Maximizing tort settlements during bankruptcy

If your plaintiff is an undischarged bankrupt for any period of time during a tort action, you will be required before disbursing settlement funds to obtain a release from your client’s trustee in bankruptcy.

This article provides a simple overview of the interplay between tort personal injury settlements and the Bankruptcy and Insolvency Act (BIA).

First of all, there is no need to worry about the impact of the bankruptcy on your legal fees or disbursements. It is by this point trite law that the amount of the settlement or award to be calculated, if any, in the bankruptcy context is net of legal fees, disbursements and HST.

Section 67 of the BIA requires that the bankrupt’s assets (property) vest in the trustee for the benefit of the creditors. Sec. 68 of the BIA sets out a scheme dealing with “income,” specifically for the payment of “surplus income” earned during the period of bankruptcy.

Surplus income is defined in Sec. 68 of the BIA and more particularly calculated through the directive published by the Superintendent in Bankruptcy.

The actual calculation of surplus income is based on location, family size, and certain other obligations of the bankrupt. Using the metrics prescribed by Sec. 68 and the directive, a maximum allowable income to be earned without being fettered by the trustee is determined for the bankrupt. Beyond that, the amount is considered surplus, generally half of which is payable to the trustee.

It is well settled law that general damages in a personal injury action for pain and suffering are neither “property” nor “income” of the bankrupt and thus nothing on account of generals has to be paid to the trustee.

Similarly, the Ontario Court of Appeal in Conforti (RE) [2015] ONCA 268 held that settlement proceeds for housekeeping and future care costs are akin to general damages in that they are monies which are personal to the plaintiff and as such are neither income nor property under the BIA.

This leaves for discussion the important characterization of proceeds of settlement for income loss, loss of future earning capacity and loss of competitive advantage.

The determining factor of whether any of the lost income settlement (past or future) is payable to the trustee will depend on the time period for which the income is notionally payable. To the extent that the time period and the bankruptcy overlap, that portion of the lost income settlement which falls into the period of the bankruptcy will be payable as surplus income to the trustee.

The issue arose in Conforti (RE) and was fleshed out over three decisions. Initially, the trustee sought to have the lost income settlement characterized as “property” of the bankrupt, which would mean that all of the proceeds would vest in the trustee. At Conforti (RE) [2012] ONSC 199, Justice Wilton-Siegel determined that while the settlement was not “property,” it was indeed “income” pursuant to Sec. 68 of the BIA.

The issue of allocation of lost income to the trustee then went before Spence J. Conforti (RE) [2012] ONSC 2656. The trustee sought to have the entire lost income portion of the settlement declared as income in the year it was received, which would thus open the entirety of those proceeds to exposure of the trustee.

Justice Spence disagreed with the trustee and held that the proper allocation was to determine what portion of that lost income was attributable to the years of the bankruptcy.

The Court of Appeal Conforti (RE) [2015] ONCA 268 upheld the reasoning of Spence as to the apportionment but tinkered with his calculation to more precisely line up with the actual period of the bankruptcy. The cumulative result of these decisions provides a method by which to calculate the amount of a lost income settlement that will be attributable to income of the bankrupt.

Simply put, this is done by pro-rating of the years of the bankruptcy against the total number of years for which the lost income is payable.

In Conforti, the plaintiff was being paid future lost income for a notional period of 15 years — the date of the settlement until age 65. The period of this that overlapped with the bankruptcy was two years (post-accident date of bankruptcy to date of discharge). Therefore, the Court of Appeal took a practical approach and allocated for the benefit of the trustee a pro-rated amount of 2/15 of the lost income amount which was be plugged into the surplus income calculation and thus available to the trustee.

It should be noted that awards for loss of competitive advantage will be treated the same as loss of future income claims.

Clever personal injury lawyers, wanting to maximize the recovery for their clients, might be tempted to allocate in the minutes of settlement all of the money for general damages. While this may work in certain instances, the reality is that Justice Wilton-Siegel found, and the Court of Appeal endorsed, a purposive approach to treatment of the monies.

It is not what the words of the settlement say, but what they actually mean. If your client has never returned to work since the accident and is unlikely to in the near future, then it would be difficult for a court not to consider some allocation of the award as lost income.

