



COURT OF APPEAL FOR ONTARIO

CITATION: McEwen (Re), 2021 ONCA 566

DATE: 20210812

DOCKET: C67520

Juriansz, Huscroft and Jamal
    JJ.A.

In the
    Matter of the Bankruptcy of Robert Morris Jr. McEwen and Caroline Elizabeth
    McEwen, of the Town of Perth, in the County of Lanark, in the Province of
    Ontario

BETWEEN

Barbara
    Lynn Carroll by Her Litigation Guardian Shannon Luknowsky, Shannon Luknowsky,
    Jeffrey Carroll and Shannon Luknowsky as Executor for the Estate of Lorne
    Carroll

Plaintiffs
    (Respondents)

and

Robert
    McEwen and Caroline McEwen

Respondents

and

Traders General Insurance Company
,
    improperly described in Superior Court of Justice Court File Number
CV-17-00073740-0000 as Aviva Canada Inc.

Person Affected by an Order

Obtained
    on Motion Without Notice

(
Appellant
)

Harvey Chaiton and Alan Rachlin, for
    the appellant

Joseph Y. Obagi, for the respondents

Heard: May 14, 2021

On appeal from the order of Justice Stanley
    J. Kershman of the Superior Court of Justice, dated September 26, 2019, with
    reasons reported at 2019 ONSC 5593.

Juriansz J.A.
:

A.

INTRODUCTION

[1]

This appeal is brought by the defendant to an
    action assigned to the respondents by a trustee in bankruptcy under s. 38 of
    the
Bankruptcy and Insolvency Act
, R.S.C. 1985, c. B-3 (BIA). As is
    often observed, the BIA is a complete code governing the bankruptcy process.
    Parliament enacted the BIA to provide summary and expeditious procedures to
    determine the questions that arise in bankruptcy with a minimum of cost. Generally,
    the defendant to a s. 38 assigned action lacks standing in the bankruptcy
    process to contest the s. 38 order and resulting assignment and thus avoid
    defending the assigned action. Where such defendants wish to avoid the risk and
    expense of responding to assigned lawsuits that they consider meritless, the
    civil rules of practice provide summary procedures to which they can resort.

[2]

In this case, Traders General Insurance Co. (Traders)
    appeals, with leave, from the order of Kershman J. dated September 26, 2019, dismissing
    its motion to set aside his order dated December 21, 2016, pursuant to s. 38 of
    the BIA, made in the bankruptcy of Robert McEwen and Caroline McEwen. The s. 38
    order authorized the respondents (the Carrolls) to commence an action against
    Traders for alleged bad faith in failing to settle the Carrolls personal
    injury claims against the McEwens within the policy limits. After the s. 38 order
    was made, the trustee assigned its interest in the action to the Carrolls, as
    contemplated by s. 38(2).

[3]

I conclude that Kershman J. correctly found Traders
    did not have standing to challenge the s. 38 order, and consequently, I would
    dismiss the appeal.

B.

Facts

(1)

The personal injury action

[4]

On March 28, 2009, Barbara Carroll was injured
    by a motor vehicle driven by Robert McEwen and owned by Caroline McEwen. The
    McEwens were insured by Traders
[1]
for $1 million. On March 25, 2011, the Carrolls commenced an action against the
    McEwens and their own insurers, Aviva Canada Inc. and Pilot Insurance Co. Some
    months later, on September 15, 2011, the McEwens filed for bankruptcy,
    automatically staying the Carrolls personal injury action. The sworn statement
    of affairs that the McEwens filed in their bankruptcy listed the Carrolls
    personal injury claim as an unsecured claim for $375,000.

[5]

On June 18, 2012, the McEwens received their
    automatic absolute discharge from their bankruptcy, and subsequently, the
    trustee was discharged.

[6]

On October 12, 2012, the Carrolls obtained an
    order lifting the stay of proceedings pursuant to s. 69.4 of the BIA, and granting
    leave to the Carrolls to continue to prosecute their claims against the
    bankrupts, ROBERT MCEWEN and CAROLINE MCEWEN.

