Re Lucio Anthony Ferro

CITATION: Re Lucio Anthony Ferro, 2017 ONSC 6149
COURT FILE NO.: 32-1970339
DATE: 20171016

ONTARIO SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST – IN BANKRUPTCY)

IN THE MATTER OF THE BANKRUPTCY OF LUCIO ANTHONY FERRO OF THE CITY OF HAMILTON, IN THE PROVINCE OF ONTARIO

BEFORE: F.L. Myers J.

COUNSEL:
Kelli Preston and Sara Mosader counsel for Ellen Helden and Christine Helden
David J. Jackson, counsel for the A. Farber & Partners Inc., Replacement Trustee

HEARD: October 12, 2017

ENDORSEMENT

The Motion and Outcome

[1] A. Farber & Partners Inc. is the replacement trustee in bankruptcy of the estate of Lucio Anthony Ferro. Mr. Ferro was a lawyer who carried on a sole proprietorship that employed a number of lawyers. Mr. Ferro declared bankruptcy on March 12, 2015. He passed away just three months later.

[2] The inspectors of the bankrupt estate replaced the initial trustee with A. Farber. Unless I mention A. Farber by name, all references to the trustee in this endorsement are references to the initial trustee.

[3] Ellen Helden was the spouse of Mr. Ferro. Christine Helden is their daughter.

[4] Although she is not a lawyer, Ellen Helden was involved in Mr. Ferro’s law firm. The precise degree of her involvement is in issue between the parties. Apparently, the sole proprietorship firm continued to operate after the bankruptcy of the proprietor. The trustee seemingly did not take possession of the business or even the bankrupt’s accounts and receivables. There are allegations that Ms. Helden received significant compensation from the firm after Mr. Ferro’s death. Those issues are not before me

[5] There is always pressure on trustees to keep their fees down. The pressure can come from bankrupt debtors and their creditors alike. There is also pressure on fees from the competitive market place, the oversight of fees provided by the Office of the Superintendent of Bankruptcy, and the Court. To keep fees in check, trustees may make proper judgments to forgo spending time on tasks that are not perceived to be likely to yield fruitful recovery. Often only the low hanging fruit is harvested while more complex, unripe sources of realization are left on the vine. While one generally cannot criticize the exercise of bona fide business judgment by trustees, the pressure to keep fees low can also result in corners being cut. Trustees are Officers of the Court and front line representatives of the bankruptcy system. As discussed below, they are expected to operate on a high moral plane. They face tension between the need to operate with proportionality and efficiency on the one hand, and the legal and ethical requirements to cross every “t” and dot every “i” on the other. Trustees must recognize that if they choose to forgo expected activities, they can be leaving themselves open to criticism and perhaps attack. At minimum, a trustee should leave a complete paper trail to facilitate transparency and accountability. If nothing else, careful recordkeeping is prudent defensive practice.

[6] Would that the trustee in this matter had kept full records, this proceeding would likely have been avoided.

[7] The legal issue on this motion is quite narrow and straightforward. The complication is that the Heldens claim that they suffered loss and they are looking for sources of recovery. They are trying to implicate the trustee. They do not so much oppose the relief sought as they want to ensure that they remain able to make claims against the estate and the trustee despite any relief to which A. Farber may be entitled on this motion. The personal assets of Officers of the Court are generally not legitimate sources of realization for creditors in an insolvency proceeding. While bringing claims against trustees and other Officers of the Court is never simple or particularly desirable, the merits of any possible claim against the trustee are not before me. Nothing that I write below is intended to address the question of whether the Heldens, the creditors of Mr. Ferro, or A. Farber as trustee, have claims against the initial trustee.

[8] For the reasons that follow, A. Farber, on behalf of the bankrupt estate, owns, free and clear, the furniture and equipment that was the subject of the three equipment leases between National Leasing Group Inc. and the bankrupt. All that is sought at this time is confirmation that A. Farber has sufficient title so that it is free to realize on the equipment and furniture. It does and it is.

The Facts

[9] The bankrupt had life insurance policies with Manulife. He named the Heldens as the beneficiaries under the life insurance policies.

[10] In November, 2008, Mr. Ferro leased office equipment and furniture from National. As is usually the case, the leasing transaction, in substance, provided financing for the purchase of the equipment and furniture. As a result, under the terms of the financing lease, the bankrupt could acquire title to the leased property once he paid all lease payments through to the end of the lease term.