Darryl Singer is a Toronto-based litigation lawyer at SINGER Barristers Professional Corporation, with experience in both bankruptcy and personal injury matters.

ATE insurance resolves plaintiff intimidation over trial costs

For plaintiffs who might not otherwise be able to risk an adverse costs award by going to trial, the advent of after-the-event (ATE) insurance in Ontario has levelled the playing field, Toronto personal injury lawyer Darryl Singer tells Law Times.

As the article notes, several companies in Ontario are now offering ATE insurance or indemnities that can be purchased once a case has been instigated. These products allow litigants to protect themselves from the risk of a cost order, and can also be provided as a blanket policy for a law firm that needs protection for its disbursements.

Singer explains that the importance of the product weighs in at the negotiation stage, as “cases which would not settle at mediation because the plaintiff would be intimidated by potential costs consequences now stand their ground and get the case resolved. In addition, cases that would get dropped on the eve of trial by the plaintiff can now proceed to trial.”

In a typical scenario, before companies like legal expense insurer DAS Canada and BridgePoint Indemnity Company came on the scene, Singer says the insurer, the mediator or the judge would tell clients that they might win, but if they don’t, a two-week trial could cost $100,000.

“The clients would fold like a pack of cards. This allows me as a lawyer to sit there, slap the certificate on the table, and say, ‘You don’t care if you lose and have to pay costs. Well, neither do we.’ Now the single biggest leverage they’ve got is off the table. It has taken a major weapon away from the defence side.”

Singer currently has a blanket policy that covers every personal injury file he opens.

“I pay $200 to cover up to $10,000 in disbursements with a rider that allows me to increase coverage to $50,000 without any review. If I decide that I am going to trial in a couple of weeks and the $50,000 is not enough, I can increase it to $100,000 or higher,” says Singer, who has chosen to use the indemnity product from BridgePoint.

Singer tells Law Times that he knows of firms with a higher blanket policy. “My practice has a high volume of small files. Some firms have blanket coverage of $50,000 to $60,000.”

The indemnity covers adverse costs, including defence legal fees and the plaintiff lawyers’ disbursements, but not the plaintiff lawyer’s legal fees.

Flood of special award claims unlikely to follow rare ruling

A recent Financial Services Commission of Ontario ruling to grant a special punitive award against an insurance company for its handling of a client’s application for catastrophic impairment is unlikely to open the floodgates to a rash of special award claims, Toronto personal injury lawyer Darryl Singer tells Law Times.

In Waldock v. State Farm Automobile Insurance Company, the plaintiff was helping a car stuck in a snow bank when he was struck by a vehicle that had lost control coming down a hill, the article says.

He subsequently applied for and received statutory accident benefits from State Farm, but disputes arose between the two parties about whether or not his injuries were deemed ‘catastrophic.’

In 2014, a preliminary issues hearing to determine if he was catastrophically injured ruled in favour of the plaintiff, but LawTimes reports that the arbitrator deferred the decision on hearing costs until a later date.

“When the 2014 decision was released, [Arbitrator Knox] Henry found that the insurer’s medical assessor failed to follow the accepted guidelines to determine whether a person is catastrophically impaired, and ruled the insurer based its denial of catastrophic impairment on a flawed report.”

In mid-November, the arbitrator ruled that State Farm had refused to accept his original ruling of catastrophic impairment.

“Because the insurer had ample evidence to support Waldock was in fact seriously injured and partially incapacitated by the collision, he found the company was responsible for withholding or delaying payments, and he ordered a special award of 30 per cent of the $361,520 still owing, plus accumulated interest, calculated at two per cent per month and compounded monthly starting from early July 2010. Waldock was also awarded $125,435 for his bill of costs and disbursements of $45,824,” Law Times reports.

While Singer says Waldock is not a ruling that will lead to a flood of special award claims, he tells Law Times that it is a “sound decision” that reinforces the court’s discretion in making such rare awards.

“The conduct has to be essentially so egregious; in this particular case, it should have been patently obvious to the insurer the client was catastrophically injured,” he adds.

The arbitrator ruled because the insurer decided to force the matter to arbitration, and even after the ruling on catastrophic impairment, only paid the client about a third of what was owing, Singer tells AdvocateDaily.