Allen W. MacLeod, Donald A. MacLeod and
D. & A. MacLeod Company Ltd.—December 1, 2008

Professional Conduct Decision

In the matter of the Bankruptcy and insolvency act
R.S.C. 1985, c. B-3

In the matter of the Superintendent of Bankruptcy

and in the matter of the alleged allegation of professional misconduct as against Allen W. MacLeod, Donald A. MacLeod and D.& A. MacLeod Company Limited

Proceedings heard before the honourable james b. chadwick, Q.C.

Appearances:
Julie Martin and Alden Christian for the Trustees
Gary Wetzel and Mark Taggart for the Superintendent of Bankrupcty

---

Decision

Stay of Motion

[1] The applicant trustees brought a motion returnable at the start of the hearing for a stay of the proceedings against the trustees on various grounds. The grounds for the application can be summarized as follows:

(a) Delay

(b) Disclosure of the investigation to members of the public

(c) Inclusion in allegations of the Estates, where Superintendent of Bankruptcy and Court has approved actions of the applicants

(d) Delays, bias and lack of fairness in all dealings with the trustees

(e) Delay in issuing letters of comment

(f) Forbidden by the office of the Superintendent of Bankruptcy to expand business into Québec and permitting Peter Markham to open practice while under investigation

(g) Destruction of records and files of retired employee, Claude Leduc, contrary to government policy

(h) Improper comments by Jean-Louis Boucher

(i) Appointment of Richard Hunter as District Assistant Superintendent

(j) Prejudice caused by the office of the Superintendent of Bankruptcy

[2] In support of their motion the applicant filed an affidavit of Allen W. MacLeod setting forth the facts to support their position.

[3] The respondent Superintendent of Bankruptcy filed a reply along with the affidavit of Ms. Laperrière.

[4] Although neither deponent was cross-examined on their affidavits prior to the hearing, they both gave evidence at the hearing.

[5] I had advised counsel prior to the hearing that I would reserve on the motion until I heard all of the evidence.

[6] In support of their position, counsel for the trustees referred to a number of authorities:

Blencoe v. British Columbia (Human Rights Commission), [2002] 2 S.C.R. 307

The Superintendent of Bankruptcy v. Pricewaterhouse Coopers Inc. and Robert Brouchu and Serge Morency and Serge Morency & Associates Inc. January 19, 2005

Stefani v. The College of Dental Surgeons, 1996 CanLII 877 (B.C.S.C.) p.18

The Association of Professional Engineers and Geoscientists of the Province of British Columbia v. Brown (unreported Sept. 16, 1994) (B.C.S.C.)

Gage v. Ontario, (1992) (Ont.S.C.) (Div.Ct.) 90 D.L.R. (4th) 537

R. v. Regan, [2002] 1 S.C.R. 297

Canada (Attorney General) v. Todd Y. Sheriff and Segal and Partners Inc., (2007) (F.C.A.) Can LII 2007 FCA 90.

[7] Likewise, counsel for the respondent OSB, also filed a number of authorities to support their position.

Case Law

Blencoe v. British Columbia (Human Rights Commission, 2000 CarswellBC 1860 (Supreme Court of Canada)

Friedman & Friedman Inc. v. Canada (Superintendent of Bankruptcy) 2001 CarswellNat 3180 (Federal Court of Canada – Trial Division)

Groupe G. Tremblay Syndics Inc. v. Canada (Superindentent of Bankruptcy) 1997 CarswellNat 771 (Federal Court of Canada – Trial Division)

Krop v. College of Physicians & Surgeons (Ontario) 2002 CarswellOnt 271 (Ontario Divisional Court)

Roy v. Poitras 2006 CarswellNat 5957 (Federal Court)

Sam Lévy & Associés Inc. v. Mayrand 2005 CarswellNat 4657 (Federal Court)

Sheriff v. Canada (Attorney General) 2007 CarswellNat 515 (Federal Court of Appeal)

Stinchcombe v. Law Society (Alberta) 2002 CarswellAlta 539 (Alberta Court of Appeal)

Statutes, Regulations (ie Rules), Directives, Policies and Programs

Bankruptcy and Insolvency Act, R.S., 1985, c. B.3, s. 5(2) and 5(3) (e)

Bankruptcy and Insolvency Act, R.S., 1985, c. B.3, s. 14.01(1) (d), (e), and (f)

Bankruptcy and Insolvency Act, R.S., 1985, c. B.3, s. 14.02(2)

Bankruptcy and Insolvency Act, R.S., 1985, c. B.3, s, 41(8) and (8.1)

Policy on Publicizing Professional Conduct Matters (July 12, 2001)

Program No. 1 — Superintendent of Bankruptcy's Programs Effective April 1, 1994 (II. — Taxation of the Trustee's Accounts in Summary Administration)

Superintendent Memorandum – Professional Conduct and Publicity of Decisions (July 12, 2001)

I find the decision of the Supreme Court of Canada in Blencoe v. British Columbia (Human Rights Commission) 2000 SCC 44,190 D.L.R. (4th) 513 to be the most helpful.

