Suing a trustee for prolonging the bankruptcy process?

Overview: 

In this case, the Court considered the requirements for leave to bring an action against a trustee under section 215 of the Bankruptcy and Insolvency Act. A creditor sought leave to sue a trustee in bankruptcy, alleging that the trustee enriched itself by prolonging the bankruptcy process and increasing its fees, causing the creditor millions in losses. It also sought to bring a claim for negligence regarding the manner in which the trustee removed fixtures from the hotel property at issue in this case. The Court allowed this latter claim to proceed, finding that the creditor had made out a prima facie case. However, the Court concluded that the pleadings with respect to the other proposed causes of action were inadequate and refused to grant leave to pursue such claims, but did grant leave to reapply.

TA Hotel Management Limited Partnership operated the Trump International Hotel and Tower Vancouver (the “Hotel Property”) and an adjacent property known as the Conference Centre until it assigned itself into bankruptcy on August 27, 2020. Grant Thornton Limited was appointed trustee in bankruptcy. Maxfine International Limited and TA Properties (Canada) Ltd. owned the Hotel Property and the Conference Centre, respectively. They alleged that instead of undertaking an orderly and efficient bankruptcy, Grant Thornton enriched itself by prolonging the bankruptcy process and increasing its fees—causing Maxfine and TA Properties losses in excess of $3.8 million. They sought leave to commence proceedings against Grant Thornton for damages for breach of contract, negligence, trespass, and breach of fiduciary and other duties, pursuant to s. 215 of the Bankruptcy and Insolvency Act.

Section 215 of the BIA provides that no action lies against a trustee with respect to any report made or action taken pursuant to the BIA except with leave of the court. The threshold for granting leave under s. 215 is not high and the provision “is designed to protect the receiver or trustee against only frivolous or vexatious actions, or actions that have no basis in fact”. Grant Thornton asserted that the proposed claim against it was frivolous, vexatious and factually unfounded. It further submitted that the claim could not pass the low threshold for leave to commence proceedings against a trustee in bankruptcy.

The s. 215 leave inquiry is whether the party seeking to bring proceedings against the trustee has a prima facie case, and involves a twofold inquiry: (a) whether the proposed claim as pleaded discloses a cause of action; and (b) whether there is evidence of a factual foundation for the claim. The evidentiary threshold is described as whether the pleadings and the evidentiary basis disclose a prima facie case. In cases where the court has expressly approved of the conduct of the trustee, such as where there is a discharge order containing a provision that the court approves of the trustee’s steps, there must be a strong prima facie case.

The court should not engage in the weighing or assessing of evidence, resolve hotly contested issues, draw inferences where the evidence on the topic conflicts or make final assessments of the merits of the claims or the defences of the claims based on evidence or lack of evidence. On the other hand, bare allegations and allegations unsupported by evidence are not enough. Evidence that is merely an affiant “contending to” the facts in the proposed claim or deposing that he believes that the facts alleged in the proposed claim are true or will be made out is insufficient.

Maxfine and TA Properties sought leave to commence claims for a slew of causes of action, including breach of fiduciary duty and other duties, breach of trust, breach of contract, negligence, conflict of interest and wilful misconduct. In respect of their proposed claim for negligence, the Court noted that the loss sought to be recovered must be the result of an interference with a legally cognizable right. Only claims for damage to person or property and losses consequential on such damages are justiciable under negligence unless the relationship between the plaintiff and the defendant is sufficiently proximate such that a duty of care is owed to avoid pure economic loss.

Maxfine and TA Properties alleged that Grant Thornton was negligent by removing fixtures and chattels from the Hotel Property and the Conference Centre. They pled that the removal of the fixtures and chattels was done in a careless and highly improper manner, causing damage to the Hotel Property and the Conference Centre. The damages claimed included damages for delay in the hotel re-opening, depreciation to assets due to their removal, costs to move the assets back to the hotel, repair costs to the assets and to plumbing and electrical hookups, a lost dividend of $400,000, loss of profit from delay in re-opening the hotel and reputational damage to the hotel. The Court concluded that the proposed notice of civil claim disclosed a cause of action for negligence due to the damage to property causing property loss, and claims for consequential losses.

Given its decision that the proposed notice of civil claim disclosed a cause of action for negligence for damage to property and consequential losses, the Court considered whether there was evidence that demonstrated a factual foundation for the claim. The affiant of Maxfine and TA Properties deposed that the removal of fixtures and chattels caused damage to them and to the premises from which they were removed, and supplied supporting evidence such as pictures and repair invoices and estimates. That evidence provided factual support for the claim for negligent damage to property and consequential damages.

As to the other proposed causes of action, the Court concluded that the proposed pleadings were inadequate and refused to grant leave to pursue such claims. The Court granted leave to re-apply based on a revised proposed notice of civil claim pertaining to breach of contract, damages for pure economic loss arising from negligence and trespass.

Judge: The Honourable Justice Matthews

Counsel: Ritchie Clark, K.C. of Bridgehouse Law for the Applicants, Maxfine International Limited and TA Properties (Canada) Ltd.

William Roberts and Anna Paczkowski of Lawson Lundell for Grant Thornton as Trustee in Bankruptcy