Court File and Parties

COURT FILE NO.: 31-1932502 DATE: 20170119 ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL LIST – IN BANKRUPTCY)

IN THE MATTER OF THE BANKRUPTCY OF CRATE MARINE SALES LIMITED

BEFORE: F.L. Myers J.

COUNSEL: R. Brendan Bissell, counsel for A. Farber & Partners Inc. in its capacity as trustee in bankruptcy of the estates of Crate Marine Sales Limited and others Alex Ilchenko, counsel for Dodick Landau Inc., in its capacity as former proposal trustee for Crate Marine Sales Limited and others John McReynolds, counsel for 2124915 Ontario Inc.

HEARD: January 17, 2017

Endorsement

[1] Dodick Landau Inc. agreed to serve as proposal trustee for Crate Marine Sales Limited and six related companies in 2014. The proposals failed. Under the statutory scheme, each of the debtors was deemed to have made an assignment into bankruptcy. By order dated December 8, 2014, Newbould J. appointed A. Farber & Partners Inc. as trustee in bankruptcy for each of the seven bankruptcy estates. This endorsement applies to each of the seven bankruptcies.

[2] A secured creditor held security against all of the assets of the seven bankrupt companies. A receiver has sold the assets of the companies. It is common ground that the secured creditor suffered a shortfall on the receiver’s sale. Therefore, there were no proceeds remaining available to fund the bankrupt estates or to pay the fees and disbursements of Dodick Landau as proposal trustee.

[3] The secured creditor, through the receiver, agreed to indemnify Farber for the fees and expenses that it incurred in carrying out the limited duties of a trustee in no asset bankruptcies. Dodick Landau did not have an indemnity agreement from a third party to pay the shortfall in its fees and disbursements as proposal trustee.

[4] Dodick Landau opposes the motions brought by Farber for approval of its fees and expenses and to obtain discharges in the seven bankrupt estates. It opposes on the basis that prior to being discharged, Farber is required to pay the fees of Dodick Landau under s. 36 (2) (e) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c.B.3.

[5] For the reasons that follow, Farber’s motion is granted in full subject to a caveat in favour of 2124915 Ontario Inc. that is made on consent.

[6] Section 36 of the BIA provides a process for transition among successive trustees as follows:

(i) Duty of former trustee on substitution

• 36 (1) On the appointment of a substituted trustee, the former trustee shall without delay pass his or her accounts before the court and deliver to the substituted trustee all the property of the estate, together with all books, records and documents of the bankrupt and of the administration of the estate, as well as a statement of receipts and disbursements that contains a complete account of all moneys received by the trustee out of the property of the bankrupt or otherwise, the amount of interest received by the trustee, all moneys disbursed and expenses incurred and the remuneration claimed by the trustee, together with full particulars, description and value of all the bankrupt’s property that has not been sold or realized, setting out the reason why the property has not been sold or realized and the disposition made of the property.

• Duty of substituted trustee (2) A substituted trustee shall

  • (a) [Repealed, 1992, c. 27, s. 14]
  • (b) if appointed by the creditors, file with the court a copy of the minutes of the meeting signed by the chair;
  • (c) notify the Superintendent of his appointment;
  • (d) if required by the inspectors, register a notice of the appointment in the land register of any land titles or registry office where the assignment or bankruptcy order has been registered; and
  • (e) as soon as funds are available, pay to the former trustee his remuneration and disbursements as approved by the court.

[7] It is apparent that the statute envisions a tradeoff. On the one hand, on being replaced, a trustee is required to cooperate fully to transition the estate to the substituted trustee and to account for its stewardship forthwith. The replaced trustee is not even entitled, for example, to retain funds on account of accrued fees that have yet to be taxed. Bannack (Trustee of) v. Bannack (Former Trustee of), 1996 CarswellOnt 4587 (C.A.). To balance out the scales however, s. 36 (2) (e) provides that “as soon as funds are available” the substituted trustee is to pay the former trustee its approved fees and disbursements.

[8] Dodick Landau argues that the funds paid by the receiver to Farber under the fee indemnity were “available” under s. 36 (2) (e). If they were available to pay Farber, they must have been available to the estate to first pay Dodick Landau under the subsection. However, this reflects a misunderstanding of how the funding sections work.