[11] As security for his obligations under the lease, Mr. Ferro granted National a collateral assignment of his Manulife life insurance policies limited to a maximum of $188,519.20.

[12] Mr. Ferro paid all “rent” required for the full term of the first lease. When the lease ended, the equipment that Mr. Ferro financed became his free and clear. This occurred prior to Mr. Ferro’s bankruptcy and death.

[13] In January 2013, Mr. Ferro bought further equipment. He financed this purchase by way of way of a new lease from National that the parties refer to as the “second lease.” Ellen Helden produced on this motion a collateral assignment from Mr. Ferro in favour of National of the proceeds of a different insurance policy issued by Co-Operators. The Heldens produced only the one document of this transaction. There is nothing in evidence positively confirming that Mr. Ferro had insurance with Co-Operators, that Co-Operators recognized the assignment by amending its endorsement, or that this assignment specifically related to the second lease. As this collateral assignment is dated contemporaneously with the second lease and there is no further Manulife collateral assignment in evidence, it seems a fair inference that Mr. Ferro probably provided the Co-Operator’s collateral assignment to National as security for his obligations under the second lease. But this is not necessarily so. Ellen Helden swears this to be the case but only due to the likely inference due to contemporaneity rather than from any actual knowledge on her part.

[14] There is no evidence as to how Ellen Helden obtained the Co-Operator’s collateral assignment and whether she has access to further documents evidencing the underlying transaction. There is an indication in the evidence that only Christine Helden (rather than both Heldens) was the beneficiary a life insurance policy from Co-Operators. But there is no evidence that National knew of or enforced a collateral assignment of a Co-Operators policy. A. Farber’s counsel chose to refrain from cross-examining the Heldens explaining that he did not need to do so to make out the narrow relief sought. Under the relevant OSB Directive, trustees are supposed to review life insurance policies of the bankrupt to determine whether the bankrupt estate has an interest in them. Had the trustee done so, it might have been able to clarify details of any Co-Operators’ policy and whether the Co-Operator’s collateral assignment produced by the Heldens was indeed security provided by the bankrupt in respect of the second lease.

[15] In March, 2015, the bankrupt bought yet further equipment and furniture. He financed this purchase with a third financing lease with National. In cross-examination A. Farber’s representative confirmed his understanding that for the third lease National required that it be added as a loss payee on an unidentified insurance policy rather than requiring Mr. Ferro to deliver a specific collateral assignment. There is no evidence before the court as to whether Mr. Ferro named National as a loss payee under any policy of insurance.

[16] After Mr. Ferro died, National continued to debit his bank account with monthly lease payments on the second and third lease. The trustee did not investigate whether it should terminate the leases or continue to make payments under them. There is no indication whether the bankrupt had any equity in the used furniture and equipment leased from National as at the date of bankruptcy. I do not understand there to have been a liquidation analysis of the value of the furniture and equipment undertaken to date. The trustee did have some discussions with a lawyer who is occupying Mr. Ferro’s office premises as to possible terms of sale of the equipment and furniture in the event that the trustee is free to sell the assets to her.

[17] In July, 2015, Manulife paid the Heldens a portion of the death benefit to which they were entitled under Mr. Ferro’s Manulife life insurance policies. Manulife held back $188,519.20 pending confirmation of whether the National leases had been paid in full by then. Manulife expressly told the Heldens that before paying the rest of the benefit to them, Manulife required written confirmation that the leases secured by the collateral assignment had been paid in full.

[18] There is no evidence from either Helden as to what they did to try to obtain the release of the collateral assignment from National. If, as they assert, the collateral assignment applied only to the first lease that was long since paid in full, the Heldens could have readily obtained a release or discharge of the security. This was not an issue for the trustee at that time. The contest for the Manulife insurance proceeds was between National and the Heldens. If National was required to provide a discharge of its security to Manulife to free up the insurance proceeds for payment to the Heldens and it refused to do so, the Heldens could have brought a simple application under the PPSA or the Insurance Act to resolve the question quickly. However, there is no evidence that the Heldens did anything to try to obtain a release of the collateral assignment from National so as to obtain payment of the rest of the Manulife insurance benefit.

[19] In January, 2016, the trustee made an inquiry of Manulife to obtain details of the life insurance of the bankrupt and payment details in respect of the payment to the Heldens. Manulife advised the trustee of the details. Manulife also told the trustee that it had requested confirmation of the status of the collateral assignment but that it had not received any information as of that time. It is not clear if Manulife inquired directly to National or if it was waiting for the Heldens to respond to its inquiry from months earlier.