[7]

The Carrolls claim they made an offer to settle
    the action within policy limits on the eve of the trial that began in September
    2015, and that the offer was not accepted by Traders. The trustee wrote to the
    McEwens counsel stating that the insurer, by refusing the offered settlement,
    had placed its own financial interests in priority to that of its insureds and
    accordingly was acting in bad faith. The trustee gave notice to Traders that
    in the event a Judgment is granted against Robert and Caroline McEwen for any
    sum greater than the limits of the liability policy, we hold Aviva fully liable
    for the excess amount.

[8]

After a six-week trial, the jury assessed Barbara
    Carrolls pain and suffering in the amount of $300,000 and her future care
    costs in the amount of $3,600,000. The jury also awarded family law damages in
    the amount of $43,000. The jury found Barbara Carroll 38 percent contributorily
    negligent for the accident. With pre-judgment interest included, the trial
    judges formal judgment, dated September 19, 2016, found the McEwens liable to
    the Carrolls in the amount of $2,610,744.32 plus costs and post-judgment
    interest. The formal judgment also ordered the Pilot Insurance Company to pay
    $1 million of the judgment pursuant to the provisions of the OPCF 44R endorsement
    in the Carrolls own automobile insurance policy. The trial judge included a
    paragraph in the judgment limiting the McEwens personal liability. The
    paragraph provided:

THIS COURT ORDERS AND AJUDGES that the
    judgment against the Defendants Robert McEwen and Caroline McEwen, personally,
    is limited to the limits of their insurance policy with the Aviva Insurance
    Company Canada in the amount of $1,000,000.00.

[9]

Finally, the trial judge made a conditional
    assignment order of Barbara Carrolls future statutory accident benefits in
    favour of the insurer if the insurer paid the trial judgment in full, even
    though it exceeded the limits of coverage. The trial judge fixed costs of the
    action in the amount of $375,000, a sweeping reduction from the amount claimed
    of $795,616.09 because of the behaviour of the Carrolls counsel relating to a
    settlement offer made by the insurance companies, the lack of benefit to the Carrolls
    in pursuing the trial, and the behaviour of the Carrolls counsel that extended
    the trial:
Carroll (Litigation guardian of) v. McEwen
,2016 ONSC 2075,
    37 C.B.R. (6th) 70. The Carrolls appeal of the assignment order and the costs
    award was unsuccessful:
Carroll v. McEwen
, 2018 ONCA 902, 143 O.R.
    (3d) 641.

(2)

Proof of claim and s. 38 order

[10]

On October 11, 2016, the Carrolls filed a proof
    of claim in the McEwens estate for the amount of $624,349.01, which was the
    amount awarded by the trial judgment in excess of insurance coverage. The
    Carrolls also asked the trustee to advance a bad faith claim against Traders
    for its refusal to settle the action within the policy limits before trial. The
    trustee, after consulting with the Office of the Superintendent of Bankruptcy regarding
    the scope of s. 41(10) of the BIA, which provides a discharged trustee may
    perform duties as may be incidental to the full administration of the estate,
    advised the Carrolls in writing that it would accept the proof of claim as
    filed, that it would not take any action against the McEwens insurers, and
    that it would consent to a s. 38 BIA order allowing the Carrolls to take the
    action in their own name.

(a)

Section 38

[11]

Section 38 of the BIA contemplates that the
    trustee may refuse or neglect to take a proceeding. Here, the trustee refused
    to take action with respect to any claim against Traders, stating the estate
    was without funds. In such situations s. 38 of the BIA allows a creditor to
    obtain a court order authorizing it to take the proceeding at its own expense
    and risk. Section 38(1) provides:

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.

[12]

Upon such an order being made, s. 38(2) provides
    that the trustee shall assign and transfer to the creditor all their right,
    title, and interest in the proceeding including any document in support thereof.
    Section 38(3) provides that any benefit derived from the proceeding belongs
    exclusively to the creditor who instituted the proceeding to the extent of
    their claim, and that any surplus belongs to the bankrupt estate.

