Hendley (Re), 2016 ABQB 721

Court of Queen’s Bench of Alberta Citation: Hendley (Re), 2016 ABQB 721 Date: 20161219 Docket: BE03 1680494 Registry: Edmonton In the Matter of the Bankruptcy of Norman John Hendley _ ________________________________________ ______________ Reasons for Judgment of S. L. Schulz , Registrar in Bankruptcy _______________________________________________________ [ 1 ] This is an application pursuant to

Section 152 of the Bankruptcy and Insolvency Act (the “ BIA ”) to hear the objection of the Bankrupt to the Trustee’s Statement of Receipts and Disbursements (“SRD”). This is a preliminary decision based on several evidentiary points that arise from the general principles to be applied on a section 152(6) application. I. Facts [ 2 ] Mr.

Hendley, (“the Bankrupt”) was deemed bankrupt on November 13, 2012 as a result of a failed Division 1 Proposal. [ 3 ] The Trustee administered the Estate and then filed and served a Notice of Intention to Pay a Final Dividend in accordance with the procedure set out in section 152(5) of the BIA . [ 4 ] The Bankrupt filed a Notice of Objection pursuant to section 152(6) of the BIA , noting the following objections: (

i) The fees and expenses charged by the Trustee are disproportionate to the amount of work done by the Trustee; (ii) The Trustee has failed to provide adequate proof to the Bankrupt or his counsel of the Trustee’s efforts; (iii) The Trustee has set its fees and costs in an amount exactly equivalent to the surplus in this Estate without reason or justification; (iv) Such further and other reasons as counsel may advise. II. General Principles [ 5 ] The following general principles have been assembled from the BIA and case law as noted: 1. The process to be followed is set out in

section 152 of the BIA . [ 6 ]

Section 152 of the BIA sets out the process for a trustee to put forward his SRD, and the process for a Bankrupt, among

others, to object: 152 (1)...

(2) Prescribed form - The statement [SRD] referred to in subsection (1) shall be prepared in the prescribed form or as near thereto as the circumstances of the case will permit and together with the dividend sheet shall be submitted to the inspectors for their approval.

(3) Copy to Superintendent - The trustee shall forward a copy of the statement and dividend sheet [SRD] to the Superintendent after they have been approved by the inspectors.

(4) Superintendent may comment - The Superintendent may comment as he sees fit and his comments shall be placed by the trustee before the taxing officer for his consideration on the taxation of the trustee’s accounts.

(5) Notice of final dividend, etc. - After the Superintendent has commented on the taxation of the trustee’s accounts or advised the trustee that the Superintendent has no comments to make and the trustee’s accounts have been taxed, the trustee shall send, in the prescribed manner, to every creditor whose claim has been proved, to the registrar, to the Superintendent and to the bankrupt (

a) a copy of the final statement of receipts and disbursements; (

b) a copy of the dividend sheet; and (

c) a notice, in the prescribed form, of the trustee’s intention to pay a final dividend after the expiry of 15 days from the sending of the notice, statement and dividend sheet and to apply to the court for his or her discharge on a subsequent date that is not less than 30 days after the payment of the dividend.

(6) Objections - No interested person is entitled to object to the final statement and the dividend sheet unless, prior to the expiration of the fifteen days referred to in paragraph (5)(c), that person files notice of his objection with the registrar setting out his reasons therefor and serves a copy of the notice on the trustee. 2. The starting point for the assessment of the remuneration of the Trustee is

section 39 of the BIA as interpreted by the case law. [ 7 ] Section 39(2) and (5) of the BIA establishes a base remuneration which may be increased or decreased by the Court: 39(2) Where the remuneration of the trustee has not been fixed under subsection (1) the trustee may insert in his final statement and retain as his remuneration, subject to increase or reduction as hereinafter provided, a sum not exceeding seven and one-half per cent of the amount remaining out of the realization of the property of the debtor after the claims of the secured creditors have been paid or satisfied. ...

(5) On application by the trustee, a creditor or the debtor and on notice to such parties as the court may direct, the court may make an order increasing or reducing the remuneration. [ 8 ] The case law has interpreted the seven and one-half percent threshold as being inadequate unless the estate is easily administered: [14] ...Generally the Ontario courts have approved remuneration well over the 7.5% threshold unless the estate is simple and easily administered...There is general recognition that the statutory rates for remuneration of trustees, 7.5% of assets distributable to creditors after secured creditors have been paid, is inadequate given the increased complexity in administration of estates and the statutory and quasi-statutory responsibilities placed on trustees.

