IN THE SUPREME COURT OF BRITISH COLUMBIA

Date: 200141128

Docket: 10-4301

Registry:
Victoria

In
Bankruptcy and Insolvency

In
the Matter of the Bankruptcy of
Daren Leo Kuta

Before:
Master Bouck

(Registrar
in Bankruptcy)

Reasons for Decision

Relief Sought

[1]
Daren Leo Kuta made an assignment into bankruptcy on October 13,
2010, and was automatically discharged on July 9, 2011.

[2]
Following his discharge, Mr. Kuta became entitled to settlement proceeds
in a personal injury action. As framed in the notice of motion, the trustee
seeks direction from the bankruptcy court as to whether the $248,000 attributed
in the settlement as “future wage loss” [in fact described as “future income
loss”] is in the nature of wage loss and thus can be retained by the bankrupt
pursuant to s.68 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c.
B-3 (the “Act”), or whether it is “Property” which vests in the trustee for
the general benefit of creditors: s. 67 of the Act.

[3]
Through oversight, the Office of the Superintendent of Bankruptcy was
not served with the motion in the time prescribed by the Act’s General
Rules. Argument on the motion proceeded, subject to any further submissions
from the Superintendent. I am now informed that no such submissions will be
made, including with respect to any jurisdictional issue. On that latter subject,
both the trustee and the bankrupt consented to the registrar hearing this
motion.

[4]
This decision addresses whether Bell (Re) (1996), 20 B.C.L.R.
(3d) 92 (S.C.) is still good law.

Background Facts

[5]
Mr. Kuta was injured in a motor vehicle accident in July 2008. An action
was commenced against the tortfeasor on March 26, 2009, but presumably stayed
during the bankruptcy term. The bankruptcy assignment is partly attributed to
the financial difficulties experienced by Mr. Kuta as a result of his injuries.

[6]
Following a mediation session held on July 25, 2013, Mr. Kuta entered
into a written settlement agreement with the tortfeasor (the “Settlement”). The
tortfeasor agreed to pay Mr. Kuta various sums, including $248,000 as compensation
for what is described in the Settlement documents as “future income loss”. The Settlement
was made subject to the trustee’s approval on the terms. That approval was not
forthcoming on the grounds that the trustee had not been invited to participate
in the mediation. Subsequently, Mr. Kuta received the Settlement proceeds
except for $248,000 (or $250,000 — different figures are given in the
evidence) which is now held in a trust account pending the outcome of this
motion.

[7]
According to the trustee, roughly $200,000 is sufficient to pay the
claims of all of Mr. Kuta’s creditors as well as associated administration
costs. Not surprisingly, Mr. Kuta seeks to retain all of the Settlement proceeds.

Discussion

[8]
Despite the initial resistance to the Settlement, the trustee took a
neutral position on this application. In written and oral submissions, counsel
for the trustee set out the law, including Bell (Re). That case says
that a future income loss award ought to be characterized as property and thus
vest in the trustee for the benefit of creditors. The trustee also noted
contrary authorities emanating from bankruptcy courts in other provinces.

[9]
The more comprehensive argument on the motion was presented by the
bankrupt’s counsel. The argument was highly persuasive such that I have
concluded that Bell (Re) should not be followed.

[10]
It is impossible to improve upon the legal analysis provided by the
bankrupt’s counsel. Had this not been a decision which seemingly results in a
change to the law in British Columbia, I might simply have given an oral
decision adopting the bankrupt’s submissions in their entirety. For the sake of
economy, I will attempt to provide a summary of the submissions provided. The
source of this summary is contained in the bankrupt’s written application
response.

[11]
The relevant statutory provisions are these:

67. (1) The
property of a bankrupt divisible among his creditors shall not comprise

(a) property held by
the bankrupt in trust for any other person;

(b) any property that
as against the bankrupt is exempt from execution or seizure under any laws
applicable in the province within which the property is situated and within
which the bankrupt resides;

(b.1) goods and
services tax credit payments that are made in prescribed circumstances to the
bankrupt and that are not property referred to in paragraph (a) or (b);

(b.2) prescribed
payments relating to the essential needs of an individual that are made in prescribed
circumstances to the bankrupt and that are not property referred to in
paragraph (a) or (b); or

(b.3) without
restricting the generality of paragraph (b), property in a registered
retirement savings plan or a registered retirement income fund, as those
expressions are defined in the Income Tax Act, or in any prescribed
plan, other than property contributed to any such plan or fund in the 12 months
before the date of bankruptcy,

  but it shall comprise

(c) 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, including any
refund owing to the bankrupt under the Income Tax Act in respect of the
calendar year — or the fiscal year of the bankrupt if it is different from the
calendar year — in which the bankrupt became a bankrupt, except the portion
that

(i) is not subject to
the operation of this Act, or

(ii) in the case of a
bankrupt who is the judgment debtor named in a garnishee summons served on Her
Majesty under the Family Orders and Agreements Enforcement Assistance Act,
is garnishable money that is payable to the bankrupt and is to be paid under
the garnishee summons, and

(d) such powers in or
over or in respect of the property as might have been exercised by the bankrupt
for his own benefit.