(b)

The Carrolls motion for a s. 38 order

[13]

The Carrolls applied for a s. 38 order. The
    supporting material for their motion included a lawyers affidavit alleging
    that Traders had acted in bad faith leading up to the trial by refusing to
    settle the personal injury claim within the policy limits. The exhibits to the
    affidavit included the Masters order to continue, the Carrolls offer to settle
    the personal injury action, the trial judges judgment in the amount of
    $2,610,744.32, the Carrolls proof of claim, a letter from the trustee
    accepting the proof of claim, and the trustees consent to the s. 38 order.

[14]

The Carrolls served the motion materials on the trustee
    and the other creditors of the estate. They did not serve Traders. The motion
    came before Kershman J., who granted the s. 38 order on December 21, 2016. The
    next day the trustee assigned the bad faith claim to the Carrolls. On August
    25, 2017, the Carrolls issued the statement of claim against Aviva Canada, claiming
    damages for the breach of a duty of good faith in its dealings with the McEwens
    insurance coverage.

[15]

The statement of claim pleads that Aviva Canada provided
    the McEwens with liability insurance with policy limits of $1 million and that [t]he
    rights, interests and liabilities [of the McEwens]  under their policy of
    insurance were transferred to their trustee in bankruptcy. It goes on to plead
    that at the same time as Aviva Canada was defending the action against the
    McEwens, Aviva Canada (together with Pilot Insurance Company) was also the
    insurer of Barbara Carroll under her OPCF 44R Family Protection Endorsement with
    limits of $2 million. The theory of the bad faith action asserted in para. 16
    of the statement of claim, is that Aviva Canada improperly withheld the policy
    limits of the McEwens in an effort to leverage the settlement position and
    litigation strategy of Aviva Canada in its capacity as OPCF 44R insurer of
    Barbara Carroll.

[16]

In the action, the Carrolls claimed damages of $624,349.01,
    which is the amount of the judgment in excess of the McEwens insurance
    coverage, and punitive and exemplary damages of $1 million.

(c)

Traders motion to set aside the s. 38 order

[17]

Traders moved to set the s. 38 order aside, indicating
    it was improperly described as Aviva Canada Inc. in the Carrolls bad faith
    action. Traders motion, brought in the Superior Court of Justice in Bankruptcy
    and Insolvency, sought an order:

1)

reversing the decision of the trustee to allow the proof of claim
    filed by the Carrolls;

2)

setting aside the s. 38 order granting the Carrolls leave to
    commence proceedings against Traders; and

3)

setting aside the trustees assignment of the bad faith claim of
    action to the Carrolls.

[18]

The motion relied on ss. 37 and 187(5) of the
    BIA. Section 37 allows the bankrupt, any creditor, or an aggrieved person to
    apply to the court to confirm, reverse or modify an act or decision of the
    trustee. Section 187(5) allows the court to review, rescind or vary any order
    made by it under its bankruptcy jurisdiction.

[19]

Traders motion alleged:

1)

the Carrolls proof of claim was improper and filed in violation of
    the trial judges reasons and judgment in the personal injury action;

2)

the Trustee erred by accepting the Carrolls proof of claim;

3)

the bad faith claim was not property belonging to the McEwens on the
    date of bankruptcy and did not devolve on the McEwens before their discharges
    from bankruptcy;

4)

the Trustee had no interest in the bad faith claim and therefore could
    not consent to the s. 38 order and could not assign the bad faith claim to the Carrolls;

5)

the trustee could not consent to the s. 38 order and assign the bad
    faith claim after it had been discharged;

6)

the Carrolls had acted improperly in obtaining the s. 38 order without
    giving notice to Traders; and

7)

that the Carrolls failed to make full disclosure in their s. 38
    motion.

[20]

The motion was brought before Kershman J. who
    had granted the s. 38 order.

(3)

Kershman J.s decision

(a)

Standing

[21]

The motion judge dismissed Traders motion on
    the basis that it lacked standing to attack the trustees acceptance of the
    proof of claim and assignment of the bad faith action, and lacked standing to
    challenge the s. 38 order.

