Law Times

Law Times • march 17, 2014 Page 11 www.lawtimesnews.com Toll-road debts Class plaintiffs hoping for boost from 407 ruling he plaintiffs in a $25-million class action against the operators of Highway 407 got a boost when the Ontario Court of Appeal ruled the govern- ment couldn't suspend the vehicle permits of dis- charged bankrupts for outstanding toll-road debts. 407 ETR Concession Co. Ltd. relies heavily on the en- forcement process enshrined in s. 22 of the Highway 407 Act by which it can cause the Ministry of Transportation to refuse to issue or renew the licence plates of highway users aer 90 days of non-payment of a toll invoice. But on Dec. 19 in Canada (Superintendent of Bankrupt- cy) v. 407 ETR Concession Co. Ltd., Ontario Appeal Court Justice Sarah Pepall found the use of the remedy against dis- charged bankrupts undermined the "fresh start" principle that underlies the entire bankruptcy and insolvency regime in this country. David ompson, a partner at Hamilton, Ont., firm Scarfone Hawkins LLP, is counsel to three proposed rep- resentative plaintiffs in a class action launched last year on behalf of about 7,000 people who paid outstanding tolls or charges to 407 ETR aer declaring bankruptcy. He appeared at the appeal court on behalf of his clients aer they obtained intervener status and warmly welcomed the decision. "It's hugely important for us. It doesn't go as far as being determinative of the entire class proceeding because the is- sues raised there are slightly broader but it certainly goes a long way," says ompson. e appeal court case dates back almost a decade when truck driver Matthew David Moore began running up an unpaid toll bill with 407 ETR. By the time he declared bank- ruptcy in November 2007, his debt to the highway opera- tor totalled $35,000. e bankruptcy proceedings listed 407 ETR as a creditor, but it failed to file a proof of claim. Moore retrained as a car salesman before obtaining a conditional discharge from bankruptcy in February 2011, but the ministry denied his request for a vehicle permit due to his unpaid tolls. Aer his absolute discharge in June 2011, Moore convinced a registrar in bankruptcy to declare his 407 ETR debt released and order the ministry to issue him a vehicle permit. However, 407 ETR then moved to set aside the regis- trar's order before a Superior Court judge and successful- ly argued there was no operational conflict between the Highway 407 Act and the Bankruptcy and Insolvency Act. By this stage, in October 2011, Moore's toll debt had climbed to almost $90,000. ings then got complicated when the superintendent of bankruptcy expressed an interest in the case due to doubts about the correctness of the motions judge's decision. But when Moore accepted a "very, very attractive offer" to settle from 407 ETR, that le the superin- tendent without a case to pursue. Ul- timately, the superintendent obtained leave to appeal due to the exceptional circumstances of the case. Liz Tinker, counsel to the superin- tendent of bankruptcy for the appeal, says the case has become an impor- tant one for clarifying how and when regulators like it can exercise their powers of intervention. "e superintendent brings some- thing different to the table than a bankrupt themselves. It doesn't mean there can't be a shared interest, but the superintendent's focus tends to be the system as a whole, whereas the bank- rupt's focus is going to be on their own interest," she says. e final decision itself, Tinker adds, was a "good outcome" for the superintendent. Writing for the unanimous three- judge appeal court panel, Pepall concluded there was no operational conflict between the enforcement provision in s. 22(4) of the Highway 407 Act and s. 178(2) of the bankruptcy act that releases discharged bankrupts from all claims provable in bankruptcy. Howev- er, she found the denial of vehicle permits did conflict with the "fresh start" purpose of the bankruptcy act. "From a debtor's perspective, and indeed society's, fi- nancial rehabilitation is a primary goal of the bankruptcy regime," wrote Pepall. "At its heart, permitting a creditor to insist on payment of pre-bankruptcy indebtedness aer a bankruptcy discharge frustrates a bankrupt's ability to start life afresh unencum- bered by his or her past indebtedness. It is no answer to say that a vehicle permit is a privilege. Denial of a vehicle permit may constitute a significant deprivation. e non-renewal of a vehicle permit does not just affect a discharged bank- rupt's ability to drive his or her own vehicle on Highway 407 but on any road in Ontario. Frequently, it is essential to employment as well as family transportation requirements and responsibilities. Ontario is a vast province. Denial of a vehicle permit has the potential to result in great hardship to a discharged bankrupt struggling to start anew." Tom Curry, who acted for 407 ETR in the appeal, has already won a stay of the decision while the company seeks leave to appeal from the Supreme Court of Canada. He says it's important to balance the financial rehabilita- tion of discharged bankrupts with the creditor's interest in protecting itself. "e 407 is an open-access highway. It doesn't have the ability in the normal course to pre- vent anyone from accessing the high- way, and in that respect, it is a creditor to everyone who uses the facility. e licence plate denial regime permits it, even in cases of discharged bank- rupts I say, to prevent a particular person from obtaining licence plates as a consequence of failing to pay in the past. It's no different in that way with respect to a discharged bankrupt than a financial institution or person giving credit," says Curry. e issue is a hot topic across the country. Just last month, the Alberta Court of Appeal ruled the province couldn't enforce the payment of a debt by a discharged bankrupt by re- fusing to issue him a driver's licence. John Moloney owed $195,000 to the