Discouraging trustees from taking on contentious bankruptcies?

Garcha v. 690174 B.C. Ltd., 2023 BCCA 376
Can an order be appealed on the basis that it would impair bankruptcy proceedings by discouraging trustees from taking on contentious bankruptcies?

Overview: In this case, the Court of Appeal upheld a decision that a bankruptcy trustee did not act impartially and neutrally in administering the estates, failed to consider the financial consequences of its conduct, and took unreasonable legal positions in exceeding its authority by using funds held in trust for non-bankrupts to pay its administrative expenses.

These appeals and cross-appeals arose out of orders that were entered following a 102-day trial combining two civil actions and three appeals from notices of disallowance of bankruptcy claims. The trial resulted in two sets of reasons for judgment: 2021 BCSC 607 and 2021 BCSC 1925. The trial judge resolved numerous factual and legal issues arising out of the 2007‑2011 acquisition of five contiguous lots of land in Surrey and their development into residential subdivisions for the purpose of resale (the “Project”). The issues arose because of breaches of fiduciary duty by the Project’s driving force, Jaswant Singh Sangha, and the subsequent bankruptcy of Sangha and his two companies: 690174 and Panorama (collectively, the “Sangha Parties”).

The parties to the litigation included non-bankrupt investors who invested in the acquisition of the lots and/or the development of the Project. Based on their contributions, these investors claimed an interest in approximately $13 million in net proceeds generated by the sale of subdivided lots.

In the First Set of Reasons, the judge determined who was entitled to share in the net sale proceeds and in what amounts (before payment of the expenses and fees, including legal fees, of the trustee in bankruptcy of the Sangha Parties). In doing so, the judge rejected the Trustee’s position that various investors were merely equity claimants rather than beneficial owners of the land that was subsequently subdivided and sold. These findings affected the priority of claims against the net sale proceeds. In the Second Set of Reasons, the judge resolved issues arising out of the First Set of Reasons, including determining the extent of remedies granted to the successful plaintiffs, clarifying the rights and obligations of various parties, and awarding costs. He also resolved issues arising out of the administration of the bankruptcies.

The Trustee filed a total of five appeals specific to the bankruptcy proceedings before the judge, arguing that the judge erred by: (1) ordering under s. 37 of the Bankruptcy and Insolvency Act that approximately $2,000,000 in already-paid professional fees be refunded into an account for certain parties referred to as the “2007 Joint Venturers”; (2) ordering that costs in the proceedings be paid by the Trustee personally; (3) granting certain of the 2007 Joint Venturers, namely, the Garchas, uplifted costs; and (4) concluding that he did not have jurisdiction to reapportion the entitlements of the non-bankrupt parties for the purpose of contributing to the Trustee’s professional fees.

The trial judge found that the Trustee did not act impartially and neutrally in administering the estates, failed to consider the financial consequences of its conduct, and took unreasonable legal positions. Specifically, the Trustee exceeded its authority by using funds held in trust for non bankrupts to pay its administrative expenses. Utilizing trust funds to pay its administrative fees without lawful authority was an act that fell within the ambit of s. 37 of the BIA because it contravened the scheme of distributions set out in the BIA. Accordingly, the trial judge concluded that the total amount of expenses and fees charged was “simply too high given the resources of the Bankrupt Estates, the limited benefit of its involvement in the Civil Actions, and the frailty of the positions it advanced”. He held the Trustee and its legal counsel were entitled to retain $4,048,310 of the withdrawn funds, comprised of the entirety of the Sangha Parties’ entitlements, and a $1,000,000 share of the 2007 Joint Venturers’ entitlement. Among other things, he ordered the Trustee and its counsel to refund any amount in excess of $1,000,000 withdrawn from the 2007 Joint Venturers’ share of the net sale proceeds.