[22]

Kershman J. held that Traders had failed to put
    forward any basis on which it was an aggrieved party under s. 37 of the BIA
    for the purpose of reviewing the trustees decisions to accept the proof of
    claim and to assign the bad faith claim to the Carrolls. On appeal, Traders
    does not seek to rely on s. 37.

[23]

Kershman J. also held that Traders did not have
    standing to review the s. 38 order of the court. He recognized that
    Traders motion fell within an exception to the general rule that defendants
    have no standing to challenge a s. 38 order because Traders had alleged
    misrepresentations and non-disclosure by the Carrolls. However, he made
    findings of fact rejecting these allegations. Therefore, Traders fell within
    the general rule and had no standing to challenge the s. 38 order.

[24]

After he concluded Traders motion failed for
    lack of standing, Kershman J. recognized he had no jurisdiction to deal with
    Traders arguments but went on to address them anyway in consideration of the
    possibility that this Court is found to have otherwise erred in its standing
    analysis. He indicated he would have rejected all of Traders arguments and
    dismissed its motion, even if it had had standing.

C.

Issues ON APPEAL

[25]

The relief claimed on appeal is narrower than
    what was sought before the motion judge. The amended notice of appeal seeks to
    appeal only from the dismissal of Traders motion to set aside the s. 38 order
    granting leave to the Carrolls to commence the bad faith action against
    Traders. The amended notice of appeal does not seek to set aside the trustees
    acceptance of the Carrolls proof of claim and his assignment of the bad faith
    claim to the Carrolls. Traders factum on appeal is consistent with the amended
    notice of appeal. The request for relief in the factum requests only an order
    setting aside the s. 38 order.

[26]

On appeal, Traders raises three issues:

1)

Did the motion judge err in holding that Traders had no standing to challenge
    the s. 38 order?

2)

Should the s. 38 order be set aside because the Carrolls were not creditors
    of the McEwens?

3)

Should the s. 38 order be set aside because the bad faith claim was
    not property of the bankrupts and therefore could not be assigned by the
    trustee?

D.

Analysis

(1)

Traders had no standing to challenge the s. 38
    order

[27]

In order for Traders to advance its second and
    third issues, it must establish that the motion judge erred in holding that it
    had no standing to challenge the s. 38 order.

(a)

The general rule is that a proposed defendant
    has no standing to challenge a s. 38 order

[28]

The established and strict rule, subject to certain
    limited exceptions, is that a defendant to an action assigned under s. 38 has
    no standing to contest the assignment:
Shaw Estate v. Nicol Island
    Development Incorporated
, 2009 ONCA 276, 248 O.A.C. 35, at paras. 44-45. But
    for the exceptions, the proposed defendant to an intended action has no right
    to notice of the application for a s. 38 order, no right to be heard at the
    application, and no right to review or appeal the order if it is made:
Coroban
    Plastics Ltd., Re

(1994),
10 B.C.L.R. (3d) 52 (C.A.) (
sub nom Formula
    Atlantic Financial Corp. v. Attorney General of Canada
)
, at
    para. 8. The motion judge in
Formula Atlantic
, in explaining the defendants lack of
    standing, noted that a proposed defendants rights are not adversely affected
    by the
transfer from trustee to creditor of whatever
    right of action may exist: [t]he order  imposes no liability on the [proposed
    defendant] which did not previously exist, and leaves it free to assert in the
    action every defence it ever had: at para. 8.

[29]

In
Shaw
, at paras. 43-45, Cronk J.A. reviewed
    the jurisprudence that establishes the general rule against standing and the
    limited exceptions. Cronk J.A. explained that the reason for the limited
    exceptions is to ensure that the administration of justice and the integrity
    of the bankruptcy process had not been undermined: at para. 48. Thus, the
    defendant will be granted standing to contest a s. 38 order when there are
    allegations of abuse of process, non-disclosure, procedural irregularities,
    fraud and misrepresentation to the court: at para. 48. As well, where the s.
    38 order imposes obligations on the defendant to the assigned action, directs it
    to take specific steps in the litigation, or subjects it to costs, it will have
    standing to move to vary the order:
Shaw
, at para. 45.

