Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Mary Paterson and Dave Rosenblat. Mary Paterson is an associate in the litigation group of Osler, Hoskin & Harcourt LLP and Dave Rosenblat is an associate in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP.

In msi Spergel Inc. v. I.F. Propco Holdings (Ontario) 36 Ltd., 2013 ONCA 550, the Court of Appeal held that stays arising as the result of appeals from bankruptcy orders do not pause limitation periods under the Ontario Limitations Act, 2002 (the “Limitations Act”). As a result, trustees ought to move for the Court to cancel or vary the stay when there is a risk that a preference claim may otherwise become barred by the Limitations Act.

This case considers the interaction of three statutory sections:

• Section 4 of the Limitations Act, which requires that claims be commenced within two years of being discovered;
• Section 195 of the the Bankruptcy and Insolvency Act (the “BIA”), which states that proceedings under an appealed bankruptcy order shall be stayed until the appeal is decided; and
• Section 20 of the Limitations Act, which provides that the Limitations Act “does not affect the extension, suspension or other variation of a limitation period or other time limit by or under another Act”.

The question in the case was whether a stay under section 195 of the BIA suspended the limitation period. The Court of Appeal held that it did not.

Facts

In 2006, I.F. Propco Holdings (Ontario) 36 Ltd. (“Propco”) obtained a default judgment against Cosimo Dilollo (“Dilollo”) for $22,031,787.67.  In exchange for Propco consenting to the dismissal of its bankruptcy application against Dilollo, Dilollo agreed to pay Propco $1.2 million. Dilollo paid only $1.136 million, however, Propco accepted it in satisfaction of the debt. The bankruptcy application remained outstanding and three other creditors added themselves as applicants. A bankruptcy order was made on January 11, 2010. Dilollo appealed the order soon after. The Court dismissed the appeal on September 27, 2010.

The Trustee brought a motion under section 95 of the BIA for a declaration that the payment to Propco was a preference that must be repaid. Propco brought a motion for an order that the Trustee’s claim was time-barred under the Limitations Act.

The Trustee acknowledged that the two-year limitation period applied and that it began running on the date of the bankruptcy order. The preference claim was commenced more than two years after this order, however, the Trustee argued that the limitation period had been suspended during the appeal, relying on section 20 of the Limitations Act.

The Trustee submitted that the stay under section 195 of the BIA constituted a suspension under the Limitations Act, thus delaying the expiration of the limitation period. The motion judge held that the limitation period was not suspended and dismissed the preference motion for being time-barred. The Court of Appeal reached the same decision.

Analysis

The Court accepted that an “extension, suspension or other variation” contained in the BIA could suspend the operation of the limitation period in the Limitations Act. The question was whether or not a stay under section 195 of the BIA constituted an “extension, suspension or other variation”.

The Trustee submitted that principles established in the case law under section 69 of the BIA stood as authority for a section 195 stay suspending the operation of a limitation period. Section 69 of the BIA prevents the exercise of a creditor’s cause of action while a bankruptcy is in effect by providing that the creditor has no remedy against the bankrupt. The Court held that section 69 is not a provision which extends, suspends or varies a limitation period. Rather, “[i]t takes away creditors’ civil remedies and requires them to submit their claims through the bankruptcy process”. Further, the Court held that sections 69 and 195 of the BIA were distinguishable as section 195 serves a distinct purpose. Section 195 stays provide that the status quo will be preserved on the appeal of an order in the course of a bankruptcy to ensure that nothing is done which cannot be unwound in the event of a successful appeal.

The Court noted that neither section 69 or 195 of the BIA fell within the purview of section 20 of the Limitations Act. Per the Court, the Limitations Act has the purpose of promoting certainty in the law of limitation periods. This purpose would not be accomplished by extending, suspending or varying limitations unless expressly authorized by statute. As held by the Court, section 69 and 195 do not fulfill this criterion.

The Trustee had argued that it could not pursue the preference claim because the order from which it derived authority was under appeal. It submitted that a section 195 stay prevents a trustee from holding a first meeting of creditors, holding a meeting with the inspectors and investigating potential claims. The Trustee suggested that this would create the risk of the limitation period slipping away before there was an opportunity to investigate potential claims. The Court of Appeal affirmed the motion judge, stating that the Trustee could have moved to lift the stay if it interfered with initiating the preference motion.

Implications

As a result of this case, if the bankruptcy order is appealed, trustees must nonetheless investigate claims, assess whether there are limitation period issues, and move to lift the section 195 stay if the limitation period is about to expire.

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