SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

COURT FILE NO.: 32-134973
DATE: 20120501

RE: IN THE MATTER OF THE BANKRUPTCY OF SALLY CREEK ENVIRONS CORPORATION, OF THE CITY OF BRANTFORD, IN THE COUNTY OF BRANT, IN THE PROVINCE OF ONTARIO, Applicants

BEFORE: CUMMING J.

COUNSEL:
Bobby H. Sachdeva and Wojstek Jaskiewicz, for the Moving Parties, A. Robert Murphy, A. Robert Murphy Architect Incorporated and Gray Wave Resources Inc.

Liz Tinker, for the Superintendent of Bankruptcy

Chris Reed, for the Trustee

HEARD: April 26 and 30, 2012

ENDORSEMENT

The Motions

[ 1 ] There are two motions before the Court: first, a motion by the main creditors (having about 81% of proven claims) in this bankruptcy, being Allan Robert Murphy (“Murphy”), A. Robert Murphy Architect Inc. and Gray Wave Resource (collectively, the “Murphy Group”) to allow them to bring an action pursuant to s. 38 of the Bankruptcy and Insolvency Act (“ BIA ”); and second, the Murphy Group seeks leave under s. 215 of the BIA to include as defendants in the proposed action Canada (Office of the Superintendent of Bankruptcy) (“OSB”), together with Ms. Janet Russell (“Russell”) and Ms. Ginette Trahan (“Trahan”), two employees of the OSB (collectively, the “OSB defendants”).

[ 2 ] The motion for leave under s. 215 to commence the s. 38 action against the OSB and its two employees is opposed by the proposed OSB defendants. They submit that the Murphy Group’s request for leave under s. 215 should be denied because there is no reasonable cause of action supported by sufficient evidence pleaded against them and, even if there were, any such action would be based on material facts known since at least 2008, which renders the proposed action in negligence statute barred by reason of the applicable two-year limitation period from the date on which the claim was discovered: Limitations Act , 2002 , S.O. 2002, c. 24, ss. 4 and 5 .

The Evidence

[ 3 ] Sally Creek Environs Corporation (the Bankrupt”) was assigned into bankruptcy on January 10, 2003. The Trustee in bankruptcy was Mr. Edward White (“White”) and later Edward White & Associates (collectively, the “Trustee”). Mr. White and Mr. Murphy knew each other well as good friends prior to the bankruptcy and it was on Mr. Murphy’s initiative that Mr. White became Trustee. However, their relationship deteriorated as the result of issues involving the management of the bankrupt estate.

[ 4 ] In particular, Mr. Murphy was unsuccessful in bidding for the real property of the estate and Mr. Murphy asserted that Mr. White had misled him in the crafting of his bid such that it was made unacceptable. This issue was argued before Mr. Justice Pitt of this Court who found that the competing third party bid was successful. Mr. Murphy’s appeal was unsuccessful.

[ 5 ] There were several other issues and a very protracted dispute that developed between Mr. Murphy and Mr. White.

[ 6 ] The perceived misconduct of the Trustee resulted in the Murphy Group making formal, particularized complaints to the OSB, amongst other professional organizations.

[ 7 ] The first complaint to the OSB was made March 1, 2004. It was investigated by Ms. Russell, the Senior Bankruptcy Analyst for the OSB, who responded June 24, 2004. Mr. Murphy’s complaint alleged inter alia that the Trustee had “committed perjury”, had made false statements both written and oral, had “failed to disclose critical and relevant information to the Inspectors”, had “misrepresented material facts to the Inspectors, the Creditors and his counsels”, had “failed to conduct the affairs of the estate in compliance with his duties under the BIA ” and “failed to provide appropriate instructions and directions to legal counsel.”

[ 8 ] The OSB response concluded that “ Rules 34-53 constitute the Code of Ethics for trustees…I do not find that the Trustee in this estate has breached these standards and as such consider this matter closed.”

[ 9 ] The second complaint was made July 20, 2004 with additional allegations and supporting material submitted September 15, 2004, February 9, April 15, June 6 and July 19, 2005. These complaints were investigated by Ms. Russell and reviewed by Ms. Trahan, Deputy Superintendent of the OSB who responded May 11, 2006 with Ms. Russell’s 11 page report appended. The OSB took the position that Mr. Murphy’s complaints had been answered. The OSB took no further action.