[8] In that case, complaints of sexual harassment were filed against a case petitioner who held public office. Complaints were eventually referred for hearing. The petitioner applied for judicial review to terminate proceedings on the ground that a 33 month pre-hearing delay breached s. 7 of the Charter.

[9] Bastarache J, on behalf of the Court, found there was no breach of s. 7 of the Charter. The Court went on to consider whether the petitioner was entitled to a remedy, pursuant to Administrative Law Principles. At paragraphs 101 and 102 he states as follows:

101. In my view, there are appropriate remedies available in the administrative law context to deal with state-caused delay in human rights proceedings. However, delay, without more, will not warrant a stay of proceedings as an abuse of process at common law. Staying proceedings for the mere passage of time would be tantamount to imposing a judicially created limitation period (see: R. v. L. (W.K.), [1991] 1 S.C.R. 1091 (S.C.C.), at p.1100; Akthar v. Canada (Minister of Employment & Immigration), [1991] 3 F.C. 32 (Fed. C.A.). In the administrative law context, there must be proof of significant prejudice which results from an unacceptable delay.

102. There is no doubt that the principles of natural justice and the duty of fairness are part of every administrative proceeding. Where delay impairs a party's ability to answer the complaint against him or her, because, for example, memories have faded, essential witnesses have died or are unavailable, or evidence has been lost, then administrative delay may be invoked to impugn the validity of the administrative proceedings and provide a remedy (D.J.M. Brown and J.M. Evans, Judicial Review of Administrative Action in Canada (loose-leaf), at p. 9–67; W. Wade and C. Forsyth, Administrative Law (7^th ed. 1994), at pp. 435–36). It is thus accepted that the principles of natural justice and the duty of fairness include the right to a fair hearing and that undue delay in the processing of an administrative proceeding that impairs the fairness of the hearing can be remedied (see, for example, J.M. Evans, H.N. Janish and D.J. Mullan, Administrative Law: Cases, Text and Materials (4^th ed. 1995), at p. 256; Wade and Forsyth, supra, at pp. 435–36; Nisbett, supra, at p.756; Canadian Airlines, supra; Ford Motor Co. of Canada v. Ontario (Human Rights Commission) (1995), 24 C.H.R.R. D/464 (Ont. Div. Ct.); Freedman v. College of Physicians & Surgeons (New Brunswick) (1996), 41 Admin. L.R. (2d) 196 (N.B. Q.B.).

[10] And further, at paragraphs 105 at 106 he makes the following comments:

105. It is trite law that there is a general duty of fairness resting on all public decision-makers (Martineau v. Matsqui Institution (No. 2) (1979), [1980] 1 S.C.R. 602 (S.C.C.), at p.628). The human rights processes at issue in this case must have been conducted in a manner that is entirely consistent with the principles of natural justice and procedural fairness. Perhaps the best illustration of the traditional meaning of this duty of fairness in administrative law can be discerned from the following words of Dickson J. in Martineau, at p.631:

In the final analysis, the simple question to be answered is this: Did the tribunal on the facts of the particular case act fairly toward claiming to be aggrieved? It seems to me that this is the underlying question which the courts have sought to answer in all the cases dealing with natural justice and with fairness.

106. Throughout the authorities in this area, terms such as "natural justice", "procedural fairness", "abuse of process", and "abuse of discretion" are employed. In Martineau, at p.629, Dickson J. (writing for three judges, while all nine concurred in the result), stated that "the drawing of a distinction between a duty to act fairly, and a duty to act in accordance with the rules of natural justice, yields an unwieldy conceptual framework". With regard to these terms, I would adopt the following words of Sherstobitoff J.A. of the Saskatchewan Court of Appeal in Misra v. College of Physicians & Surgeons (Saskatchewan) (1988), 52 D.L.R. (4th) 477 (Sask. C.A.), at p.490:

There are two common denominators in each of the terms. The first is the impossibility of precise definition because of their breadth and the wide array of circumstances which may bring them into play. The other is the concept of "fairness" or "fair play". They clearly overlap. Unreasonable delay is a possible basis upon which to raise either of them.

