Challenging a trustee's conduct?

Baigel Corp. (Trustee of Kolenc) v. Di Francesco, 2024 ONSC 5923 
Can an examinee challenge the conduct of an examination under s. 37 of the BIA?

Summary: In this case, the Court considered the scope of a s. 163 examination under the BIA, the trustee’s duties when conducting a s. 163 examination when there’s existing or contemplated litigation, and the applicable principles on a review/appeal of a trustee’s decision as an “aggrieved party” under s. 37 of the BIA. The Court ultimately upheld the trustee’s conduct and awarded costs to the trustee.

The moving parties, Marcello and Gabriela, are spouses. On September 16, 2020, the Trustee was appointed over the Estate of Vesna Kolenc (the “Bankrupt”). In September of 2022, the Trustee commenced three actions involving certain real properties, including one owned by Gabriela. The three actions were not served. Gabriela was not told about, and was not aware of, their existence. Marcello was also not told about the existence of the actions and was not aware that his wife was being sued. The Trustee, for its part, argued that it did not want to precipitously commit to proceeding with the actions, and potentially provoke defences or attract cost consequences to the estate, before more fully investigating the nature and extent of the Bankrupt's interest in the real properties.

On October 12, 2022, the Trustee's lawyer wrote a letter to Marcello advising him that the inspectors of the Bankrupt's estate had directed that Marcello be examined under s. 163 of the BIA "in respect of the business and affairs of the bankrupt". The examination took place on November 30, 2022.

Marcello and Gabriela subsequently sought a declaration under s. 37 of the Bankruptcy and Insolvency Act that they were aggrieved by the s. 163 examination that the Trustee conducted of Marcello (the "s. 163 BIA Examination") and by the Trustee's decision not to disclose to either Marcello or Gabriela that the Trustee had commenced actions against Gabriela in September of 2022 prior to Marcello's s. 163 BIA Examination. Under s. 37 of the BIA, the bankrupt, a creditor or any other person who is aggrieved by any act or decision of a trustee may apply to the court and the court may confirm, reverse or modify the act or decision complained of and make such order as it thinks just. Marcello or Gabriela claimed to be aggrieved because the Trustee conducted an examination of Marcello under s. 163 of the BIA without first disclosing the existence of the pending action.

At issue were the scope of a trustee's discretion and obligations when conducting a s. 163 BIA examination, and the ability of the moving parties to challenge the Trustee's actions or decisions as "aggrieved parties" under s. 37 of the BIA.

Examinations conducted under s. 163 of the BIA are one of the investigative tools available to the trustee to collect information to assist the trustee in performing its duties in administering the bankrupt's estate. The trustee is entitled to investigate contemplated litigation that might involve the property and affairs of the bankrupt. A s. 163 examination is a tool that enables the trustee to do so thoroughly, before expending estate money in court proceedings.

However, as a general rule, a s. 163 BIA examination should not be used as a form of discovery for contemplated litigation. If the Trustee chooses to conduct a s. 163 BIA examination of a witness who is a defendant in a civil proceeding commenced by the Trustee or by the bankrupt, that witness might challenge that decision if they disagree with it and maintain that the Trustee should proceed by way of examination for discovery. The challenge presupposes that the party being examined knows about the existence of the civil action.

In this case, the Trustee was effectively forced to commence the actions against the Bankrupt and the legal title holders of the properties to protect against the potential expiry of a limitation period in respect of any claims regarding the Bankrupt's interest in those properties. The Trustee did what it believed was necessary for that purpose, while it continued to investigate the Bankrupt's interest in the properties that were the subject of the actions. Part of the Trustee's investigation was to conduct the s. 163 BIA Examination of Marcello to determine what information he had about the Bankrupt's interest in the properties. That was the focus of the s. 163 BIA Examination. Marcello's interest in the properties, if any, was unclear based on the evidence available to the Trustee at the time.

The fact that the s. 163 BIA Examination ultimately led to an omnibus action in which Marcello was subsequently named as a defendant did not offend any of the established principles or guidance regarding the conduct of s. 163 BIA examinations. He was properly questioned by the Trustee about his knowledge of the Bankrupt's financial affairs including, but not limited to, her apparent financial contributions to the properties. It was only after the Trustee later discovered evidence that contradicted Marcello’s testimony that the Trustee commenced the fresh omnibus action against him and others.

The Trustee did not have an obligation to disclose to Marcello, who was not a defendant to the actions and who the Trustee did not have the option to examine for discovery, the existence of the actions against Gabriela at the time of his examination. Marcello was identified as someone who might have information about the affairs and property of the Bankrupt. The s. 163 BIA Examination was the only right of examination of Marcello that was available to the Trustee at the time.

Further, neither of the moving parties were aggrieved persons within the meaning of s. 37 of the BIA and had standing to challenge the Trustee's conduct of the s. 163 BIA Examination of Marcello or the Trustee's decision not to disclose the existence of the actions in advance of that examination. An "aggrieved person" is someone who has suffered a legal grievance, a person against whom a decision of the trustee has wrongfully deprived him of something, wrongfully refused him of something, or wrongfully affected his title to something.

Gabriela was not examined and, accordingly, she was not legally aggrieved by the Trustee's s. 163 BIA Examination of Marcello. Marcello was not legally aggrieved because, at the time of his examination, he was compellable under s. 163 of the BIA and had no right to refuse to attend or to be questioned. At that time, Marcello was not a party to any of the actions commenced by the Trustee. Marcello was only "aggrieved" now because the veracity of the evidence he provided under oath on his s. 163 BIA Examination was called into question by subsequent evidence that came to light. The Trustee did not wrongfully deprive Marcello of something, wrongfully refuse him of something, or wrongfully affect his title to something. Nor did the Trustee wrongfully deprive Gabriela of anything, wrongfully refuse her of anything, or wrongfully affect her title to anything.

The motion was dismissed with costs to the Trustee.

Judge: Kimmel J.

Counsel: Ian Klaiman of Spetter Zeitz Klaiman for Baigel Corp. as Bankruptcy Trustee

Melvyn Solmon and Rajiv Joshi of Solmon Rothbart Tourgis Slodovnick for the Defendants Marcello Di Francesco, Gabriela Pierantoni, Gordana Mihailovic and Michael Kolenc

Ranjan Das of BYLD for the Estate of Vesna Kolenc

Gregory Gryguc of Zeppieri & Associates for Ugo Crescenzi, Ugo Crescenzi Consultants Limited and Norcrest Investments Inc.