[9] The trustee’s entitlement to fees flows from s. 39 of the BIA. That section provides that the trustee is entitled to be paid an amount voted by the creditors. If the fees are not agreed upon between the trustee and the creditors, then the trustee can claim up to 7 ½ percent of realizations (other than for secured creditors) in its statement of receipts and disbursements. The fees are ultimately subject to approval or variation by the court.

[10] The trustee is also entitled to be reimbursed for expenses that it incurs on behalf of the estate.

[11] The trustee’s claims for expenses and fees stands as the third ranking preferred claim against the estate under s. 136 (1)(b)(ii) of the BIA. It is significant to note that s. 136(1)(b)(ii) does not distinguish between the claims of a former trustee or the substituted trustee. Both would have a claim at the same rank or priority against the assets of the estate.

[12] The requirement that the substituted trustee pay the former trustee “as soon as funds are available” speaks to cash flow and not priority. The former trustee is to be paid its approved fees as soon as funds are available to do so. But funds cannot be “available” to pay the trustee(s) until priority payments and payments of equal rank have been paid or reserved. Once that is done, then if the trustee has funds available to make a payment to the former trustee, it is required to do so. That is, the former trustee is to be paid as soon as it can be fairly and properly paid in accordance with the scheme of distribution under the BIA. The quid pro quo for the substituted trustee’s cooperation is the promise of the earliest proper payment available.

[13] The former trustee should be paid. But, what would have happened in this case had there been no transition at all? Had Dodick Landau not been replaced, it would have become trustee of seven estates with no assets. It had no indemnity to call upon and it would have had no way to get paid for its work as trustee in bankruptcy. In all likelihood it would have resigned or else it would have had to perform the duties of a no-asset estate trustee pro bono. In either case, it still would not have been paid the amounts owing to it as proposal trustee.

[14] What actually happened was that the secured creditor wanted Farber to do the work of the bankruptcy trustee and authorized or empowered the receiver to pay Farber $80,000 plus HST of $12,000 spread among the seven estates. The $12,000 was remitted to the CRA and then refunded to Farber as trustee. The trustee’s R&Ds show the receipts from the receiver and from HST refunds. Farber disclosed in its initial report that it was being funded by a third party agreement with the secured creditor. After being reminded by Dodick Landau of its duty to do so, Farber disclosed the funding in a footnote to the R&Ds that provides:

As set out in the Trustee’s Preliminary Report: “[The secured creditor] has agreed to pay Farber’s fees and expenses of the Receivership and Farber’s fees and expenses for the basic administration of the bankruptcy estates to the extent that realizations from the assets are insufficient to cover such costs”. The Funds from Receiver Account are funds that would otherwise have been payable to [the secured creditor] that suffered a shortfall on its security and are not from realizations on assets that would otherwise have been available to the estate.

[15] The Office of the Superintendent of Bankruptcy Canada has published Directive No. 19 that became effective September 18, 2009 to deal with remuneration guarantees provided to trustees by third parties. One of the purposes of the directive was to “maintain intact the principle that the trustee is paid from the estate.” Therefore payments are required to be reported by the trustee in its R&D. However, s. 9 (1) of Directive No. 19 expressly recognizes that as long as they are properly disclosed, “Third-party deposits and guarantees are not estate funds.”

[16] Here, the receiver paid Farber $80,000 precisely because the bankruptcy estates did not have sufficient or any funds available. But, on paying the trustee $80,000, the receiver caused the estate to receive a $12,000 HST refund. Arguably those funds are indeed funds of the estate. But they are not nearly enough to pay the fees and disbursements of either trustee let alone both of them.

[17] In Jenny Lind Candy Shops, Ltd., Re, 1942 CarswellOnt 82, the court held that an interim receiver’s expenses should be paid before the trustee’s expenses. Where there was insufficient funds however, the expenses and fees were to be allocated as between them. In O’Doherty, Re, 1995 CarswellNB 19, the Registrar held that if he was unable to fairly allocate the fees and expenses based upon the work performed, he was left to make a fair division of the funds on hand irrespective of third party guarantees. But in that case there were some funds available albeit insufficient funds to pay the aggregate fees and expenses of both trustees.