[11] There is no doubt that these proceedings could have moved along at a much quicker pace. The OSB did not seem well-organized as to the production of documents. Although they had produced six binders full of documents to support their allegations, these were selective documents.

[12] The trustees wanted to know what other documents were available. This seems to be a reasonable request considering the time frame which the allegations cover. As a result, the proceedings were delayed.

[13] The trustees also requested "will say" statements of all potential witnesses. Although the OSB found this an unusual request, I do not. After a commitment by counsel for the OSB indicating that the witnesses would confine their evidence to what was contained in the allegations; counsel for the trustees withdrew their request. This resulted in a delay of the hearing.

[14] The OSB decided to do a practice review and conveyed their intent to the trustees in October 2007. The trustees were in the middle of preparation for this hearing and requested that this practice review be postponed until after the hearing. The OSB refused. As a result, I adjourned the scheduled hearing to allow the trustees proper time to prepare.

[15] In addition to the delay, the trustees also rely upon other allegations, which I have set out above.

[16] I am mindful that this is an administrative hearing pursuant to a federal statute and not a criminal trial.

[17] I am satisfied that the matters raised by the trustees in their stay application can be dealt with in dealing with the allegations on their merits. As such, I would dismiss the stay application.

Stay Request Relating to Donald MacLeod

[18] At the opening of the proceedings Ms. Martin, on behalf of the trustee Donald MacLeod, requested the OSB to consider staying the allegations against Donald MacLeod on the basis of his ill health.

[19] At the time of the request, Mr. MacLeod, who was 89 years of age, was hospitalized and being treated for cancer. Counsel for the OSB refused to stay the allegations against Mr. MacLeod.

[20] Upon the completion of the evidence on October 10^th and in particular after hearing the evidence of Allen MacLeod as it related to the health of his father, Donald MacLeod, I asked the OSB to reconsider their position against Donald MacLeod. On October 12, the OSB agreed to stay the six months allegations against Mr. MacLeod. Donald MacLeod passed away on October 25, 2008.

Allegations

[21] In her 118 page report Ms. Laperrière sets out the allegations against the trustees. Under each heading she provides details in support of the allegation. The material to support the allegation is contained in the 6 binders, filed. The allegations are as follows:

Alleged Contraventions

1. Bank balances of estate and insolvency files deposited in an "Interest Account".
2. Applications for trustee discharge while having a bank balance in the estate account.
3. Surplus from the consolidated trust account for summary administrations deposited in an "Interest Account".
4. Moneys withdrawn for various uses from an "Interest Account".
5. Statements of Receipts and Disbursements.
6. Unauthorized fee withdrawal in a consumer proposal.
7. "Clearing Account" used to post estate transactions.
8. Co-mingling of funds in consolidated trust accounts.

   a) Summary estates converted to ordinary in the consolidated trust account for summary administrations.

   b) Division I proposals in the consolidated trust account for consumer proposals.

9. Disbursement claimed for services performed by a related person.
10. "Third Party Account" used to post estate transactions.
11. Moneys not deposited forthwith.
12. Delay in the administration of estates.

    a) Estate of Mary Elizabeth Ann Ruda filed on September 2, 1987.

    b) Estate of 595880 Ontario Limited filed on September 22, 1989.

[22] There is no allegation, or suggestion, that the trustees misappropriated any monies.

Nature of the Offences under the Bankruptcy and Insolvency Act and Regulations:

[23] Section 14.01 (1) of the Bankruptcy and Insolvency Act reads as follows:

14.01 (1) [Decision affecting license]

Where, after making or causing to be made an investigation into the conduct of a trustee, it appears to the Superintendent that

(a) a trustee has not properly performed the duties of a trustee or has been guilty of any improper management of an estate,

(b) a trustee has not fully complied with this Act, the General Rules, directives of the Superintendent or any law with regard to the proper administration of any estate, or

It is in the public interest to do so,

[24] Mr. Wetzel's position, on behalf of the OSB, is that issues of diligence and intent are relevant to the sanction stage, as opposed to the liability stage, where we need to look strictly at whether the Act/Rules/Directives were complied with. In support of his position, Mr. Wetzel referred to the decision in CTC Crown Technologies Corp. A.S.C.S. 1940. This is a decision of the Alberta Securities Commission relating to an individual who failed to provide full disclosure of all material facts in a prospectus filed with the commission. As well, they included an untrue statement of material fact in an Offering Memorandum filed with the commission. At page 6 of their decision they state:

(i) whether due diligence can be a defence in this type of proceeding

If this were a prosecution of an alleged offence under the Act, then due diligence could be a complete defence. That is because offences under the Act are "strict liability" offences according to the categories described by the Supreme Court of Canada in R. v. Sault Ste. Marie (1978), 85 D.L.R. (3d) 161. Dickson J. described this category as follows, at pp. 181–2:

Offences in which there is no necessity for the prosecution to prove the existence of mens rea; the doing of the prohibited act prima facie imports the offence, leaving it open to the accused to avoid liability by proving that he took all reasonable care. This involves consideration of what a reasonable man would have done in the circumstances. The defence will be available if the accused reasonably believed in a mistaken set of facts which, if true, would render the act or omission innocent, or if he took all reasonable steps to avoid the particular event. These offences may properly be called offences of strict liability.