  68. (1) The Superintendent shall, by
directive, establish in respect of the provinces or one or more bankruptcy
districts or parts of bankruptcy districts, the standards for determining the
surplus income of an individual bankrupt and the amount that a bankrupt who has
surplus income is required to pay to the estate of the bankrupt.

  Definitions

(2) The following definitions apply in this
section.

“surplus income”

“surplus income” means the portion of a
bankrupt individual’s total income that exceeds that which is necessary to
enable the bankrupt individual to maintain a reasonable standard of living,
having regard to the applicable standards established under subsection (1).

“total income”

(a) includes, despite
paragraphs 67(1)(b) and (b.3), a bankrupt’s revenues of whatever
nature or from whatever source that are earned or received by the bankrupt
between the date of the bankruptcy and the date of the bankrupt’s discharge,
including those received as damages for wrongful dismissal, received as a pay
equity settlement or received under an Act of Parliament, or of the legislature
of a province, that relates to workers’ compensation; but

(b) does not include any amounts received by
the bankrupt between the date of the bankruptcy and the date of the bankrupt’s
discharge, as a gift, a legacy or an inheritance or as any other windfall.

[12]
While these provisions have been amended from time to time, neither
section has specifically defined a future loss of income award or settlement as
either property or income. Thus, the answer to the question raised on this
motion must be found in the common law authorities interpreting these
provisions.

[13]
Bell (Re) is the seminal authority in British Columbia on the
question and is binding on the registrar under stare decisis. However,
the bankrupt submits that the registrar is not so bound as:

(a) subsequent decisions have
affected the validity of the impugned judgment;

(b) some binding authority in the
case law, or relevant statute was not considered by the court;

(c) the judgment was unconsidered,
a nisi prius judgment given in circumstances familiar to all trial
Judges, where the exigencies of the trial require an immediate decision without
the opportunity to fully consult authority.

Re Hansard Spruce Mills Ltd., [1954] 4 B.C.J. No. 136
(S.C.) at para. 4.

[14]
While not in any way critical of the judge who decided Bell (Re), the
bankrupt submits that at least (a) and probably (b) and (c) are demonstrated.

[15]
In Bell (Re), the court was asked to decide whether monies
intended to compensate a bankrupt for “economic loss” should be payable to the
trustee or to the bankrupt personally. The bankrupt was not represented by
counsel but did cite authorities to the court. The court also referred to
various authorities, including decisions which favoured the bankrupt. The court
concluded that the award for economic loss was to compensate the bankrupt for
the impact on his earning capacity: para. 6. And further, that the award was to
“compensate Mr. Bell for loss of or impairment to property, the capital
asset called the capacity to earn, and accordingly the award rightly passed to
the Trustee to be distributed to creditors”: para. 7. In this analysis the
court relies on the oft-cited passage from Andrews v. Grand and Toy Alta.
Ltd., [1978] 2 S.C.R. 229 at 251:

. . . What sort of career would
the accident victim have had? What were his prospects and potential prior to
the accident? It is not the loss of earnings but, rather, loss of earning
capacity for which compensation must be made … A capital asset has
been lost: what was its value?

(Emphasis added.)

[16]
Central to the court’s analysis in Bell (Re) is the
characterization of future income loss as the loss or impairment of property,
being the capacity to earn income. The court declined to adopt the contrary
analysis made by the Ontario Court of Justice in Lang v. McKenna, 1994
CarswellOnt 295 (Ct. J. (Gen. Div.)). In Lang, the court found that
monies paid to an individual while he is incapacitated from earning a living
for himself and his family do not form part of the bankrupt’s estate.

[17]
Bell (Re) has been followed in at least two other reported cases:
Mostajo (Re), 2006 CarswellOnt 6421 (S.C.J.), and MacLeod (Re), 2008
CanLII 32835 (Ont. S.C.J. (Bank. & Ins. Div.)).

