Alberta Court of King’s Bench warns: think twice before making unfounded claims against receivers

The Court of King’s Bench of Alberta (the Court) recently revisited the stringent boundaries on the types of claims that can be brought against court-appointed officers. The decision in North v Davison, 2024 ABKB 242 (the Decision) highlighted the protective measures that courts employ to safeguard the integrity and function of receivership proceedings against unfounded or speculative claims. In the Decision, the Court struck down a counterclaim against Ernst & Young Inc. and its individual representative (collectively, the Receiver), due to the failure of the applicant (the Davison Parties) to advance a reasonable claim. Additionally, the Court denied the Davison Parties’ request for leave to sue the Receiver, emphasizing the high standards required for legal actions against receivers and the importance of presenting clear, substantiated claims.

What you need to know

• Stricter standards for claims against court-approved receiver actions. When considering requests for leave to sue a receiver, courts generally apply a low threshold, requiring a reasonable foundation for a claim and ensuring it is neither frivolous nor vexatious. However, when a receiver's actions have been approved by a court, the threshold becomes higher, demanding a strong prima facie case with solid evidence and a clear potential for success. This approach helps ensure that claims are well-founded and protects court-appointed officers from meritless and broadly alleged legal challenges, allowing them to perform their duties without unnecessary legal burdens.
• Limitations on receivers’ liability. The Court affirmed the limitation on receivers’ liability to the amount that could be fully indemnified from the property, except in cases of gross negligence or willful misconduct. This was consistent with the protections under the Bankruptcy and Insolvency Act, RSC 1985, c B-3, reinforcing the Court’s commitment to supporting court-appointed officers by upholding legislative intent and safeguarding them from excessive liability.
• Rigorous application of Rule 3.68. The Court’s application of Rule 3.68 of the Alberta Rules of Court, Alta Reg 124/2010 (the Rules) emphasized that only claims deemed “certainly bad" should be struck. This rule emphasized that claims against receivers must be based on well-substantiated evidence and not on patently unprovable facts or mere bald allegations. The rule ensures a fair and proportionate response to civil litigation while protecting court-appointed officers from unfounded claims.

The details

Background

The Court considered an application by the Receiver to strike a counterclaim filed by the Davison Parties against the Receiver within the context of a receivership proceeding. In the counterclaim, the Davison Parties requested leave to commence a lawsuit against the Receiver—a step required under the Receivership Order. They asserted that the Receiver’s conduct constituted conspiracy, gross negligence and willful misconduct, unjust enrichment, and interference with contractual relations.

Rule 3.68 and its application

Rule 3.68 of the Rules allows for striking a claim if the Applicant does not disclose a reasonable cause of action or if it is abusive. In considering the application under Rule 3.68, the Court evaluated the counterclaim to determine whether the claims were clear, substantiated, and capable of success.

The modern approach to Rule 3.68 aims to provide a fair yet proportionate response to civil litigation and examines whether an action has a reasonable prospect of success. Because striking a counterclaim is a significant measure, the Court applied the Rule sparingly, noting that Rule 3.68 had been misused in its applications for claims that were “probably bad”. However, in the Decision, the Court found that the counterclaims against the Receiver were “certainly bad” and therefore struck them down.

Analysis of the counterclaims

The Court's analysis demonstrated a high threshold for claims against receivers, emphasizing that claims must be based on clear evidence and not on speculative or broad allegations.

• Conspiracy. The Court found the conspiracy allegations against the Receiver to be broad and lacking in specific facts. The counterclaims relied heavily on hearsay and inference, and failed to provide substantial evidence to support the claims.
• Gross negligence/willful misconduct. The Court found no evidence in the pleadings or affidavits to support the counterclaims of gross negligence or willful misconduct by the Receiver.
• Unjust enrichment, restitution and constructive trust. The Court noted that the counterclaims were broad and lacked factual support. The allegations were vague and did not provide specific details about the alleged unjust enrichment.
• Negligent or intentional interference with contractual relations. The Court determined that the claims were insufficient and only supported by bare allegations.

Three distinct periods and the Court's findings

The Davison Parties requested that the Court look at three distinct periods when considering whether leave to sue the Receiver ought to be granted:

• Pre-Approval period (pre-March 3, 2023): Leave was not required to file the counterclaim during this period, which pre-dated the granting of the Receivership Order. However, the Court found that the counterclaim did not disclose a reasonable cause of action against the Receiver, particularly regarding the conspiracy claim. As a result, the counterclaim was struck against the Receiver.
• Interim approved period (March 3, 2023 to May 23, 2023): The Court had previously approved the Receiver’s actions during this period. The Court found that the Davison Parties failed to establish a prima facie case for a claim, as the evidence presented did not provide a sufficient basis for the claims, relying instead on conjecture and speculation.
• Post-Approval period (after May 2023): Despite the lower threshold during this period (where the Receiver’s actions had not yet been approved by the Court), the evidence did not establish a claim for any of the causes of action. The Davison Parties failed to present anything beyond broad allegations and conjecture. As such, the Court did not grant leave with respect to this time period.

The Court ultimately ordered that the counterclaim be struck and denied the Davison Parties’ applications for leave to sue the Receiver. The parties were invited to make submissions on costs in the case that they could not be agreed to.

Implications

The Court’s decision underscored the need for parties to present clear, substantiated claims supported by credible evidence when pursuing legal action against receivers. It serves as a reminder of the stringent standards courts impose when evaluating claims and granting leave to pursue legal actions against court-appointed officers. Such rigour upholds the integrity and efficiency of legal proceedings within the context of receivership cases.