SUPERIOR COURT OF JUSTICE

IN BANKRUPTCY AND INSOLVENCY

ESTATE NO.: 32-1197089
HEARD: 20140722
RELEASED: 20150728

In the Matter of the Bankruptcy of

IJAZ AHMAD KHAN

Debtor

ORDINARY ADMINISTRATION

APPEARANCES:
-L. Gyldenbjerg, for Trustee
-A. Hughes, Office of the Superintendent of Bankruptcy

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

HEARD: July 22, 2014 and other subsequent dates

REASONS FOR DECISION in Test Case

I. Overview

[1] This is a cautionary tale with respect to problems that can arise when participants in the insolvency world seek to take advantage of various circumstances, to the disadvantage of a wide range of parties including, debtors, creditors, trustees, regulators, solicitors and others.

[2] While this matter was originally argued a year ago, a number of interim developments have resulted in deferral of the release of these complete reasons until this point in time.

[3] The specific issue before me on this hearing arose from a disputed Taxation of the Trustee’s accounts rendered on the completion of the administration of the estate of Ijaz Ahmad Khan and the parallel bankruptcy of his wife.

[4] The Trustee in these cases initially met with a debt resolution consultant who was prepared to refer to the Trustee individuals who were interested in filing assignments in bankruptcy, or proposals.

[5] The arrangement worked well for both sides in that a number of families were assisted in debt reconstruction and getting back on their feet. After a number of months, the Trustee formed the opinion that perhaps there was a difficulty with the appraisals that were being submitted to the Trustee regarding real properties owned by the various debtors. Upon closer examination, it was determined that the same appraiser was involved in most, if not all, of the insolvencies.

[6] As well, it turned out that for the most part all those appraisals established that one the existing mortgage balances were deducted there was little or no equity in the homes. As a result there was no point in the Trustee seeking to take over the property to sell it or to perhaps sell the bankrupt’s interest to a joint owner as it was unlikely there would be any net recovery for the creditors.

[7] Upon determining the apparent extent of this problem, the Trustee, reasonably, drew it to the attention of the Office of the Superintendent of Bankruptcy (“OSB”), and to the Bankruptcy and Insolvency division of the Ontario Superior Court of Justice.

[8] Following those consultations the Trustee understood that the OSB had recommended that the Trustee evaluate all the possible files where there was a real property upon which there had been no realization. Following that analysis the Trustee was then to submit a comprehensive report to the OSB regarding the status of the files as well as the impact on the various bankruptcy and proposal estates flowing from those assessments.

[9] The Khan estates were two such estates involving the retention of their jointly owned home. There being no objection, they originally each obtained an automatic discharge based on the appraisal submitted. Based on subsequent valuation information obtained the Trustee sought to annul those automatic discharges with a view to recovering monies for the estates based upon a new valuation of the property.

[10] Amongst other issues questions arose as to the appropriate date to use for the historic appraisal. Should it be the date of filing or a later date reflecting when the Trustee first became aware of the irregular appraisals?

II. Taxations of Accounts on Khan Bankruptcy Estates

[11] When the Trustee submitted its accounts in these Bankruptcies the OSB issued a Letter of Comment indicating their opposition to the amounts sought by the trustee for its services in the Khan estates. In order to provide guidance for similar estates I determined to treat these as test cases.

[12] The letter read in part as follows:

“Re: Superintendent's Comments - Section 152 (4) Statement of Receipts and Disbursements Dated: May 25, 2014 - Final

Total Receipts: $4,950.36

Total Disbursements: $4,950.36 …

Further to the review of your Statement of Receipts and Disbursements, pursuant to Subsection 152(4) of the Bankruptcy and Insolvency Act (BIA), including various reports and related documents considered necessary in the circumstances, we are unable to issue a positive letter of comment for the reasons set out below.”

[13] The letter then proceeded to set out a history of the facts in this case:

“Ijaz Ahmad Khan ("the debtor") filed for bankruptcy on April 25, 2009. Laura Gyldenbjerg & Associates ("the trustee") was appointed as trustee by the Official Receiver on the same date. The debtor was granted an automatic discharge on January 26, 2010.

The Statement of Affairs (Form 79) reported that the debtor held a 50% interest in his residence ….The estimated dollar value of this property was reported to be $350,000, with an estimated net realizable value of $0.

On November 8, 2010, while reviewing other unrelated files, the trustee became concerned regarding letters of opinion submitted to the trustee on various properties. The Trustee commenced an investigation into the letters of opinion. The results of the investigation were reported to the debtors and creditors of the various estates, the Office of the Superintendent of Bankruptcy, and the Ontario Superior Court of Justice. The trustee attended before the Ontario Superior Court of Justice, Commercial List on several occasions to obtain orders and directions regarding the estates. This file was subject to that investigation.

