Can a debtor use a trustee’s look-see report in subsequent ligation with its lender?
On March 9, 2017, the Royal Bank of Canada served a notice to the Debtor of its intention to enforce a security in accordance with s. 244 of the Bankruptcy and Insolvency Act. RBC subsequently retained Richter to analyze the Debtor’s financial situation and the security granted to the RBC, and to report its findings to the RBC on a confidential basis.
RBC and the Debtor entered into a forbearance agreement. The Debtor agreed to cooperate with Richter and provide all financial or business information. RBC agreed to suspend execution of all of its rights and recourses, including those related to its security.
On May 4, 2017, Richter was appointed receiver and on May 17, 2017, Richter was named trustee in bankruptcy. Richter instituted three actions against the Appellants in recovery of preferential payments.
The Appellants examined a representative of Richter in the context of these recourses and requested copies of the reports prepared for RBC in the context of its consultation mandate. Richter objected on the basis of litigation privilege. The Appellants filed a case management notice seeking to have the objection adjudicated.
On July 17, 2019, the Registrar maintained the objection as to litigation privilege, concluding that it was clear that the mandate was to examine RBC’s recourses against the Debtor in the context of litigation.
The Appellants argue that the Registrar erred in law by improperly broadening the scope of litigation privilege by relying solely on the forbearance agreement to conclude that the dominant purpose of the mandate was in reference to actual or eventual litigation. They also claim that the Registrar failed to take into account the terms of Richter’s mandate, which was limited to a financial analysis of the Debtor and which made no reference to actual or eventual litigation.
On the first ground of appeal, the Court held that the Appellants did not demonstrate that the Registrar made an error with respect to the characterization of the legal standard applicable to litigation privilege. The parties agreed that the Registrar correctly characterized the dominant purpose test for litigation privilege when she agreed with the position put forward by Richter orally and in its plan of argument.
The Court also held that the Appellants did not demonstrate a palpable or overriding error in the Registrar’s assessment of the facts and her finding that the principal object of the Richter mandate was to provide RBC with recommendations as to its recourses against the Debtor in regard to eventual litigation. First, Richter did not limit its representations to the forbearance agreement in order to demonstrate the dominant purpose of the mandate related to actual or eventual litigation. The terms of the forbearance agreement was argued in the context of the evidence as a whole. Second, based on her global assessment of the evidence, the Registrar concluded that the dominant purpose of the Richter mandate was to make recommendations to RBC with regard to existing and eventual litigation against the Debtor.
On the second ground of appeal, the Court concluded that the Registrar did fail to take into account the terms of the Richter mandate in her assessment of the dominant purpose test. The Registrar specifically referenced the mandate in her conclusions and examined same along with other facts. The absence of a specific reference in the Richter mandate that it was for the preparation of litigation or eventual litigation was not determinative of the existence of litigation privilege.
Therefore, the Registrar did not err when she concluded that the Richter reports to RBC were protected by litigation privilege in the context of the specific facts and circumstances of this case. The Appeal was, therefore, dismissed.
Counsel: Rachid Benmokrane of Gowling WLG for the Trustee/Petitioner-Respondent and Nicolas Plourde of Sarrazin Plourde for the Respondents-Appellants.