The 2010 decision of the Ontario Court of Appeal in Murphy v. Sally Creek Environs Corp. (Trustee of) considered the role of a trustee in bankruptcy as an officer of the court and its obligation to act fairly and with integrity throughout bankruptcy proceedings.

This case concerned an appeal from the decision of the Superior Court of Justice (Commercial List) (the “Commercial List”) to vary a Registrar’s scathingly critical order of a trustee in bankruptcy (the “Trustee”) for its alleged misconduct in administering the bankruptcy of Sally Creek Environs Corporation (“Sally Creek”). Litigation commenced with the Trustee’s appearance before Registrar Nettie on a taxation motion with respect to the final statement of receipts and disbursements (“SRD”) relating to Sally Creek. The relief sought was hotly contested by several creditors of the estate, due to alleged misconduct on the part of the Trustee in the administration of the estate.

The Trustee’s alleged transgressions included lying to regulatory bodies; failing to receive requisite authorization from the inspectors (particularly with regard to hiring counsel and initiating litigious proceedings); failing to properly convene and keep minutes of meetings of the inspectors in breach of its statutory duties; incurring unnecessary professional fees; selling the only significant estate asset without inspector approval; failing to invest proceeds of sale properly and misleading counsel as to when those proceeds were actually invested; threatening the largest unsecured creditor as a means of bullying it to relinquish part of its claim; failing to provide sufficient information to the inspectors with regard to the taxation process; claiming fees for which there was no description of the work performed; and claiming fees for duplicative work or for work that was otherwise questionable.

On the Trustee’s taxation motion, Registrar Nettie allowed only $1 in fees (despite the Trustee’s claim for $240,000 in fees for administration of the estate) and the Registrar disallowed and reduced the Trustee’s claimed disbursements, including denying the Trustee reimbursement for close to $300,000 in fees that had been paid to its legal counsel. On appeal to the Commercial List, the Registrar’s order was varied by increasing the Trustee’s fees from $1 to almost $88,000 and allowing a significant portion of the legal fees.

The Court of Appeal reviewed the decisions of both the Registrar and the Commercial List and held that the Registrar’s findings of fact were deserving of deference, unless the Registrar had made a “palpable and overriding error”. In addition, the Court noted that the Registrar is awarded broad discretionary powers pursuant to subsection 192(1) of the Bankruptcy and Insolvency Act (the “BIA”).

In its decision as to what fees should be allowed, the Court of Appeal looked to the nature of taxation proceedings under sections 152 and 192 of the BIA. The Trustee had argued that the Registrar did not have the authority to disallow a disbursement for a solicitor’s account under section 152, as the disbursement had already been taxed by another Registrar pursuant to paragraph 192(1)(i). The Court rejected this argument and found, instead, that the taxation of a solicitor’s bill of costs pursuant to paragraph 192(1)(i) of the BIA is distinct from the taxation of a trustee’s SRD under section 152. The Court of Appeal found that any overlap created by the two provisions ensures appropriate scrutiny of the trustee’s management of the estate. Such scrutiny in respect of the Sally Creek bankruptcy led the Court to conclude that the Trustee was personally liable for any legal services that were performed on its instruction in the absence of inspector approval.

In light of the Trustee’s misconduct in the exercise of statutory powers, the Court held that, pursuant to section 152 of the BIA and the related case law, the Registrar has a wide discretion to set the appropriate amount of a trustee’s fees. While the Court found that the Registrar’s reduction of the Trustee’s fees to $1 was not appropriate due to the Registrar’s (incorrectly applied) punitive approach, it equally did not accept the Commercial List’s award of $88,000 in fees. The Court considered several factors in its analysis, including, the quantum that would represent fair compensation for the Trustee’s services, the need to prevent unjustifiable payments for fees to the detriment of both the estate and its creditors, and the need to encourage efficient, conscientious administration of the bankrupt estate for the benefit of the creditors and to carry out the principles and objectives of the BIA. Ultimately, the Court fixed the Trustee’s fees at approximately $49,500, which the Court held served as a means of preventing the Trustee from obtaining compensation for its misconduct, while upholding the principles of the bankruptcy system, and communicating the Court’s displeasure with the Trustee’s actions.