[30]

The appropriate practice for a defendant
    claiming standing under the exceptions is to challenge the s. 38 order by
    bringing an application for review under s. 187(5) of the Act:
Shaw
,
    at para. 46. Section 187(5), however, does not give the defendant standing it
    does not otherwise have:
Formula Atlantic
, at para. 11. Unless an
    exception applies, the defendant to an action assigned under s. 38 cannot
    resort to s. 187(5) to attempt to review and rescind a s. 38 order authorizing
    a creditor to proceed with an action against it.

[31]

As noted already, in this court Traders does not
    contest the motion judges finding that there was no misrepresentation or lack
    of disclosure that would allow Traders standing. In this court Traders submits
    that the
Shaw
exceptions are not exhaustive. It submits the New
    Brunswick Court of Appeal recognized a different exception in
Isabelle v.
    Royal Bank of Canada
, 2008 NBCA 69, 336 N.B.R. (2d) 332. Traders submits that
Isabelle

stands for the proposition that a defendant has
    standing to challenge a s. 38 order on the basis of a discrete and genuine
    issue of law that if decided in favour of the potential defendant would avoid
    the need to defend a lawsuit that never should have been commenced in the first
    place:
Isabelle
, at para. 39.

(b)

Isabelle
does not
    change the law

[32]

In my view Traders misconstrues what was said in
Isabelle
. On my reading, the New Brunswick Court of Appeal did not
    intend to create a new exception to the general rule that a proposed defendant has
    no standing to challenge a s. 38 order.
Isabelle
had nothing to do with
    standing to challenge a s. 38 order that has been issued.
Isabelle
addressed
    standing at the s. 38 motion itself.
Isabelle

established that where
    a proposed defendant is also a creditor, and thus has notice of another
    creditors s. 38 motion, a motion judge has a narrow discretion to grant that
    proposed defendant standing on the s. 38 motion if it raises a discrete and
    genuine issue of law that if decided in favour of the potential defendant might
    well avoid the need to defend a lawsuit that should never have been commenced
    in the first place: at para. 39 The circumstances of this case are different.

[33]

The issue in
Isabelle

was
    whether a bank, which was both the proposed defendant to the s. 38 assigned
    action
and a creditor
, should have been granted intervener status to
    oppose another creditors s. 38 motion. The proposed defendant had received the
    notice of motion because it was also a creditor. The court said a proposed defendant
    that is also a creditor was entitled to participate in the s. 38 proceedings for
    the limited purpose of preserving his or her right to share rateably in the
    spoils of the action: at para. 33. The court also recognized that a motion
    judge, when hearing a s. 38 motion, retained a narrow discretion to grant a proposed
    defendant who is also a creditor standing to raise a determinative discrete and
    genuine of law: at paras. 5, 39.

[34]

In my view, it is a mistake to divorce the
    court's comments from the context of the case and understand them as generally
    applicable. The courts comment in
Isabelle

applies only to a
    proposed defendant who happens to be at the s. 38 hearing because it is also a
    creditor. The court was not suggesting that a party named as a defendant in a s.
    38 order could be granted standing to move to set aside the order
after
it had been made.

[35]

It may well be more efficient to allow a
    defendant, who is participating in the s. 38 motion as a creditor, to raise a
    decisive discrete and genuine issue of law in opposing the motion, but there is
    no economy in allowing a defendant to commence a s. 187(5) process to review
    and rescind the s. 38 order after it has been made rather than raising the
    alleged decisive issues on a summary judgment motion in the assigned lawsuit
    itself.
Isabelle

alluded to the situation in which the proposed
    defendant had not been given notice of the s. 38 motion and suggested, then
    presumably the potential defendant has the right to raise the issue on a
    preliminary motion once the lawsuit is filed: at para. 38.

