Ricketts (Re), 2021 ABQB 77

Court of Queen’s Bench of Alberta Citation: Ricketts (Re), 2021 ABQB 77 Date: 20210201 Docket: B203 578877 Registry: Edmonton In the Matter of the Bankruptcy of Donald Freeman Ricketts _______________________________________________________ Memorandum of Decision of Brian W. Summers , Registrar in Bankruptcy _______________________________________________________ Facts [ 1 ] MNP Ltd, Licensed Insolvency Trustee (“Trustee”) of the bankruptcy estate of Donald Freeman Ricketts (“Mr.

Ricketts” or “the Bankrupt”, as the case may be) applies for advice and directions of this Court as to what amount, if any, the estate is entitled to receive with respect to a settlement Mr. Ricketts made with Royal Bank of Canada Life Insurance Company (“RBC Life”). The background facts are as follows:

a) In January of 2015 Mr. Ricketts entered into a contract of insurance with RBC Life. That contract (“Insurance Contract”) included long-term disability coverage (“LTD”).

b) Mr. Ricketts was involved in a motor vehicle accident in September of 2016 which left him totally disabled within the meaning of that term in the Insurance Contract.

c) RBC Life made LTD payments to Mr. Ricketts from October 14, 2016 through December 13, 2018 at a rate of $3600.00 per month. The total paid by RBC was $89,664.43.

d) RBC Life terminated the LTD payments in December of 2018 and alleged that Mr. Ricketts had been overpaid in the amount of $44,679.22 because his monthly LTD payments were to be reduced by other benefits (from Industrial Alliance and Canada Pension Plan).

e) Mr. Ricketts commenced action against RBC Life on June 19, 2019 alleging breach of the Insurance Contract (“Disability Insurance Action”).

f) On November 1, 2019 Mr. Ricketts made a voluntary assignment into bankruptcy.

g) The Trustee was made aware of the Disability Insurance Action. The Bankrupt’s affidavit says that the Trustee was in regular communication with the Bankrupt’s lawyer.

Conversely, the Trustee’s Supplementary Report to the Court stated among other things, at paragraphs 4 and 5: “...upon communication with counsel to the Bankrupt, the Trustee was unable to determine what interest, if any, the estate may have in the monies received by the Bankrupt and communicated this position to the Bankrupt and his counsel; and despite repeated requests for information and confirmation of settlement details, the Trustee was not provided with those details until after the automatic discharge of the Bankrupt”.

h) The Bankrupt received an automatic discharge from bankruptcy on August 2, 2020.

i) Following his discharge from bankruptcy, Mr. Ricketts negotiated a settlement with RBC Life as follows: i. Mr. Ricketts would concede that RBC Life is owed $44,679.22 for overpayments made between October 14, 2016 through December 13, 2018; ii. Mr. Ricketts would concede that RBC Life is entitled to setoff his LTD benefits until the debt is extinguished, which meant RBC Life would be obligated to resume payments in June 2022. Mr. Ricketts would then be entitled to LTD benefits until he was 70 (April 2028) in the amount of $1874 per month; iii. Mr. Ricketts negotiated a lump sum settlement in the amount of $105,000 as an all-inclusive settlement of his claim (“Settlement Funds”).

j) No formal settlement agreement has been signed. [ 2 ] Mr. Ricketts asserts that the bankruptcy estate has no right to any part of the Settlement Funds. [ 3 ] The Trustee claims that a portion of the Settlement Funds is income earned between the date of bankruptcy and the date of discharge and consequently the Bankrupt would have had surplus income, which would have required him to remit $917 per month for 21 months, for a total of $19,257.00. Applicable Legislation [ 4 ] Sections 67 and 68 of the Bankruptcy and Insolvency Act (“ BIA ”) are relevant to the determination of this legal issue . Relevant portions of these two sections are as follows: Property of Bankrupt 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 , a registered retirement income fund or a registered disability savings plan , 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. . . . in that subsection and the amounts deducted or withheld under that law of the province are of the same nature as amounts referred to in subsection 23(3) or (4) of the Canada Pension Plan , ... Directives re surplus income 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 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. Determination of trustee re surplus income