Because these proceedings are not a prosecution of an alleged offence under the Act, the defence of due diligence is not available to the Respondents (Gordon Capital Corporation v. Ontario Securities Commission (1991), 14 OSCB 2713). These proceedings are regulatory and any sanctions we impose are intended to protect the public. This is distinct from the quasi-criminal proceedings of a prosecution under the Act and the penal consequences that may flow from such a prosecution. So, even if the Respondents were able to establish due diligence sufficient to provide a defence to a prosecution under the Act, that would not necessarily prevent the Commission from exercising its regulatory and discretionary powers to impose sanctions upon the Respondents.

Notwithstanding that due diligence is not a defence in this type of proceeding, it may properly be considered by the Commission as a relevant factor in determining what sanctions are appropriate. Even if the Respondents' actions fall short of due diligence, they may still be relevant in determining what sanctions are appropriate.

[25] Ms. Martin, on behalf of the trustees, takes the position that these are professional conduct decisions and as such are "strict liability" offences. She refers to two decisions in support of her position. They are Stuart v. College of Teachers (British Columbia) (2005) 254 D.L.R. (4th) and Ghilzon v. Royal College of Dental Surgeons (Ontario) (1979) 22 O.R.(2d) 756 (Div. Ct.)

[26] In Ghilzon the appellant was appealing a decision of the Royal College of Dental Surgeons whereby he had been disciplined as a result of allowing a person who was not licensed to practice dentistry. The college found him guilty and also made a finding of credibility. On appeal to the Divisional Court Henry J., on behalf of the Court, referred to the decision in Regina v. Sault Ste. Marie. He reviewed the three types of offenses, namely those that required mens rea; those offenses where it was not necessary to prove the existence of mens rea, only the doing of the prohibited act, leaving it open to the accused to avoid liability by proving that he took all reasonable care. And thirdly, offenses of absolute liability where it is not open to the accused to exculpate himself by showing that he was free of fault.

[27] The court found that the offense before them fell within the second category. Although the appellant offered an explanation, his explanation was not accepted by the discipline committee. Likewise, the Court found that the appellant had not discharged the onus showing that he took all reasonable care to avoid the commission of the offense in the circumstances.

[28] It is my view that the allegations of misconduct, pursuant to the Bankruptcy and Insolvency Act, Regulations, and Directives, are strict liability offenses. It is open for the respondent to prove that he took all reasonable steps under the circumstances. I do not agree that his explanation must be left until the penalty phase of the hearing.

Overview

[29] The office of the Superintendent of bankruptcy (OSB), under the provisions of the Bankruptcy and Insolvency Act has the responsibility and authority of licensing trustees in bankruptcy, supervising their activities, and disciplining them. The discipline can be in various forms, including the removal of the trustees' license. The OSB is in a rather unique position of carrying out all of these functions.

[30] The trustees who are licensed by the OSB have the duty and responsibility of carrying on their practice in accordance with the provisions of the BIA, the regulations passed there under, and directives issued by the OSB from time to time.

[31] The Superintendent of Bankruptcy may delegate his investigative authority to someone else pursuant to the provisions of section 14.01 and 14.02 of the BIA.

[32] At the conclusion of the investigation, the delegate will prepare a written report for the benefit of the Superintendent and if the report alleges misconduct on behalf of the trustee, then the delegate will also recommend sanctions. A copy of the report is eventually served upon the trustee and the trustee is entitled to a hearing in accordance with the provisions of 14.02(1) and 14.02(2). The Superintendent may conduct a hearing himself or he may delegate the responsibility to some other person.

Evidence and Findings

[33] Sylvia Laperrière was a senior analyst in the office of the Superintendent of Bankruptcy. On January 13, 2005, she was requested by the Superintendent of Bankruptcy to carry out an investigation of the trustees practice. In preparation for her investigation she reviewed previous monitoring and auditing reports that had been prepared by her colleagues.

