SUPERIOR COURT OF JUSTICE – ONTARIO

COMMERCIAL LIST

RE: IN THE MATTER OF THE BANKRUPTCY OF Exposoft Solutions Inc.

BEFORE: D. M. Brown J.

COUNSEL: J. Wigley, for the Purchaser, Bassel Annab

C. Ho, for the Trustee in bankruptcy, Crowe Soberman Inc.

HEARD: September 13, 2013

REASONS FOR DECISION

I. A motion which should never have been: variation of a BIA sale approval order

[1] This was a motion which should never have been. It also involved the smallest amount of money I have encountered to date in a Commercial List matter – less than $5,000. But, being a motion brought in the Toronto Region, about two inches of materials were served and filed, and four cases handed up during the course of the argument, capped off with a request for full indemnity costs of $28,136.23. Just another day in the wonderful world of litigation, Toronto-style.

II. The all-too-simple facts

[2] Exposoft Solutions Inc. made an assignment in bankruptcy on January 22, 2009. On January 24, 2012, the trustee in bankruptcy, Crowe Soberman Inc., moved for court approval of the sale “of the Trustee’s right, title and interest, if any, in the remaining unrealized assets of the Bankrupt, more specifically listed in Appendix “A” to this Notice of Motion”.

[3] Bassel Annab, a party related to the bankrupt, previously had made an en bloc, as is, offer to purchase all of the bankrupt’s assets for $1,000.00. That is not a typo - $1,000 was the offered purchase price. In an October 8, 2010 letter from his solicitors, Mr. Annab had offered to purchase “all but not less than all of the assets of Exposoft in their totality including all accounts receivable if any, inventory, equipment, fixed assets, intellectual property, names, websites, domain names, prepaid expenses and so on”. At the time of the 2012 approval motion, that was the only offer to purchase on the table.

[4] On the initial return of the sale approval motion, I ordered the Trustee to file some valuation evidence in order to obtain directions on the sale of the assets. The Trustee did so.

[5] The Schedule “A” listing the assets of Exposoft attached to the Trustee’s notice of motion did not list any intellectual property. In light of Annab’s offer to purchase all assets of Exposoft, including the intellectual property, on February 21, 2012, two days before the final approval motion, counsel for the purchaser emailed Trustee’s counsel:

…I have the supplementary report. It does deal with the physical assets but not especially the intellectual property such as there is. As you know, Bassel’s offer was for all that remains (excluding cash and a/r). Hope that doesn’t cause any problems.

I’m presuming you will be asking for the permission to sell to Bassel tomorrow. Given that everyone else seemed to be consenting, I don’t see any real reason for me to come over do you? I think you can confirm that Bassel’s offer still remains for all of the assets remaining (not cash and a/r).

[6] Trustee’s counsel responded:

…the Receiver does not have sufficient funds to conduct any valuation of intellectual property or sales process so could not perform same. I too hope it doesn’t create any issues – so may be good to have you there.

Yes, we will be asking permission to sell to Bassel tomorrow – to date we have received no opposition from anyone…(emphasis added)

[7] On February 23, 2012, I approved the sale, concluding that “the sale meets the requirements of BIA 30(6)”. Paragraph 1 of my formal order read:

THIS COURT HEREBY APPROVES the sale of the Trustee’s right, title and interest, if any, in the remaining residual assets of the Bankrupt, including the assets listed at Schedule “A” hereto to Bassel Annab, or to his designate as the case may be.

Although Schedule “A” to the Sale Approval order did not list any intellectual property, the Approval Order clearly approved the sale of the bankrupt’s “remaining residual assets”, “including”, but not limited to, those in Schedule “A”.

[8] The Trustee sent Annab a draft bill of sale on April 17, 2012. The draft bill of sale would convey assets specifically identified on its Schedule “A”. That Schedule did not include any intellectual property, in particular trademarks.

[9] On December 4, 2012, (time moved slowly on this file), Annab’s counsel wrote to counsel for the Trustee pointing out that the Approval Order had approved the sale of the bankrupt’s residual assets, yet the draft bill of sale did not include the trademarks. Counsel also pointed out that the trademarks were set to lapse on December 26, 2012.

[10] After several further emails, counsel talked – the telephone does remain a useful device! The Trustee evidently expressed concern about its exposure to liability if it included intellectual property in the bill of sale, in response to which purchaser’s counsel pointed out the protection afforded by section 142 of the Courts of Justice Act to persons acting in good faith in accordance with a court order. Purchaser’s counsel ended his email:

The deal was made in good faith, the trustee acted in good faith and it was all in accordance with an order of the court. End of story. Let’s get this done!

[11] Not to be. The Trustee dithered – the only word which can be used to describe the positions communicated through his counsel’s correspondence in mid-December. In the result, Annab was able to renew the trademarks, at his cost. Notwithstanding his counsel pointing out that the Trustee would have been aware of the trademarks as early as October, 2010, the Trustee was not prepared to execute a bill of sale including those assets. Purchaser’s counsel threatened a motion for January, 2013. That did not materialize.