[36]

In my view,
Isabelle

provides no
    support for the contention that a defendant has the right to standing to review
    an issued s. 38 order, under s. 187(5), on the basis of a determinative discrete
    and genuine issue of law.

[37]

I conclude that Traders, having abandoned its
    allegations of misrepresentation and lack of disclosure, does not have standing
    to challenge the motion judges grant of the s. 38 order.

E.

Conclusion and Discussion

[38]

The conclusion that Traders has no standing to
    challenge the s. 38 order dictates that the appeal be dismissed, and this court
    is without jurisdiction to determine the other issues raised. The motion judge
    went on to address Traders other arguments in consideration of the
    possibility that this Court is found to have otherwise erred in its standing
    analysis. I will follow the same approach.

(1)

The s. 38 order should not be set aside on the
    basis that the Carrolls were not creditors of the McEwens

[39]

Traders argues that the Carrolls were not
    creditors of the bankrupt and therefore a s. 38 order could not be made
    authorizing them to proceed with the action. The wording of s. 38 makes clear
    that an order can only be made in favour of a creditor.

[40]

To support this argument, Traders submits: 1) the
    stay of proceedings against the McEwens had been lifted solely to enable the
    Carrolls to access the McEwens' insurance proceeds; 2) the trial judge had
    specifically limited the judgment against the McEwens to the limits of their
    insurance policy; and 3) the most the Carrolls could realize of the damages
    awarded was the amount of their liability and underinsured insurance coverage.

[41]

Traders submissions presume that whether the
    Carrolls were creditors was a discrete and genuine issue of law that would be
    determinative. That presumption is incorrect. The question whether the Carrolls
    were creditors of the bankrupt estate is a question of fact before the s. 38
    motion judge. Cronk J.A. in
Shaw
, at para. 60, said, For the purpose of
    a s. 38 motion, the court need only be satisfied on a balance of probabilities
    that the applicant is a creditor of the bankrupt: at para. 60. See also
DeGroote
    v. Canadian Imperial Bank of Commerce
(1996), 45 C.B.R. (3d) 132 (Ont.
    Gen. Div.), at para. 7, aff'd (1998), 37 O.R. (3d) 651 (C.A.), leave to appeal
    to S.C.C. refused, [1998] S.C.C.A. No. 149;
Alfano v. KPMG Inc
.
(1999), 7 C.B.R. (4th) 47 (Ont. Gen. Div.); and
Polar Products Inc. v.
    Hongkong Bank of Canada
(1992), 14 C.B.R. (3d) 225 (B.C.S.C.).

[42]

On appeal, a s. 38 motion judges conclusion
    that the applicant is a creditor would be reviewed as a finding of fact. For
    example, in
Shaw
, Cronk J.A. was satisfied there was some evidence the
    applicant was a creditor: at para. 62. In
Shaw
, there was an affidavit
    before the motion judge that the applicant was a creditor, and though the
    applicants proof of claim was not part of the affidavit, the bankrupts sworn
    statement of creditors and liabilities, in which he acknowledged the
    [applicant] as one of his unpaid creditors at the date of bankruptcy, was
    attached as an exhibit to the affidavit: at para. 61.

[43]

In this case, there was evidence before the
    motion judge that the Carrolls claim had been included on the McEwens sworn statement
    of affairs filed on the date of bankruptcy; that the Carrolls had a judgment
    against the McEwens in the amount of $2,610,744.32; and that their proof of
    claim for the damages in excess of the limits of the insurance policy had been
    accepted by the trustee (a determination of the trustee that is not contested
    on appeal). Based on this evidence, it is my view the motion judge could have
    been satisfied the Carrolls were creditors for the purpose of s. 38.

(2)

The s. 38 order should not be set aside on the
    basis that the bad faith claim was not property of the bankrupt

[44]

The second argument Traders makes is that the
    bad faith claim is not property of the bankrupts because it did not devolve on
    them before they were discharged as required by s. 67(1)(c) of the BIA.

