The Court Rules that the Fees of a Court Appointed Receiver of a Low Value Estate are Too Excessive

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NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Rupert Chartrand and Artem Miakichev.  Rupert Chartrand is a partner in the insolvency and restructuring group of Osler Hoskin & Harcourt LLP, and Artem Miakichev is an associate in the group.

A model form of a Receivership Order, approved by the Ontario Superior Court of Justice (Commercial List), appointing a Receiver over the assets, property and undertaking of a debtor (the “Property”) provides that the Receiver and the Receiver’s counsel shall be paid their reasonable fees and disbursements at their standard rates and that the Receiver and the Receiver’s counsel are granted a charge (the “Receiver’s Charge”) on the Property, as security for such fees and disbursements. The Receivership Order also provides that the Receiver’s Charge shall form a first charge on the Property in priority to all security interests.

In a recent case Sub-Prime Mortgage Corp. v. Phoenix Apartments Ltd. a motion was brought by a secured creditor for the fixing of the costs of the Receiver where recovery was less than anticipated by either the Receiver or the secured creditor that appointed the Receiver for the purpose of selling the property and realizing on its security.

In this case, the Receiver in the course of the sale process, retained a manager to maintain some of the debtor’s properties  pending liquidation or sale of the debtor’s assets. The secured creditor complained that the Receiver allowed the properties to deteriorate through the retention of an incompetent manager and by a delay in preparing the properties for sale and proceeding with an improvident sale. Furthermore, the secured creditor believed that amount of time and costs spent by the Receiver and its counsel were excessive in the circumstances.

The secured creditor was not challenging the fees of the Receiver on the basis of hourly rates or that time was not spent; the secured creditor challenged the fees to the extent that they were incurred by the Receiver on matters for which the secured creditor denied the obligation to compensate the Receiver, or where the Receiver’s claim for compensation was excessive, or for matters benefitting primarily the Receiver.

The Receiver contended that it retained what it believed was a competent manager but whose tasks were interfered with by a mortgagor. The Receiver also submitted that the market conditions did not permit for a more expeditious and provident sale.

The Court in Sub-Prime Mortgage concluded that an adjustment to the Receiver’s account was appropriate in the circumstances and that a reduction was warranted. He found that the manager, for whom the Receiver bears some responsibility, did an inadequate job of preserving the properties from deterioration. The Court also found that the secured creditor must bear some responsibility for the receivership continuing in circumstances in which it knew the recovery might not warrant the cost of continuing the receivership.

The Receiver’s fees were in the amount of approximately $208,000.00, and it was the position of the secured creditor that the fees should be reduced by $133,000.00. The Receiver submitted that the costs should not be reduced by any more than between $18,000.00 and $36,000.00, otherwise the Receiver would not recover sufficient funds to pay its counsel.

Notwithstanding the Receiver’s concern that if the secured creditor’s request for a fee reduction was granted, no Receiver would be willing to take on a receivership of this nature, the Court concluded that a reduction by $58,000 was fair and reasonable in the circumstances. The Court was mindful of the fact that the Receiver is a court-appointed officer and it is only in extraordinary circumstances that such an officer should not be entitled to recover its actual costs. The Court was satisfied, however, that this was one of those extraordinary circumstances where a reduction was warranted.