SUPERIOR COURT OF JUSTICE

IN BANKRUPTCY AND INSOLVENCY

ESTATE NO.: 31-1140682
HEARD: 20130822
RELEASED: 20130829

SUPERIOR COURT OF JUSTICE

IN BANKRUPTCY AND INSOLVENCY

In the Matter of the Bankruptcy of

JORDAN MARK SADJA

of the City of Toronto, in the

Province of Ontario

APPEARANCES:
Kevin D.Toyne - for the Bankrupt fax 416-362-8410
Philip Gertler - for the Trustee fax 416-485-7307

BEFORE: MASTER D. E. SHORT, Registrar in Bankruptcy

HEARD: August 22, 2013

REASONS FOR DECISION

I. Contested Discharge

[1] This is another case highlighting the difficulties that can be encountered as a result of the interaction of the bankruptcy regime with the family law legal labyrinth.

[2] The Trustee opposes the bankrupt’s discharge on the basis that the bankrupt ought to be responsible for the amounts expended and lost as a result of the bankrupt changing his position during the course of his matrimonial litigation.

II. Overview

[3] Mr. Jordan Sadja voluntarily went bankrupt on December 5, 2008. In July of 2009 the trustee applied to the court to fix a date for the hearing of Mr. Sadja’s discharge.

[4] That matter came on for hearing on March 3, 2010 and was adjourned sine die to the next available date at the trustee’s request some seven months later it came on again before Deputy Registrar Mills.

[5] Her endorsement at that time indicated that the bankrupt attended and “explained that he has in large measure turned his life around it is now awaiting the final resolution of his matrimonial equalization payment which may be sufficient to pay his debts in full.” She noted that in the circumstances the bankrupt might wish to put forth an “in-bankruptcy” proposal and to annul the bankruptcy filing. She therefore directed, in 2010, that the hearing was to be adjourned sine die until resolution of the Family Law Act (“FLA”) issues.

[6] She further indicated that any future suspension (due a prior bankruptcy) should take into account the bankrupt’s “co-operation during this period of delay in addressing his discharge.”

[7] Now almost 3 years later the matter comes on for a hearing as a result of the opposition of the trustee to the granting of an otherwise unconditional discharge at this time.

III. Special Appointments

[8] The Registrars in Toronto have established a requirement for the Filing of a Special Appointment Scheduling Form, for all matters in which the hearing of the matter is expected to require in excess of one hour. The parties are at expected to set out a brief summary of the matters in issue and to indicate, if oral testimony is expected at the hearing, the anticipated witnesses and the estimated length of their evidence is to be set out on the form.

[9] In this case the Trustee indicated that, despite numerous attempts, he had experienced difficulty in obtaining the views of counsel for the bankrupt and as a consequence filed the form setting out only his estimations and highlighting the difficulty he had encountered.

[10] This became relevant during the hearing as that form indicated that two individuals were expected to give evidence: the bankrupt and the Trustee.

[11] The Trustee relied upon his Supplementary Report as it set out the facts upon which he relied. As a consequence he was not called by his counsel to give evidence.

[12] Because of the nature of the dispute, counsel for the bankrupt indicated that he wished to put questions to the Trustee. The Trustee’s counsel raised the question of whether or not the Trustee could be required to testify since his report had been served and filed and no notice had been given to him of the intention of the bankrupt to require evidence from the Trustee.

[13] I determined that inasmuch as the Trustee had indicated on the Case Management Form that he anticipated evidence would be given by the Trustee, it did not strike me as fair to prevent an examination at this hearing or perhaps to require an adjournment to another day. I however held that the nature of the examination ought to be in the form of an examination in chief. Counsel for the trustee was allowed to examine his client following that examination.

IV. The Issue

[14] On the Case Management Form the brief factual overview completed by the Trustee read as follows :

Due to the action of the bankrupt and his counsel, the realization on the primary asset in the estate was reduced and the Trustee was required to expend a very significant amount of time and incur sizable (taxed) legal fees. The Trustee is seeking a conditional discharge to recover those costs.