[45]

Traders relies on this courts decision in
Dundas
    v. Zürich Canada
, 2012 ONCA 181, 109 O.R. (3d) 521
.
In that case
    the court held an action against an insurer for breach of its duty of good
    faith was not a claim under the insurance contract; rather, it was an
    extra-contractual claim that did not arise until the insurers liability to
    indemnify the insured was established. Traders argues that in this case its
    liability to indemnify the McEwens was not established until more than three
    years after the McEwens were discharged from bankruptcy in June 2012. Traders
    liability to indemnify the McEwens was established at the earliest when the
    jury rendered its verdict on October 30, 2015, or more likely when the trial
    judgment was issued on September 19, 2016. Traders argues that since the bad
    faith cause of action did not arise until after discharge it could not be property
    that devolved on the McEwens before their discharge. Thus, Traders submits the
    bad faith claim did not vest in the trustee and the trustee was unable to
    assign it.

[46]

The issue may raise a question of law that could
    be determinative, but it is not one that the s. 38 motion judge had to decide. This
    court has held, where the trustee consents to the s. 38 order, that the merits
    of the action are irrelevant at the s. 38 motion:
Dominion Trustco Corp.,
    Re

(1997), 50 C.B.R. (3d) 84 (Ont. C.A.).

[47]

The reasons of the court are admittedly brief, but
    the court made clear it approved of the reasoning of the motion judge in that
    case. Cameron J. in that case,
Dominion Trustco Corp., Re
(1997), 45
    C.B.R. (3d) 25 (Ont. Gen. Div.), said, at paras. 12-13:

The purpose of s. 38 is to enable the creditors to protect
    their own interests where the Trustee declines, for economic or other reasons,
    or neglects to do so.
The merits of the
    action have nothing to do with this purpose
.

If this was not a bankruptcy situation, there is nothing to
    prevent the holder of a right of action assigning it to another without regard
    to the merits of the right of action.
The
    fact that the assignor is a bankrupt should not give the proposed defendant a
    right to attack the authorization based on the merits of the cause of action
.

[48]

He opined, at para. 11, that the merit of the
    action was an issue for the trial of the action itself:

an issue for the courts of the jurisdiction
    hearing the action. If this was a condition, the proposed defendant would, by
    way of appeal from a s. 38 order, have two opportunities to attack the proposed
    action on the basis that it is without sufficient merit to justify bringing the
    action. This makes no sense to me in the context of the BIA. It is better left
    for determination under the laws of the jurisdiction in which the proceedings
    will be brought.

[49]

Cameron J. did recognize that there may be a
    need for a s. 38 motion judge to inquire into the merits when the trustee
    opposes the granting of the order:
Jolub Construction Limited, Re
(1993), 21 C.B.R. (3d) 313 (Ont. Gen. Div.).

[50]

In upholding Cameron J.s decision this court stated
    that
the registrar who granted the s. 38 order did not
    have a duty to be assured that there was substance in a claim which is going
    forward by consent of the Trustee:

Dominion
    Trustco
, at para. 1.

[51]

The Alberta Court of Appeal is the only other
    court of appeal to consider
Dominion Trustco. In Smith v.
    Pricewaterhousecoopers Inc
.
, 2013 ABCA 288, the Alberta Court of Appeal
    distinguished
Dominion Trustco
on the basis that the motion in
Dominion
    Trustco
proceeded with the consent of the trustee: at para. 21. In
Smith
,
the trustee had not consented and the court, citing a long line of authority,
    described establishing a
prima facie
case or showing the claim is not
frivolous or vexatious or
obviously
    spurious as a requirement for issuing a s. 38 order: at para. 19.

[52]

In
Davidson (Re)
, 2021 ONCA 135, 86 C.B.R. (6th) 1, this court followed
Smith

without
    citing
Dominion Trustco
. However, that was a case in which the s. 38 motion was made
    without the trustees consent.