On March 19, 2014, Registrar D. E. Short, Ontario Superior Court of Justice in Bankruptcy and Insolvency, endorsed a settlement agreement reached between the debtor and the bankrupt with respect to home equity. The order stipulated that the Trustee may, pursuant to Section 30(4) of the Bankruptcy and Insolvency Act, disclaim its interest in the bankrupt's portion of the equity in real property for the sum of $3,750. Pursuant to this order, the Detail Trial Balance for the estate reveals that $3,750 was received on March 11, 2014.

On May 25, 2014, the Final Statement of Receipts and Disbursements for the debtor's estate was submitted to the Official Receiver. The statement showed total receipts and total disbursement of $4,950.36, and no dividend payable to unsecured creditors.”

[14] Because the parties were dealing in somewhat uncharted territory with respect to the Kalsey Bankruptcies I was engaged in a progressive honing of an appropriate method of balancing the interests of the creditors, the “system” and the Trustee. The Letter of Comments continued by referring to an earlier ruling in a similar case:

“On March 19, 2014, during a motion hearing for … RANDHAWA, Court Number 32-1227234, Mr. K. Page and Laura Gyldenbjerg requested direction from the court regarding the conceptual approach to settle these matters. In response, Registrar D. E. Short provided the following direction:

A = Value of equity at time of bankruptcy as stated in the Statement of Affairs

B = Value of equity at time of bankruptcy as per a new historical appraisal

Y = Cost of Appraisal

Amount to be paid into the estate by debtor = (B -A) /2 + Y

[15] At that hearing I was asked for further direction on how the amount to be paid into the estate is to be distributed. More precisely, how much will be distributed to the creditors versus and how much will be attributed to costs to administer the estates. In response, endeavouring to provide immediate guidance at that time, I provided the following direction:

Amount that must be distributed to creditors= Amount to be paid into the estate by debtor/2

Registrar D. E. Short then provided a hypothetical numerical example. In this example, the total difference in the value of equity (i.e. B - A) was $50,000, and the cost to conduct the historical appraisal was $700 (i.e. Y)

Accordingly,

Amount to be paid into the estate by debtor= $50,000 / 2 + 700 = $25,700.

Amount that must be distributed to creditors = $25,700 / 2 = $12,850.

[16] In my view this formula continues to provide at least rough justice for cases where there is a meaningful recovery. However it results in difficulties in estates where the amounts recovered are more modest.

[17] In support of its decision to not provide a positive Comment Letter the OSB set out the result of the application of my March 2014 formula:

“The Final Statement of Receipts and Disbursements show that total receipts and disbursements equal $4,950.36, and thus $0 is available for distribution. As previously noted, a settlement was reached in this estate wherein the bankrupt paid $3,750 representing his portion of the equity in real property. Following the direction provided by Registrar D.E. Short on March 19, 2014:

Amount that must be distributed to creditors = $3,750/2 = $1,850.

Recommendation to the Court

Following the direction provided by the court, I respectfully request that the Final Statement of Receipts and Disbursements be amended such that the Amount Available for Distribution be changed from $0 to $1,850.”

[18] The normal types of disbursements by the trustee for filing fees, postage, bank charges etc. totalled $1915.86. In addition taxes totalling $ 449.92 are detailed; meaning payments were made out of the estate totalling $ 2365.53. Against those expenses the total reported Receipts were $4,950.36 which included the settlement of the property equity share at $3750.

[19] Note 10 to the Statement of Receipts and Disbursements filed reads:

“10. The Trustee engaged legal counsel regarding the issue of the valuation of the real property, as well as to cause a caution to be registered against title to the real property owned in part by the bankrupt. There are insufficient funds in the estate to pay the accounts of that solicitor and the Corporate Trustee will be held responsible for payment of those funds outside of this estate.”

[20] The Statement reflects requested Trustee’s fees of $8014.58 and a negative entry for “Loss absorbed by Trustee of -$5,429.75. Thus before applying the formula the amount available for the trustee would be $4950.36 minus $2365.53 which yields $2365.53

[21] If 50% of the real estate realization of $3,750 being $1875 is directed to the creditors the Trustee’s total compensation is only $709.83.

[22] Regardless of the causes of the valuation problems, I do not regard an amount of less than $725 as reasonable or fair compensation for the Trustee in cases such as this.

