Superior Court of Justice
In Bankruptcy and Insolvency
COURT FILE NO.: BK-09-00207675-0031
MOTION HEARD: 20120509
ENDORSEMENT RELEASED: 20130426
SUPERIOR COURT OF JUSTICE
IN BANKRUPTCY AND INSOLVENCY
In the Matter of the Bankruptcy of Kevin McConnell
of the Village of Kleinberg,
in the Province of Ontario
APPEARANCES: L. Anderson Vojdani
- for the Creditors and the Trustee
Leo Klug
- for the Bankrupt
BEFORE: MASTER D. E. SHORT,
Registrar in Bankruptcy
HEARD: May 1st and 9th, 2012
REASONS FOR DECISION
Regarding Costs of a Motion concerning Section 163 Examination
I. Motion
[1] What at first blush appeared to be a refusals motion turned out to be somewhat out of the ordinary and presented a number of issues which seem not to have been resolved by prior case law with this particular combination of circumstances.
II. Overview
[2] The Trustee was directed by the inspectors to conduct an examination of the bankrupt to investigate some real property transactions
[3] Surplus income payments based on an annual income of $75000 as wages have been made as required.
[4] Some of the creditors however take issue as to whether this sum constitutes the total real income of the bankrupt.
[5] Initially a motion was brought for a Section 38 order to investigated possible fraudulent conveyances of real properties. Registrar Nettie granted the Order sought.
[6] Many months later, Registrar Mills amended that Order to add an undisclosed income related claim.
[7] The bankrupt’s wife has a number of credit card accounts on which the bankrupt has been issued a supplemental cards.
[8] His position is that the funding provided by those cards, for the most part, was not being spent by him as being his own earnings but rather were for corporate expenses.
[9] The Trustee obtained the monthly statements of the various credit card accounts and these were annotated to identify occasions where funds may have been expended for the personal benefit of the Bankrupt (e.g. $1000 Orthotics) as opposed to entertaining clients of the corporations as part of legitimate client entertainment etc.
[10] An examination of the bankrupt was scheduled in order to permit an investigation of the charges to the credit cards.
III. The Examination
[11] The transcript of that March 7 2012 examination reflects on its cover page, that the matter was brought under section 163 (1) of the Bankruptcy and Insolvency Act, and that the counsel appearing as:
J. W. Kramer “for the Trustee”
L Klug for the bankrupt
[12] The questioning by Mr. Kramer at that time seemed to involve a detailed examination of a series of credit card statements, and the underlying receipts and chits. The thrust was to determine whether or not the corporation was paying Mr. McConnell’s personal expenses or corporate expenses.
[13] The following is an example of the depth of the detail sought:
“Q. …The first item is called Dixon Keg, April 23 for $75.62. What was that, Mr. McConnell?
A. That was probably a lunch.
Q. And is that a business expense?
A. Yes
Q. And why do you say it’s a business expense?
A. I had clients out.
Q. You had clients out. Do you know who the clients were?
A. No
Q. Can you find out who the clients were?....
A. No
Q. And why not?
A. I can’t remember that how far back that is.
Q. Do you typically take clients out for lunch?
A. Yes.
Q. And why is that as a business expense? What do you --are you talking business with them?
A. Yes
Q. And how often to do that?
A. Whenever it shows up here I guess.”
[14] Counsel for the bankrupt took the position that this degree of detailed examination for each invoice was not appropriate in the circumstances and ultimately indicated that he would seek a ruling from the registrar as to whether or not inquiring as to what customer client or what was talked about in each business deal was appropriate.
[15] Mr. Klug indicated on the transcript “I’m going to adjourn the examinations now, and I’m going to bring a motion seeking directions of the court as to whether or not you’re entitled to go through each and every specific one. Bearing in mind that these are allocated by Rachelle McConnell, and they are charged to her credit card and she pays for them.
[16] That motion is what gives rise to this order.
IV. Whose examination?
[17] In the course of the argument of the motion I raised the question of who in fact was seeking the information and on what basis. That element is the reason that I am doing what are more extensive reasons than would normally be the case on, what has now become, only a question of the appropriate costs award. That examination requires a closer examination of the history of this matter.
[18] Originally a notice of motion dated January 18, 2012 was served seeking an order that Mr. McConnell produce all invoices used for his credit card since the date of bankruptcy.
[19] The grounds for that motion were amplified in Mr. Kramer’s affidavit in support that indicated:
“Prior to his bankruptcy, McConnell controlled KKR and was its president. Subsequent to his bankruptcy, McConnell’s wife Rachelle McConnell (“Rachelle”) purports to control the company and has become its president. McConnell and Rachelle allege that McConnell is now a lowly employee of KKR earning a minimal salary.
The trustee is investigating whether McConnell and Rachelle have created a sham with respect to KKR whereby Rachelle is a mere nominee for McConnell and money properly earned by McConnell is being paid to Rachelle or being kept in the company. Further the trustee is investigating whether KKR is paying personal expenses of McConnell through the aforementioned credit card but alleging that they are proper corporate expenses.”
