Executive Summary: Key Legal and Evidentiary Issues

• Capacity of an undischarged bankrupt to commence and maintain litigation concerning property vested in a trustee under s. 71 of the Bankruptcy and Insolvency Act (BIA).
• Interpretation of s. 30(1)(l) BIA and whether a trustee’s informal acquiescence in property management can amount to an implied appointment to sue on behalf of the estate.
• Characterization of the plaintiff’s claimed losses as proprietary (belonging to the bankruptcy estate) versus personal (remaining with the bankrupt and not vesting in the trustee).
• Adequacy of pleadings to support a truly personal claim (e.g., nuisance grounded in interference with health, comfort, or convenience) as opposed to claims rooted in property and economic loss.
• Application of the standard of review for mixed questions of fact and law when assessing a motion judge’s findings on assignment of authority and the nature of the claim.
• Consequences of failing to obtain express authorization from the trustee or to cure a procedural defect in standing, including dismissal of the action for lack of capacity.

Facts of the case

Joshua Phillips was the owner of a combined commercial and residential property that included his family home and a commercial building with several rental units. The respondents, Hassouna M. Kheil and Bido Kheil, rented one of the commercial units, which they used for an auto dismantling and repair business. In 2013, Phillips made an assignment into bankruptcy. By operation of s. 71 of the Bankruptcy and Insolvency Act (BIA), all of his property, including the real estate and any related causes of action, vested in the trustee in bankruptcy. Despite this, the trustee allowed Phillips to remain in possession of the property and to continue managing it. He collected rents, paid the mortgage, and handled operating expenses, effectively functioning as a de facto manager of the property during the bankruptcy. In 2016, a fire damaged part of the commercial building. Phillips alleged that the fire was caused by the respondents’ activities in their auto-related business and that significant repairs and related losses flowed from the incident. Without informing the trustee, Phillips commenced an action in 2018 against the respondents for damages arising out of the fire. The trustee did not learn of either the fire damage or the lawsuit until after Phillips was discharged from bankruptcy in 2019.

The procedural history and motion to dismiss

In 2023, the respondents discovered that Phillips had been an undischarged bankrupt when he started the action. They brought a motion under rule 21.01(3)(b) of the Ontario Rules of Civil Procedure to dismiss the action on the basis that Phillips lacked the legal capacity to commence or continue proceedings in respect of property that had vested in the trustee. Their position was that under s. 71 BIA, Phillips had no capacity to deal with or litigate over the property; only the trustee could do so, absent a valid assignment or authorization. Phillips opposed the motion. He argued that s. 30(1)(l) of the BIA allowed the trustee to “appoint the bankrupt to aid in administering the estate” and that the trustee’s decision to let him manage the property and continue collecting rents implicitly gave him authority to sue in relation to that property. Alternatively, Phillips contended that a component of his claim—general damages for loss of enjoyment and use of the property—was personal in nature, and therefore did not vest in the trustee. On that footing, he sought to characterize at least part of the action as a personal claim that he could prosecute in his own name, including through an amendment to plead nuisance.

The motion judge’s decision

The motion judge accepted the principle that a trustee may, in some circumstances, effectively assign to an undischarged bankrupt the right to pursue litigation in relation to the bankrupt’s property. However, the judge found that this had not occurred on the facts before the court. The trustee had never been informed of the fire or the lawsuit and thus could not have authorized the litigation, either prospectively or retroactively. There had been no attempt by Phillips, the trustee, or any creditor to transfer the litigation into the trustee’s name, to substitute parties, or otherwise to regularize the plaintiff’s standing. The judge held that mere acquiescence in Phillips’ day-to-day management of the property did not amount to an “appointment” to commence legal proceedings under s. 30(1)(l) BIA. On the nature of the claim, the motion judge concluded that the damages Phillips pleaded were proprietary, not personal. The pleading focused on physical damage to the building (e.g., roof replacement, remediation of structural and electronic elements, smoke and water damage), as well as economic losses such as lost profits and rent arrears. There were no pleaded facts supporting personal harm such as physical or psychological injury, nor any substantial interference with health, comfort, or convenience that would ground a truly personal nuisance claim. In light of these findings, the motion judge dismissed Phillips’ motion to amend his claim to add a nuisance cause of action and granted the respondents’ motion to dismiss the entire action for lack of capacity.