[53]

Houlden and Morawetz, citing
Zammit, Re
(1998), 3 C.B.R. (4th) 191
    (Ont. Gen. Div.), a decision that followed
Dominion
    Trustco
, say, in Ontario, an applicant for a s.
    38 order does not have to present a
prima facie
case: Lloyd W. Houlden, Geoffrey B. Morawetz & Dr. Janis P.
    Sarra,
Bankruptcy and Insolvency Law of Canada
, 4th ed (Toronto: Thomson Reuters Canada, 2009, loose-leaf) Bankruptcy
    and Insolvency Act, at §86 (WL). That is so, at least in a case in which the
    trustee consents to the s. 38 order.

[54]

The s. 38 order, in this case, was issued with
    the trustee's consent. Thus, even if Traders had general standing
in the bankruptcy process to contest the s. 38 order, its argument that
    the trustee had no property interest in the bad faith action would fail as it
    relates to the merits of the proposed action.

[55]

Taking the analysis one step further, even if
    the assessment of the merits of the proposed action was a prerequisite of the
    issuance of a s. 38 order, the bad faith claim, in this case, meets the not spurious
    standard. Upon the McEwens bankruptcy, their liability for the motor vehicle
    accident was transferred to the trustee and the bankrupt estate became liable
    for the damages caused by the accident. The McEwens contract of insurance was also
    transferred to the trustee and the bankrupt estate became the insured and
    entitled to the proceeds of the insurance to satisfy the estates liability to
    the Carrolls:
Mercure v. Marquette & Fils Inc
.
, [1977] 1 S.C.R. 547, at p. 553;
Perron-Malenfant v. Malenfant (Trustee of)
, [1999] 3 S.C.R. 375, at para. 14. An insurer generally has the
    duty to deal with an insured with the utmost good faith and the insured has a
    right of action for any breach of that duty. As the insured was the bankrupt
    estate, the trustee could take action to remedy any breach of the alleged duty
    of good faith.

[56]

Any argument that the bad faith claim is not
    property of the estate would have to be decided conclusively on a summary
    judgment motion in the action itself.
In
Holley v.
    Gifford Smith Ltd
, 26 D.L.R. (4th) 230 (Ont. C.A.), this court explained that defendants to
    actions assigned under s. 38 should generally pursue their efforts to avoid
    defending against the action in the civil trial court rather than in bankruptcy
    court. This and other arguments to defeat the action could not constitute a
    collateral attack on the s. 38 order as long as they leave the order in place.

[57]

As was pointed out in
Formula Atlantic
, at para. 8, the
    effect of a s. 38 order is to transfer from trustee to creditor
whatever
    right of action may exist
 (Emphasis added). The motion judge, in that case,
    went on to observe, "The order in this case imposes no liability on the
    appellant which did not previously exist, and leaves it free to assert in the
    action every defence it ever had: at para. 8. The Carrolls, as assignees,
    stand in the shoes of the trustee:
Shaw
, at para. 72;
Indcondo Building Corp.
    v. Sloan
, 2012 ONCA 502, 91 C.B.R. (5th) 324, at
    para. 29. If the trustee has no property interest in the bad faith claim, then
    neither do the Carrolls and their action would be dismissed on a summary
    judgment motion.

F.

DISPOSITION AND Costs

[58]

I would dismiss the appeal and would fix costs in
    favour of the respondent in the amount of $22,500 all inclusive as counsel have
    agreed.  I am not persuaded there is any basis for revisiting the costs awarded
    on the appellants applications for leave.

Released: RSJ August 12, 2021

R.G.
    Juriansz J.A.

I
    agree. Grant Huscroft J.A.

I
    agree. M. Jamal J.A.





[1]

The statement of the claim in the assigned action, the s. 38
    order, and the trustees assignment and correspondence all refer to the
    McEwens insurer as Aviva Canada or Aviva Canada Inc. In the style of its
    motion to set aside the s. 38 order, Traders indicates it was improperly
    described as Aviva Canada Inc. in the bad faith action. The McEwens insurance
    policy was not included in the record. The cause of the confusion, or the
    relationship between Aviva Canada and Traders, if any, was not explained at the
    appeal.


