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Naghshbandi et al. (Court File No. BK-22-02805050-0031)

Can counsel for the petitioning creditor also represent the trustee in examinations?

The Bankrupt made an assignment into bankruptcy in February 2022, following an unsuccessful appeal of a judgment in excess of $1 million. A trustee was appointed over the estate of the bankrupt. The Bankrupt and his former spouse were examined under s. 163(1) of the Bankruptcy and Insolvency Act, which was conducted at the judgment creditor’s expense with the Trustee’s consent. Counsel representing the Trustee on the examinations was also counsel for the judgment creditor. Both the Bankrupt and his spouse were represented by counsel, and did not object to proceeding with the examinations on the ground that examining counsel was also counsel for the judgment creditor.

In July 2022, the Bankrupt sought an order (i) declaring that the judgment creditor and his legal counsel were not entitled to have access to the responses to the undertakings, under advisements and refusals given at the examinations of the Bankrupt and his spouse, and any other subsequent examinations in the proceedings, except with leave of the court; and (ii) removing the Trustee and appointing another trustee. They argued that the examinations were improper because they were not conducted by the Trustee, but by the judgment creditor, and under s. 163(2) of the BIA, leave of the court is required for a creditor to conduct such an examination. By not seeking leave, the judgment creditor usurped the court’s gatekeeping and oversight functions.

First, the evidence was that the Trustee authorized counsel for the judgment creditor to represent the Trustee and act as its counsel on the examinations. The moving parties failed to show that the Trustee acted improperly in giving such authorization.

Second, section 163(3) of the BIA provides that “[t]he evidence of any person examined under this section shall, if transcribed, be filed in the court and may be read in any proceedings before the court under this Act to which the person examined is a party.” Where undertakings are given or questions refused are ordered to be answered, the examining party is entitled to have the answers given by the witness under oath and at follow-up examination, and to ask proper questions arising from the answers. Here, the Court found that the impugned answers were answers that the examining party would be entitled to have transcribed and, if transcribed, the BIA mandated that the evidence be filed with the court.

Third, the Court considered whether it had jurisdiction to relieve against the requirement in s. 163(3). The moving parties did not seek a sealing order, and instead, sought an order suspending the requirement to file the transcript if the Court was satisfied that it would be proper to grant injunctive relief. The Court held that it did not have discretion to relieve against the mandatory requirement in s. 163(3), other than by granting a sealing order.

A person seeking a sealing order must establish three prerequisites to justify an exception to the open court principle:

  1. court openness poses a serious risk to an important public interest;
  2. the order sought is necessary to prevent this serious risk to the identified interest because reasonably alternative measures will not prevent this risk; and
  3. as a matter of proportionality, the benefits of the order outweigh its negative effects.

The Court found that the moving parties had not shown that the dismissal of their motion posed a serious risk to an important public interest. If the moving parties had requested a sealing order, the Court would not grant one on the evidentiary record in this case.

Finally, the Court considered the moving parties’ request for injunctive relief. The moving parties argued that if additional personal information were provided through answers to the questions asked on the examinations, the judgment creditor could misuse the information to harass the moving parties and potentially cause financial and personal harm to them. The onus was on them to show that there was a serious question to be tried with respect to whether the judgment creditor had threatened them in the past and was likely to do so if given access to the answers. The one text that he sent, which was the sole evidence tendered by the moving parties, contained aggressive and disparaging language, but did not include a threat of injury. It fell short of evidence that is needed to justify the extraordinary injunctive relief requested.

The Court dismissed the motion.

Judge: Cavanagh, J.

Counsel: Arash Jazayeri of Rogerson Law Group for the Bankrupt and his former spouse; James S. Quigley and Sean N. Zeitz of LZW Law for A. Farber & Partners Inc. as Trustee and the petitioning creditor

Fullcase: https://mcusercontent.com/a3e2039936cbf8a31bda45ab3/files/25dbb3c0-d868-1039-5794-aac92757794d/Counsel_Slip_NAGHSHBANDI_et_al_2_2_1_.pdf

By Matilda Lici