounds, 2013 ONCA 298;
Dumitrascu v. State Farm
    Fire and Casualty Co.
, 2014 ONSC 2224. The Newfoundland and Labrador Court
    of Appeal similarly held that the
Fire Insurance Act
, R.S.N.L. 1990, c.
    F-10 did not apply to comprehensive policies:
Co-operators General Insurance
    Co. v. Burry
, 2007 NLCA 52.

On the other hand, courts in New
    Brunswick and Manitoba have distinguished
KP Pacific
, and have concluded
    that comprehensive policies are included in the Fire Insurance sections of
    their provinces insurance acts:
Thomas v. Aviva Insurance Co.
, 2011
    NBCA 96;
Casey v. Federated Insurance
, 2004 MBQB 99.

Denis Boivin, in
Insurance Law
,
    2d ed. (Toronto: Irwin Law, 2015), at pp. 73-78 suggests that
Aviva
should prevail in Ontario. Whether Part IV of the
Insurance Act
applies
    to comprehensive policies has not been determined by this court. The issue was
    not argued by the parties and, because the subrogation clause in the Homeowners
    Policy permitted State Farm to subrogate before the Douglases were fully
    indemnified, it is unnecessary to determine it.



[3]

Of interest, the position in England and other Canadian
    provinces is not as clear. In
Napier v. Hunter
,
[1993] A.C. 713, [1993] 2 W.L.R. 42,
    [1993] 1 All ER. 385 (U.K.H.L.) the House of Lords hesitated to characterize
    the subrogation relationship as one of trust, concluding that an insurers
    interest in damages recovered by an insured was protected by an equitable lien.
    This position was followed by Mackenzie J.A. in
Armstrong v. Lang
,
2011
    BCCA 205.



[4]
While
Ramgotra
is long-standing authority
,
I note that there is
    commentary to the effect that it has resulted in practical difficulties. Roderick
    Wood and David Bryan, in Creeping Statutory Obsolescence in Bankruptcy Law,
    IIC Art. Vol. 3-1 (Thomson Reuters Canada Ltd, 2014), at p. 12 suggest that the
    statutory framework within which
Ramgotra
was decided has changed, and
    that trustees in bankruptcy are not in fact applying the conceptual framework
    developed in that case. They state,

The practical reality is that
    trustees in bankruptcy do not convey trust property and exempt property back to
    the bankrupt. They treat the property as not ever having vested in the
    bankrupts estate. The difficulty, of course, is that the bankrupt has no power
    to dispose or otherwise deal with the property until the property has been
    transferred back to the bankrupt.

They suggest that Parliament should amend the BIA to
    either provide that non-divisible assets do not vest in the trustee in
    bankruptcy, or else set out a specific procedure as has been done in the United
    States to withdraw exempt property from the bankrupt estate.



[5]
In
Luckevich v. Ivany
, 2018 ONCA 144, a bankrupt appealed a motion
    judges dismissal of his motion seeking leave to commence third party claims
    for contribution and indemnity. In the course of his hearing before the motion
    judge, the bankrupt raised s. 37 of the BIA. In reasons released while this
    judgment was under reserve, this court held that the motion judge erred in dismissing
    the bankrupts motion without permitting the bankrupt to seek relief, or making
    clear the bankrupt remained entitled to seek relief, under s. 37 of the BIA.
    Section 37 permits a bankrupt or creditor who is aggrieved by any act or
    decision of the trustee to apply to the court to reverse or modify the act or
    decision complained of and make such order as it thinks just. Insofar as
Luckevich
may suggest that an undischarged bankrupt can obtain an order under s. 37
    of the BIA granting leave to issue third party claims in the bankrupts name, I
    would overrule it. In that case, the order available to the bankrupt would be
    one that reverses the trustees decision not to pursue the third party claims
    and orders the trustee to do so. See, for example,
Brown v. Royal Bank of
    Canada
, 2001 ABCA 73, 277 A.R. 241.



[6]

The trustee would be entitled to be indemnified for any costs
    awarded against the trustee in the litigation, to the same extent as an insured
    who was not bankrupt and in whose name the insurer commenced the action. See,
    for example,
John Birds, Ben Lynch
    and Simon Milnes,
MacGillivray on Insurance Law
,

13
th
ed. (London: Thomson Reuters (Professional) UK Ltd.,
    2015), at paras. 24-060  24-066
.



[7]

It is reasonable to conclude that, had the Trustee considered
    the issue, he inevitably would have concluded that the cause of action was
    property that was incapable of realization.

A cause of action is an asset incapable of
    realization when 
a trustee determines that it is
    inappropriate to commence a lawsuit given the potential cost and the potential
    benefits.:
Stefaniak
, at para. 18, referring
    to the Office of Superintendent of Bankruptcy Canada: Directive Number 22
    (pre-1992) Guidelines at para. 2(d).

In this case, the Trustee could not
    commence the action once State Farm was the
dominus litis
. Moreover, if there
    were no limitation issues and it had been able to do so, any net proceeds that
    could have been recovered (with the exception of the deductible, if State Farm
    had not elected to pay it) would have constituted trust property in the
    possession of the Trustee, which pursuant to s. 67(1)(a) of the BIA would not
    be divisible among creditors.



[8]
See
Mazzuca v. Silvercreek Pharmacy Ltd.

(2001), 56 O.R. (3d)
    768 and
Ormerod v. Strathroy Middlesex General Hospital
, 2009 ONCA
    697.