[15] Thus this is a somewhat unusual case wherein none of the creditors of the bankrupt are opposing his discharge and the Trustee has been paid any amounts for fees etc. which were agreed upon by the bankrupt at the time of his filing for bankruptcy.

I note in passing that in the materials filed prior to the hearing there was no indication of any surplus income liability ever having been established in the over five-year period since the original filing.

V. Legal Counsel for Trustee

[16] It is my understanding that the previous Registrars in Toronto established practice of requiring trustees to obtain the approval of the court for the appointment of counsel to the Trustee in any cases where there were no inspectors had been appointed, who would have been in a position to independently consider the advisability of incurring such expenses. This was in accord with Re Tlustie, (1923), 3 C.B.R. 654 (Ont. S.C.)

[17] The Trustee first contacted his counsel in April of 2011 and legal services were provided throat the balance of that year.

[18] In this case, an ex parte motion was brought in January 2012 and an Order was granted by Registrar Diamond authorizing the appointment (nunc pro tunc) of both of a lawyer experienced in bankruptcy matters and also a family law lawyer to assist the Trustee in this matter. In April of that year a settlement of the family law matter was reached.

[19] The bankrupt would appear not to have been provided with notice of this application prior to the order being granted. In hindsight I wonder whether in any case where the trustee might potentially be looking to recover such legal expenses from the bankrupt, the best practice might be to ensure that the bankrupt has notice of the application prior to the order being made.

VI. Legal fees

[20] In July 2012 the bills of costs of both lawyers were submitted and taxed by me. The Trustee completed the necessary certificate indicating that the services had been “duly authorized and rendered and the charges are in its opinion fair and reasonable.”

[21] The preamble to the 13 page bill of costs rendered by the bankruptcy counsel read:

TO MY PROFESSIONAL SERVICES RENDERED in receiving the instructions of [the Trustee]… to act on its behalf in connection with the bankrupt’s equalization claim against his wife…. Counsel’s involvement was required given that, in the event the bankrupt’s equalization claim is upheld, there would be sufficient funds available to pay creditors in full (including statutory interest) plus all professional fees and disbursements.

[22] I regret now that the taxation took place prior to this contested discharge taking place. I confess it was unclear to me at the time of the taxation that, it had ultimately turned out, that at the end of the day there was no real net recovery made on the bankrupt’s equalization claim.

[23] The difficulty raised by the Trustee at this stage is that, prior to that resolution, the total legal fees (including the family lawyer) came to a total, inclusive of disbursements, in excess of $22,000.

[24] That sum is part of the total the Trustee now seeks to recover as a condition of the bankrupt’s discharge.

VII. The Family Law Matter

[25] A discharge hearing is supposed to be a relatively simplified matter dealt with in a summary manner. In that environment is difficult to summarize accurately all the stages of the family law matter that was running parallel with this bankruptcy.

[26] The bankrupt’s former spouse played no part in this hearing with the result that my understanding of the family law matter is based purely on the husband’s viewpoint.

[27] Mr. Sadja indicates that he and his spouse separated a couple of years before his bankruptcy and that they entered into a separation agreement at that time. They subsequently determined to reconcile and again cohabited for a period in excess of the year.

[28] While they were cohabiting Mr. Sadja determined to file for bankruptcy, in part due to the liabilities incurred by him in running a landscaping architecture business.

[29] Mr. Sadja testified that at all material times his spouse was employed in senior positions in the financial services industry. She earned significantly more money each year than he did. The couple had three children and Mr. Sadja had a significant involvement in the care and upbringing of their children as a result of the time demands flowing from the requirements of his spouse’s employment.

[30] The matrimonial home was registered solely in his wife’s name. The husband’s evidence was that there was significant equity in the home at the date of separation. Apparently there was a line of credit secured against the residence for which he had co-signed, along with his wife. His evidence however was that most of the proceeds of that line of credit had not flowed to him.

[31] Shortly after the bankruptcy order was granted, the couple again separated. Both spouses ended up with well-known and experienced family law litigation firms.

