



COURT OF APPEAL FOR ONTARIO

CITATION:
Indcondo Building
    Corporation v. Sloan, 2012 ONCA 502

DATE: 20120718

DOCKET: C54391

Goudge, Sharpe and Juriansz JJ.A.

BETWEEN

Indcondo Building Corporation

Plaintiff (Appellant)

and

Valerie Francis Sloan, David Robin Sloan and Cave
    Hill Properties Ltd.

Defendants (Respondents)

P. James Zibarras and Trung Nguyen, for the appellant

Philip P. Healey and Miranda Spence, for the respondents

Heard: March 14, 2012

On appeal from the order of Justice Ruth E. Mesbur of the
    Superior Court of Justice, dated August 30, 2011.

Goudge
    J.A.:

[1]

On March 14, 2012, this court heard two separate matters in this case.
    The first was the respondents motion to review the decision of Armstrong J.A.
    refusing to order security for costs pending appeal. The order was sought
    against counsel for the appellant because counsel was acting on contingency and
    the appeal was said to be frivolous and the appellant impecunious.

[2]

The second was the appeal itself. The appellant appeals from Mesbur J.s
    order dismissing its action commenced pursuant to an order under section 38(1)
    of the
Bankruptcy and Insolvency Act
, R.S.C. 1985 c. B-3 (the
BIA
).
    The motion judge found that the action was an abuse of process and barred by
res
    judicata
and issue estoppel because of the discharge of the appellant in
    bankruptcy and the dismissal of a prior action for the same relief brought by
    the appellant in its own capacity.

[3]

Although an order for security for costs pending appeal would have had
    only short duration, the court acceded to the respondents request to hear the
    motion for review because of the nature of the issue presented. Both matters
    were reserved.

[4]

For the reasons that follow, I would dismiss the motion to review the
    decision of Armstrong J.A. and allow the appeal.

The Motion to Review

[5]

This can readily be disposed of. In seeking security for costs against
    the appellants counsel, the respondents argue, as required by Rule 61.06, that
    the appeal is frivolous and the appellant is impecunious. They urge that
    because of the contingency arrangement, counsel has such a stake in the
    litigation that it would be unjust not to require counsel to post security.

[6]

Armstrong J.A. disposed of the respondents request without needing to
    address the requirements of Rule 61.06, because, in his view, to order counsel acting
    on contingency to post security would chill the very access to justice that is
    a main objective of the contingency fee regime.  He found that while in future,
    exceptions to this governing principle may arise, this was not such a case.

[7]

I agree. Moreover, because of the result I have reached on the appeal
    itself, it is obvious that this appeal could not be said to be frivolous, and
    in this respect Rule 61.06 could not be complied with.

[8]

I would therefore dismiss with costs the respondents motion to review
    the decision of Armstrong J.A.

The Appeal

[9]

The proceedings leading to this appeal have a somewhat tortured history.
    It began in 1992 when the appellant commenced an action against the respondent
    David Robin Sloan (Mr. Sloan). On December 10, 2001, the appellant obtained
    judgment against Mr. Sloan for $8,010,573.30.

[10]

After
    obtaining judgment, the appellant learned that Mr. Sloan had apparently
    transferred the matrimonial home to his wife, the respondent Valerie Francis
    Sloan, for no consideration, forty-five days after being served with the
    statement of claim.

[11]

As
    a consequence, on August 6, 2002, the appellant commenced an action (the 2002
    action) against Mr. Sloan, his wife and their company, the respondent Cave Hill
    Properties Ltd. to set this transfer aside as a fraudulent conveyance. The
    appellant subsequently broadened its action to claim that Mr. Sloans transfers
    of other assets and properties were fraudulent preferences as well.

[12]

On
    January 13, 2004, Mr. Sloan declared personal bankruptcy. This stayed the 2002
    action. Mr. Sloan listed the appellant as a creditor in the amount of $8.7
    million. The appellant proved its claim in bankruptcy.

[13]

At
    a meeting of creditors in March 2004, the appellant asked the Trustee whether
    he would be pursuing the transactions that were the subject of the 2002 action.
    The Trustee advised that any action to be pursued by the estate would have to
    be undertaken by creditors pursuant to s. 38 of the
BIA
because the
    estate was impecunious.

[14]

On
    August 19, 2005, Mr. Sloan was discharged from bankruptcy by order of the
    Deputy Registrar. The appellant opposed the discharge but did not attend the
    discharge hearing. It appears that no evidence was offered concerning the
    transactions that were the subject of the 2002 action, nor did the Deputy
    Registrar make any decision in connection with them.

[15]

On
    April 5, 2006, the respondents obtained an order dismissing the 2002 action.
    The action was dismissed as required by s. 178(2) of the
BIA
. There
    was no adjudication of the issues raised in that action. The appellant did not
    attend, but some months later, moved to set the order aside saying that its
    failure to attend was due to inadvertence. This motion was unsuccessful and the
    appellant has since conceded that the 2002 action was properly dismissed by
    operation of s. 178(2) of the
BIA
.