[20] On January 28, 2016, the trustee advised counsel for the Heldens that there is a collateral assignment on the Manulife insurance policies in favour of National for up to $188,000 that is “presently under review by Manulife.” The trustee advised further that a payment by Manulife to National would result in the furniture and equipment vesting in the estate as “after acquired property.” The trustee offered to discuss the issue with counsel for the Heldens.

[21] There is no evidence of the Heldens replying to this communication either.

[22] It is apparent that the trustee did not know or investigate whether the collateral assignment applied only to the first lease and was spent or whether it applied to all three leases. Moreover, it is not clear that National had security against the equipment and furniture itself as opposed to holding only security against the insurance proceeds. The trustee assumed that payment of the collateral assignment would release National’s secured claims against the equipment and furniture. It is not clear to me that National had any such claims or that free and clear title to the furniture and equipment was not already held by the trustee. It is clear that if, as the Heldens assert, the collateral assignment applied only to the first lease, then the equipment and furniture financed under that lease were already assets of the estate since Mr. Ferro had paid that lease in full years earlier. Moreover, if the collateral assignment did not bind the second or third leases, as the Heldens also submit, then on the bankruptcy of the debtor, the leased equipment and furniture also vested in the trustee free and clear of any Manulife security. It is not after-acquired at all in that circumstance.

[23] The trustee engaged in discussions with National and Manulife. According to A. Farber’s answers to undertakings, the trustee kept no notes and has no independent recollection of its discussions or its steps, if any, to satisfy itself as to the existence of security against the leased equipment and furniture.

[24] National delivered a proof of claim to the trustee in February, 2016. On February 10, 2016, the trustee advised National that “Manulife appears to have a collateral assignment in favor [sic] of National Leasing that might pay out the balance of this lease.” By email dated February 10, 2016, the trustee said that it was concerned that National was considering transferring the lease to someone else. Instead, it advised National that if “the lease is paid out via this insurance then the assets vest with the trustee.” The trustee advised National that it had requested “forms from Manulife to facilitate the payout under the policy to National Leasing which would be in the best interest of National leasing also.”

[25] The Heldens argue that without investigating whether National had any rights to the Manulife proceeds or any security over the furniture and equipment at all, the trustee was positively helping facilitate payment of the Manulife insurance proceeds to National that ought to have been paid to them and to which National had no right. They argue that the trustee interfered with their legal rights to receive the insurance proceeds in order to obtain for the estate the release of security over furniture and equipment.

[26] On February 10, 2016, the trustee also sent an email to the Heldens’ lawyer. It advised that it was considering a sale of the equipment but that it had to address the Manulife collateral assignment first. Significantly, the trustee wrote:

I have contacted Manulife and understand that they are working with your client on this claim presently.

[27] It appears then that the Heldens were not only aware of the issue (having been advised previously by both Manulife and the trustee in writing) but they were actively engaged in dealing with Manulife on their own. Once again, the Heldens’ counsel did not respond to the trustee. Neither Helden chose to favour the court with evidence of their involvement in these issues.

[28] On February 23, 2016, Manulife wrote to the trustee advising that it had completed its review of claims under its policies. It sought the trustee’s confirmation that the trustee agreed to the payment by Manulife to National of $188,519 in accordance with the collateral assignment “[a]s per our discussion.” And once again the trustee has no notes or recollection of this discussion. The trustee responded by an email dated February 24, 2016 that provides in part:

We confirm that we are in agreement with the release of $188,519.20 to pay out National Leasing Group Inc.

[29] The Heldens argue that Manulife looked to the trustee to decide the whether National had a valid security interest in the Manulife insurance policies and the trustee confirmed its agreement without performing any due diligence and contrary to the documents that appear to support the contrary outcome. There is no evidence of whether this is the case. Manulife’s email says it completed its own review. No doubt it wanted the trustee to be onside. Any insurer can be expected to seek buy-in to proposed payouts from everyone with a possible interest in order to avoid a subsequent dispute. Whether Manulife also approached the Heldens for sign-off or what involvement they had is not before the court. What Manulife did or did not do internally is also not before the court. The trustee would argue that since the estate had no interest in the insurance proceeds and the trustee believed (rightly or wrongly) that the estate stood to realize value on the leases being paid out, of course it consented to the proposal by Manulife. It assumed that Manulife satisfied itself as a capable insurer would. Whether a trustee was required to have done more than to jump at a prospect of obtaining value such as, for example, obtaining an independent security opinion on National’s collateral assignment before consenting to its enforcement, is not before me today.