[32] Not long after the separation the Trustee received a letter from the wife’s solicitor indicating that she wished to negotiate the net family property with the Trustee, as that asset had vested in the Trustee by virtue of the bankruptcy. Questions of support and access were to be left to be dealt with between the couple’s family law firms. By virtue of the disparity between their individual annual incomes, the husband was also asserting a claim for spousal support. Issues of access to the children also remained to be resolved.

VIII. What is to be Done?

[33] In his evidence before me, the Trustee candidly acknowledged that he does not have professional credentials as a lawyer and that, when parties with whom he is dealing contact him through counsel, it is his practice to retain a lawyer to represent his interest and that of the estate.

[34] In this case, the bill of costs suggests that the initial telephone call with the trustee’s counsel took place on May the 18th , 2011 the order approving that retainer, as noted above was eventually made in in January 2012, with retroactive effect.

[35] In a letter to the bankrupt’s family law counsel written in January 2012 counsel for the Trustee summarizes what gives rise to the present dispute:

“As you may recall, [the wife] had made a settlement offer to the Trustee in the range of $20,000. After discussions with you on behalf of the Bankrupt the Trustee did not accept the settlement offer as you had indicated the Bankrupt’s equalization claim to be more in the range of $150,000. Given the Bankrupt’s claims provable are in the range of $60,000.00, this would have suggested a substantial recovery to the Bankrupt and the Trustee felt it appropriate to consider its duty of fairness to the bankrupt in not accepting [the wife’s] $20,000 equalization claim settlement offer.

Under the circumstances, the Trustee had expected that your client would be actively pursuing equalization claim and was taken aback when your client, without warning, abandoned his claim.

It was not until the last settlement conference held on October 21, 2011 that you advised this writer, Ms. Wilson and the Family Court (during the settlement conference) that the Bankrupt would no longer be pursuing a family law equalization claim and that the Trustee was free to address this matter as it chose. Unfortunately by that time, the settlement offer made by [the wife] had been withdrawn.

The Trustee is of the view that your client’s conduct in respect of equalization claim and his ultimate decision not to pursue same has potentially prejudiced the creditors the creditors of his estate. This conduct will be brought to the attention the Bankruptcy Court when his discharge application is heard.” [My emphasis]

[36] That January 2012 letter also indicated that the Trustee’s counsel had first become aware that the family matter had been set down for trial with the hearing to take place in April of 2012.

[37] I note from my review of the bill of costs that, to a large extent, it appears that a large portion of the total time charged by counsel for the Trustee’s lawyer and the family law lawyer who participated in the settlement conference before Mdm. Justice Speigel, was incurred after this point in time.

[38] The letter sent in response by the Bankrupt’s family counsel read in part;

It was after very careful consideration of Mr. Sadja decided to abandon his claim to an equalization of net family property (over and above what was payable to the creditors). He did this in good faith and with the hope that he would be able to move this matter towards a final resolution with [his wife].

At the last settlement conference that you attended….You indicated also that the amount being offered by [the wife] was low in your opinion as you did not accept her value with respect to the matrimonial home.. I fail to understand why my client’s position should be seen as prejudicing his creditors when his discharge application is heard. In fact, what he was endeavoring to do was make it easier for you to be able to resolve the issue with [his wife for the benefit of the creditors.” [My emphasis]

[39] The bankrupt’s uncontradicted evidence before me was that he determined to abandon any claim he would have to be paid any surplus amount, over and above the total claims of his creditors in the bankruptcy, in order to address problems that were being encountered with respect to the access and care of the children of the marriage.

[40] I accept his evidence that he had no intent of undermining the Trustee or his creditors but rather was only intending to reduce the amount being sought to the extent of any amount that would otherwise flow to him on account of family property values being balanced as of the date of separation.