[23] What is to be done as a consequence? The answer involves a further review of the overall circumstances in this case.

III. Kalsey Bankruptcies

[24] A Mr Arvinder Kalsey appears to have referred a number of insolvencies through his company, Business Solutions and Credit Counselling Services to Ms Gyldenbjerg’s firm. The trustee has expressed concerns regarding various documents provided through Mr. Kalsey with respect to matters which have been the subject of ongoing litigation, for over 4 years, as well as delays in the administration of approximately 125 similar estates.

[25] The investigations seem to of concluded that in a number of cases, the appraisals originally provided were not in accord with the genuine value of the properties at the appropriate point in time.

[26] That conclusion followed a number of detailed investigations and appraisals.

IV. Initial Investigations

[27] The Trustee set about obtaining, at its own cost (which might not have been recoverable), some 140 independent drive-by appraisals of the properties in order to comply with the OSB’s perceived recommendations.

[28] The Trustee has advised the Court that the OSB did not assist with any of the investigations relating to the valuations of the properties.

[29] Ultimately, a large number of files were identified and the matter ended up before Mr. Justice Colin. Campbell, sitting as a Judge on the Commercial List in Toronto.

[30] Justice Campbell provided for the appointment of an amicus curiae to review each of the appraisal situations and to advise whether or not action should be taken by the Trustee/Administrator to endeavour to realize something more for the creditors.

[31] The amicus curiae had submitted two reports to the Court, and based on those reports, Justice Campbell issued various Orders and Directions to the Trustee/Administrator, with the OSB in attendance.

[32] Unfortunately, at the time of his appointment, no one turned their mind as to how the services performed by the amicus curiae were going to be funded. Ultimately, the fees of the amicus curiae involved were billed for an amount in excess of $25,000.

[33] The account of the amicus curiae was later paid through various Orders issued by myself roughly on a pro-rata basis against the additional recoveries made through several Division I and Division II proposals for parties involved with Kalsey Bankruptcies.

[34] Mr. Justice Campbell had issued various Orders and Directions, that among other things, it was appropriate for the Trustee to use the ”low-end” valuation of the drive-by appraisals to determine what equity existed in the various properties and to apply a formula to determine the amount of equity in each property.

[35] The Trustee/Administrator wrote to the approximately 120 debtors to advise them of the Orders and Directions of the Court, with very few of them responding to the correspondence.

[36] I am advised that most of the debtors did not have English as their first language and were confused and disturbed by the court papers now arriving with respect to the equity in their homes. In a handful of cases, the house had already been sold. That at least gave access to a market value of the property at some point after the date of bankruptcy.

[37] The difficulty is that several of these individuals had already received a discharge from their bankruptcy or that a proposal had been approved by creditors based on the amounts sworn to on the Statement of Affairs, which included “declared “values of the real estate which apparently in many cases was not close to the “real” value of the properties.

[38] Several of the debtors filed insolvencies with other insolvency practitioners (bankruptcy assignments, or proposals by bankrupt), without leave of the Court, and without notice to the Trustee/Administrator, thus making a difficult situation even more difficult and confusing to creditors, and other participants in the various insolvencies. Many hearings and motions had been booked by the Trustee/Administrator, with the Trustee/Administrator only finding out about the subsequent insolvency filings at the otherwise scheduled hearings.

[39] Mr. Justice. Campbell, prior to his retirement, issued a final direction that all files that were subject of the house valuation issue were to be heard by myself as Registrar in Bankruptcy.

[40] In the interests of proportionality, the original formula developed by Campbell J. was not always followed by me at the various bankrupt’s discharge hearings and motions that have been brought before me. The Orders that I have issued to date with respect to the equity to be paid in the interests of completing the administration of these estates in a timely manner, and to keep the costs to the estates to a minimum.

[41] The Trustee retained counsel to bring applications to set aside the various discharges, annul proposals and to register appropriate documentation on title that resulted in substantial legal fees being incurred. Who was to pay for those fees? Out of what money?

[42] Moreover, the Trustee was spending time (otherwise billable on new unrelated matters) on each of these files with a view to renegotiating proposals, negotiating settlements, etc.

[43] The Trustee was docketing its time on each file and now comes to the court with more than 100 files where substantial trustee and legal time have been incurred. The bulk of these files did not yield sufficient monies to pay all those fees, let alone have cash left over for the creditors.

[44] Taxations of various accounts came before me, and in some cases were opposed solely by the Office of the Superintendent on the basis that the entire recovery process had resulted in no additional monies whatsoever being available for the creditors. It seems that no creditors have elected to oppose the taxations as submitted. What is the fairest way to proceed in these circumstances?

