Barrie Lawyers Discuss: The Effects of Bankruptcy on Tort and SAB Actions
Declaring bankruptcy can have a profound effect on a person’s tort or statutory accident benefit (SAB) claims. Normally, a person would receive his damages or benefits at the end of an action. A declaration of bankruptcy, however, may result in some or all of those damages or benefits being paid to a trustee in bankruptcy. It is therefore necessary to understand the legislation and jurisprudence that govern the effects of declaring bankruptcy on tort and SAB claims. In this article, we will first provide a brief outline of the relevant legislation, and then analyze the case law that surrounds this issue.
Overview of Legislation
The Bankruptcy and Insolvency Act (BIA) is the most relevant piece of legislation regarding the effects of bankruptcy on tort and SAB claims. The most relevant sections of the BIA on this issue are sections 67 and 68.
Section 67 defines the property to which a bankrupt’s creditors are entitled. This provision casts a wide net, and states that any and all property of the bankrupt shall be divided among his or her creditors. Section 67(1)(c), in particular, states that the property to which creditors are entitled shall include “all property wherever situated of the bankrupt at the date of the bankruptcy or that may be acquired by or devolve on the bankrupt before their discharge…” In other words, creditors are entitled to all of bankrupt’s property from the date of bankruptcy until they are discharged.
While section 67 of the BIA covers property, section 68 of the BIA establishes a different set of rules for income. As the Supreme Court of Canada ruled in Wallace, any asset or payment that satisfies the definition of “total income” under section 68 of the BIA must be wholly excluded from the operation of section 67. Under section 68(2), “total income” includes…
“…a bankrupt’s revenues of whatever nature or from whatever source that are earned or received by the bankrupt between that date of the bankruptcy and the date of the bankrupt’s discharge, including those received as damages for wrongful dismissal, received as pay equity settlement or received under an Act of Parliament, or of the legislature or a province, that relates to workers’ compensation…”
In other words, any asset or payment that qualifies as income between the date of bankruptcy and the date of discharge is “total income”, and must be dealt with under section 68 rather than section 67.
The scheme of section 68 is a needs-based system. Section 68 requires the trustee in bankruptcy to determine if the bankrupt has “surplus income”, which is the portion of the bankrupt’s total income that exceeds the amount that is necessary to allow the bankrupt to maintain a reasonable standard of living. This amount is approximately equal to the poverty line.
The trustee calculates “surplus income” by applying the standards created by the Superintendent in Bankruptcy under Directive 11R2-2018, as well as the personal and family situation of the bankrupt. Under Directive 11R2-2018, the trustee must first determine the available monthly income of the bankrupt’s family unit. He must then subtract the amount set out in Appendix A of the Superintendent’s Directive that corresponds to the number of individuals in the bankrupt’s family unit. Finally, he deducts the family unit’s total monthly income remittances such as income tax and employment insurance deductions, as well as all monthly non-discretionary expenses, which include child support payments, spousal support payments, and any expenses associated with a medical condition. The remaining amount is the family unit’s surplus income. If the remaining amount is less than $200, then the bankrupt is not required to pay any amount of his surplus income into the trustee’s estate. However, if the remaining amount is equal to or greater than $200, then bankrupt is required to pay fifty percent of his or her monthly surplus income to his or her trustee in bankruptcy. These rules ensure that the interests of the bankrupt’s creditors are balanced with the bankrupt’s own need to maintain a reasonable standard of living.
It is essential to note that if an asset or payment does not satisfy either of the criteria found in sections 67 or 68 of the BIA, the trustee in bankruptcy has no entitlement to that particular asset or payment.
The jurisprudence has become more beneficial to plaintiffs involved in tort or SAB actions that subsequently declare bankruptcy. The relevant cases are the two Re Conforti decisions at the Ontario Superior Court, the Conforti decision at the Ontario Court of Appeal, and Morasch v Gauvreau. Each of these cases deal with different aspects of how damages received as the result of a tort claim and benefits received as the result of a SAB claim may be affected by declaring bankruptcy.
