Federal bankruptcy law trumps Alberta law allowing suspension of uninsured drivers’ privileges: Supreme Court of Canada

An Alberta law that allows for driving prohibitions of uninsured motorists who fail to repay the Motor Vehicle Accident Claims Program – and are discharged from bankruptcy – is unconstitutional, the Supreme Court of Canada has ruled.

Section 102 of the Alberta Traffic Safety Act allows the province to disqualify a person from driving in Alberta – and to suspend that registration of any motor vehicle in that person’s name – if the person fails to satisfy a judgment for damages arising from an accident.

That law “is meant to deprive the judgment debtor of driving privileges until the judgment arising from a motor vehicle accident is paid in full, or periodic payments in satisfaction of the judgment are being made” in accordance with the Traffic Safety Act, wrote Mr. Justice Clément Gascon on behalf of himself and six other Supreme Court of Canada judges, in a ruling released Friday.

All nine judges hearing the case essentially agreed that the Alberta Traffic Safety Act “frustrates” the objective, in the federal Bankruptcy and Insolvency Act, of financial rehabilitation. Chief Justice Beverley McLachlin and Madam Justice Suzanne Côté issued a separate decision in which they ruled that there is no “operational conflict” between the Alberta and federal laws, disagreeing with the majority on that point.

In Friday’s decision, Canada’s highest court dismissed an appeal, from the Attorney General of Alberta, and ruled in favour of Joseph Moloney, who was involved in an auto accident while driving uninsured in 1989. He was successfully sued for nearly $195,000 in 1996. The plaintiff was paid by Alberta’s Motor Vehicle Accident Recoveries (MVAR) program. Court records indicate that Moloney made arrangements to pay his debt to MVAR in installments. But in 2008, Moloney made an assignment in bankruptcy, listing the Motor Vehicle Accident Claims debt in his statement of affairs. Moloney was discharged from bankruptcy in 2011. In October of the same year, he was told by the province that his driver’s licence and vehicle registration privileges “would be suspended until payment of the outstanding amount of the judgment debt,” Justice Gascon noted in the ruling released Friday.

In November, 2011, Moloney’s lawyer received a letter from MVAR advising Moloney that he “remains indebted for the judgment debt obtained against him . . . ‘until the judgment is satisfied or discharged, otherwise than by a discharge in bankruptcy'” Justice Gascon added. “The letter proposed that new payment arrangements be made, failing which the suspension of his driving privileges would continue.”

The following year, Moloney applied successfully – to the Court of Queen’s Bench of Alberta – for a stay of the licence and registration privilege suspensions. Moloney also obtained a stay of the default judgment. In its ruling in Moloney’s favour, the Court of Queen’s Bench found that the province was attempting to circumvent the federal Bankruptcy and Insolvency Act in order to collect a debt. That ruling was upheld two years later by the Alberta Court of Appeal. The Supreme Court of Canada heard the province’s appeal in January, 2015 and released its decision in favour of Moloney Nov. 13.

Ontario’s Ministry of the Attorney General had intervener status, supporting the Province of Alberta’s position.

The Ontario government contends that argued that all provinces “have a legitimate regulatory interest in preventing irresponsible drivers who drive without insurance and cause harm to others as a result from driving again until they take responsibility for their actions.”

In its appeal of the decision in Moloney, the Alberta Ministry of the Attorney General argued there was no conflict between the Alberta Traffic Safety Act and the federal Bankruptcy and Insolvency Act.

The “valid purpose of the [Bankruptcy and Insolvency Act] cannot properly extend to the regulation of driving,” the Alberta Ministry of the Attorney General argued, adding there is nothing in the Bankruptcy and Insolvency Act “that suggests that suggests any Parliamentary intention to regulate the restoration of driving privileges, and certainly nothing that would require provincial regulators to restore driving privileges as part of the BIA’s rehabilitative purpose.”

Related: Supreme Court of Canada to rule on license privileges for bankrupt uninsured drivers who owe money to accident victims’ claims funds

One purpose of bankruptcy is “the equitable distribution of assets,” which “is achieved through a single proceeding model,” Justice Gascon wrote. “Under this model, creditors of the bankrupt wishing to enforce a claim provable in bankruptcy must participate in one collective proceeding. This ensures that the assets of the bankrupt are distributed fairly amongst the creditors.”

In order for that model to be viable, “creditors must not be allowed to enforce their provable claims individually, that is, outside the collective proceeding, “Justice Gascon added.

There are some exceptions, he noted, adding the second purpose of bankruptcy is “the financial rehabilitation of the debtor,” which “is achieved through the discharge of the debtor’s outstanding debts at the end of the bankruptcy.”

Provinces have the power, under the 1867 Constitution Act (formerly known as the British North America Act) “to legislate with regard to property and civil rights,” Justice Gascon noted, adding the Supreme Court of Canada “has long recognized that this power includes traffic regulation and the authority to set conditions for driver’s licences and vehicle permits.”

But while it is “plausible” that Section 102 of the Alberta Traffic Safety Act “might discourage drivers from driving uninsured, this is neither its main purpose nor its main effect,” Justice Gascon wrote. “For one, the deterrent effect of s. 102, if any, is not tied to the failure to maintain proper insurance. The deterrent effect materializes only if the uninsured driver causes an accident. The accident must also cause injury to a third party. In addition, the victim must seek damages and obtain a judgment. Yet this is still not sufficient. The uninsured driver must also be incapable of satisfying the judgment in question or refuse to do so. Clearly, it is the failure to pay the judgment debt that triggers s. 102, not the failure to be insured.”

He added that Section 54 of the Traffic Safety Act already provides for a penalty to drive without insurance.

Section 102 “is clearly aimed at the repayment of a judgment debt,” Justice Gascon wrote. “Even if it were aimed at recovering the resulting regulatory charge, such a charge would nonetheless be a claim provable in bankruptcy, and as such, it would remain a debt subject to the bankruptcy process.”

Section 102 (2) of the Alberta Traffic Safety Act is “constitutionally inoperative by reason of the doctrine of federal paramountcy,” Justice Gascon wrote, citing case history. In the context of the Moloney case, the “purpose and effect” of Section 102 “are to suspend a debtor’s driving privileges until payment of a provable claim.”

In a dissenting decision – on behalf of herself and Chief Justice McLachlin – Justice Côté wrote that she does not believe that there is an “operational conflict to speak of” in the Alberta government’s appeal.

They concurred with the majority in that Section 102 of the Alberta Traffic Safety Act “frustrates the purpose of financial rehabilitation” under the federal BIA and “is accordingly inoperative to the extent of the conflict by reason of the doctrine of federal paramountcy.” They agreed that the Province of Alberta’s appeal should be dismissed.

“The issue in this case is whether the effect of the province withholding driving privileges in this manner produces a conflict with the purposes of the BIA, thereby accomplishing indirectly what the province cannot do directly,” Justice Côté wrote. “The frustration of one federal purpose is sufficient to trigger the application of the doctrine of federal paramountcy.”

The judges who sided with Justice Gascon were Madam Justice Rosalie Silberman Abella, Mr. Justice Thomas Cromwell, Mr. Justice Michael Moldaver, Madam Justice Andromache Karakatsanis, Mr. Justice Richard Wagner and Mr. Justice Marshall Rothstein (who retired from the Supreme Court of Canada in August).