Claiming solicitor-client costs against the OSB

Overview: In this case, a trustee in bankruptcy successfully appealed from a Registrar’s decision taxing down the trustee’s fees and sought solicitor-client-level costs of the appeal from the OSB, arguing bad faith and improper purpose. The Court refused to award any costs against the OSB, finding that the OSB is an administrative official whose duties include examining and commenting on the trustee’s accounts set out in the final statement of receipts and disbursements for the purposes of aiding Registrars in the taxation process. In so commenting and participating, the OSB was exercising its statutory function to supervise the administration of all estates and matters to which the BIA applies and discharging its statutory duty. Costs against the OSB will not be awarded unless their conduct is shown to be egregious or in bad faith. Here, the Court found no bad faith or improper purpose.

At the outset of the proceedings, the Trustee concluded that neither insolvent person (then spouses) could make a viable proposal, and they were assigned into bankruptcy. When the trustee objected to their discharges, it did not cite the “viable proposals possible” ground. On review of the trustee’s final statement of receipts and disbursements, the Superintendent of Bankruptcy concluded viable proposals were possible and issued a comment letter asking the Registrar to tax down the Trustee’s fees to make up, at least in part, the perceived shortfall recoveries. The Registrar accepted the Superintendent’s position and taxed down the fees.

The Trustee successfully appealed from the Registrar’s decision, and sought solicitor-client-level costs of the appeal from the OSB. The Trustee argued that the OSB was centrally involved in these proceedings and, as the successful party, the Trustee should receive costs for “the harm done”. The OSB raised its concerns—which the Trustee argued were invalid—too late (i.e. on review of the Trustee’s final statement of receipts and disbursements), and in objecting to the Trustee’s fees in the circumstances, the OSB pursued an improper purpose. The OSB, for its part, stressed that it was a non-party, whose letter comments and court submissions were offered in good faith and for a proper purpose.

The Court held that the OSB was not liable for costs on any scale. The OSB did not exercise its right to intervene under s. 5(4)(a) of the Bankruptcy and Insolvency Act and effectively become a party here. To so intervene, the OSB would have had to file a notice of intervention with the Court under Rule 12 of the General Bankruptcy Rules. If it had done so, it may have become exposed (or entitled) to costs in the same way as any party to litigation. Instead, the OSB limited its role to providing a comment letter under s. 152(4) of the BIA, attending the taxation hearing to address issues raised in the comment letter, and appearing on the Trustee’s appeal to address those issues.

The OSB is an administrative official appointed by the Governor General in Council pursuant to s. 5 of the BIA. One of its duties is to examine the Trustee’s account set out in the Final Statement of Receipts and Disbursements and to comment on these accounts for the purposes of aiding Registrars in the taxation process. The comments of the OSB are not binding on the Court. The OSB’s Letters of Comment are not required to be supported by evidence of rates or standards. The OSB is not required to prove a case in the ordinary sense. The only requirement is that letters of comment be reasoned and impartial.

In so commenting and participating, the OSB was exercising its statutory function to supervise the administration of all estates and matters to which the BIA applies and discharging its statutory duty. Costs against the OSB will not be awarded unless their conduct is shown to be egregious or in bad faith. The Court found no bad faith or improper purpose.

On bad faith, the trustee argued that the OSB created a false narrative incongruent with the BIA’s timelines in an effort to affect the Trustee’s remuneration. However, the fact remains that the OSB is not precluded from raising its proposal-related concerns at the taxation stage. While the BIA allows the OSB to offer comments on and even formally object to bankruptcy discharges, it does not preclude OSB comments at the fee-taxation stage bearing on what could or should have been done by a trustee at an earlier stage. The OSB was authorized to raise its proposal concerns at both (discharge and taxation) stages.

In any case, there was no “false narrative” or other bad-faith conduct here. The OSB perceived that proposals were a viable option for these bankrupts and that more surplus income could have been so recovered for the creditors and argued that the shortfall should be made up (in part) by reducing the Trustee’s fees. There was nothing bad faith about any of that, even if the OSB’s concerns could have been raised earlier.

On improper purpose, the Trustee alleged that even if proposals had been viable and more surplus income could have been recovered, the bankrupts made the decision to assign into bankruptcy. Accordingly, the Trustee should not be held responsible for any perceived shortfalls to the estate, and, in seeking to tag the Trustee with the shortfall, the OSB pursued an improper purpose. The Court held that such argument ignored the Trustee’s responsibility to explore the proposal option with insolvent persons and, where viable proposals are in fact possible, to flag for the bankrupts that objections to their discharges may be made on that basis and to raise that objection on discharge. While the “assignment versus proposal” decision ultimately rests with the insolvents, a trustee has an oversight role to play. In appropriate circumstances, a trustee may be exposed to fee reductions for failing to perform that role.

While the Trustee made the right call on the “proposals viable” point, that the OSB concluded otherwise and sought fee reductions to remedy the perceived resulting shortfall to creditors did not equate to pursuit of an improper purpose. Per its comment letters, the OSB examined the insolvents’ circumstances—primarily, the husband’s new employment and the wife’s recent employment, in light of her medical and later parental leave—and concluded that their combined earning capacity could and would have supported viable proposals to their creditors. Nothing in the OSB’s factual or legal analysis reflected any pursuit of an improper purpose or motive, including exercising animus towards the Trustee, or pursuing extra-statutory objectives. The OSB’s downstream steps (i.e. comments letters, appearance at taxation, and participation on appeal) were logical and rational, given its “viable proposals” conclusion.

Accordingly, the Court dismissed the Trustee’s request for costs.

Judge: The Honourable Justice M. J. Lema

Counsel: George Body of the Department of Justice Canada for the Superintendent of Bankruptcy

Amber Poburan of Sharek Logan & Van Leenen for the Applicant Trustee