This rate was legislated in 1950... Re: Bennett , [2013] ONSC 1433 at para 14 (“ Bennett ”) [ 9 ] The Registrar has a wide discretion to set the appropriate amount of a trustee’s fees, including reducing the trustee’s fees for specific acts of misconduct that cost the estate quantifiable amounts ( Murphy v Sally Creek Environmental Corporation , 2010 ONCA 312 at para 11 ). 3. Trustee remuneration must take into account the objects of the taxation. [ 10 ] The Ontario High Court in Re: Hess (1977), 23 CBR 215 (Ont.) (“ Hess ”) sets out the objects of the taxation process at page 218:

(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 creditorsand, so far as the public is concerned, in the interests of the proper carrying-out of the principles and objectives of the Bankruptcy Act. Inthis respect, it should be borne in mind that the labourer is worthy of his hire. The creditors and the public are entitled to the best servicesfrom professional trustees and must expect to pay for them. 4. The opinions of the creditors or inspectors should be givenconsiderable weight. [11] Hess at page 219, point 3, explains:

(3) With this in mind, the court should take into account the views of the creditors or the inspectors if they are expressed. Considerableweight should be given to their approval or disapproval.

It must be borne in mind that the inspectors are the persons representing thecreditors who are in a strong position to judge, from their day-to-day supervision, whether the work done and the results achieved meritthe compensation claimed; moreover, the inspectors are frequently creditors whose interests are directly affected by the fee charged bythe trustee; in any event, it is not to be assumed that their approval is given lightly. 5. There are a number of charges that should be disallowedprima facie: [12] Hess at page 219, point 4, gives a non-exhaustive list of charges that prima facie should be disallowed: (

a) Services not authorized by law; (

b) Irresponsible decisions producing no positive results; (

c) Conduct contrary to the instructions of the creditors or inspectors, or the court; (

d) Patent attempts to take advantage of the estate by performing unproductive or unnecessary services not authorized by the inspectors; (

e) Over-charging for routine services; (

f) Charging for services not clearly performed; (

g) Charging at an excessive rate for professional services; (

h) Errors of judgment, not based on the consent of the inspectors; (

i) Any matter not required by law to be done that adversely affects the interests of the creditors and not approved by the creditors orthe inspectors. 6.

Fees for clerical, secretarial and support staff should beallowed or disallowed based on evidence establishing thestandard billing practice of the insolvency practitioner andwhether the services were reasonably necessary having regardto the amount involved. [13] The principle determining whether the work done by the secretarial and clerical staff of the trustee has been dealt with inconflicting ways in other provinces (See Bennett at paragraph 20 where fees for clerical staff were found to be part of overhead and notallowed as a separate disbursement; Peat, Marwick Ltd v Farmstart Ltd v Carlson (1980), 35 CBR (NS)312 (Sask QB) where fees forclerical staff were part of overhead and not allowed as a separate disbursement; Bank of Montreal v Nican Trading Co (1990), (BC CA), 78 CBR (NS)85 at para 93 (BCCA) where clerical charges were properly billed separately. [14] The issue has been clarified in Alberta.

In Northland Bank v GIC Industries Ltd (1986), (AB KB), 60CBR (NS) 217 (“Northland”) at para 30, Referee Funduk commented that the exclusion of separate billing for clerical or support staffrested on the erroneous presumption that receivers used the same standard billing format as lawyers, not the standard billing format usedby chartered accountants who bill out support staff separately.

Referee Funduk concluded that the two operations are not the same andthe inquiry should focus on the standard billing format and practice of the profession in question. [15] This principle was further clarified by Justice Topolniski in Winalta Inc. (Re), 2011 ABQB 399 (“Winalta”) at para 40 whereshe held the standard billing practice should be based on the Monitor’s (Trustee’

s) own specialized profession, being that of theinsolvency practitioner.

[16] The sufficiency of the evidence required and the standard that must be satisfied were addressed in Columbia Trust Companyv Coopers & Lybrand Ltd (1986), 1986 ABCA 225 , 76 AR 303 (CA) (“Columbia Trust”) at para 8, where Justice Stevenson ofthe Court of Appeal of Alberta preferring to send the matter back for the application of the proper principles rather than making anarbitrary award: ...the propriety of charges for secretarial and accounting services must be reviewed to determine if they are properly an “overhead”component that should be or was included or absorbed within the hourly fee charged by some of the professionals who renderedservices.