Key legal framework and interpretation

On appeal, the Ontario Court of Appeal reviewed the statutory framework governing a bankrupt person’s capacity to sue. Under s. 71 BIA, the bankrupt “ceases to have any capacity to dispose of or otherwise deal with their property,” which immediately vests in the trustee. This broad notion of “property” includes tort and contract claims relating to property, meaning that the trustee, not the bankrupt, must bring proceedings to recover such losses. Section 30(1)(d) BIA empowers the trustee to initiate or defend legal proceedings regarding the bankrupt’s property, while s. 30(1)(l) permits the trustee to appoint the bankrupt to assist in administering the estate “in such manner and on such terms as the inspectors may direct.” The Court of Appeal emphasized that previous cases in which bankrupts had been allowed to litigate on behalf of the estate involved some form of express authorization or assignment by the trustee. The court held that s. 30(1)(l) contemplates a positive act of appointment. Acquiescence in the bankrupt’s practical management of the property is not enough. Requiring express authorization protects the policy objective of the BIA: the equitable and orderly distribution of the bankrupt’s estate among creditors. Litigation can affect the estate’s value and expose it to costs. Ensuring that the trustee (and, where applicable, inspectors) expressly authorizes litigation makes sure that all stakeholders’ interests are considered before proceedings are launched or continued.

Findings on assignment and capacity

Applying these principles, the Court of Appeal agreed with the motion judge that there had been no assignment or appointment under s. 30(1)(l) BIA. The trustee had not been told of the fire or of the lawsuit and had taken no step to approve, adopt, or ratify the litigation. The fact that Phillips managed the property and collected rents was not proof that he had been granted litigation authority. Interpreting s. 30(1)(l) to allow an implied appointment based solely on such management would undermine the trustee’s role as the central decision-maker for the estate and would risk uncoordinated litigation that could prejudice creditors. Because no express authorization existed, Phillips remained without capacity to commence or maintain an action in respect of the property while he was an undischarged bankrupt.

Characterization of the damages claim

The Court of Appeal also upheld the motion judge’s characterization of the claim for general damages. The court accepted that certain causes of action—those rooted in personal, bodily, or reputational harm—do not vest in the trustee and remain enforceable by the bankrupt personally. Examples include claims for physical injury, mental distress, or loss of reputation, reflecting a policy against monetizing a debtor’s mental or physical anguish for the benefit of creditors. However, the appellate court agreed that Phillips’ pleaded claim was not of that kind. The losses described were all tied to the property and the commercial operations: cost of repairs to the building and its components, remediation of smoke and water damage, lost profits, and unpaid rent. There was no pleaded personal injury or genuine interference with health, comfort, or convenience sufficient to support a personal nuisance claim. Even though Phillips remained physically in possession of the property, that fact did not convert the claim into a personal one. The court held that the alleged losses were suffered by the estate’s real property, which was vested in the trustee at the relevant time. In this context, a proposed nuisance claim was, in substance, proprietary and belonged to the bankruptcy estate, not to Phillips personally.

Outcome and monetary consequences

The Court of Appeal concluded that the motion judge had made no palpable and overriding error on either of the appellant’s grounds. The judge was correct that no express appointment or assignment had been given by the trustee, and that the claim was proprietary rather than personal. As a result, Phillips had no capacity to commence the action at the time it was filed, and the dismissal of the action was properly ordered. The appeal was therefore dismissed. The successful parties were the respondents, Hassouna M. Kheil and Bido Kheil. However, the respondents did not participate in the appeal by filing materials or making submissions, and the Court of Appeal specifically declined to make any costs order in their favour. The decision does not award any damages, costs, or other monetary relief to any party, and no total monetary amount can be determined from the judgment.