Pursuant to section 38 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the “BIA”) a creditor of the bankrupt estate can obtain the trustee’s right to pursue estate litigation where the trustee refuses or fails to pursue such litigation. In a recent Ontario case, Indcondo Building Corp. v. Sloan [2010], CarswellOnt 9785, the Court of Appeal was asked to determine whether the limitation period for the assigned litigation commences with the trustee’s knowledge of the facts giving rise to the claim or the assignee’s knowledge of those facts. The Court of Appeal determined that pursuant to the Limitations Act, 2002, S.O. c.24 (the “LTA”) the limitation period commences on the earlier of the trustee’s discovery of the facts or the creditor’s discovery of them.

Background

On January 13, 2004, the Bankrupt filed a voluntary assignment in bankruptcy. In April 2006 a creditor of the Bankrupt’s estate obtained an order pursuant to section 38 of the BIA obtaining the trustee’s rights to pursue an alleged fraudulent conveyance from the Bankrupt made to his wife in the late 1990’s and commenced proceedings to set it aside (the “Conveyance Litigation”).

The Bankrupt sought the dismissal of the Conveyance Litigation on the basis that it was statute barred under the LTA. Counsel for the Bankrupt argued that actions must be commenced within two years from the date on which the claimant discovered the facts giving rise to the claim. Given that the trustee was appointed in 2004, more than two years prior to the start of the Conveyance Litigation, the Bankrupt’s counsel argued that the Conveyance Litigation ought to be barred on the basis that it was commenced outside the limitation period. The motions Judge held that the trustee’s discovery of the claim was the relevant limitation under the LTA and barred the Conveyance Litigation.

The Court of Appeal arrived at a different conclusion. The Court of Appeal referred to the LTA’s provisions for scenarios where litigation rights are assigned. In those circumstances, the limitation period commences on the earlier of the assignor’s discoverability or the assignee’s discoverability. The Court of Appeal’s decision had the unusual result of preserving the Conveyance Litigation because, during the time the creditor learned the facts giving rise to the Conveyance Litigation, the limitation period was unlimited, as opposed to the two year period now prescribed under the LTA.

The take away from the Court of Appeal’s decision is that creditors seeking to pursue a Trustee’s cause of action must first determine when they [and the Trustee] became aware of the facts giving rise to the cause of action. If their knowledge of these facts is two years old or more their efforts to pursue the trustee’s claim will be statute barred (unless their knowledge predates the LTA). A creditor under these circumstances would have to use creative means to maintain the trustee’s cause of action. Options available include having the interested creditor fund the estate so as to let the trustee pursue the claim directly or having another creditor to the estate, that didn’t know of the facts giving rise to the cause of action, pursue an assignment of the trustee’s claim under section 38 of the BIA.