Pain and Suffering Damages
It is settled law that general damages received in a tort claim, including damages for pain and suffering, as well as other non-pecuniary damages, are completely exempt from the operation of the BIA, and are therefore unavailable to the trustee in bankruptcy. These damages, the courts have stated, are personal to the bankrupt. As the court ruled in Re Hollister, “causes of action arising from bodily or mental suffering remain with the bankrupt”.
In the first Re Conforti decision at the Ontario Superior Court, Spence J reaffirmed the principle that pain and suffering damages remain with the bankrupt. In determining whether the plaintiff had “surplus income” under section 68 of the BIA, he ruled that his settlement funds received for pain and suffering could not be considered “income” at all, let alone “surplus income”. In other words, the plaintiff’s pain and suffering damages were not to be paid to the bankruptcy trustee, but were to remain totally with the plaintiff.
Future Care and Housekeeping
The Court of Appeal for the second Conforti decision clarified that damages for future care and housekeeping are also personal as to the plaintiff. According to the court, future care and housekeeping payments “bear a close relationship to damages on account of pain and suffering” because they “are intended to alleviate…[a person’s] injured state”. Such payments therefore remain with a bankrupt in the same way as damages for pain and suffering, and need not be transferred to the bankruptcy trustee.
Loss of Future Income
The biggest changes in this area of law have involved the treatment of damages for loss of future income. Under the old case law, any capitalized loss of future earnings was a capital asset and was therefore “property” under section 67 of the BIA to which creditors were entitled. This jurisprudence originated from the Supreme Court of Canada’s decision in Andrews v Grand & Toy Alberta Ltd, wherein Dickson J. stated that “it is not loss of earnings but, rather, loss of earning capacity for which compensation must be made: The Queen v Jennings, supra. A capital asset has been lost: what was its value?” This short statement led many courts to hold that a capitalized loss of future earnings must be property governed by section 67 of the BIA. These decisions led many lawyers and trustees in bankruptcy to assume that claims for income loss made by a plaintiff who had filed for bankruptcy vested in the trustee. This effectively meant that bankrupt plaintiffs could not pursue any income loss claims once they filed for bankruptcy.
However, a few recent cases have dramatically changed the landscape when it comes to the impact of filing for bankruptcy on claims for loss of future income. The most salient case in this regard is the first Re Conforti decision. This case revolved around whether settlement funds for “loss of competitive advantage” would be considered “property” to be dealt with under section 67 of the BIA, or “income” to be dealt with under section 68. In this decision, Wilton-Siegel J. adopted the reasoning found in Wallace v United Grain Growers Ltd. In Wallace, Iacobucci J. ruled that an award that is “akin to income” does not lose that characterization simply because it takes the form of a lump sum payment. Iacobucci J. reached this decision for a number of different policy reasons. In particular, Iacobucci J. stated that this interpretation of section 68 of the BIA is consistent with the overriding concern for the support of families. Wilton-Siegel J. furthermore adopted the reasoning of Registrar Wacowich in Re Anderson. In Anderson, Registrar Wacowich ruled that “bankruptcy laws are not meant or intended to require payments by the bankrupt to the estate after the bankrupt’s discharge” and that requiring “payment of any of the amount of future loss of wages to the estate would bring about this result”. Wilton Siegel J. expounded upon the reasoning in both of these cases in holding that that courts “should adopt a purposive approach in determining whether a particular receipt is income for the purposes of s. 68 of the BIA”. In other words, courts must consider the nature of a particular payment rather than its source.
Applying the case law and reasoning outlined above, Wilton-Siegel J. ruled that the settlement funds paid with respect to loss of “competitive advantage” is “income” to be dealt with under section 68 of the BIA. The fact that these funds were paid out as a capital sum does not change the nature of the payment to compensate for lost income. Wilton-Siegel J. furthermore concluded that since an award for loss of competitive advantage constitutes compensation for a component of loss of future income, it is conceptually indistinguishable from an award for loss of future earnings or earning capacity within the context of a bankruptcy. Thus, it seems clear that any settlement funds paid for loss of future earnings, loss of earning capacity, or loss of competitive advantage would be considered income to be dealt with under section 68 of the BIA.