[45] As a result of that quandary. I heard submissions from the parties with respect to the most appropriate way of proceeding.

[46] To a large extent, this is the situation without precedent. The Trustee is a sole practitioner and is facing substantial financial challenges in the event that the Trustee is unable to negotiate compromises with its legal counsel concerning the fees generated in the various investigations and other legal steps taken with respect to the subject estates.

V. Cases Relied Upon by Trustee

[47] One of the major difficulties presented in this case was the determination of appropriate compensation to the trustee who spent time that could otherwise potentially be billed at full normal rates, endeavouring to ascertain what really went on in each of these files. In such cases, where creditors might assert the costs were incurred due to the failure of the trustee to adequately investigate the estates at the beginning, what is and appropriate hourly allowance for the trustee services, especially when there is a court order obliging the trustee to take such actions.

[48] The Trustee provided the court with a number of cases supporting the view that normally, the trustee should not be entitled to charge the estate. The usual hourly rate for services performed while endeavouring to achieve recovery for the creditors.

[49] One such case relied upon by the trustee was Re Hess, a decision of Henry J. found at 1977 CarswellOnt 68, 23 C.B.R. (N.S.) 215.

[50] In summary, Justice Henry held that on a taxation of the trustee's fees the objects of the court should be to allow the trustee fair compensation while preventing unjustifiable payments for fees to the detriment of the estate and the creditors. I interpret his decision as directing that the process should strive to encourage, rather than discourage, efficient, conscientious administration of the bankrupt estate for the benefit of the creditors.

[51] In particular His Honour observed:

“11 (2) The court should direct its mind to the object of the taxation. In a bankruptcy matter, these objects, as I see it, are:

(a) To allow the trustee a fair compensation for his services;

(b) To prevent unjustifiable payments for fees to the detriment of the estate and the creditors;

(c) To encourage, rather than to discourage, efficient, conscientious administration of the bankrupt estate for the benefit of the creditors and, so far as the public is concerned, in the interests of the proper carrying-out of the principles and objectives of the Bankruptcy Act...

[52] As well, the Trustee referred the court to other cases dealing with the difficulty in establishing appropriate compensation, including:

Re Scott
2007 CarswellBC 2969, 2007 BCSC 1792, 38 C.B.R. (5th) 66

Re Nelson
2006 23396 (ON SC), 2006 CarswellOnt 4198, 24 C.B.R. (5th) 40

Re Perfection Dairy Foods Ltd.
2005 CarswellNB 407, 2005 NBQB 243, 14 C.B.R. (5th) 89

Re Wright
2005 CarswellBC 2759, 2005 BCSC 1618

Re Bennett
2013 CarswellOnt 3845, 2013 ONSC 1433

[53] These cases need to be read carefully in light of more recent guidance provided by the Ontario Court of Appeal with respect to appropriate fees in Insolvency matters.

VI. Bank of Nova Scotia v Diemer

[54] In Bank of Nova Scotia v Diemer, 2014 ONCA 851 Hoy A.C.J.O., Cronk, Peppall JJ.A. of the Ontario Court of Appeal addressed issues relating to appropriate legal fees in receiverships and insolvency matters and the correct basis for the establishment of reasonable and fair compensation.

[55] In that case the Judge at first instance held that the compensation sought for legal services performed for the court-appointed receiver were unacceptably high.

[56] Justice Peppall opens the appellate court’s reasons with this observation:

“The public nature of an insolvency, which juxtaposes the debtor’s financial hardship with a claim for significant legal compensation, focuses attention on the cost of legal services.”

[57] The court observes that in Federal Business Development Bank v. Belyea (1983), 1983 4086 (NB CA), 44 N.B.R. (2d) 248 the New Brunswick Court of Appeal set out a number of factors to be considered in determining a receiver’s compensation:

• The nature, extent and value of the assets;
• the complications and difficulties encountered;
• the degree of assistance provided by the debtor;
• the time spent;
• the receivers knowledge, experience and skill;
• the diligence and thoroughness displayed;
• the responsibilities assumed;
• the results of the receivers efforts; and
• the cost of comparable services when performed in a prudent and economical manner.

[58] The court also notes, relying on the Ontario Court of Appeal’s decision in Re Bakemates International Inc. that these factors “constitute a useful guideline, but are not exhaustive”.

[59] Justice Peppall further observes:

[35] Having said that, it is evident that the fairness and reasonableness of the fees of a receiver and its counsel are thus stated lynchpins in the Bakemates analysis...

