Canada: Early Bird Gets Paid In Priority!

A creditor commences an action against a debtor and obtains a judgment after a trial. The debtor then appeals and loses. The creditor does its due diligence and tracks down land that the debtor owns. The creditor files a writ of seizure and sale and commences proceedings whereby the land is to be sold to pay the judgment debt. By this time, the judgment debt, including interest, is $200,000 and the costs that the creditor has incurred have ballooned to $110,000. Not to worry, the equity in the land is $320,000 and payday is coming.

However, not so fast. Just before the sale takes place, the debtor assigns himself into bankruptcy. Aside from cursing, what is the creditor to do? According to a seemingly little-known provision of the Bankruptcy and Insolvency Act ("BIA"), depending upon the facts the creditor may recoup much of the costs spent in chasing the debtor. An example is set out in Re Walker, a 2010 British Columbia Supreme Court decision.

BIA

The BIA has 3 rungs of creditors: secured creditors (who usually care little about the bankruptcy and are paid from assets they have taken as security), preferred creditors (e.g. the trustee in bankruptcy, a landlord for some months of rent, etc.), and ordinary creditors (i.e. everybody else). Section 70(1) of the BIA provides that all ordinary creditors are treated the same, regardless of judgments, seizures, garnishments, and executions. In essence, under this subsection, a creditor who has done nothing to validate and collect its debt is in the same position as the judgment creditor that we referenced in the first paragraph.

However, there is one saving grace; section 70(2) provides that a creditor, "who has first attached by way of garnishment or filed with the executing officer an attachment, execution or other process against the property of the bankrupt" is paid "one bill of costs". In effect, if a creditor has incurred legal fees and disbursements in the judgment and execution process and is the first creditor to file a writ of seizure and sale affecting the bankrupt's property, then, to the extent of the property's equity, those legal fees are bumped from ordinary creditor to preferred creditor status. In our example, the creditor would be an ordinary creditor for purposes of the bankruptcy for its $200,000 debt, but would be a preferred creditor for $110,000 in costs.

Costs

Other than the dollar amounts involved, the Walker case mirrored the basic facts that we set out in the first paragraph. In that case, the debtor had led the creditor on a merry chase all the way to the Supreme Court of Canada and then went bankrupt just as her property was being sold to pay her judgment debt.

The dispute between the trustee and the creditor was not whether the creditor's trial costs (which were only partial indemnity for its true costs) would be a preferred debt, but, rather, whether the costs on appeal and the collection costs would also be included in the "one bill of costs."

The judge noted that if only the trial costs were to be included, a defendant would be provided with an incentive to launch an appeal of dubious merit, knowing that she might declare bankruptcy if unsuccessful and prevent the execution creditor from enjoying any protection for the costs of the appeal. Worse, that knowledge would be a potent weapon to compel the plaintiff to settle the matter for less than the plaintiff was entitled or run the risk that the defendant would appeal and, if unsuccessful, make a subsequent assignment into bankruptcy.

After analysis, the judge noted that "one bill of costs" meant all costs – and it mattered not whether those costs were assessed before or after the date of the bankruptcy.

Moral

The creditor in Walker had all of its costs paid in priority to all of the ordinary creditors, but only because it was the first execution creditor of the bankrupt. The 2^nd place execution creditor would have received nothing for its costs, other than as part of the ordinary, pro rata, distribution process. It pays to be the early bird.

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