A Case Comment on AssessNet Inc. v. Ferro Estate, 2023 ONCA 577

By Matilda Lici, Associate, Aird & Berlis LLP and Sam Babe, Partner, Aird & Berlis LLP

The Court of Appeal for Ontario in AssessNet Inc. v. Ferro Estate, 2023 ONCA 577 recently considered when an action commenced in respect of a claim assigned pursuant to s. 38 of the Bankruptcy and Insolvency Act (the “BIA”) will be statute-barred under the Limitations Act, 2002 (the “Limitations Act”). Being a creditor of the bankruptcy estate of Lucio Anthony Ferro, AssessNet Inc. (the “Appellant”) asserted a claim against an accounting firm and an employee thereof (the “Respondents”), collectively being the former bankruptcy trustee of Ferro’s estate (the “Original Trustee”), for their alleged acts and omissions in the administration of Ferro’s bankruptcy.

Ferro made an assignment in bankruptcy in March 2015. He was the principal of a law firm to whom AssessNet supplied medical reports for its clients’ personal injury claims. The principal of AssessNet was appointed as one of two inspectors of Ferro’s estate. In November 2015, the Original Trustee obtained an order approving the sale of the law firm’s client files to another law firm for a percentage of the fees generated by the files. On February 22, 2016, the Original Trustee was advised by the purchaser law firm that many of the files it had purchased had already been settled. By March 2016, inspectors of the estate discussed with the Original Trustee certain potential claims by the estate against the individuals who had been responsible for operating and overseeing the financial and administrative functions of the law firm (the “Administrators”). At the second meeting of creditors, the Original Trustee was removed and replaced with a new trustee. On March 13, 2018, the Appellant sought an order under s. 38 of the BIA for an assignment of the bankrupt’s claim against the Respondents and was granted leave to commence proceedings in its own name, and at its own expense, against the Respondents. The Appellant’s action against the Respondents was commenced on that same day. The Appellant asserted, inter alia, negligence and breach of fiduciary duties by the Respondents in failing to supervise or control the conduct of the Administrators.

The Respondents sought summary dismissal of the action for being statute-barred, and the motion judge granted summary judgment dismissing the action. The motion judge found that, by February 22, 2016 (i.e., the date on which the Respondents informed the inspectors that the purchaser law firm had advised that many of the files had been settled), the Appellant had sufficient knowledge from which to draw a plausible inference of liability of the Respondents.

The Court of Appeal allowed the appeal and set aside the dismissal of the Appellant’s action. In so doing, the Court provided important guidance on the interplay between s. 38 of the BIA and the provisions of the Limitations Act.

1. Claims Assigned Under S. 38 of the BIA Engage S. 12 of the Limitations Act

Section 4 of the Limitations Act provides for a basic limitation period of two years from the date of discovery of a claim. Section 5 sets out the framework for determining when a claim is discoverable. The overarching question is whether the claimant knew or, exercising reasonable diligence, ought to have known of the material facts stipulated under s. 5(1)(a) that give rise to a claim.

When a claimant advances its claim through a predecessor in right, title or interest, the s. 5 analysis must be conducted with regard to s. 12 of the Limitations Act. Section 12 provides that, for the purpose of s. 5(1)(a), the claimant advancing an action shall be deemed to have knowledge of the matters referred to in s. 5(1)(a) on the earlier of: (i) the day on which the predecessor first knew or ought to have known of those matters; or (ii) the day on which the claimant first knew or ought to have known of those matters.

In the bankruptcy context, claims of a bankrupt may be assigned to a creditor from a trustee in bankruptcy pursuant to an order under s. 38 of the BIA. The Court of Appeal confirmed that when, as in this case, claims have been assigned under s. 38, the discoverability analysis under s. 5 of the Limitations Act to determine whether the assigned claim is statute-barred must be informed by s. 12 of the Limitations Act. The knowledge of the predecessor must feature into the discoverability analysis, not simply that of the claimant.

This decision is not the first time that the Court of Appeal has held that a s. 38 assignment engages s. 12, but it is unique in that the claim at issue arose after the bankruptcy filing, against the Original Trustee. Since the claim (i) initially arose against the Original Trustee and was vested in that same trustee, and (ii) passed from the Original Trustee to the replacement trustee without assignment or transfer, the question to be addressed at a new trial will be which trustee’s knowledge is the relevant knowledge of the predecessor for the purpose of s. 12 of the Limitations Act.

2. Defendants Raising a Limitation Period Defence Bear the Burden of Proof

The expiry of a limitation period is an affirmative defence, and the defendant raising it has the burden of proving it. A defendant may rely on the presumption in s. 5(2) of the Limitations Act that the claim was discovered on the day that the act or omission on which the claim is based took place. In order to rebut such presumption, a plaintiff need only prove that its actual discovery of the claim within the meaning of s. 5(1)(a) was not on the date of the events giving rise to the claim. If a plaintiff rebuts the presumption, the onus stays with the defendant to prove that the plaintiff knew, or ought reasonably to have known, the elements of s. 5(1)(a) more than two years prior to the commencement of the proceeding.

Here, the claims concerned the post-bankruptcy period between March 12 and December 22, 2015. Once the Appellant established that neither it nor its predecessor in right knew about the claim during that post-bankruptcy period, the onus shifted to the Respondents to prove that the Appellant or its predecessor in right knew or ought to have known of the matters set out in s. 5(1)(a) at least two years before the action was commenced.

The Court of Appeal confirmed that, as the moving party in a summary judgment motion to dismiss the claim for being statute-barred, the defendants also bear the onus of proving that there is no issue requiring a trial.

3. Bankruptcy Context Requires Findings of Fact Under S. 12 of Limitations Act

In determining whether a bankrupt’s assigned claim is statute-barred, a court must take into consideration the fact that the plaintiff was only entitled to pursue the claim after obtaining the requisite order under s. 38 of the BIA and—where the claim is advanced against a trustee—the requisite order under s. 215 of the BIA.

The court must make specific findings of fact to (i) identify the “predecessor” for the purpose of s. 12 of the Limitations Act, (ii) determine when that predecessor had or ought reasonably to have had knowledge of the matters listed in s. 5(1)(a) of the Limitations Act and (iii) determine when the assignee of the claim, as the “person with the claim,” knew or ought reasonably to have known of the matters listed in s. 5(1)(a).

The Court of Appeal held that the motion judge erred in failing to consider when the Appellant became or ought to have become the “person with the claim.” The motion judge ignored that the Appellant was not a claimant in its own right, and could not commence an action against the Original Trustee without first obtaining an assignment of the claim and an order authorizing the commencement of the action. In addition to being a creditor in its own right, the Appellant was a representative of the general body of creditors with statutory duties to oversee the administration of the estate. Accordingly, the motion judge failed to make findings of fact about when the Appellant ought reasonably to have known that the action was appropriate, having regard to its abilities and circumstances.

Conclusion

This decision serves as a reminder that the bankruptcy context from which an action originates must inform any analysis regarding whether such action is statute-barred under the Limitations Act. Defendants asserting that the action was not brought on time bear the evidentiary burden of proving that either the claimant or its predecessor in right knew or ought to have reasonably known that the action was appropriate sooner than when it was ultimately commenced.