[16]

On
    April 6, 2006, the appellant attended before the Registrar and obtained an
    order pursuant to s. 38(1) of the
BIA
. That order included the
    following:

2.       THIS COURT ORDERS that the Applicant may and it is
    hereby authorized to commence and prosecute proceedings against Cave Hill
    Properties Ltd., Valerie Frances Sloan and David Robin Sloan, or any of them,
    in its own name and at its own expense and risk, for the purpose of setting
    aside any fraudulent preference, fraudulent conveyance or settlement involving
    such parties (the Proceedings).

6.       THIS COURT ORDERS that all benefits to be derived from
    the Proceedings authorized by this Order together with the costs of same, shall
    belong exclusively to the Applicant and to such other creditors of the Bankrupt
    who may within fourteen (14) days of the service upon them of the Notice agree
    to contribute
pro rata
according to the amount of their respective
    claims (or as otherwise may be agreed in accordance with the terms set out in
    the Notice) to the expense and risk of the Proceedings...

10.      THIS COURT ORDERS that any surplus that remains after
    payment of the costs of the Proceedings and the claims of the Applicant and any
    Included Creditor shall be paid to the Trustee in favour of the Bankrupts
    estate.

13.     THIS COURT ORDERS that the Trustee shall within four
    days of service of this Order upon it, execute an assignment assigning all of
    its right, title and interest in the subject matter of the Proceeding and shall
    transfer and make available, all books and documents in support thereof of
    relevance thereto and that such assignment shall vest in the Applicant and any
    Included Creditor all the right, title and interest which the Trustee has, had
    or shall have in the subject matter of the proceeding by virtue of its office
    as Trustee.

[17]

Mr.
    Sloan moved to set aside the s. 38(1) order, but ultimately abandoned his
    motion. The appellant then commenced this action on June 20, 2008 (the 2008
    action) in accordance with that order.

[18]

The
    respondents moved to dismiss the action on the basis that it was barred by the
Limitations
    Act
, 2002, S.O. 2002, c. 24, and by abuse of process,
res judicata
and issue estoppel.

[19]

The
    motion judge who heard the motion granted the order, finding that the 2008
    action was out of time. He did not deal with the other issues raised by the
    respondents. On appeal, this court set that order aside, declared that the 2008
    action was not statute-barred and reinstated the action. This required that the
    issues of abuse of process,
res judicata
and issue estoppel raised by
    the respondents motion be dealt with on the merits. That motion was heard on
    July 26, 2011. It is the decision of the motion judge on those issues that is
    before this court now.

[20]

The
    motion judge found that the 2008 action constitutes an abuse of process for
    several reasons. She found it to be a collateral attack on the discharge order
    granted to Mr. Sloan and on the order dismissing the 2002 action. She also
    found that the 2008 action cannot succeed because the underlying debt owed to
    the appellant has been released by the discharge order, and that this too makes
    it an abuse of process.

[21]

The
    motion judge also found that the 2008 action should be dismissed because the
    dismissal of the 2002 action meant that the doctrines of
res judicata
and issue estoppel apply to the issues raised in the 2008 action.

[22]

In
    this court, the respondents sought to support each of the reasons of the motion
    judge. In my view, their arguments cannot succeed. All rest on a faulty premise;
    namely, that in the 2008 action, the appellant is advancing claims identical to
    those it advanced in the 2002 action. This fails to recognize that, unlike the
    2002 action, which the appellant brought on its own behalf, the 2008 action is
    brought pursuant to s. 38(1) of the
BIA
and the claim is that of the Trustee.

[23]

In
Shaw Estate (Trustee of) v. Nicol Island Development Inc
., 2009 ONCA
    276, 51, C.B.R. (5th) at 12, this court set out the purpose of s. 38 of the
BIA
.
    Speaking for the court, Cronk J.A., at para. 37, cited with approval
Toyota
    Canada Inc. v. Imperial Richmond Holdings Ltd.
(1994), 27 C.B.R. (3d) 1
    (Alta. C.A.), at paras. 14-15, leave to appeal to S.C.C. refused, [1994]
    S.C.C.A. No. 346:

In my view, its primary purpose is to ensure that the
    bankrupts assets are preserved for the benefit of the creditors.  It
    provides the mechanism for creditors to proceed with an action when the trustee
    refuses or fails to act; thereby ensuring that assets of the bankrupt (which
    may otherwise go unrecovered) are available to creditors willing to finance the
    litigation.

The secondary purpose, relating to notice, is to make sure the
    section operates fairly.  While it is fair that those parties willing to
    accept the risks and costs of litigation receive a preference in terms of
    recovering their losses, the right to that preference must be shared with all
    creditors.