[41] Exhibit 16 marked at the hearing before me was the Settlement Conference Brief filed by the Bankrupt before Justice Spiegel, dated April 20, 2012. That document contained under the heading “Property Issues” the following:

Jordan is an undischarged bankrupt. It is his position that Julia would in fact owe him an equalization payment that might be greater than the amount that would be payable to his Trustee in Bankruptcy, he is not pursuing this claim. He is prepared to leave that issue to be resolved between the solicitor for the Trustee in Bankruptcy and Julia. Jordan understands that this issue is not yet settled. The Trustee has offered to settle all property equalization of net family property claims by Julia paying the sum of $32,500, inclusive of interest and costs. Julia has offered payment of $1800. Jordan’s discharge from bankruptcy is being delayed because of this unresolved matter.” [My emphasis]

[42] The document then sets out the outstanding issues as between the husband and wife as being:

(a) retroactive and ongoing spousal support to the husband…

(b) retroactive and ongoing child support to the husband; and

(c) the wife’s claim for child support payable to her.\

[43] Justice Speigel, at the settlement conference, apparently required the claim of the Trustee to be resolved first. During the conference counsel for the Trustee signed handwritten Minutes of Settlement which read in part:

The parties agree to fully and finally settle all property and equalization of net family property issues between them upon the applicant [wife] paying to the trustee in bankruptcy for Jordan Sadja… the sum of $14,500 inclusive of interest and costs.

[44] As a party to the agreement, the wife signed the minutes of settlement. The husband was not required to sign the document. Apparently following the execution of that document counsel for the Trustee was excused and the parties, with the assistance of the pretrial judge proceeded to resolve all other issues. The resolved issues included the husband’s support claim.

[45] The evidence of the Trustee given before me was that the first time he learned that a substantial sum had been paid to the bankrupt in full satisfaction of any and all support claims was at the hearing before me. No claim by the Trustee to the husband’s support or any portion of it was advanced before me. The husband testified that in any event the majority of the settlement amount was used to pay his family lawyer’s fees.

[46] The Trustee asserted at the hearing before me that, had he simply accepted the original offer from the wife’s family law counsel, there would have been perhaps $17,000 available for distribution amongst the creditors. Instead all the monies recovered were insufficient to pay the legal bills alone. He therefore seeks as a condition of the discharge a payment of the full amount of the legal costs and the “lost” $17,000 sum less the $14,500 which was obtained on the settlement. With HST the total sought from the bankrupt as a condition of his discharge was thus in the vicinity of $39,000.

IX. The Trustee’s Dilemma

[47] In part, it was my understanding that the Trustee was concerned that if he did not maintain the claim for $150,000 the husband would potentially have looked to him for failing to act in the best interest of the bankrupt. He argues that when the bankrupt ceased to have an interest in pressing forward the full net family property claim Mr. Sadja greatly undermined the Trustee’s ability to advance that claim.

[48] However, the bankrupt says that the Trustee never asked him to help. The Trustee had his own family law specialist and the evidence to prove the property equalization claim was available to both.

[49] There was no evidence before me as to why the bulk of the claim was abandoned at the settlement conference. Obviously the Trustee had no interest in forcing the matter to trial if the all the other matters were resolved between the husband and his former spouse. That resolution had not happened at the point in time when the Trustee entered into a full and final settlement through his counsel. Notwithstanding the well-known record of success of Justice Speigel in resolving matters such as this, there was still a possibility that the matter would actually go to trial. The Trustee voluntarily determined to settle the claim.

[50] In my view it is inappropriate to saddle the bankrupt with the costs of enforcing this claim. Circumstances all alter cases. The circumstances changed in this case. The husband, in order to avoid additional family distress, agreed to his wife obtaining a decree absolute and her remarrying, notwithstanding the property issues had not been resolved. It would seem that after the divorce was obtained the wife’s position became more inflexible. The Trustee could have endeavoured to negotiate a deal on his own without waiting. He chose not to do so.

[51] I see no reason to fault the Trustee’s decision. It made practical sense to await developments.

[52] From the creditors’ point of view, they stood to make a much greater recovery than would otherwise have been the case, if the net family property dispute was resolved favourably by the trustee.