The decision of Wilton-Siegel J. regarding whether compensation for loss of competitive advantage is income under section 68 remains good law. This particular issue was not disputed at the Ontario Court of Appeal. Furthermore, Hennessy J. subsequently affirmed this decision in Morasch v Gauvreau. Hennessy J. expressly adopted the reasoning found in the first Re Conforti decision by ruling that a “claim for future income loss shall be considered as part of the total income under section 68(2) of the BIA”.
Once it is determined that a certain asset or payment shall be classified as income to be dealt with under section 68 of the BIA rather than property under section 67, the next question becomes what amount of that asset or payment should be considered in calculating the bankrupt’s monthly surplus income. In this regard, the ruling of the Ontario Court of Appeal in the first Re Conforti decision is the relevant decision. In this case, Pepall J.A. confirmed that the settlement funds paid to Mr. Conforti for loss of competitive advantage must be prorated such that only the amount that compensates for the period before the date of the bankrupt being discharged and after the date of the settlement would be considered in calculating the surplus income of the bankrupt under section 68.
There are a variety of different SAB benefits that may be available to someone injured in a motor vehicle accident. These benefits include Income Replacement Benefits (IRBs). Because these benefits compensate for income loss, they are dealt with in the same manner as tort damages paid for loss of future income. Thus, IRB benefits are considered to be income, rather than property, and are dealt with under section 68 of the BIA. They are thus prorated over the period of time for which they provide income replacement. The first Conforti decision cited Re Snow in order to provide some guidance. In Snow, Mesbur J. held that it is the essential nature of the payment and not its source that should determine whether it is income or property. Thus, IRB payments are income to be dealt with under the needs-based scheme laid out in section 68 of the BIA.
When it comes to the other SAB benefits, however, the effects of declaring bankruptcy can be much less certain. In one sense, the law seems quite clear. The Court of Appeal for the second Conforti decision ruled that that damages for future care and housekeeping are personal as to the plaintiff. According to the court, these kinds of damages “bear a close relationship to damages on account of pain and suffering” because they “are intended to alleviate…[a person’s] injured state”. This decision would seem to imply that benefits for medical care and housekeeping should always remain with the plaintiff even if he should declare bankruptcy.
However, the Court of Appeal still ruled that the net amount of Mr. Conforti’s SAB settlement should be included as income in the year that this lump-sum payment was received for the purposes of determining his surplus income. The court decided that, in the circumstances of the case, Mr. Conforti had not used the payment from his SAB settlement for its intended purpose to alleviate his suffering, but rather used it to pay off an outstanding debt. He furthermore neither disclosed this debt nor the fact that he had paid it. In other words, the court decided on the nature of SAB benefits based on how they were subsequently used after being paid out. The court therefore appears to have the authority to decide upon the nature of a payment apart from its source based on the particular facts of the case.
Therefore, although SAB benefits may often be excluded from income and be treated in the same manner as pain and suffering damages, the facts of the case may nevertheless effect how the courts will characterise payments of SAB benefits.
In conclusion, the impact of declaring bankruptcy on the damages or benefits paid as the result of a tort or SAB claim is complicated and not necessarily clear-cut. General damages, including pain and suffering, are not owed to a trustee in bankruptcy. Damages and benefits paid to compensate for lost income, however, would be dealt with under section 68 of the BIA. In this case, the damages or benefits that compensate for the period after the settlement and up to the bankrupt’s discharge would be added to the bankrupt’s income for that period, and the bankrupt’s estate would be entitled to receive fifty percent of the amount by which this total income exceeds the standard set out in Directive No 11R2-2018.
The situation is less clear when it comes to other payments, such as payments for certain SAB benefits. Nevertheless, payments that relate to future care and housekeeping appear to be governed by the same rules as pain and suffering damages unless circumstances suggest that the damages or benefits should be characterized differently.
