SCC Decides Provincial Legislation is Inoperative – and Leaves Insurers Out in the Cold in Alberta (Attorney General) v. Moloney
November 16, 2015
By John Kulik, Partner at McInnes Cooper,
Katie Archibald, Associate at McInnes Cooper
On November 13, 2015, the Supreme Court of Canada ruled that provisions in provincial motor vehicle legislation providing that a person’s driver’s licence will remain suspended for failing to pay a judgment arising from a motor vehicle accident even after bankruptcy are invalid and of no force and effect – and leaving insurers out in the cold, with little recourse except lobbying. The decision is based on Alberta’s motor vehicle legislation – but most Canadian Provinces have similar provincial motor vehicle legislation, so the decision will impact insurers across the country.
In Alberta (Attorney General) v. Moloney, an uninsured driver, caused a car accident. Through its uninsured motorist fund, the Province of Alberta compensated the person injured in the accident, and sought to recover the judgment amount from the uninsured driver. The uninsured driver made an assignment in bankruptcy and was eventually granted an absolute discharge form all his debts, including Alberta’s judgment against him. However, Alberta continued to maintain its suspension of Mr. Moloney’s driver’s license and vehicle permits pursuant to section 102 of Alberta’s Traffic Safety Act, which allows the Registrar of Motor Vehicles to suspend a debtor’s driver’s license and vehicle permits until a judgment debt arising from a motor vehicle accident is satisfied – otherwise than by a discharge in bankruptcy. Mr. Maloney contested this suspension, arguing that the federal bankruptcy legislation, the Bankruptcy and Insolvency Act, releases him of all provable claims and prohibits creditors from enforcing them. The Supreme Court of Canada agreed.
Federal or Provincial. It is arguable that the provisions of the motor vehicle legislation could be characterized as a debt collection mechanism – a federally regulated matter – because the debtor’s driving privileges are suspended until the judgment is paid in full. However, it is equally arguable the provision simply deals with the regulation of driving privileges – a provincially regulated matter – preventing drivers who fail to satisfy auto accident judgments (because they were driving without insurance) from driving again until they have righted their past wrong. The SCC agreed with the former.
Released From Claim. Section 178(2) of the federal Bankruptcy and Insolvency Act provides that upon discharge from bankruptcy, the debtor is released from all claims provable in bankruptcy. From a creditor’s perspective, a discharge in bankruptcy means creditors cannot enforce their provable claims – essentially giving the debtor a “clean slate”. Alberta’s judgment debt against the uninsured driver is a claim provable in bankruptcy.
True Conflict. According to constitutional law, when the provisions of a federal law and a provincial law conflict, the federal law prevails, and the provincial law is of no force and effect. Provincial motor vehicle legislation providing that a debtor cannot regain his driver’s licence until he repays auto accident judgment, even after being discharged from bankruptcy, is in direct conflict with federal bankruptcy law which provides for a “clean slate” once a debtor is discharged from bankruptcy. This is a true incompatibility because it is impossible to apply the provincial motor vehicle legislation without contravening the federal bankruptcy legislation. Accordingly, the provincial motor vehicle legislation is inoperative to the extent of the conflict.
Read the SCC’s decision in Alberta (Attorney General) v. Moloney, 2015 SCC 51 here.
This decision is based on Alberta’s motor vehicle legislation – but most Canadian Provinces have similar provincial motor vehicle legislation, including Nova Scotia, New Brunswick and Newfoundland & Labrador – so it will impact insurers across the country:
No Recovery after Bankruptcy Discharge. The bottom line is that once bankruptcy occurs and a discharge is granted, there will be no further possibility of recovery. If a judgment debtor applies for and receives a discharge in bankruptcy; there will no longer be any way for provincially mandated uninsured motorist funds (such as Judgment Recovery or the Facility Association) to use the threat of licence suspension to continue to receive repayment of an auto accident judgment from a discharged bankrupt.
Subrogated Judgments. The same will be true for insurers who hold subrogated judgments against either:
- Uninsured drivers. In cases where an insured is injured by an uninsured driver and the insured recovers from his own insurer under the Section D provisions of the insured’s own policy; or
- Their own insureds. In cases where an insurer pays out an auto accident claim caused by an insured who is in breach of the terms of his/her own policy and the insurer is entitled to recover their payout.
Lobbying. The only option now open to the insurance industry: lobby the Federal Government to amend the Bankruptcy and Insolvency Act to provide that judgments arising from motor vehicle accidents are not discharged by bankruptcy, much the way that judgments arising from fraud or breach of trust are exempt from bankruptcy.
Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Insurance Team to discuss this topic or any other legal issue.
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