[53] None of them chose to be inspectors and were thus trusting the Trustee’s judgment. All litigation is to an extent a gamble. In this case the gamble was lost.

[54] I do not see that it is the responsibility of the bankrupt in such a situation to alter his position in matrimonial litigation to improve the position of the Trustee.

[55] The bankrupt believed that by giving up his claim to any excess he was in fact improving the Trustee’s position.

X. Duties of Bankrupts

[56] Reference was made by the Trustee’s counsel to the decision of the Court of Appeal in Engels v. Richard Killen & Associates Ltd., 2004 14399 (ON CA), 69 O.R. (3d) 183. There the issue was whether or not an insurance broker who went bankrupt, was obliged not to compete with the entity that purchased his former business from the Trustee. The court held there was no such obligation in that case. It seems to me that in this case, similarly, there is no obligation on a bankrupt to refrain from altering his position in other litigation to improve the position of the Trustee in his bankruptcy.

[57] However the Trustee relied upon section 158 of the BIA which details the duties of a bankrupt. The section reads in part:

158. A bankrupt shall

(a) make discovery of and deliver all his

property that is under his possession or control

to the trustee or to any person authorized

by the trustee to take possession of it or any

part thereof;

(k) aid to the utmost of his power in the realization

of his property and the distribution of

the proceeds among his creditors;

(n.1) inform the trustee of any material

change in the bankrupt’s financial situation;

(o) generally do all such acts and things in

relation to his property and the distribution

of the proceeds among his creditors as may

be reasonably required by the trustee, or may

be prescribed by the General Rules, or may

be directed by the court by any special order

made with reference to any particular case or

made on the occasion of any special application

by the trustee, or any creditor or person

interested; [my emphasis]

[58] An electronic search of the provisions of the BIA discloses that section 158 (k) is the only section in the Act which contains the word “utmost”. Online dictionaries define the noun “utmost” as meaning:

• “The greatest possible amount, degree, or extent; the maximum”: [American Heritage® Dictionary of the English Language, Fourth Edition]

• “The greatest degree or amount;

• the most or best of one's abilities, powers, etc.;

• the extreme limit or extent.” [Random House Kernerman Webster's College Dictionary]

[59] In my view this section is nevertheless subject to the overriding guidance of the Supreme Court of Canada concerning statutory interpretation.

[60] Paragraph A5 of The 2012 Annotated Bankruptcy and Insolvency Act [Houlden, Morawetz & Sarra] observes that:

The Supreme Court of Canada has held that the starting point for statutory interpretation in Canada is Driedger’s formulation in Construction of Statutes (2nd ed. 1982) at p. 87:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context and in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act and the intention of Parliament: Barrie Public Utilities v. Canadian Cable Television Assn. (2003), 1226, 2003 CarswellNat 1268.

[61] It is my view, the intention of Parliament cannot have been to require that the bankrupt in this case would be obliged choose to take actions which he determined were not in the best interests of his relationship with his children and in particular the best interests of those children. My interpretation of the word utmost is thus constrained by what I regard as the overall scheme of the Act and the object of the Act taking into account the interests of both the bankrupt and his creditors.

[62] I am thus construing this provision liberally to secure what I regard as the most just and appropriate determination of this dispute.

[63] As a consequence, I therefore conclude that the bankrupt is entitled to his discharge at this time which will be suspended for a period of one month as a result of his prior to bankruptcy. The time period is intended to reflect the delay already encountered in bringing this matter to a conclusion.

[64] I wish to stress that I am not faulting the trustee for his actions in this case. He followed the prudent course. Far be it from this court to suggest that a party ought not to seek legal advice in legally complex matters. Nevertheless it is not appropriate in my view to have this bankruptcy discharge delayed on account of the alleged obligation to indemnify the trustee where the bankrupt neither agreed to providing any form of indemnity nor asked the trustee to incur the expenses claimed.

[65] I thank both counsel for their skilful assistance in the addressing of this complex matter.

Master D. E. Short
Registrar in Bankruptcy

August 29, 2013

DS/ B. 21