Expansion of s. 38 of the BIA assignment of claims

Historically, an assignment of claims pursuant to s. 38 of Bankruptcy and Insolvency Act (the “BIA”)[1] has only been used in the context of an assignment in bankruptcy. For instance, the use of s. 38 of the BIA in the context of a receivership was outright denied by the Manitoba Court of Queen’s Bench (“MBQB”) in Astra Credit Union.[2] Common law principles had largely governed the ability of a receiver to opt-out of certain litigation.

However, in the recent decision in Easy Loan Corporation v Base Mortgage & Investments Ltd,[3]the Alberta Court of Queen’s Bench (the “ABQB”) held that s. 38 of the BIA is applicable in the context of a receivership.

Astra Credit Union v Protos International Inc.

Astra involved a dispute between a secured creditor (“Astra”) and a debtor company (“Protos”) in the context of a receivership. Protos was placed in receivership, and Ernst & Young Inc., (the “Receiver”) was appointed.

Two of Protos’ creditors commenced litigation in Florida alleging, among other things, fraud, misrepresentation and misappropriation of corporate assets by Protos’ shareholders (the “Florida Litigation”). The Receiver was unwilling to participate in the claims and sought to assign Protos’ interest in the Florida Litigation to the creditors who sought to bring the claim pursuant to s. 38 of the BIA. The issue before the Court was whether it was appropriate to approve the proposed assignment.

The MBQB held that the matter should not and could not be resolved by analogy to the provisions of s. 38 of the BIA, stating the following:[4]

I am not satisfied that this matter should be resolved by analogy to the provisions of s. 38 of the Bankruptcy and Insolvency Act. The statutory scheme provided by that act is not what is at issue in this case. Rather, I believe this case falls to be decided by reference to the principles governing the duties, responsibilities and powers of court-appointed receivers.

The MBQB further noted that the Receiver has a common law duty to enforce a claim that is an asset of a debtor which may produce some proceeds, but has the power to compromise indebtedness to the debtor, creating a commercially reasonable discretion.[5] The MBQB also held that the receivership appointment order, along with its common-law duty and its “fiduciary relationship” to the debtor and creditors,[6] gave the Receiver the ability to opt-out of the Florida litigation. The proposed assignment was held to be reasonable.

Easy Loan Corporation v Base Mortgage & Investments Ltd.

This recent 2020 case involved the application by a creditor (“Easy Loan”) of the debtor company (“Base Mortgage”) for an order to take an assignment of estate claims against ten (10) entities in the context of a receivership, pursuant to s. 38(1) of the BIA.

Disputing the order granting the assignment, the defendants argued that the Court lacked jurisdiction to grant an assignment of claims, as Base Mortgage had not been assigned into bankruptcy and was instead a receivership. On that basis, the defendants argued that s. 38(1) of the BIA did not apply.

As in Astra, the ABQB agreed that the appointment order gave the receiver “the power to assign the property or any parts of it with the approval of the Court”, but diverged from Astra in agreeing with counsel for the applicants’ argument that an assignment by the receiver would be akin to the test under s. 38 of the BIA.

In its analysis, the Court began by referring to the decision of the Alberta Court of Appeal (the “ABCA”) in Smith v Pricewaterhousecoopers Inc.[7], which laid out the test to be applied in deciding whether to grant an assignment under s. 38 of the BIA, as follows:

To obtain an order under section 38(1) of the BIA, an applicant must satisfy a court that four criteria are met:

1. the applicant must be a creditor of the bankrupt estate;
2. the applicant must have requested that the trustee undertake the proceeding which the applicant now seeks permission to undertake itself;
3. the trustee must have refused or neglected to undertake the requested proceeding; and
4. there is threshold merit to the proposed proceeding, i.e., it is not obviously spurious.

The Court in Easy Loan held that the first, second, and third parts of the test had been indisputably met with respect to Easy Loan’s application for assignment. The contention was in relation to the fourth part of the test, namely, whether Easy Loan had established a threshold merit to the proposed assignment. After detailing Easy Loan’s evidence against each of the ten entities, the Court made individual conclusions on whether each claim satisfied the burden of “threshold merit” under the test for statutory assignment in s. 38 of the BIA. The Court concluded that Easy Loan’s claims against seven of the ten entities had merit, while three did not, approving assignment for the seven entities that satisfied the test under s. 38 of the BIA.

Implications

The decision in Easy Loan is a welcome expansion of the use of the statutory scheme for assigning claims to a creditor under s. 38 of the BIA.

The statutory mechanism provided to creditors in s. 38 of the BIA is critical where a trustee (or receiver) fails or refuses to pursue a claim, or more often, where there are insufficient resources in the bankrupt estate to fund the claim. An order under s. 38 preserves creditors’ rights to proceed with a claim, and as discussed, the test applied by the courts when granting such an order will act as a safeguard to ensure that only claims that meet the “threshold merit” will be approved.

If you have any questions on the above article, please contact a member of our Restructuring team.

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[1] R.S.C. , 1985, c. B-3, [the “BIA”].

[2] Astra Credit Union v Protos International Inc. 2006 MBQB 174, [“Astra”].

[3] Easy Loan Corporation v Base Mortgage & Investments Ltd. 2020 ABQB 568, [“Easy Loan”].

[4] Ibid at para 37.

[5] Ibid at para 39.

[6] Ibid at para 38.

[7] Smith v Pricewaterhousecoopers Inc., 2013 ABCA 288 at para 16.