[20] This would seem to be a reasonable course of inquiry for the trustee in bankruptcy. What complicates this matter is a series of orders that were obtained in 2011
[21] This problem was briefly identified in Mr. McConnell’s materials on this motion where he raised (seemingly for the first time) in an affidavit sworn April 24, 2012 the following allegation:
- The original motion returnable on January 26, 2012 was brought on behalf of the trustee. I contend that Mr. Kramer is in a position of conflict. He cannot use and should not use the section 163 examinations in order to provide them with evidence in the claim he commenced on behalf of the creditors in March of 2012.
[22] This issue goes back to July 22, 2010 when Registrar Nettie made an order of the motion of KDL Capital Inc. and 1449400 Ontario Inc. (described his creditors of the estate of Mr. McConnell) for an order under Section 38 authorizing them to commence proceedings against McConnell and others.
[23] Paragraph 4 of the Order made at that time read in part:
“THIS COURT ORDERS that all benefits to be derived from the proceedings authorized by this order, together with the cost of same, shall belong exclusively to KDL, 144 and such other creditors of McConnell that within seven days of the service upon them of this notice of the granting of this order agree to contribute pro rata according to the amount of the respective claims to the expense and risk of such proceedings (the “Joined Creditors”).
[24] The next month, on August 17, 2010 the inspectors of the bankrupt’s estate authorized the trustee to examine the bankrupt pursuant to section 163(1). It does not appear the Section 38 action was commenced at that time.
[25] Almost a year and a half later, on January 19, 2012 Registrar Mills issued an order on a motion brought to vary the Section 38 Order of July 22, 2010.
[26] The order granting added an additional claim to those over which the section 38 Order had been made.
[27] What was sought and was ordered included in the amended Order to be was a claim for:
“an order imputing to McConnell income, expenses and other remuneration by King Koating companies to Rachelle, her family, kept in King Koating companies or in any event not paid to the bankrupt for work or services performed by him or to which he is entitled at law or in equity.”
[28] On March 1, 2012, ten entities commenced the Section 38 authorized action on the Commercial List, as plaintiffs against Mr. McConnell, his wife and a number of their companies and the McConnell Family Trust. Counsel for the plaintiffs is named on the statement of claim as Kramer Barristers, the trustee’s counsel.
[29] An earlier examination of the bankrupt’s wife Rachelle McConnell was held on December 1, 2011. The transcript of that examination indicates that it was brought under section 163 (1) of the Bankruptcy and Insolvency Act and identifies the examining counsel as :
“J. W. Kramer “For the creditors, KDL Capital Inc. numbers 1449400 Ontario Inc. and the trustee Schwartz Lipinski Feldman Inc. Trustee”
[30] I am uncertain why counsel for the trustee who represents all the creditors would also be retained by specific members of that class for a Section 163(1) examination. If there was a Section 163(2) order made at some point, it did not come to my attention. While the order permitting the Section 38 action had been made, I do not believe that the action had been commenced at that point in time.
[31] In my view different rights and obligations with respect to discovery and other matters flow from whether or not an examination is being made in the context of a civil action or in an examination by a trustee of a bankrupt on behalf of all the creditors. I also had concerns as to how the trustee could dispose of this type of entitlement through a section 38 proceeding.
[32] As a consequence, during the course of argument of the motion before me, I expressed concern as to why the trustee would release a claim of this nature to specific creditors rather than to continue to act on behalf of the estate for all the creditors. The fact that the same counsel continues to act for both the trustee and those creditors I found troubling and asked counsel to research the law so that a proper consideration of the applicable jurisprudence could be made. As a result following the balance of the motion was adjourned.
[33] The parties in the interim agreed to a basis of resolution of this portion of the dispute between them and the motion was withdrawn. However, as part of that resolution Mr. Klug on behalf of the bankrupt reserved his right to seek costs of this motion before me and I requested written submissions on that matter from both sides.
[34] In a document styled “Responding Submissions on Costs by the Trustee” it is noted that:
The trustee does not concede a loss of the right to examine the bankrupt on his expenses by virtue of the creditors’ sections 38 action now being issued the decision is not to proceed with the motion is made without prejudice to that position, in the interest of not incurring further costs in connection with completing the bankrupt’s examination.”
[35] Thus the question of whether this is an acceptable or appropriate manner of proceeding in matters of this type, will have to wait for another day.
XIII. DISPOSITION
[36] Having considered the helpful arguments by both counsel in their costs submissions and the concept of proportionality. In all the circumstances I have determined to allow a credit to Mr. McConnell on account of his costs of the motion in the amount of $2500 plus applicable HST.
[37] However, given the nature of the allegations in this action it seems that there is no practical value in requiring the trustee to disburse funds to Mr. McConnell, particularly as I understand his discharge hearing is scheduled for today.
[38] I am therefore directing that Mr. McConnell shall be entitled to a credit in the total sum of $2825 on any calculation of his otherwise determined outstanding obligations to the estate. If such a credit would result in an obligation of a payment being made to Mr. McConnell, I leave the disposition of such a potential credit to the discretion of the judge hearing his discharge application.
Registrar D. E. Short
DATE: April 26, 2013
B. 13