On appeal, the Trustee argued the judge erred by finding that it used trust funds to pay administrative expenses and fees without lawful authority. According to the Trustee, the withdrawals and payments were all expressly authorized by binding court orders, none of which have been appealed or quashed, and the fees and expenses were all assessed and approved in the contemplated court process. The Trustee argued further that the judge misinterpreted the payment orders that approved the Trustee’s expenses and fees (“Term Payment Orders”). According to the Trustee, those orders were final as to the amounts assessed and court-approved, and could not be attacked collaterally or treated as nullities. As such, the judge was not entitled to deprive the Trustee retroactively of its lawful authority to pay administrative fees and, in doing so, erroneously treated the Term Payment Orders as nullities.

According to the Trustee, upholding such a retroactive deprivation of lawful authority would seriously impair bankruptcy proceedings because trustees must be able to rely on court orders to carry out their duties effectively. Moreover, upholding the deprivation would mean a trustee’s entitlement to administrative fees depends on final success in litigation, which would discourage trustees from taking on highly contentious bankruptcies.

The Court of Appeal rejected those submissions. In Kingsway General Insurance Company v. Residential Warranty Company of Canada Inc., 2006 ABCA 293, the Court discussed the jurisdiction of a judge sitting in bankruptcy where, as here, a trustee sought a charge for its fees on property that was subject to undetermined trust claims. The Court concluded that s. 183(1) of the BIA preserves the inherent jurisdiction of judges sitting in bankruptcy, thus empowering them to permit a trustee’s fees to be paid from property subject to undetermined trust claims. This principle represents an exception to the general principle that, unless the BIA provides otherwise, a bankrupt estate and its trustee have no higher right against third parties than the bankrupt did before bankruptcy.

The trial judge interpreted the Directions Motion Order—which added the Trustee as a defendant to the actions commenced by, among others, Garcha—as granting the Trustee lawful authority to use funds which had been found to be beneficially owned by the 2007 Joint Venturers to pay litigation costs in accordance with the Residential Warranty principle. However, the Term Payment Orders only granted the Trustee authority to use trust funds for ongoing expenses on an interim basis, subject to further court review as to the amount payable and who was responsible for payment. In other words, the judge found the Term Payment Orders did not authorize the Trustee to retain funds which had been found to be beneficially owned by the 2007 Joint Venturers and use them for final payment of general administrative costs.

The Court of Appeal saw no error in the judge’s interpretations of the Term Payment Orders or the Directions Motion Order. Given their language and the circumstances in which they were made, those interpretations were correct. The judge did not retroactively deprive the Trustee of its lawful authority to use trust funds which had been found to be beneficially owned by the 2007 Joint Venturers to pay general administrative expenses. The Trustee never had that lawful authority.

As to the Trustee’s submission that upholding the judge’s order would impair bankruptcy proceedings by discouraging trustees from taking on contentious bankruptcies because their entitlement to expenses and fees would depend on final success, the Court was unpersuaded. The effectiveness of a trustee’s efforts in administering a bankrupt estate is a relevant consideration with respect to appropriate remuneration. The greater risk to the efficacy of bankruptcy proceedings would arise from tolerating excessively expensive administration of the sort the judge found occurred in this case. Accordingly, the Court dismissed the Trustee’s appeals.

Judges: Justice Dickson, Justice DeWitt-Van Oosten and Justice Marchand

Counsel: G. Allan Phillips for Daljit Singh Garcha and Jaswinder Kaur Garcha; John Sullivan and Erin Hatch of Harper Grey for Crowe MacKay & Company Ltd. in its capacity as trustee in bankruptcy; Duncan Magnus and E. Watson for Parmjit Kaur Sangha and Raveen Sangha; A. Beesley for Ranjit Singh Sangha and Svender Singh Sangha; Michael Feder, K.C and Kate Macdonald of McCarthy Tétrault for Fasken Martineau Dumoulin LLP; and J.V. Payne for Daljit Singh Mattu and 0731431 B.C. Ltd.

discouraging trustees from taking on contentious bankruptcies?