Bankrupts often lack recourse against trustee for mismanagement of their affairs, says lawyer
A recent Superior Court ruling is among the few cases in which a bankrupt party has been permitted to bring an action against a trustee, without leave of the court, says Tara Vasdani, counsel for the plaintiff.
In Flight v. Adamson, 2021 ONSC 4278, Justice Kelly Tranquilli found that, as the causes of action targeted the trustee in his personal capacity, and his omissions, the leave requirement under s. 215 of the Bankruptcy and Insolvency Act did not apply.
“The insolvency process is built in such a way that bankrupts are often left without recourse against their trustees for mismanagement of their affairs,” says Vasdani, principal lawyer and founder at Remote Law Canada.
“This comes from several things. For example, licensed insolvency trustees are considered officers of the court. And as a result, they're granted significant authority in administering estates. As well, bankrupts typically do not have the assets – which is why they’re in bankruptcy – to proceed with actions, and especially actions that are defended by lawyers, against their trustee. Hence, the caselaw was scarce.”
Vasdani was only able to find two decisions in which the bankrupts were permitted to sue the trustee.
The plaintiffs, Brian Flight and his spouse, brought the claim personally against the trustee, John Adamson, a licensed insolvency trustee with Adamson & Associates Inc. They claimed negligence, fraud, breach of fiduciary duty, unjust enrichment and conversion. Adamson had carriage over each of the four bankruptcies Flight experienced between 2004 and 2016.
In 2018, Flight discovered his former bookkeeper had stolen around $206,000 from his business, Heritage Painters & Services, over the previous 12 years. Flight brought an action against the bookkeeper – who was his ex-wife – who responded with a motion to dismiss, arguing Flight lacked the right to sue, says Vasdani.
Flight and Adamson’s relationship then deteriorated and Flight sought an absolute discharge, an effort he abandoned in October 2020, after finding another trustee and filing a consumer proposal, which effectively annulled the bankruptcy.
Flight sought $10 million against Adamson and accused him of failing to detect and respond to fraud carried out by his bookkeeper, which he alleged was the cause of his four bankruptcies. After discovering it, Adamson took no “meaningful action” to address the fraud and its impact on the fourth bankruptcy, claimed Flight. Adamson did not “diligently commence an action” against the bookkeeper, investigate, adjust Flight’s “surplus income,” recommend a consumer proposal instead of bankruptcy, nor “promptly” discharge Flight from the fourth bankruptcy, said the decision.
“The plaintiff bankrupt discovered the theft in January 2018. The trustee did nothing for 28 months,” says Vasdani.
Flight’s motion sought direction on whether he required leave from the court to pursue the action, under s. 215 of the Bankruptcy and Insolvency Act, while also submitting they did not.
Adamson responded that leave was required and should not be granted as the claim was frivolous and vexatious and did not disclose a cause of action.
According to s. 215 of the Bankruptcy and Insolvency Act, “Except by leave of the court, no action lies against the Superintendent, an official receiver, an interim receiver or a trustee with respect to a report made under, or any action taken pursuant to, this Act.”
But Flight’s position was that leave was not required when the trustee is sued personally. Three Superior Court rulings supported that view – one from British Columbia, two from Alberta. Justice Tranquilli added that the Supreme Court of Canada has held the provision should not be interpreted as applying to “any action arising out of the administration of the estate.” Claiming the trustee made an “act of omission” does not count as a “report” or “action taken pursuant” to the Act.