[24]

Cronk
    J.A. went on, at para. 72, to clearly describe the difference I have
    delineated:

A creditor obtaining a s. 38 order advances not his or her own
    cause of action but, rather, the trustees cause of action:
Re Zammit
(1998),
    3 C.B.R. (4
th
) 193
    (Ont. Gen. Div.), at para. 4.  The proceeding authorized by a
s. 38
order is brought
    on the basis that the trustee in bankruptcy has the right to bring the action,
    and the creditor with a
s. 38
order is taking
    the action as if the creditor were the trustee.  As the Motion Judge
    indicated, once a
s. 38
order is made,
    the creditor to whom it is granted stands in the shoes of the trustee: see for
    example,
Swerdlow
, at para. 17.  This accords with the intended
    purpose of
s. 38(1)
of the Act,
    namely, to ensure that the bankrupts assets are preserved for the benefit of
    all creditors.

[25]

This
    distinction is explicit in the s. 38(1) order obtained by the appellant. The
    order authorizes it to commence proceedings in its own name to set aside any
    fraudulent preferences involving the respondents, and for that purpose the Trustee
    is ordered to assign its right, title and interest in such claims to the
    appellant. The order provides that the appellant and such other creditors of
    the bankrupt as joined with it in contributing to the litigation, can claim any
    recovery to satisfy their claims in bankruptcy, but any surpluses must be paid
    to the Trustee in favour of the bankrupts estate.

[26]

In
    short, the proceeding authorized by this order is not an action by the
    appellant on its unsatisfied judgment. To paraphrase Cronk J.A. at para. 73 of
Shaw
    Estate
, in the s. 38 motion, the appellant was not seeking to pursue its
    own claim in bankruptcy based on its default judgment. Rather, it was seeking
    leave of the court to proceed with the Trustees claim against the respondents
    in relation to conveyances said to be fraudulent.

[27]

The
    respondents do not argue that the Trustee could not bring such an action. Nor
    do they argue that the appellant failed to meet the three prerequisites for the
    invocation of s. 38(1) of the
BIA;
namely, that it was a creditor of
    the bankrupt at the date of the bankruptcy, that it has requested the Trustee
    to take these proceedings, and that the Trustee has refused. Moreover, the
    discharge order did not bring the bankruptcy to an end, nor is it a bar to a
    subsequent s. 38 motion. See:
Shaw Estate
, footnote 5.

[28]

Rather,
    the respondents argue that the motion judge was correct to find that the 2008
    action is an abuse of process because it constitutes a collateral attack on the
    discharge order and the order dismissing the 2002 action, and because its
    foundation, the underlying debt owed to the appellant, was released by the
    discharge. The respondents also argue that the motion judge was correct to find
    the issues in the 2008 action to be subject to
res judicata
and issue
    estoppel because of the dismissal of the 2002 action.

[29]

In
    my view, these arguments all fail. The 2008 action does not constitute a
    collateral attack on the discharge order. The appellant does not bring this
    action in its personal capacity. Rather, in bringing this action, the appellant
    is standing in the shoes of the Trustee. The Trustee is indifferent to the
    discharge order in that the bankruptcy continues despite that order. Moreover,
    the discharge order is not a bar to a subsequent s. 38 motion: see
Shaw
    Estate
,
at footnote 5. As
    I have noted, the appellant does not argue that the Trustee could not bring such
    an action. Hence, by asserting the Trustees claim, the appellant can bring the
    action without indirectly attacking the discharge order by which it as creditor
    would be bound. That action is no more of an indirect attack on the discharge
    order than it would be if the Trustee brought it.

[30]

Nor
    is the 2008 action a collateral attack on the order dismissing the 2002 action.
    Had the Trustee brought the 2008 action it would not have been a collateral
    attack on the 2002 order, both because that order did not dismiss the claim on
    the merits and because in any event the Trustee was not a party to the earlier
    action. The 2008 action is no more of an attack on the dismissal order because
    it was brought by the appellant than it would be if the Trustee brought the
    2008 action.

[31]

Moreover,
    I do not think that the release of the debt owed to the appellant renders the
    2008 action an abuse of process. That action is not the assertion of the
    appellants claim in bankruptcy based on the debt owed to it, but the assertion
    of the Trustees claim based on alleged fraudulent conveyances.

[32]

Finally,
    in my view,
res judicata
and issue estoppel do not apply to the 2008
    action either as a result of the discharge order, or the order dismissing the
    2002 action. In neither of these proceedings was there an adjudication of the
    issues sought to be raised in the present action.

[33]

In
    my view, this case is distinguishable from
Morganti v. Strong
(1999),
    14 C.B.R. (4th) 127 (Ont. C.A.). In that case, the basis for this courts
    decision was that the parties had participated in a proceeding resulting in an
    adjudication of the issues sought to be raised in the s. 38(1) action at the
    hearing for the discharge order.

[34]

In
    summary, therefore, I would allow the appeal and dismiss the respondents
    motion to dismiss the 2008 action. The appellant is entitled to its costs for
    the motion and in this court, including the review of the order of Armstrong
    J.A. and the appeal itself. Because of the convoluted history of this matter,
    the best course is to have the parties make their costs submissions in writing
    in no more than five pages, to be filed within 30 days of the release of these
    reasons.

Released: July 18, 2012 (S.T.G.)

S.T.
    Goudge J.A.

I
    agree. Robert J. Sharpe J.A.

I
    agree. R.G. Juriansz J.A.


