Proprietary Claims of Third Parties

• Author: Roderick J. Wood
• Profession: Faculty of Law University of Alberta
• Pages: 118-150

118

CHAPTER 5

PROPRIETARY CLAIMS

OF THIRD PARTIES

This chapter is t he f‌lip side of the previous chapter. Upon bankruptcy,

the assets of the bankrupt vest in the trustee. However, the occurrence

of bankruptcy does not permit the trustee to conf‌iscate a ssets belong-

ing to persons other tha n the bankrupt. A third party who success-

fully claims an intere st in an asset is permitted to withdraw it from the

bankrupt’s e state. Where the cl aimant establishes absolute ownership

in the property, the asset is entirely removed from the bank rupt’s es-

tate. The t hird party’s proprietary r ight in the asset may be of a more

limited nature such that the asset or its value is not completely removed

from the estate. For example, a person who ow ns land jointly w ith the

bankrupt does not have the right to t ake t he la nd enti rely out of the

bankrupt’s estate. Bankruptcy severs the joint ten ancy and converts

it into a tenancy in common. The t rustee may bring proceedings for

partition and sale of the interest, or may sell the bankrupt’s interest to

a purchaser who will enjoy a similar ability to do so.1

An astonishing var iety of property intere sts can be created. Many

arise th rough consensual deal ings, but they can al so arise t hrough the

operation of law in response to other events such as wrongdoing or un-

just enrichment.2 It is beyond the scope of this work to catalogue all the

different kinds of property rights. This chapter will limit itself to a con-

sideration of the bankruptcy procedure that is used to determine the

legitimacy of the third party’s claim to the property and to an examina-

1 See Chapter 3, Sect ion B(1).

2 See Chapter 3, Sect ion C(1).

Proprietar y Claims of Third Part ies 119

tion of some of the proprietary claims that a re commonly a sserted by

third part ies in the context of bankr uptcy proceedings.

A. ASSERTING PROPRIETARY CLAIMS

AGAINST THE TRUSTEE

The BIA provides a procedural mechanism for the resolution of propri-

etary claims made by third parties in respect of asset s th at are under

the control of the trustee. The procedure is a complete code and it is not

open for a claimant to pursue an altern ative avenue to have the claim

recognized.3 Although the procedure is of general application, claims

of secured creditors and sellers claim ing thir ty-day goods are resolved

through a different procedure.4

A person who cl aims a proprietary r ight in an asset in the posses-

sion of the trustee must f‌ile a proof of claim verif‌ied by an aff‌idavit that

sets out the basis for t he claim and suff‌icient pa rticulars to enable t he

property to be identif‌ied.5 The tr ustee must either admit the claim and

deliver pos session of the property to the claimant or give notice that

the claim is disputed and provide reasons.6 This determination must be

made within f‌ifteen days from the f‌iling of the proof of clai m or f‌ifteen

days after the f‌irst meeting of creditors, whichever is later. If the claim-

ant does not appeal the trustee’s decision to dispute the claim within

f‌ifteen days of the sending of the notice, the claimant is deemed to have

abandoned all right and interest in the property. A court has the discre-

tion to e xtend the time for the appeal even after expir y of the f‌ifteen-

day period.7 In s uch proceedings, t he onus of proof is on the claimant

to establish the claim.8

B. SECURED CREDITORS

Creditors who have taken the precaution of obtaining a security inter-

est are able to assert a proprietary claim to some or all of the bankrupt’s

3 Bankruptcy an d Insolvency Act, R.S.C. 1985, c. B-3, s. 81(5) [BIA]. And see Bank

of Montreal v. XED Services Ltd . (1992), 15 C.B.R. (3d) 112 (B.C.S.C.); Re Bothwell

(2000), 22 C.B.R. (4th) 56 (Ont. S.C.J.).

4 See Sections B(2) and C, below i n this chapter.

5 BIA, above note 3, s. 81(1).

6 Ibid., s. 81(2).

7 Ibid., s. 187(11). Re St-Pierre (1963), 5 C.B.R. (N.S.) 61 (Que. S.C.).

8 Ibid., s. 81(3).

BANKR UPTCY A ND INSOLVENCY LAW120

pro pert y. The perv asi ve us e of se cur ed cr edit in mo dern tim es ha s me ant

that these claims arise routinely. Indeed, it has occurred to such a degree

that some commentators have ex pressed concern that it has permitted

most of the bankrupt’s assets to be swept out of the bankrupt’s estate,

leaving nothing at all for the un secured creditors.9

A secured creditor’s enforcement remedies against the collateral are

not regulated by the bankruptcy system and continue to be governed by

non-bankruptcy law pri nciples. Personal property security law gener-

ally governs en forcement proceedings against personal property while

provincial mortgage foreclosure law general ly governs proceedings

against land.10 The exerci se of t hese enforcement remed ies results in

the removal of the collateral from t he bankruptcy e state. The proceeds

from the realization of the collateral are not shared among the creditors

but are used to satisfy the obligation owed to the secured cred itor. If

there is a surplus following an enforcement sale, the t rustee is entit led

to claim the proceed s unless there is another part y with a higher right

(such as the holder of a subordinate per fected security interest). A se-

cured creditor w ill typically as sert a claim in bankruptcy only if the

value of the collateral is not suff‌icient to satisf y the obligation secured.

1) The Def‌inition of Secured Creditor

The BI A def‌ines a “secured creditor” as “a person holding a mortgage,

hypothec, pledge, charge or lien on or against the property of the debtor”

that s ecures a debt.11 This def‌inition covers security interests i n both

real property and personal property. It encompasses security rights that

arise by operation of l aw or by st atute (non-consensual security inter-

ests) as well as consensual ly created security interests. The def‌inition

therefore covers a common law possessory lien of a repairer as well as a

non-possessory statutory lien given to a garage keeper. Legislation may

give the provincial or federal Crown a non-consensual secur ity interest

in t he debtor’s property to secure an obligation owing to the Crown.

Although the Crown falls w ithin the def‌inition of a secured creditor, it

9 R. Goode, “Is the L aw Too Favourable to Secured C reditors?” (1984) 8 Can. Bus.

L.J. 53.

10 Some federa l statutes create federal s ecurity interest enforce ment regimes on

certain t ypes of collateral, suc h as ship mortgages. See R. Cumin g, C. Walsh, &

R. Wood, Personal Propert y Security Law (Toronto: Irwin Law, 2005) at 597–99

and 603– 4.

11 BIA, above note 3, s. 2 “se cured creditor.” The def‌inition also identif‌ie s with

considerable spe cif‌icity the rights under t he Civil Code of Quebec that are

brought within t he def‌inition.