(3) The trustee shall, having regard to the applicable standards and to the personal and family situation of the bankrupt, determine whether the bankrupt has surplus income. The determination must also be made (

a) whenever the trustee becomes aware of a material change in the bankrupt’s financial situation; and (

b) whenever the trustee is required to prepare a report referred to in subsection 170(1) . ... [ 5 ] The starting point in this case is to consider whether the Settlement Funds are subject to

section 67 or

section 68 of the BIA , or neither of them . [ 6 ] The position put forward on behalf of Mr. Ricketts is that the Settlement Funds are not subject to either s 67 or s 68 of the BIA . More specifically, it is argued that:

a) The Settlement Funds relate to compensation under a contract of insurance for the bodily harm, pain and suffering, and other personal heads of damage listed in his claim, that Mr. Ricketts experienced as a result of the car accident and as such are not included in the definition of ‘property’ within the meaning of the Act”; and

b) The Settlement Funds are benefits, and not income. Even if the Settlement Funds were income, that income cannot be characterized as income ‘earned or received within the bankruptcy period’. [ 7 ] The position put forward by the Trustee is that the Settlement Funds are income and consequently are subject to

section 68 of the BIA . The Disability Insurance Action [ 8 ] The Disability Insurance Action is a chose in action. This action meets the definition of “property” in

section 2 of the BIA . [ 9 ] The remedies sought under the Disability Insurance Action include: (

a) Payment of all disability benefits due at trial; (

b) An order that the Plaintiff is entitled to recover disability benefits from December 14, 2018; (

c) An order that the Defendant shall waive payment of premiums and return premiums; (

d) An accounting; (

e) An order that the Defendant shall pay all extra income tax payments; (

f) Damages for mental suffering in the amount of $65,000; and (

g) Aggravated damages of $250,000. [ 10 ] The “disability benefits” sought in the action are defined under the Insurance Contract. The relevant provisions of the Insurance Contract are as follows: 3.02 Total Disability Benefit If You are Totally Disabled after the Elimination Period, We will pay You the Loss of Income Benefit for each Month that You remain Totally Disabled. The payment of Total Disability Benefits is subject to the Maximum benefit Period and the Limitations and Exclusions.

Definitions of relevant terms in the Insurance Contract include the following: Loss of Income Benefit in any Month means the least of the following amounts: (

a) the Monthly Benefit shown on the Policy Schedule; (

b) Your Maximum Eligible Monthly Benefit; or (

c) Your Maximum Eligible Monthly Benefit reduced by Other Benefits. Maximum Eligible Monthly Benefit (MEMB) means the maximum of Monthly benefits available to You under the Policy and fromOther Sources. It is based on Your Insurable Annual Earnings at the date Your period of Disability began. The Maximum EligibleMonthly Benefits at different levels of Insurable Annual Earnings are set out in the Benefit Determination Chart Below. Your MaximumEligible Monthly Benefit will be determined by:

a) Calculate Your Insurable Annual Earnings;

b) Locating the range of Annual Insurable Earnings in the Benefit Determination Chart that includes Your Insurable AnnualEarnings; and

c) Identifying the Maximum Eligible Monthly Benefit that is set out in the same row as that range of Insurable Monthly Earnings. [11] It is clear from the above terms of the Insurance Contract that Mr. Ricketts’ claim under the Disability Insurance Action is notfor compensation for bodily harm, pain and suffering as argued by counsel for Mr. Ricketts. Rather, the “disability benefits” sought byMr. Ricketts constitute “income”. I also note that disability benefits have been classified as income in the cases of Re Ali, (1987), 62CBR (NS) 64 (Ont.

SC); Re Cole, (1995), (BC SC), 32 CBR (3d) 213 (BCSC); and Re Doucet, (1992), 19 CBR (3d)249 (NBQB). Consequence of Disability Insurance Action being a claim forincome [12] Since the Disability Insurance Action is a claim for income, its treatment falls under

section 68 rather than

section 67 of theBIA.

Section 68 is intended to be a complete code with respect to income: Marzetti v Marzetti, (SCC), [1994] 2 SCR 765and Wallace v United Grain Growers Ltd, (SCC), [1997] 3 SCR 701. [13] However, the definition of “income” under s 68 has changed since these two decisions of the Supreme Court of Canada.“Income” is now restricted to “... a bankrupt’s revenues of whatever nature or from whatever source that are earned or received by thebankrupt between the date of the bankruptcy and the date of the bankrupt’s discharge...” (emphasis added). [14] Counsel for Mr.

