Check Your Numbers Twice: Receiver and Its Counsel Denied Their Inadvertently-Omitted Fees and Disbursements

In what can only be described as a bitter pill to swallow for the professionals involved, the Ontario Superior Court of Justice (Commercial List) (the “Court”) in Duca Financial Services Credit Union Ltd. v. 2203284 Ontario Inc.¹ has refused to approve the inadvertently-omitted fees and disbursements of its own receiver and receiver’s legal counsel, notwithstanding the highly-unusual outcome that all other creditors (secured and unsecured) had already been paid in full (thanks, ironically, in large part to the efforts of the very receiver in question).

While time will only tell if Duca represents an outlier, the case is nonetheless an important reminder for all insolvency practitioners to check their numbers twice before seeking distribution-related relief from the Court.

Facts

Pursuant to an Order of The Honourable Madam Justice Conway made on June 22, 2017 (the “Receivership Order”), the Court appointed a licensed insolvency trustee as receiver (in such capacity, the “Receiver”) over all the assets, undertakings and properties (the “Property”) of 2203284 Ontario Inc. (the “Debtor”). As is standard practice, the Receivership Order provided, amongst other things, that the Receiver was empowered to engage legal counsel, that the Receiver and its counsel were entitled to be paid their reasonable fees and disbursements at their standard rates “unless otherwise ordered by the Court on the passing of accounts” and that the Receiver and its counsel were also entitled to a super-priority charge to secure their fees and disbursements.²

Fast-forward approximately two years, and the Receiver’s monetization of the Debtor’s estate was going so well that the Receiver found itself in the unusual position of having raised sufficient proceeds from the sale of the Property to pay the applicant secured creditor’s claim plus all the proven claims of the unsecured creditors.³ The coffers were so full that a dispute arose between the Receiver, on the one hand, and the Debtor and its related parties (together with the Debtor, the “Debtor Group”), on the other hand, as to the scope of the Debtor’s unsecured creditor body and how much monies these unsecured creditors were entitled to receive. The Receiver took the view that the Debtor had a larger unsecured creditor pool and higher quantum of enforceable unsecured debt, while the Debtor Group attempted to minimize these categories as much as possible so that the surplus amount remaining for the Debtor Group would be as large as possible.⁴

Based on the public filings available at the time of writing this article, the dispute appears to have been hotly contested and took almost a year to resolve. The dispute was originally heard before The Honourable Madam Justice Dietrich on November 20, 2019, with subsequent written submissions made to Her Honour on March 16, 2020 and March 31, 2020, before a 70-paragraph decision was ultimately released by Her Honour on June 19, 2020.⁵

Her Honour ultimately decided that the Receiver’s broader understanding of the unsecured creditor pool was in fact the correct one, and Her Honour approved the Receiver’s proposal to pay all amounts owing to these unsecured creditors.⁶ Nonetheless, even under the Receiver’s proposed scheme of distribution, there was still a surplus amount available in excess of $1 million to distribute to the Debtor Group, which distribution Her Honour also approved.⁷ Finally, Her Honour approved the relief sought by the Receiver that was not being contested, most notably, the fees and disbursements of the Receiver and its counsel to and including September 2019, plus a small fee accrual to conclude the receivership, and the discharge of the Receiver.⁸

Unfortunately for the Receiver and its counsel, they allowed Her Honour’s Order (the “Discharge and Distribution Order”) to proceed in June 2020 without raising the issue of the significant additional fees and disbursements that they incurred beyond the modest fee accrual that was originally sought in November 2019.⁹ By the time this oversight was identified in the summer of 2020, the Discharge and Distribution Order had already been entered and the Receiver had already paid the amounts owing to the unsecured creditors, but had not yet distributed any of the funds that had been earmarked for the Debtor Group.¹⁰

The Debtor brought a motion compelling the Receiver to comply with the full distribution to the Debtor Group that had already been ordered by the Court, while the Receiver sought approval of the inadvertently-omitted fees and disbursements, and, accordingly, a reduced distribution to the Debtor Group.¹¹

Decision

The Honourable Madam Justice Gilmore granted the Debtor’s motion and dismissed the Receiver’s motion.¹² In substance, Her Honour held that:

1. there was no conflict between the super-priority payment entitlement of the Receiver and its counsel under the Receivership Order with the scheme of distribution and discharge under the Discharge and Distribution Order. In this regard, Her Honour noted that “It is this court’s view that the [Discharge and Distribution] Order is intended to be final and therefore subsumes the provisions of the [Receivership] Order. That is, it is open to this court to find that the Receiver has no ability to request further fees or accruals given the clear intention of the [Discharge and Distribution] Order to finalize all issues between the parties including the termination of the Receivership;”¹³ and
2. on the facts of the case, it was not open for the Discharge and Distribution Order to be amended or varied, which, in substance, is what Her Honour concluded the Receiver was seeking.¹⁴
   

Her Honour’s decision concludes with the following comment: “The Receiver has admittedly made an error. Who should pay for it? It is this Court’s view that it should not be the [Debtor] who settled the final Order understanding that its terms were clear and that it had the right to rely on it.”¹⁵ Ironically, it appears that the Debtor Group failed to comply with at least two Orders issued by the Court during the lifetime of the receivership.¹⁶

Implications

Duca represents a tough pill for insolvency professionals to swallow.

On the surface, the clear takeaway message is that court-appointed officers and their counsel need to double-check their respective fee and disbursement amounts to ensure they are captured adequately by the necessary Court Orders – not only at a static point in time, but on a continual and updated basis.

Probing beneath the surface of Duca, the decision is perhaps even more alarming for insolvency professionals given the factual background against which Duca is set. It is not the case, for example, that the additional fees and disbursements of the Receiver and its counsel were disallowed because the realizations from the estate could not support them, or because the Debtor Group was generally cooperative with the Receiver and respective of the receivership process. Rather, the realization process was so successful that there was a surplus of over $1 million available for the Debtor Group. Moreover, based on the public record at the time of writing, it would appear that these additional fees and disbursements were incurred by the Receiver and its counsel to ensure that arm’s-length creditors of every stripe received the totality of the funds to which they were entitled, despite: (a) the considerable and lengthy opposition from the Debtor Group; and (b) the previous non-compliance by the Debtor Group with Court Orders.

Insolvency professionals cannot help but be left with a bad taste in their mouths. Notwithstanding the legal basis upon which Duca was decided, the effect of the decision appears to penalize the Receiver for a job otherwise well done in difficult circumstances.