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Judgment Creditors Beware: The Impact of Limitation Periods on Section 38 BIA Claims

On July 31, 2019, the Ontario Court of Appeal rendered its decision in Ridel v. Goldberg, clarifying the interplay of the various provisions of the Limitations Act, 2002 at play in circumstances where judgment creditors are allowed to take proceedings in their own name pursuant to an order under the Bankruptcy and Insolvency Act.

The Facts

In December 2006, the Plaintiffs, the Ridels, commenced an action against their broker and his employer, e3m, for negligence, breach of contract and breach of fiduciary duty in the management of their investment accounts. They alleged e3m had failed to supervise their broker's handling of their accounts (the 2006 Action). On April 17, 2013, judgment was granted against e3m and the broker, concluding that e3m was vicariously liable for the broker's conduct and directly liable to the Ridels. The reasons for judgment also criticized Goldberg, the founder, CEO, president and sole director of e3m. The judgment was subsequently appealed, but the Ontario Court of Appeal upheld the lower court decision in November 2014 (the 2013 Judgment).

On January 20, 2015, e3m made an assignment in bankruptcy. At the time of the assignment, the Ridels were owed just over $1 million by e3m in their capacity as judgment creditors. On October 25, 2016, the Ridels, as creditors of e3m, obtained an order under section 38 of the Bankruptcy and Insolvency Act (the BIA), authorizing them to take assignment of e3m's right to sue Goldberg which had vested in the trustee. On the same day, the Ridels commenced an action for contribution and indemnity against Goldberg for breach of Goldberg's fiduciary obligations and duty of care to e3m and compensation for the 2013 Judgment.

The Trial Decision

The Plaintiffs advanced a motion for summary judgment, relying on the findings in the 2013 Judgment, and the Defendant, Goldberg, brought a cross-motion for summary dismissal of the action on the basis that the Ridels' claims were statute-barred pursuant to the Limitations Act. The motions judge granted the cross-appeal and held that the action was brought out of time. The motions judge held that both the Ridels and e3m had personal knowledge of the claim against Goldberg more than two years before beginning their claim. At the very latest, they would have been aware of a claim against Goldberg the day the 2013 Judgment was rendered, April 17, 2013.

The Ridels appealed this decision.

The Appellate Court Decision

The Ontario Court of Appeal upheld the motion judge's decision and dismissed the action as being out of time. However, the Court had a different interpretation as to when the Ridels would have been aware of the claim, and the implications of s. 18 of the Limitations Act.

(a) The test

First, the Ontario Court of Appeal outlined the applicable test under the Limitations Act.

Since the proceedings were a claim for contribution and indemnity, s. 18 of the Limitations Act operated so that "the two-year limitation period presumptively [ran] from the day the first alleged wrongdoer [was] served with the claim in respect of which contribution and indemnity is sought".

This presumption can be rebutted by application of the discoverability principles outlined in s. 5 of the Limitations Act. Pursuant to this provision, a claim is discovered on the day a person with the claim knew (or ought to have known):

  • (i) that the injury, loss or damage had occurred;
  • (ii) that the injury, loss or damage was caused by or contributed to by an act or omission;
  • (iii) that the act or omission was that of the person against whom the claim is made; and
  • (iv) that, having regard to the nature of the injury, loss or damage, a proceeding would be an appropriate means to seek to remedy it.

Where the right to advance the claim is obtained by assignment, as was the case here, s. 12 of the Limitations Act qualifies the discoverability principles. s. 12 provides that the start of the 2-year limitation period is the earliest of:

  1. the day the predecessor in right, title or interest (i.e. e3m) first knew or ought to have known of the matters listed in section 5(1)(a); or
  2. the day the person claiming (i.e. the Ridels) first knew or ought to have known of those matters.

(b) When did the Ridels first know of the claim?

The Court of Appeal held that the motions judge erred in his finding that the Ridels' action was statute-barred because they personally knew of the matters more than two years prior to commencing their claim. The Ridels only "discovered" the claim once e3m was bankrupt, and after they were granted assignment of the claim in January 2015, that is, only once they became "persons with the claim". Before that time, they had no standing to claim against Goldberg.

(c) When did the predecessor in title or interest first know of the claim?

However, the Court of Appeal ultimately held that the limitation period had expired. The Court explained that the predecessor in title pursuant to s. 12 was not the trustee, but e3m, because the claim did not arise on the bankruptcy. e3m could have advanced this claim against the director prior to the bankruptcy. Further, because of the presumption outlined in s. 18 of the Limitations Act, the limitation period commenced when e3m was initially served with the Statement of Claim for the 2006 action, unless the Ridels were able to rebut this presumption.

While the Ridels argued that e3m only discovered the claim when it made an assignment in bankruptcy, the Court, applying the discoverability principles, determined that e3m knew or ought to have known of the claim when the 2006 Action was commenced, or at the very latest, by the time of the 2013 Judgment. At this point, each of e3m's shareholders "had the ability to cause e3m to sue or to bring a derivative claim on its behalf".

Finally, the Ridels tried to argue that the clock for the limitation period would have stopped running by virtue of s. 5(1)(a)(iv), when the 2013 Decision was appealed, since they did not know if the action was "appropriate" at the time. However, the Court of Appeal dismissed this argument and held that this type of litigation in stages will not delay the imposition of a limitations period.

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