[ 10 ] About June 23, 2006 the OSB received the Trustee’s Statements of Receipts and Disbursements (“SRD”). The Trustee sought approval for fees of some $240,000. And disbursements of some $330,000. for legal fees. The OSB’s letter of comment dated August 3, 2006 did not indicate any concerns with the SRD.

[ 11 ] A 14 day taxation hearing took place before Registrar Scott Nettie. The Murphy Group appeared by counsel. The OSB did not appear. Registrar Nettie rendered a 14 page decision June 23, 2008. Registrar Nettie reduced significantly the Trustee’s fees by some $150,000.and given his finding of serious misconduct by the Trustee decided that the Trustee’s fees should be further reduced to a nominal one dollar. Registrar Nettie also reduced the estate counsel fees significantly to about $40,000. Registrar Nettie as well awarded costs on a solicitor-client basis of some $181,000 against the Trustee.

[ 12 ] Registrar Nettie’s thorough and detailed analysis of the history of the bankruptcy led to express findings by him of serious misconduct on the part of the Trustee.

[ 13 ] Counsel for the moving party concedes that the time would begin to run for limitation of action purposes in respect of his proposed s. 38 action against the OSB and Ms. Russell and Ms. Trahan by (at least) the date of Registrar Nettie’s decision June 23, 2008 but for (counsel for the moving party submits) the decision by the Court of Appeal in the appeal by the Murphy Group in respect of the decision of Madam Justice Mesbur of this Court, who on appeal had allowed in part a modification of Registrar Nettie’s decision. She allowed the Trustee fees of $88,150.85 and allowed a costs award of $80,000. made payable out of the estate.

[ 14 ] Madam Justice Mesbur referred (para. 88 of her Reasons for Decision) to the OSB’s investigation of the Trustee’s alleged misconduct as set forth in Mr. Murphy’s complaints. She concluded it was “beyond the Registrar’s jurisdiction to make findings that occurred in another forum [the OSB], or that they would have come to a different conclusion had they had the same evidence as the registrar had.” However, she also found that (at para.96) “…the Registrar quite properly made sufficient findings of misconduct on the part of the Trustee to justify reducing the Trustee’s fees on account of these failings.”

[ 15 ] Mesbur J.’s decision simply modified the quantitative determinations as to allowable fees by Registrar Nettie resulting from his findings of misconduct. As stated expressly in paragraph 35 of the draft statement of claim in the Murphy Group’s Motion Record she did not overturn the Registrar’s findings of misconduct and wrongdoing on the part of the Trustee.

[ 16 ] The Court of Appeal in its decision dated May 3, 2010, stated that the appellant Murphy Group took issue with Mesbur J.’s decision on only three matters: “the bills of costs of the estate solicitor, the fees of the Trustee, and costs of the SRD hearing.” 2010 ONCA 312 at para.4.

[ 17 ] The draft statement of claim (paragraphs 75 to108) of the Murphy Group (and its motion for authority to commence a s. 38 action) insofar as the claim against the OSB defendants is concerned, is grounded in a claim of negligence on the part of Ms. Russell and Ms. Trahan and negligence and vicarious liability on the part of the OSB.

[ 18 ] In my view, neither Registrar Nettie, nor Madam Justice Mesbur, nor the Court of Appeal addressed an issue as to any asserted cause of action for negligence against the OSB defendants. All material facts with respect to any such asserted cause of action against the OSB defendants were known (as conceded by the Murphy Group) by June 23, 2008. In my view, nothing happened by virtue of the Mesbur J. decision or the Court of Appeal decision such that it can be asserted the two year limitation period did not run from (at least) June 23, 2008.

Conclusion

[ 19 ] For the reasons given, I find that the asserted cause of action against the OSB defendants is not sustainable at law, being barred by virtue of the operation of the Limitations Act, 2002.

[ 20 ] Hence, I dismiss the application under s. 215 of the BIA for leave to bring the .s 38 BIA action against the OSB defendants.

[ 21 ] I am advised the OSB defendants do not seek costs.

[ 22 ] The motion by the Murphy Group for Court authorization under s. 38 of the BIA against the defendants other than the OSB defendants is granted. An Oder was signed April 30, 2012 authorizing the s. 38 BIA action against the defendants other than the OSB defendants. The Trustee does not oppose the motion of the Murphy Group and s. 38 provides the mechanism for the Murphy Group to proceed with its intended action, thereby ensuring that assets of the bankrupt which might otherwise go unrecovered, are available to creditors willing to finance the litigation.

CUMMING J.

Date: May1, 2012