[60] While the court was specifically dealing with the legal fees involved in the receivership in Diemer, in my view, the same considerations apply to trustees calculating their billings by reference to a self -established hourly rate.

[61] Justice Peppall goes on to note that in proceedings supervised by the court, and particularly where the court is asked to give its imprimatur to the legal fees requested for counsel, by its court officer (in Diemer, the court-appointed receiver), the court must ensure that the compensation sought is indeed fair and reasonable.

[62] The court’s observations in this area conclude:

[46] It is not my intention to introduce additional complexity and cost to the assessment of legal fees and insolvency proceedings. All participants must be mindful of costs, and seek to minimize court appearances, recognizing that the risk of failing to do so may be born on their own shoulders.

[63] Clearly the appropriate cost of legal and trustee services give rise to somewhat unique considerations in a court-supervised insolvency context.

VII. Towards a Revised Formula

[64] Taking into consideration that guidance now available from the Court of Appeal I turn to the establishment of a fair and reasonable general approach to compensation of the professionals involved in these cases.

[65] Regrettably it is unlikely that any real recovery is going to be made on many of the reviewed Kalsey Bankruptcies files.

[66] Following several hearings and discussions with counsel for creditors, representative of the Superintendent of bankruptcy, Counsel for the Trustee and the Trustee, I determined that the system needs to generate at least some recovery in most cases for the creditors.

[67] Following consultation with the representative of Office of the Superintendent, I determined that an amount roughly equal to twice the statutory rate for a simple administration of $1800, being $3,600, was an appropriate the minimum that the Trustee ought to expect recover on any file involved in this type of investigation, regardless of the net realization.

[68] The Trustee’s docketed fees incurred are substantially more... I determined that at first instance, 50% of the recovery ought to go to the creditors.

[69] Understandably, in many insolvencies there are no monies available for the creditors.

[70] While it is arguable that the Trustee could have or should have been more circumspect in dealing with the original appraisals...

[71] The annexed Fee and Dividend Calculation Procedure is somewhat self-explanatory...

[72] If there are other assets which the Trustee realized upon those monies can still be available to the Trustee in the normal way for fees.

[73] If the amount left for the creditors through this process is less than $1,000.00, then the Trustee shall be entitled to have those monies applied towards its fees and disbursements as well.

[74] Many of the creditors were credit card companies and were involved in a number of these estates.

[75] I am therefore directing the Trustee to complete one of these calculations for each estate that was subject to the direction of Justice Campbell and that has not already had a taxation completed.

[76] Applying the formula in the case of the present taxation of Mr. Khan’s estate, the creditors have no recovery and the Trustee’s compensation totals the payment of disbursements and taxes of $2097.51 and an amount on account of fees of $2852.85.

[77] It is my intention... to apply this approach to the resolution of all remaining estates.

VIII. Conditional Orders

[78] Many of Kalsey Bankruptcies demonstrated similar fact patterns...

[79] In that case... the number of persons in the household was determined to have been incorrect...

[80] It is the Trustee’s position that absent any supporting documentation...

[81] One of the difficulties faced by this court is weighing the question of whether or not this investigatory process would actually generate a net gain to the estate...

[82] In an endeavour to bring closure, I held a number of discharge hearings on July 7, 2015...

IX. Statutory Support for Disposition

[83] Admittedly this is somewhat of a discretionary process...

[84] Section 178 deals with matters arising with respect to applications for discharge...

[85] In my view, the manner which these estates have been addressed has not always been in accord with the goals expressed in the Rules of Civil Procedure...

[86] The Bankruptcy and Insolvency Act provides in section 72 (1)...

[87] Section 183 (1) provides the Superior Court of Justice is invested with such jurisdiction...

[88] Given the nature of the issues at hand...

[89] In the case of any estates where no discharge...

X. Existing Orders

[90] I am not prepared to make an order at this time varying in any way previously issued conditional discharge orders.

[91] With respect to each estate in the Kalsey Bankruptcies...

[92] Subject to any future submission made by a creditor...

XI. Trustee Discharge

[93] It is my belief that the conditional orders contemplated are reasonable...

[94] If no progress occurs or no payments or documents have been provided...

XII. Conclusion

[95] With respect to the Khan test cases, the terms of Conditional Discharges were previously negotiated and the conditions subsequently met.

[96] I express my appreciation to the Trustee, Counsel to the Trustee, and those involved in the office of the Superintendent...

[97] This solution outlined above is far from perfect and attempts to smooth rough edges caused by earlier decisions made in circumstances where there was imperfect knowledge of all material facts.

B.40/DS ___________________

Registrar D.E. Short