province aer it paid out to a personal injury victim for a crash he caused while driving uninsured. ompson says he's been keeping an eye on developments in other provinces but says it's pos- sible to distinguish the 407 case from most of them. "Typically, when provincial legislation has been upheld, it's on the basis of some public interest provision," he says. "407 says it's a public-private partnership but in real- ity it's a private actor collecting a debt. ere's no public interest being served." According to ompson, the main question le unan- swered by the appeal for his potential class members con- cerns vehicle permit suspensions for undischarged bank- rupts. A statement of claim filed in April 2012 alleges 407 ETR acts unlawfully when it uses its permit denial remedy once a stay of proceedings has been issued under the bank- ruptcy act that kicks in at the moment an assignment is first made in bankruptcy. None of the allegations have been proven in court. e claim calls for $20 million in general and special damages for "abuse of process, breach of contract, restitu- tion, unjust enrichment, and/or waiver of tort" plus a further $5 million in aggravated, exemplary, and punitive damages. "It's a unique and very powerful debt-collection remedy. Even though driving is a privilege in society, it has become almost a necessity for many people," says ompson. Using government records, ompson says somewhere between 7,000 and 9,000 people have listed 407 ETR as one of their creditors as part of an assignment for bankruptcy in the last seven years. Most individual debts fall in the range $3,000-$6,000, but ompson says he has come across some cases involving six-figure sums. LT FOCUS BY MICHAEL McKIERNAN For Law Times T '407 says it's a public-private partnership but in reality it's a private actor collecting a debt,' says David Thompson. Flexibility of CCAA key for many companies seems to be working well for smaller orga- nizations," the Senate report noted. Kelly Bourassa, head of the restructur- ing and insolvency group at Blake Cassels and Graydon LLP's Calgary office, says that assessment holds true today. "e idea of taking the [bankruptcy act] proposal provisions and the CCAA and throwing them in the blender to see what comes up, I don't think is the right approach," she says. "We have two regimes intended for dif- ferent audiences: smaller corporations ver- sus larger ones. I would say the potential harm in merging them is greater than any real or perceived benefit. If it ain't broke, don't fix it." When legislative amendments boosted the proposal provisions of the bankruptcy act in 2009 by opening up the possibility of debtor-in-possession financing, some wondered again whether it would make the CCAA redundant. Companies that would otherwise have opted for the CCAA could now switch to the cheaper route under the bankruptcy act, according to the theory. But statistics from the Office of the Su- perintendent of Bankruptcy Canada show CCAA filings have held steady since the change at about 40 each year. Meanwhile, commercial proposals under the bank- ruptcy act actually fell over the same period to 1,117 in 2012 from 1,309 in 2009. Domenico Magisano, a partner at Le- rners LLP who practises restructuring and insolvency law from its Toronto office, says there's an overreliance on the CCAA by companies whose real intention is an or- derly wind down but notes there will prob- ably always be a need for it in the largest restructurings, especially those involving businesses with international interests. "When there's cross-border accom- modation sought, the CCAA is the best way for that to happen. You can co-ordi- nate with other jurisdictions, whereas the [bankruptcy act] is a little more cumber- some. ere's still a place for the CCAA, but it's not the be-all and end-all. You have to do a cost-benefit analysis before embark- ing because it's not a mid-market statute. e minimum debt level is $5 million, but if you're only at $5 million, you'd better be able to run a really streamlined CCAA." Scott Bomhof, a partner in the Toron- to office of Torys LLP, says the flexibility of the CCAA contributes to its status as a premium option. "e [bankruptcy act] sets out codes for all sorts of things: how to prove a claim, how to challenge one, and so on. e CCAA has none of that in the statute. Every time you want to do something, you have to go to court and get an order," he says. But that statutory vagueness can also be the CCAA's biggest asset, according to Bomhof. "Practitioners like it and the flexibility that it provides. We like that it's not 600 sections long because you've got the abil- ity to argue things and try to make the law fit within the facts you're working with. You can cra the claims process in a way that works for a particular company," he says. Still, Bomhof says a few more targeted amendments to the bankruptcy act could end up shrinking the pool of CCAA re- structurings even further. He says the six- month limit for filing a proposal aer ini- tiating the process tends to scare off many potential users of the bankruptcy act. "For large companies, they're doing triage in the first six months, worrying about which assets they should divest and which they can put to some other use. It's just not long enough. In the Air Canada bankruptcy, I think they were still in labour negotiations within six months, so they could never have filed a proposal," says Bomhof. e prospect of an automatic as- signment in bankruptcy in the case of a failed proposal issued under the act is also a big concern for those considering the bankruptcy act route. "Automatic bankruptcy brings with it some consequences that are irreversible, and some of the larger companies aren't prepared to roll the dice on that," says Bomhof. "Under the CCAA, you can go back to the drawing board and take a sec- ond kick at the can." LT Continued from page 10

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