Can costs be awarded personally against a trustee?
Adrenaline Drive Inc. (“Adrenaline”) is a creditor of the Debtor. Adrenaline previously challenged the Trustee’s acceptance of the proof of claim filed in the proposal proceedings by another creditor, WB Heartland Restaurant Inc. (“Heartland”), in the amount of $1.6 million. The Trustee strongly opposed Adrenaline’s application, and made submissions in support of Heartland’s claim being allowed in the asserted amount. The Court allowed the appeal and reduced Heartland’s claim to $809,382. (Click HERE for our coverage of that case).
Adrenaline sought costs of the application against the Debtor, Heartland and the Trustee. There was no dispute that Adrenaline should be awarded its costs for the application; the dispute only concerned the matter of who should pay those costs, and on what scale.
The Trustee did not oppose the costs award being made against it, but argued that it should be made only in its capacity as proposal trustee. However, in this case, it was clear that the proposal trustee would likely have no assets available to it with which to satisfy that costs award. As such, Adrenaline sought costs against the Trustee personally.
Section 197 of the Bankruptcy and Insolvency Act (“BIA”) provides that courts have wide discretion to award costs and to decide the scale. Section 197(3) makes it clear that a trustee will not normally be personally liable for costs of an application in a proceeding, even when that application is brought directly against the trustee. This is in recognition of the fact that a trustee has a statutory role in performing its duties under the BIA, and it should not risk its own assets in fulfilling that role. Costs will only be awarded against a trustee in limited circumstances—where the trustee conducts itself improperly, contrary to its duties under the BIA.
In this case, the Trustee did not properly carry out its duty under the BIA to perform an independent assessment of Heartland’s claim. If a trustee abdicates or improperly delegates its mandatory statutory duty to review claims and value unliquidated or contingent claims in favour of another entity with other motivations, the statutory objectives and purposes of the BIA proposal process will not have been served.
Additionally, the Trustee did not participate in the appeal in a neutral manner, which would have involved assisting the Court by explaining the process by which the Trustee assessed Heartland’s claim. Rather, the Trustee took an adversarial approach, arguing the positions of both Heartland and the Debtor, when both were able to oppose the appeal independently. The overall tone of the Trustee’s submissions was critical of Adrenaline’s general approach to the proposal and its opposition to it. The Trustee appeared to have abandoned any impartial attitude towards Adrenaline, in favour of the Debtor.
A trustee should not be able to hide behind the normal costs protections under s. 197(3) of the BIA so as to effectively deny any costs recovery to a creditor. In this case, there would be no point in awarding costs solely against the Debtor and Heartland, because the Debtor has no assets and Heartland was only recently revived. The only party against which a costs award would be meaningful was the Trustee. The Court sought to prevent any further expense on the part of Adrenaline in attempting to recover its costs against Heartland and the Debtor, and ordered costs against the Trustee personally.
As for the scale of costs, s. 197(2) of the BIA allows courts to award special costs in various circumstances, ranging from scandalous or outrageous conduct to milder forms of misconduct worthy of rebuke. The single standard is whether the misconduct is reprehensible. There was sufficient basis here upon which to conclude that the Trustee’s actions were deserving of rebuke, namely the fact that the Trustee abandoned its neutral role in the proceedings and failed to properly assess Heartland’s claims. Adrenaline’s application could have been avoided if the Trustee had properly performed its independent and impartial role in the first place. As such, special costs were warranted.
Counsel: William Roberts of Lawson Lundell LLP for Grant Thornton Limited, Trustee in the Proposal of Asian Concepts Franchising Corporation and Jeremy Hockin and Heather Frydenlund of Parlee McLaws LLP for Adrenaline Drive Inc.