The above analysis suggests that personal injury lawyers should strive to include a realistic breakdown of tort settlements and SAB claims into the various heads of damages and benefits into their Minutes of Settlement and Final Releases, particularly for cases that involve both pecuniary and non-pecuniary damages. While Bankruptcy Courts are not bound by these breakdowns, the courts will surely give considerable weight to any realistic breakdown that is agreed to by all of the parties involved. Our discussion above should make it clear that the effects of declaring bankruptcy on tort and SAB claims are numerous and complex. It should also make it clear that some knowledge and understanding of these effects is absolutely necessary.
 Bankruptcy and Insolvency Act, RSC 1985, c B-3, s 67(1)(c).
 Wallace v United Grain Growers Ltd.,  3 SCR 701 at para 59,  SCJ No 94.
 Supra note 1, s 68(2).
 Supra note 1, s 68(3).
 Surplus Income, Office of the Superintendent of Bankruptcy Canada, Directive No 11R2-2018, (2018 March 14), s 5.
 Ibid, s 5(3).
 Ibid, s5(6).
 Ibid, s 5(7).
 Hollister, Re,  3 DLR 707 at para 6,  OJ No 461.
 Conforti, Re, 2012 ONSC 2656 at para 26,  OJ No 2078. The inclusion of pain and suffering damages was not a subject of appeal in the Court of Appeal’s decision in Conforti, Re, 2015 ONCA 268,  OJ No 198.
 Conforti, Re, 2015 ONCA 268 at paras 45-51,  OJ No 1986.
 Ibid at para 50.
 Andrews v Grand & Toy Alberta Ltd.,  SCR 229.
 See MacLeod, Re, 45 CBR (5th) 214,  OJ No 2702 (Sup Ct); Bell, Re, 20 BCLR (3d) 92,  BCJ No 247 (SC); and Re Mostajo (2006), 26 CBR (5th) 45 (Ont CA).
 Conforti, Re, 2012 ONSC 199 at paras 2-6,  OJ No 82.
 Supra note 2 at paras 65-66.
 Ibid at para 68.
 Supra note 16 at para 13.
 Anderson, Re, 2004 ABQB 349 at para 23,  AJ No 521.
 Supra note 16 at para 12.
 Ibid at paras 27-28.
 Ibid at paras 46-47.
 Morash v Gauvreau, 2012 ONSC 2309 at para 17, 2012 OJ No 1610.
 Supra note 11 at paras 55-58.
 Snow, Re, 2012 ONSC 506 (unreported), as cited in Conforti, Re, supra note 10 at para 16.
 Conforti, Re, 2015 ONCA 268,  OJ No 1986 at paras 45-51.
 Ibid at para 50.
 Ibid at paras 52-54.
Bankruptcy and Insolvency Act, RSC 1985, c B-3.
Surplus Income, Office of the Superintendent of Bankruptcy Canada, Directive No 11R2-2018, (2018 March 14).
Anderson, Re, 2004 ABQB 349,  AJ No 521.
Andrews v Grand & Toy Alberta Ltd.,  SCR 229.
Bell, Re, 20 BCLR (3d) 92,  BCJ No 247 (SC)
Conforti, Re, 2012 ONSC 199,  OJ No 82.
Conforti, Re, 2012 ONSC 2656,  OJ No 2078.
Conforti, Re, 2015 ONCA 268 at paras 45-51,  OJ No 1986.
MacLeod, Re, 45 CBR (5th) 214,  OJ No 2702 (Sup Ct).
Major, Re, 56 BCLR 342,  SCJ No 2712.
Morash v Gauvreau, 2012 ONSC 2309, 2012 OJ No 1610.
Mostajo, Re, (2006), 26 CBR (5th) 45 (Ont CA).
Snow, Re (11 March 2011), (Ont Sup Ct).
Wallace v United Grain Growers Ltd.,  3 SCR 701,  SCJ No 94.