Can a trustee delegate the payment of proposal dividends to the debtor?
The trustee applied to tax its Final Statement of Receipts and Disbursements pursuant to s. 31 of the Bankruptcy and Insolvency Act. The estate had receipts of $69,971.63 and the trustee sought approval of its fee at $16,061.09 for administering the final two out of four distributions pursuant to the proposal in this matter. The sole inspector had approved the trustee’s Final Statement of Receipts and Disbursements, including the proposed fee. The Office of the Superintendent of Bankruptcy argued that there were deficiencies in the trustee’s administration of the proposal, which warranted a fee reduction in an amount to be assessed by the court.
The debtors started the proposal process with a different trustee. The original trustee allegedly gave the debtors a verbal fee estimate prior to the filing of the Proposal that total trustee’s fees would not exceed $35,000. After only nine months and one distribution to the proven unsecured creditors, the original trustee had already accrued fees of $39,355.65. Consequently, the relationship between the debtors and the original trustee deteriorated and the debtors made the second distribution under the proposal directly to creditors, circumventing the original trustee.
On October 12, 2017, a second meeting of creditors was held, at which the second trustee was substituted for the original trustee. The original trustee sought approval of its Final Statement of Receipts and Disbursements, which totaled $71,413. Approval was denied and, following taxation proceedings, the parties ended up consenting to an order reducing the first trustee’s fees from $71,413 to $55,000 (representing a 23% reduction).
As part of its ordinary mandate, the second trustee would have had to re-create the creditor spreadsheet (for a third time, in this case), which would have consumed even more of the debtors’ financial resources on what was essentially a duplicative process. Instead, the second trustee reviewed the distribution spreadsheet prepared by the debtors’ accounting staff for the second distribution, and confirmed it was configured correctly. It agreed to allow the debtors to make the third and fourth distributions under the proposal using the procedure they had created for the second distribution.
The second trustee argued that, given the broader context of what occurred between the debtors and the original trustee, its decisions to (a) not expend resources creating a duplicate version of the distribution spreadsheet and (b) allow the debtors to carry out the third and fourth distributions under the proposal with its oversight were a reasonable attempt to restore the debtors’ faith in the insolvency system. It suggested that the original trustee acted for its own benefit and took advantage of the debtors so as to enrich itself, while the second trustee did everything it could to keep administrative costs low and protect the interests of creditors and debtors.
The OSB argued that licensed insolvency trustees play an important role in the management of a bankruptcy estate and that role cannot be abdicated to another party, including to the debtors. The second trustee acknowledged that allowing the debtors to make dividend payments directly to creditors did not strictly comply with the applicable provisions of the BIA, but argued that the breach was merely technical in nature and should be overlooked. The proposal was ultimately a success and, essentially, the ends justified the means.
The Court disagreed, finding that it was never an option for the second trustee, the inspector or the debtors to ignore the statutory requirements established by the BIA, which mandate that proposal funds be paid to and paid out to creditors by the trustee. The second trustee’s decision to allow the debtors to make the third and fourth distributions of dividends to the creditors was a default of the proposal and a failure to comply with the requirements of the BIA.
The Court accepted that the arrangement was done with good intentions on the part of the second trustee, and the trustee took steps to satisfy itself regarding the experience and capability of the debtors’ accounting staff and the accuracy of its spreadsheets and all payout calculations. Nevertheless, while the sentiment may have been laudable, this was simply not an appropriate way to approach that objective.
The second trustee’s impugned conduct was intentional and done in the face of the OSB’s objection. Notwithstanding that the trustee’s actions did not result in any measurable harm, it was essential that the Court send a clear message that improper delegation of a trustee’s core statutory responsibilities will have significant consequences. Accordingly, a modest reduction of 15% was adequate to express the Court’s concern.
Counsel: Donald Gurney for the second trustee; S. Liu for the Superintendent of Bankruptcy
Judge: Master Bilawich