[12] Annab then went out in May, 2013, and obtained a valuation of the Exposoft trademark. The resulting opinion placed the value of the mark in the range of $0 to $5,000. The valuation cost Annab $2,825.00. For some reason Annab did not forward the valuation to the Trustee, for the Trustee deposed that he was not aware of it until this motion was brought.

[13] Annab launched this motion earlier this month for an order amending my Approval Order to refer specifically to the intellectual property of Exposoft as forming part of the conveyed assets. In the result, the Trustee did not oppose the order: “The Trustee is prepared to abide by the directions of the Court in respect of the matters herein.”

[14] Annab filed a bill of costs seeking full indemnity costs of $28,136.23 from the Trustee in its corporate capacity because there are no funds in the estate. Those costs included 73 hours of legal time for scheduling and preparing the motion and filing a responding record (no dockets were attached), plus some modest disbursements. Annab does not seek payment of the cost of the valuation he commissioned last May.

III. Analysis

[15] A $1,000 transaction and the passage of 1.5 years from the date of the sale Approval Order: what to say about such a state of affairs?

[16] Let me express strong concerns about two aspects of the conduct of the Trustee, Crowe Soberman Inc. First, in its report to the court on this motion the Trustee contended that doubts about whether the bankrupt’s assets included the trademarks justified the cautious approach it took after the Approval Order was made. Hans Rizarri, the trustee in charge, deposed that at neither court hearing had Annab made “any representations to the Court as to their need for intellectual property be included in the sale”. Strictly speaking, that is a true statement. Substantively speaking, I am astonished and very troubled that the Trustee would make such a statement in light of (i) the clear inclusion of intellectual property in Annab’s offer to purchase for which the Trustee sought court approval, (ii) the red-flagging of the omission of intellectual property from Schedule “A” to the notice of approval motion made by Annab’s counsel two days before the approval hearing, (iii) the resulting response from Trustee’s counsel which did not dispute Annab’s position that he was purchasing all assets, and (iv) the clear language in the Approval Order that all residual assets were conveyed to Annab. Given those circumstances, I do not regard the making of such a statement by a trustee in evidence filed with the court as meeting the high standards required by section 34 of the Code of Ethics for Trustees as found in the Bankruptcy and Insolvency Act General Rules.

[17] Second, section 36 of the Code of Ethics requires trustees to perform their duties “in a timely manner”. The record on this motion disclosed that the Trustee did not deal with Annab’s concern about the language in the draft bill of sale in a timely way. I am not saying that Annab acted promptly, having waited several months after receiving the draft before expressing his concerns. But, Annab does not hold the statutory office of trustee which is subject to a Code of Ethics; Crowe Soberman Inc. does. I also appreciate that by the time of the approval motion, this was a small file in an estate without funds. However, the obligations on trustees under the Code of Ethics apply as equally to the small cases as they do to the large ones, even to those cases where the estate is penniless.

[18] Insolvency matters are heard on the Toronto Region Commercial List. I think judges of this court are entitled to expect that trustees, whose duties bring them routinely before this List, will adhere to the cardinal principles of our List: co-operation, communication and common sense. Regrettably, the Trustee in this case observed none of those principles. The plain language of my Approval Order, for a $1,000 transaction, conveyed all of the assets of Exposoft to Annab. If a dispute truly existed about whether the trademarks formed part of the estate’s assets - a dispute I have difficulty understanding in light of the language of Annab’s offer and his counsel’s February 21, 2012, communication - then a simple procedure existed to deal with the matter: the Trustee should have scheduled a prompt 9:30 appointment back before me to clarify matters. Instead, I have before me a motion record, responding motion record, supplementary motion record, factum and four cases. Common sense is nowhere to be seen, and the record supports a finding that most of the responsibility for that sad state of affairs lies with the Trustee.

[19] Annab should not have been compelled to bring this motion. The Trustee’s failure to deal with this issue in a timely manner, in a common sense manner, and in a manner consistent with the clear language of my Approval Order justifies making an award of costs for this motion against the Trustee personally. Such orders are not often made under the BIA, but the facts in this case justify such an award.

[20] That said, Annab’s request for full indemnity costs of $28,136.23 is outrageous - only in Toronto! Taking into account the principles expressed in Rule 57.01 of the Rules of Civil Procedure and those set forth by the Court of Appeal in Boucher v. Public Accountants Council for the Province of Ontario (2004), 2004 14579 (ON CA), 71 O.R. (3rd) 291 (C.A.) and Davies v. Clarington (Municipality) (2009), 2009 ONCA 722, 100 O.R. (3d) 66 (C.A.), and applying them to this case, I conclude that a fair and reasonable award of partial indemnity costs for this motion would be $3,500.00, and I order Crowe Soberman Inc. to pay Annab that amount within 30 days of the date of this order. I have placed my fiat on the draft order left by counsel. They can pick it up at the Commercial List Office.

D. M. Brown J.

Date: September 16, 2013