Ricketts is correct that the Settlement Funds do not constitute income received between the date ofbankruptcy and the date of the Bankrupt’s discharge. However, can it be said that any of the Settlement Funds constitutes income earnedbetween these dates? [15] Mr. Ricketts has purported to structure settlement of the Disability Insurance Action such that no portion of the SettlementFunds may be described as having been earned between the date of bankruptcy and the date of the Bankrupt’s discharge. That has beenaccomplished by Mr.

Ricketts agreeing that the amount RBC Life overpaid LTD for the period of October14, 2016 to December 13,2018 ($44,679.22) is offset against RBC’s obligation to pay benefits for the period between December 14, 2018 and June of 2022. Thiswould cover the actual nine months that Mr. Ricketts was in bankruptcy and the 21 months Mr. Ricketts would have been in bankruptcyhad there been surplus income.

That 21-month period would be from November 1, 2019 to July 1, 2021. [16] RBC Life’s rights with respect to the overpayment of LTD is found within the following paragraph of the Insurance Contract: We may recalculate the amount of Your Loss of Income Benefit if You receive Other Benefits retroactively. If you receive any OtherBenefits as a lump sum that covers a period of Months, We will apply the lump sum to the corresponding period of Months that We paidLoss of Income Benefits to You. If We determine that We have overpaid You, You must reimburse Us.

We may determine the method ofreimbursement, including reducing or suspending the payment of further Loss of Income Benefits. (emphasis added) [17] RBC Life’s right to setoff is retained, notwithstanding Mr. Ricketts’ assignment into bankruptcy. A creditor’s right to setoff isprovided for under s 97(3) of the BIA. [18] Notwithstanding that RBC Life retained the right of setoff, it strikes me as patently unfair that RBC Life could exercise itsright to setoff in such a fashion as to prejudice the bankruptcy estate. The bankruptcy estate did have a potential interest in the DisabilityInsurance Action.

That potential interest is for any part of the income that may be claimed by the Trustee pursuant to s 68 of the BIA. Inmy view, Mr. Ricketts and RBC Life could not simply come to an agreement that eliminates the bankruptcy estate’s potential interest. [19] Nor does the fact that Mr. Ricketts received his discharge from bankruptcy prevent the Trustee from asserting its potentialinterest in the Disability Insurance Action. That interest remained. The Trustee has not been discharged and is required to administer anyrealizable asset that may come into the estate, even after the Bankrupt’s discharge.

This includes income caught under the definition in s68 of the BIA. [20] In my view, any settlement must recognize the bankruptcy estate’s interest in the Disability Insurance Action and thebankruptcy estate must be treated fairly. Given the Trustee’s interest in the Disability Insurance Action, the Trustee should have been

consulted before any settlement was arrived at between RBC Life and Mr. Ricketts. Calculation of Surplus Income [ 21 ] There is no indication that any part of the Settlement Funds consists of damages for mental suffering or punitive damages or for extra income tax paid. The Settlement Funds are purely for LTD benefits. [ 22 ] The Prayer for Relief in the Disability Insurance Action sought LTD benefits for the period from December 14, 2018 forward. This would be until April 2028 when Mr. Ricketts turns 70 years of age. Thus, the Disability Insurance Action seeks 112 months of LTD benefits.

The monthly LTD payments are $1,874. The total amount for 112 months would be $209.888. The amount due after deduction for the overpayment of $44,679.22 would be $165,208.78 [ 23 ] Mr. Ricketts negotiated a lump sum payment of $105,000. In my view, if Mr. Ricketts wants to proceed with the settlement on the basis of receiving that amount from RBC Life, it should be on the basis that Mr. Ricketts’ entitlement would be for that amount spread equally over the 112-month period from January 2019 to April 2028. The notional monthly payment in such a case would be $937.50.

Conclusion [ 24 ] Whatever the settlement amount, the notional monthly payment shall be included in the Bankrupt’s income for the 21-month period from November 1, 2019 to July 1, 2021. The Trustee shall calculate what surplus may be payable to the estate, if any, on this basis. [ 25 ] If the parties cannot agree on costs, I will entertain submissions. Heard on the 18 th day of December, 2020. Dated at the City of Edmonton, Alberta this 1 st day of February, 2021. Brian W. Summers Registrar in Bankruptcy Appearances: Sandra Landry MNP Ltd For the Trustee Thomas W. J. Hall of Robertson Moskal Sarsons for Mr.

Ricketts