The Court, moreover, must be satisfied that the services were reasonably necessary having regard to the amount involved. [17] Accordingly, I conclude that the applicable principle is that separate billing for clerical and secretarial/support staff dependsupon the evidence before the Court of the standard billing practice of the insolvency practitioner and whether the services werereasonably necessary having regard to the amount involved. 7.

The onus is on the Trustee to prove that the fees are fairand reasonable in all of the circumstances, including successfulperformance. [18] The Ontario Supreme Court of Justice in Bennett at paragraph 15 held that the burden is on the Trustee to prove that theexpenses incurred resulted from sound judgment and were reasonably necessary to satisfy the Trustee’s duties. Hess at page 219, point 5,elaborates as follows:

(5) In more positive terms, as I see it, in relation to the overall objectives of the Act, the trustee should, in the absence of compellingreasons to the contrary, be permitted to charge as fees: (

a) For the time he has spent in the administration of the estate, at the going or a reasonable rate of remuneration; this first and foremostshould be the basis of his claim; (

b) For obtaining a positive result, in getting in or saving assets for distribution to creditors; this might be termed successfulperformance. [19] Referee Funduk refused to make a minute examination of a receiver’s account in Northland Bank v GIC Industries Ltd.(1986), (AB KB), 60 CBR (NS) 217(“Northland”) stating at paragraph 35 that “parties should not expect to get theservices of a chartered accountant at a cheap rate”. Similarly, in Winalta at para 27 and 29, Justice Topolniski referenced Northlandabove and Hess at paragraph 11: “...it should be borne in mind that the labourer is worthy of his hire.

The creditors and the public areentitled to the best services from professional trustees and must expect to pay for them.” [20] Justice Topolniski further expresses the view that the appropriate focus to approve a CCAA monitor’s fees is no different thanthat in a receivership or bankruptcy. There is no presumption of “regularity”. The question is whether the fees are fair and reasonable inall of the circumstances. This involves balancing fair compensation with safeguarding the efficiency and integrity of the process, with theevidence adduced being of import in the making of those determinations.

The onus is on the monitor, in this case the Trustee, to makeout its case. Bald assertions that a fee is reasonable (or not reasonable) do not make it so. The monitor or Trustee must provide evidencethat allows the Court to assess what is fair and reasonable in the circumstances (See Winalta at para 30-32). [21] The comments and approach of Justice Topolniski in Winalta are informative and persuasive in this matter, as are those ofJustice Stevenson in Columbia Trust.

Summary of Principles [22] The principles can be summarized as follows: 1. The process to be followed is set out in

section 152 of the BIA. 2. The starting point for the assessment of the remuneration of the Trustee is

section 39 of the BIA as interpreted by the case law. 3. Trustee remuneration must take into account the objects of the taxation. 4. The opinions of the creditors or inspectors should be given considerable weight. 5. There are a number of charges that should be disallowed prima facie. 6. Fees for clerical, secretarial and support staff should be allowed or disallowed based on evidence establishing the standard billingpractice of the insolvency practitioner and whether the services were reasonably necessary having regard to the amount involved. 7. The onus is on the Trustee to prove that the fees are fair and reasonable in all of the circumstances, including successfulperformance.

III. Preliminary Evidentiary Issues [ 23 ] Several preliminary evidentiary issues arise as a result of these principles and the voluminous brief by the Trustee who is not a lawyer. The evidentiary issues have also arisen because of the acrimony between the Bankrupt and the Trustee, which culminated in a Procedural Order granted by Registrar Smart on June 23, 2016 which limited the ability of the Trustee to file additional evidence. Registrar Smart quite properly set out timelines on both parties to facilitate the hearing of this matter on the scheduled date.

Having now heard oral submissions and having reviewed the written submissions, it is clear that there are issues with the evidence that must be addressed in order to finalize this matter. To the extent that this decision varies Registrar Smart’s Order, I do so with these reasons. Tab P, Trustee’s Brief [ 24 ] It was agreed at the hearing of this matter that the submission included under Tab P is to be treated as a footnote or a commentary forming part of the written brief. It is not in affidavit form and is not considered to be evidence.