[30] I note that there is a further email exchange in March, 2016 in which the Heldens ask for details of the settlement between the trustee and the insurer. Christine Helden asserted in this email string that she is the sole beneficiary whose proceeds were at issue. This might indicate that she believed that payment had been made to National from the Co-Operator’s life insurance policy on which she is the sole beneficiary. In any event, there was confusion between the Heldens and the trustee.

Analysis

[31] The Heldens argue that payment from “their” insurance proceeds gave a windfall to the bankrupt estate. The estate received the leased equipment and furniture by virtue of the leases being paid with the insurance proceeds. Neither the bankrupt nor the estate paid for the leased equipment and furniture in full. The excess paid, being just over $188,000, represents a windfall to the estate. They argue that the rule in Ex. parte James (1874), 9 Ch. App. (L.JJ.) requires the estate to disgorge the windfall to them as a matter of fundamental justice and morality. Alternatively, they argue that it is apparent on a cursory review of the documents that National did not have valid security over the Manulife insurance policies or the equipment and furniture. The trustee committed wrongdoing by assisting Manulife to pay National in order to try benefit the estate at their expense. As such, they have remedies against the estate and the trustee.

[32] The rule in Ex p. James has been described in many different ways. Neutrally stated, it provides that courts administering bankruptcy matters will not take advantage of a legal right where doing so is inconsistent with how an honest person should act. As noted above, as an Officer of the Court, the trustee is expected to operate on a high moral plane. Its job is to be fair. It is not an unscrupulous litigant looking to take advantage of a weak adversary.

[33] The rule in Ex p. James has been referred to as a “prerogative of mercy reposing in the court to alleviate cases of unusual hardship in which a regard to strict legal or equitable rights only would work manifest injustice.” It can be used to nullify a legally proper claim by a trustee if it would be manifestly unfair for the claim to be allowed.

[34] There are limits to the rule. It is for truly exceptional cases only. The law and doctrines of equity are expected to provide the proper outcome in nearly all cases. The rule in Ex p. James has been found to apply in only a handful of cases where the application of the law resulted in an enrichment to a bankrupt estate and left a person suffering an unfair deprivation with no legal or equitable claim for recompense. The rule only prevents a grossly unfair enrichment that exceeds the bounds of honesty and decency. It is important to ensure that the rule in Ex p. James is not used simply to improve the priority of a claim that a creditor already has. It is only available where a creditor has no other legal or equitable remedy. It does not void transactions or restore the status quo ante beyond remedying the enrichment. See: Appleby Estates Ltd., Re, 1984 CarswellOnt 167 (CA); Re McDonald, 1971 CarswellOnt 72 (Ont SC in Bntcy).

[35] It is clear that were the rule in Ex p James to apply, that the Heldens’ claim would not be for the full $188,000 that Manulife paid. The estate was only enriched, if at all, by the value that it obtained to which it would not have been entitled in any event. That is, at most, the realizable value of the used equipment and furniture that the estate did not own before the payment (if any). I do not know what that value is. Looking at the list of used equipment and furniture, it does not appear likely that it is worth nearly that much if much at all. But that is a question for valuation evidence on another day.

[36] I am concerned that there is too much that I do not know. The Heldens have had counsel throughout. They selectively produced a collateral assignment document of a Co-Operators insurance policy but nothing else concerning that policy or the transaction that might have provided the terms of any pledge of that policy in respect of the second lease. Ellen Helden has or had access to Mr. Ferro’s business and files for a significant period. She is adverse to the trustee on a number of different issues. The Heldens have argued a very narrow point under Ex p. James but I have no idea what the outcome would have been had Manulife not paid National. Would Co-Operators have paid on the second lease? Of the $188,000 paid, National claimed over $145,000 on the second lease alone. Would that payment essentially have come from Christine Helden’s pocket in any event? Is there another policy to which National is a named loss payee for the third lease? Who else is the named beneficiary under that policy if it exists? Why did Manulife pay National at all? How did it conclude that National had valid security over the second and third leases? Did it do its own review or did it rely on the trustee as alleged? If it did its own review, what documents does it have that it relied upon? What role did the Heldens play in Manulife’s decision-making? Without much further evidence, I am in no position to assess the fairness of the outcome.