[18]
In contrast, the court’s characterization of a future income loss as
found in Lang has been followed in Re Anderson, 2004 ABQB 349, Conforti
(Re), 2012 ONSC 199, and Re Snow, (ONSC, unreported). In Gurniak
v. Royal Bank of Canada, 2011 CarswellSask 507 (Q.B.), the court found it
“debatable” as to whether a future income loss award falls within s. 68 but
declined to include any such award in the bankrupt’s estate: para. 49.

[19]
In Conforti (Re), the court addresses whether an award for “loss
of competitive advantage” is the property or income of a bankrupt. While the semantics
differ, the loss which the court was asked to characterize is “distinct but
related to” a future income loss award: para. 36. In a most thorough
analysis of both the case law to date as well as the statutory provisions which
apply, the court decided that:

a. the concept of a capital loss as
discussed in Andrews should not be imported into the bankruptcy context.
This is particularly so given the subsequent Supreme Court of Canada ruling in Wallace
v. United Grain Growers Ltd., [1997] 3 S.C.R. 701 (following Marzetti v.
Marzetti, [1994] 2 S.C.R. 765, a decision regarding the application of
s. 68 but one which is not mentioned in Bell (Re)). Wallace determined
that s. 68 applies to an award for damages for wrongful dismissal. The
Court found that a broad and purposive approach is necessary when determining
whether a particular receipt is income for the purposes of s. 68: Conforti (Re)
at paras. 12-13. Thus, the broadest definition of income ought to be made
by the court before any monies received by the bankrupt are deemed to fall
within s. 67;

b. In any event, “it is abundantly
clear” on a reading of Andrews that the description by the Court of the
“capitalized loss” was intended to avoid income tax consequences on the award
at that time. That does not mean that “capital” loss translates to “property”
under s. 67 in the bankruptcy context: para. 20; and

c. the essential nature of the
monies paid for the future loss of income must be considered. The monies are intended
to compensate an individual for lost income due to a reduced capacity to earn
that income, or to replace income that will never be made as a result of the
tortious act. As such, the monies are “akin to income” and fall within the
definition of s. 68(2) (a) of the Act: paras. 25-28. As Wallace decided,
a damages award that is “filling the pocket that would otherwise have been
filled by salary or wages” is not property available to a bankrupt’s creditors:
Wallace, para. 69. See also Julyan (Re), 2009 SKQB 321
(Registrar) where workers’ compensation income loss replacement monies were
found to fall within s. 68.

[20]
The bankrupt further submits that the analysis and conclusions in Bell (Re)
have been overtaken by developments of the law in British Columbia on the
characterization of a future income loss in the personal injury context.
Specifically, the Court of Appeal has determined that a future loss of income
award is not necessarily determined on a loss of capital asset approach. That
same loss can be assessed on the “real or substantial possibility” that a
future event will occur leading to loss of income: Perren v. Lalari, [2010]
B.C.J. No. 455 (C.A.) at para. 7. Thus, the bankrupt submits, the importation
of the “capital asset” concept from personal injury law into the bankruptcy
context is no longer valid even if Bell (Re) was correctly decided at
the time.

[21]
Furthermore, the objectives of the Act itself, being to balance
the rights of the creditors and the integrity of the bankruptcy system with the
bankrupt’s entitlement to make a fresh start in the financial world, must be
considered. It is submitted that the Settlement monies for future income loss
is not a financial windfall such as an inheritance. Rather, the monies
represent the means of putting an individual back in the financial place that
he would have been had the tortious act not occurred. It is submitted that a
manifestly unjust result would occur if the bankrupt was compelled to pay
current creditors with monies intended to compensate the bankrupt for future
circumstances: see Lang at paras. 41-42.

[22]
In summary, the bankrupt says that the capital asset cases ought not to
be followed, given developments in the law since Bell (Re). And further,
that Marzetti, a case not cited in Bell (Re), is the guiding and
binding judicial authority. As such, a lump sum future income loss payment must
be “income” under s. 68 as the monies are intended to replace an individual’s
lost income stream. By their very nature, these monies can never be considered property
under s. 67 of the Act.

Conclusion

[23]
The preceding summary does not do justice to the complete submissions of
the bankrupt. It does provide some basis for my decision to go against Bell
(Re). In my respectful view, Conforti (Re) accurately reflects the
proper approach to be taken by the court when asked to characterize “income”
(or “property”, for that matter) under the Act. I also reiterate that Conforti
(Re) references and follows Marzetti, a case which does not appear
to have been considered in Bell (Re) despite the relevancy of the case
to the question before the court.

[24]
In the result, I find that the monies which are intended to compensate
Mr. Kuta for future loss of income do not vest in the trustee under s. 67
of the Act.

 “C.P.
Bouck” 

Master
C.P. Bouck