Tab F, Trustee’s Brief [ 25 ] The Affidavit of Darren Crocker sworn on October 22, 2015 found under Tab F of the Trustee’s Brief is an affidavit filed in another action. It is not properly evidence in this action and will not be considered as such. It will not be considered as evidence of the proper rates to be charged by a Trustee or administrative staff. It is stricken from the record. Status of Reports [ 26 ] At issue is the status of the

section 170 Reports and the documents submitted to the Court pursuant to section 152(5) of the BIA when the matter becomes a contested application pursuant to section 152(6) . [ 27 ] The BIA mandates a format for the

Section 170 Reports and the reports provided pursuant to section 152(5). This mandated format includes full particulars and the reasons why certain actions have been taken. Counsel for the Bankrupt expresses a concern over the lengthy explanatory footnotes to the SRD and takes the position that the explanatory footnotes are not in evidence but rather are part of the commentary or brief of the Trustee. [ 28 ] Counsel for the Trustee reminds the Court that these forms are routinely relied upon by the Court in the normal course of the administration of an estate and are therefore to be considered evidence.

However, this is a contested matter. The voluminous information in the footnotes and the information in the

section 170 Reports go to the heart of the contested matter and should be in the form of a sworn affidavit if the Court is to give them any weight as evidence. The Bankrupt is then in a position to cross-examine on the affidavit and test the evidence. If the information is not in an affidavit, it is merely a submission to the Court. [ 29 ] I direct the Trustee to file an affidavit in accordance with the timelines set out at the conclusion of this decision. The affidavit should attest to the matters set out in in the footnotes to the SRD and any relevant matters contained in the

section 170 report if the Trustee wishes that information to be considered as evidence. If he does not wish to file an affidavit, then he should advise counsel for the Bankrupt and the Court accordingly. Quantum of Remuneration [ 30 ] The evidence before the Court is lacking.

Despite the extensive brief and materials filed by the Trustee himself, the evidence is lacking with respect to the industry standard for fees for services charged, whether or not it is the industry standard to charge out administrative and managerial services as a separate charge, and whether the rates charged by the Trustee were its standard fees or reduced fees. There is no evidence of the experience and level of seniority of the people, including the Trustee. There is no explanation of the alleged duplication of the work by the manager and the Trustee.

For example, there is no evidence to explain why both the Trustee and the manager were required to attend Court. Furthermore, there must be evidence that the amounts charged are fair and reasonable in light of all of the circumstances, including when there was limited or no success as a result of the step.

That evidence may be contained in footnotes to the Reports filed by the Trustee, but as discussed earlier, these footnotes are not properly in evidence before me. [ 31 ] In addition to the foregoing, the Trustee submitted the following documentation which should be in the form of an affidavit for the Court to rely on it: BIA forms 11 and 12; Minutes of the Inspector’s meeting approving the Trustee’s fees; Minutes of the meetings of the inspectors authorizing or approving the steps taken by the Trustee; and the Positive Comment Letter from the OSB. [ 32 ] The comments and process endorsed by Justice Topolniski in Winalta , and the comments and process endorsed by Justice Stevenson in Columbia Trust , are instructive with respect to the process to be followed.

It would be unduly harsh to outright refuse compensation to the Trustee. In an application of this nature, and with the allegations that are being raised, it is important the information come before the Court in the form of affidavit evidence. IV. Conclusion [ 33 ] Should the Trustee wish the Court to have the missing evidence before it when considering this matter, the Trustee must cause to be filed and served an affidavit putting into evidence the missing evidence and documentation within 60 days of the date of this

decision. Should Counsel for the Bankrupt choose to cross-examine on the affidavit, that cross-examination will take place within 60 days of being served with the affidavit. The transcript from the cross-examination must be filed with the Court within 30 days of the completion of the cross-examination. [ 34 ] Counsel for the Trustee may choose not to file an affidavit. If that is his choice, I direct him to advise Counsel for the Bankrupt and the Court within 30 days of the date of this decision.

I will then proceed to review the SRD based on the evidence currently before the Court. [ 35 ] If any of these deadlines cannot be met, counsel are at liberty to contact me in writing to seek further direction. [ 36 ] It is apparent from a review of the file and from the court applications themselves, that the Trustee and the Bankrupt have had a turbulent relationship. This file has been a battle between them since the beginning and continues to be a battle fuelled by severe frustration on both sides. The parties have been unable to set aside these problems and deal with the matter in a calm, professional manner.

Given that the matter is still not fully resolved, I trust that the parties, with the help of their counsel, will reflect on how best to move this matter forward to a conclusion. Dated at the City of Edmonton, Alberta this 19 th day of December, 2016. S. L. Schulz Registrar in Bankruptcy Appearances: Darren Bieganek, QC Duncan & Craig for the Bankrupt, Hendley Brian Summers Dentons Canada for the Trustee, Moses Advisory Group Inc.