[18] Section 39 (4) of the BIA provides for the allocation of remuneration among successive trustees as follows:

(ii) Successive trustees (4) In the case of two or more trustees acting in succession, the remuneration shall be apportioned between the trustees in accordance with the services rendered by each, and in the absence of agreement between the trustees the court shall determine the amount payable to each.

[19] It is not clear that this section has any application where each trustee has performed discrete and identifiable roles without overlapping as in this case. Moreover nothing in s. 39 (4) speaks to the issue of a shortfall in available funds.

[20] In Houlden and Morawetz Bankruptcy and Insolvency Analysis, WestlawNEXT.Canada, at C§113, the authors synthesize the various applicable sections and conclude as follows:

Section 36(2)(e) provides that a substituted trustee shall, as soon as funds are available, pay to the former trustee its remuneration and disbursements as approved by the court. This payment is subject to the provisions of s. 39(4) that in the case of two or more trustees acting in succession, the remuneration is to be apportioned between them in accordance with the services rendered by each and in the absence of agreement, the court shall determine the amount payable to each. In the ordinary case, where one trustee is substituted for another the former trustee will immediately tax its accounts (s. 36(1)) and it is only if there are not sufficient assets to pay the fees of both trustees that an application to court will be necessary. In the case where a trustee dies or is incapacitated, the court failing agreement, will be asked to apportion the fees under s. 39(4).

Where there are insufficient assets to pay both trustees, the court will divide the amount available between the two trustees in such proportion as the court feels is fit having regard to the circumstances: Re Bourassa (1923), 4 C.B.R. 136 (Que. S.C.); Re Jenny Lind Candy Shops Ltd. (1942), 23 C.B.R. 339 (Ont. H.C). [Emphasis added.]

[21] Dodick Landau also points to the former language of the predecessor to s. 36 (2) (e) that was applicable when Jenny Lind Candy Shops was decided. It provided that the new trustee was required to pay remuneration to the removed trustee “out of the funds of the estate.” As the quoted words have now been removed, Dodick Landau argues that the funds referred to in s. 36 (2) (e) do not have to be funds in the estate. Therefore, it says, the obligation to pay Dodick Landau would apply to the funds received by Farber from the secured creditor. However, the old statutory language also did not use the word “available.” In no sense can the secured creditor’s funds be seen to be available to Dodick Landau. It has no right to demand payment from the secured creditor. Moreover, the receiver’s payment to Farber under its indemnity is not available to the estate generally to use to pay Dodick Landau. No payments were made to ranking creditors or to Farbers by the estates. There were no funds available to do so.

[22] Whether I have a discretion to do what is fair with the $12,000 that is in the estate or if I am to allocate it based on the relative work performed by the trustees, it is clear that 100% of it was derived from the payment to Farber from the receiver in relation to its fees as trustee in bankruptcy. The work performed by Dodick Landau in the failed proposals had nothing to do with these funds. In my view it would not be fair to Farber or to the secured creditor to allocate any portion of the funds to Dodick Landau even if I am entitled to do so.

[23] Finally, I wish to note that this situation is most unfortunate. Its fees have been taxed and therefore it has been found to have earned its just remuneration. I will not be the first judge to remind insolvency professionals of the risk that they take when they accept assignments for insolvent companies without obtaining security for their fees. Even in estates where problems may appear to be soluble, untoward events happen. Insolvency professionals are purely voluntary creditors. They have the means and wherewithal to protect themselves. If they choose to accept a naked, unsecured retainer, they do so knowingly and at their own risk.

[24] Order to go: a. approving the trustee’s activities as outlined in its fourth report and its supplementary fourth report; b. approving the R&Ds in each of the seven bankruptcies; and c. discharging the trustee.

[25] On consent of Farber, no funds will be paid to it until all amounts due to 2124915 Ontario Inc. are paid pursuant to the decision of the Court of Appeal dated June 3, 2016.

F.L. Myers J. Date: January 19, 2017