Conclusion

[37] The trustee did not investigate the leases to determine if the estate had equity in the leased property. It seems that it did not disclaim or decide to pay ongoing rent. Rather, by default, it allowed automatic withdrawals from the business accounts by National for no articulated reason. How those accounts remained open and in operation after the date of bankruptcy is not explained. The trustee did not fully investigate the bankrupt’s life insurance situation. It did not review the equipment lessor’s claimed security. It had discussions with Manulife and National that it did not fully document in which, at minimum, it acquiesced in payments being made by Manulife potentially to the prejudice of Ellen and Christine Helden so as to obtain a release of equipment and furniture to the estate for which the bankrupt had not paid in full. The trustee seems to have assumed that National had good security over the equipment and furniture under the second and third leases based on the Manulife insurance policies. I do not know why this is so. It is not clear that even if National held valid collateral assignments in respect of those leases, the assignments gave National rights over the furniture and equipment in addition to its rights against the assigned insurance proceeds. I am not in a position to find what the trustee’s interaction with Manulife and National was or what effect it had, if any.

[38] Neither am I in a position to assess the fairness of the outcome to the Heldens. They laid in the weeds throughout. I am not at all satisfied that they have told the whole story of their involvement with Manulife or disclosed the actual net effect of the Manulife payment to National on them, if any.

[39] A few facts are unchallengeable however. First, with National’s security (if it had any) released after the payment from Manulife, the trustee owns the equipment and furniture free and clear. No one else has made a proprietary claim against it. There is no impediment to the trustee fulfilling its duty to realize on these assets.

[40] Second, if Manulife had a valid collateral assignment as security for the bankrupt’s obligations to pay for the equipment and furniture, then the Heldens have no valid complaint with Manulife’s payment to National. If, as they assert, Manulife did not hold validly perfected security in respect of the equipment leases, then on the bankruptcy of Mr. Ferro, the leased furniture and equipment vested in the trustee on behalf of the estate. The Heldens would then have a basis to complain about the payment by Manulife to National. But I find that in either case, the Heldens have no claim against the equipment and furniture.

[41] Finally, the Heldens are not left without remedies in the event that they have been mistreated. If, by paying National, Manulife failed to fulfil obligations to them, they have remedies against Manulife and National. If the trustee tortiously interfered in their economic interests or if it owed them duties of care, violated those duties, and caused them to suffer damages thereby, they may have a claims against the trustee and the estate. They are not left without legal remedies for the loss that they assert. As such, the rule in Ex. p. James does not apply or assist them.

[42] Counsel for the Heldens argued that in view of the enrichment of the estate at their expense as beneficiaries under the Manulife insurance policy, the trustee cannot have title to the leased equipment and furniture until their entitlement to remedies is determined. I do not think that this follows even if the estate was enriched at their expense. There is no reason why a claim based on an improper interference with their rights under the Manulife insurance policies or breach of duty owed to them by the trustee concerning the administration of the bankrupt estate should affect title to the leased property. The Heldens have not advanced a basis for a proprietary remedy. They did not advance a subrogated secured claim or file a proof of claim on that basis. The court raised the doctrine of subrogation during the hearing. A subrogated claim is premised on Manulife having valid security over the equipment and furniture. That is the opposite of the Heldens’ claims. As noted above, the Heldens do not really want the equipment and furniture in any event. It probably has relatively little realizable value. The Heldens are looking for a way to claim for the $188,000 paid to National. They have no claim against the leased furniture and equipment.

[43] Farber is entitled to the declaration that it seeks. As stated at the outset, I make no findings in respect of claims that are not yet brought.

[44] The fixing of costs is a discretionary decision under section 131 of the Courts of Justice Act. That discretion is generally to be exercised in accordance with the factors listed in Rule 57.01 of the Rules of Civil Procedure. These include the principle of indemnity for the successful party (57.01(1)(0.a)), the expectations of the unsuccessful party (57.01(1)(0.b)), the amount claimed and recovered (57.01(1)(a)), and the complexity of the issues (57.01(1)(c)). Overall, the court is required to consider what is “fair and reasonable” in fixing costs, and is to do so with a view to balancing compensation of the successful party with the goal of fostering access to justice: Boucher v Public Accountants Council (Ontario), 2004 CanLII 14579 (ON CA), (2004), 71 O.R. (3d) 291, at paras 26, 37.

[45] In my view costs should follow the event. Christine and Ellen Helden are therefore jointly and severally liable to pay A. Farber its costs of this motion on a partial indemnity basis fixed in the amount of $20,000 all inclusive.

F.L. Myers J.

Date: October 16, 2017