BDO Canada v. Carrigan-Warner, 2022 NSSC 16

January 19, 2022

Can a trustee’s fees be disallowed on the basis that the trustee failed to protect the interests of creditors?

In February 2019, the Debtors filed assignments in bankruptcy and the Trustee was appointed. Several weeks prior, the Debtors and the Trustee had entered into an agreement whereby the Trustee agreed that the Debtors could repurchase the family home upon payment of certain amounts.

The Trustee valued the Debtors’ home at $240,000, based on a third-party appraisal. The Trustee then deducted the mortgage amount and what it estimated to be the notional costs of disposition (since the home would not actually be sold) and arrived at an equity figure of $18,940.  Each of the Debtors agreed to pay $9,545 to repurchase half of the equity in the home.

Ultimately, the home was sold for a net purchase price of $254,574.42.  After deductions for legal fees, commissions, mortgage payout and other disposition costs, the proceeds available to the vendors on closing were $50,344.58.  Those funds were held in trust pending the hearing of the applications for an order of discharge.

In July 2020, the Trustee filed an affidavit in support of the Debtors’ application for discharge. At the hearing of the applications, the Trustee took the position that, notwithstanding the sale of the home for $14,574.42 more than the Trustee’s original $240,000 valuation, the equity due to be paid by each of the Debtors would be based on the appraisal and mortgage balance as of the date of bankruptcy.  In other words, the Debtors would still only have to pay $9,470 + $75 each to the Trustee for the benefit of their estates.

The Registrar rejected the Trustee’s position and ordered that the entire amount of the surplus be paid into the estates of the Debtors. He also ordered that the Trustee’s accounts in both estates be taxed by the Registrar.

In January 2021, the Trustee filed its statements of receipts and disbursements, and sought to have the fees taxed in accordance with Rule 128 of the Bankruptcy and Insolvency General Rules. In calculating the Trustee’s fees, the Registrar declined to give the Trustee the benefit of the additional equity ordered to be paid into the estates of the Debtors in calculating the trustee’s fees. Rather, he calculated the fees based on the equity figure proposed by the Trustee at the discharge hearing, and consequently wrote down the Trustee’s fees. The Trustee appealed from the decision.

On appeal, the Trustee argued that the Registrar erred in principle when he reduced the Trustee’s fees on the basis that he did not agree with the methodology the Trustee used to calculate the equity owed by the Debtors. The Trustee submitted that its methodology was commercially reasonable, and the Court should have deferred to the Trustee’s decision to require the Debtors to pay the equity amount calculated on a notional basis, notwithstanding the subsequent sale of the property for approximately $15,000 more than the appraised value. The Trustee conceded that the fees of a trustee who fails in his duties under the BIA may not be entitled to full compensation but argued that there was no evidence before the Registrar that would allow him to find that such was the case here.

The appellate court disagreed. The evidence before the Registrar was that the Trustee chose not to apply the Court’s matrix for calculating notional equity, which resulted in the Trustee undervaluing the equity available to creditors by $2,744. If the Trustee had applied the Court’s matrix, each Debtor would have been required to pay 14.5% more to their estates to repurchase the equity in the home. Second, once the property had been sold and its value determined by the free market, the Trustee continued to rely on the notional equity figure, thus failing to pay “fair attention” to the interests of creditors.

Accordingly, the appellate court concluded that there was ample evidence before the Registrar to support his conclusion that the Trustee breached his duties, under the BIA, and his resulting decision to write down the Trustee’s fees. The appeal was dismissed.

Judge: The Honourable Justice John Bodurtha

Counsel: Tim Hill, Q.C., of BOYNECLARK Lawyers for the trustee; Tammy Mary Rose Carrigan-Warner and Dale Patrick Carrigan-Warner, Self-Represented

By Matilda Lici