Privilege Will Not Shield a Trustee Where There Is a Conflict of Interest

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NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Caitlin Fell and Mary Angela Rowe. Caitlin Fell is an associate in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP and Mary Angela Rowe is a student-at-law at Osler, Hoskin & Harcourt LLP.

In the case of Impact Tool & Mold Inc. (Receiver of) v. BDO Dunwoody Ltd. (2013) ONSC 2616 (“Impact Tool”), the Ontario Superior Court of Justice held that solicitor-client privilege could not shield a Trustee’s documents from disclosure where there was an appearance of a conflict of interest. The decision focused on how competing interests in a bankruptcy proceeding are balanced by maintaining clearly defined roles.

In Impact Tool, the applicant Doyle Salewski Inc. (“DSI”) was the court-appointed interim receiver of a bankrupt company. It sought information from the company’s trustee-in-bankruptcy about details of the trustee’s expenses. When Impact Tool & Mold entered bankruptcy proceedings, the estate did not have enough assets to fund the bankruptcy administration. A major creditor (“Unique”) stepped in to fund the trustee and the consequent bankruptcy litigation. The trustee’s fees totalled about $275,000, only $34,000 of which had been approved however by the Inspectors in bankruptcy as required by the Bankruptcy & Insolvency Act (the “BIA”). Nor was the retainer between the estate and its counsel submitted to the inspectors for approval. DSI sought to cross-examine counsel to the trustee on these matters and to obtain related documentation. the trustee and Unique objected, arguing that this information was protected from disclosure by solicitor-client privilege and litigation privilege.

The Court ordered the trustee to disclose the information that DSI had requested.

Privilege Cannot Be Invoked to Conceal Trustee Misconduct

The Court held that using privilege to shield the information from disclosure would be “contrary to the general duties and responsibility of the trustee.” The trustee is an officer of the court, with an absolute obligation of fairness and impartiality toward all creditors. This does not change because one of the creditors, for its own commercial or business reasons, provided funds to the trustee. In this case, the trustee’s actions exhibited a potential conflict of interest with regard to Unique that could call its impartiality into question. The Court noted that “it is difficult to imagine how a trustee can act with an even hand towards all creditors when one of them has undertaken to finance the litigation.” This was compounded by the trustee’s failure to obtain authorization from the inspectors, in contravention of the BIA. These facts, according to the Court, could constitute a prima facie case of actionable misconduct. The interests of fairness during the bankruptcy litigation therefore justified disclosure of information that might otherwise be exempted by privilege.

The authority of inspectors under the BIA played a key role in this decision. The Court disapproved of  the trustee for failing to seek the inspectors’ approval for fees as required under the BIA, stressing that “approval from the inspectors is more than merely a routine process.” Inspectors are charged with overseeing the trustee’s conduct and can, if the trustee has been ineffective, disentitle the trustee to the fees it claims. Seeking to circumvent the oversight of the inspectors’ brought the trustee’s precarious relationship with a creditor under suspicion of actionable misconduct.

The Court additionally held that the creditors who funded the trustee became surrogates of the trustee and as such are bound by the same obligations- a duty of impartiality and fairness to all creditors as the trustee.

Implications

Privilege may not apply to protect a trustee’s information from disclosure where such non-disclosure could conceal a conflict of interest. Notably, the Court did not rule on whether the information was in fact covered by privilege – holding only that, had privilege existed, it would have been waived. This leaves open the question of whether solicitor-client privilege or litigation privilege might shield similar trustee documents in different circumstances.

While the Court expressed scepticism that a trustee funded by a creditor could be truly impartial, it stopped short of holding that this fact alone could prima facie constitute actionable misconduct. If the inspectors’ approval had been obtained as required by the BIA, this might have cleared the trustee of suspicion. Even when an estate cannot finance its own bankruptcy administration and a creditor steps in, the trustee is still responsible to all creditors and to the court – not the company paying its fees. Creditors should tread warily if they choose to fund the administration of bankrupt estates, keeping in mind that should they fund a bankruptcy in order to recoup money owed, such creditors and the appointed trustee still must act impartial and even handed to all other creditors, and trustees must ensure compliance with all BIA requirements to avoid conflict-of-interest accusations.

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