Future Income Loss Awards Immune From Creditors via Bankruptcy Protection

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Reasons for judgement were released today by the BC  Supreme Court, Victoria Registry, addressing whether a Plaintiff’s funds for ‘future income loss’ in a personal injury lawsuit, where the Plaintiff has made an assignment into bankruptcy, are ‘property’ that creditors can access.  In short the answer was no.
In today’s case (Kuta (Re)) the Plaintiff was injured in a 2008 collision.  In 2010 the Plaintiff made an assignment into bankruptcy.  Following his discharge he settled his personal injury claim which included $248,000 for ‘future wage loss’.    Appriximatley $200,000 would have satisfied all of the claims of the Plaintiff’s creditors.  The Court was asked whether the creditors can go after these funds.  In finding they were immune Master Bouck provided the following reasons:

[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.

[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.

Bankruptcy, bc injury law, Master Bouck, Re Kuta

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ERIK
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When not writing the BC Injury Law Blog, Erik is the managing partner at MacIsaac & Company, based in Victoria, B.C. He is also involved with combative sports regulatory issues and authors the Combat Sports Law Blog.

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