[34] In addition, she met with various people in the office of the Superintendent of Bankruptcy and conducted interviews. She kept very few, if any, notes of internal interviews.

[35] The first monitoring report that Ms. Laperrière relied upon was one prepared by Barry Schur. This report was as a result of his attendance at the offices of the trustees between August 13 and 17, 2001. During that time, he reviewed 10 estate files, nine of which were open and one was closed. As a result of his review he found eight irregularities.

[36] The most serious irregularity related to the operation of an interest trust account. The funds in the account represented the accumulation of interest on a large number of the estates which had not been distributed.

[37] Mr. Schur recommended corrective action and one recommendation was the closing of the interest account and remitting the funds to the OSB. There was no recommendation for any action or disciplinary procedure.

[38] The next report was prepared by Jean-Louis Boucher. His report is dated October 4, 2002 and he attended at the offices of the trustees between June 4 and 7, 2007.

[39] Mr. Boucher reviewed the banking procedures of the trustee namely the consolidated bank accounts, one for summary estates, one for consumer for proposals, and one for third-party.

[40] He noted the irregularities relating to the bank accounts, and the administration of the practice. He recommended corrective procedures, but did not recommend any disciplinary procedures.

[41] Neither Mr. Schur nor Mr. Boucher testified at the hearing.

[42] Richard Hunter carried out an audit of the trustees practice in June 2003. He prepared a report with certain recommendations contained therein. After Ms. Laperrière was appointed to carry out her investigation by the Superintendent, she requested Mr. Hunter to re-attend the trustees' office and to carry out a further and special audit relating to their practice and to update his previous report of June 2003. Mr. Hunter attended from June 6 to 22. Mr. Hunter testified at the hearing that, in addition to following up on his 2003 report, he was also asked to review the estate of 595880 Ontario Inc. and the file of one Michael Browne. I will deal with his report in more detail.

[43] Ms. Laperrière went through her 25 page report containing 115 paragraphs relating to allegations of misconduct against the trustees. In addition, she referred to the six volumes of attachments filed in support of her report.

[44] As Ms. Laperrière's evidence-in-chief mirrored her report, I will not go through all her evidence-in-chief. However, I will deal with each of the allegations set forth in her report, which on the face of it, appeared very complete. However, on cross-examination by Mr. Christian, it became apparent the report had been crafted to support the allegations and lacked both impartiality and objectivity.

[45] Mr. Christian asked Ms. Laperrière a series of questions relating to principles which must be followed in carrying out an impartial investigation. The questions and answers were as follows:

Q. Given your experience in these matters, then, would you agree with me, Ms. Laperrière, that the following are very important principles to keep in mind during an investigation? We will start with neutrality and impartiality as to the result?

A. Yes.

Q. Objectivity without expression of personal opinion?

A. Yes.

Q. That you or the investigator as such acts as a fact gatherer and not a decision maker?

A. Yes.

Q. That you must exhibit a high degree of professionalism?

A. Yes.

Q. That you should adhere to the rules and guidelines for a fair, balanced and open-minded hearing?

A. Yes.

Q. And that you should maintain at all times confidentiality as best you can in the context of the investigation?

A. Yes.

Q. And the fundamental principle, would you agree with me, is you obtain the evidence that exists whether that convicts or exonerates?

A. Yes.

In a further response to one of Mr. Christians questions asking whether it was fair that she would group together a series of 10 estates from 1997 until now and that they should form the grounds for discipline, she stated:

It is a contravention. It is not a question of fairness. This is what happened in those estates. They were not — whenever converted, the trustee didn't comply with the directive.

[46] In addition to not keeping any notes of the interviews, she did not keep a list of documents and files which she reviewed. This made it rather difficult for counsel for the trustees to carry out a proper defense to the allegations.

[47] I am satisfied that Ms. Laperrière's years of investigation and subsequent report lacked the necessary objectivity and impartiality and as such her evidence and her report must be weighed and scrutinized very carefully.

[48] There was also evidence that within the office of OSB not everyone agreed with the disciplinary measures that were being taken.

[49] Fortunately, Mr. Richard Hunter, a former RCMP officer, took notes of some conversations. One of the conversations that Mr. Hunter recorded was a telephone conversation on January 27, 2005 with Michelle Leduc. The notes read as follows:

Date: January 27, 2005

0745 Michel Leduc told me that following the conference call between him, Sylvie and the DAS from the Ottawa office, it was agreed that the disciplinary investigation on the allegations in the audit report be suspended for the following reasons:

• Jean-Louis Boucher was not coherent during the call and went off on all sorts of tangents concerning the trustee's actions.
• He did not acknowledge the seriousness of what had been done to the audit report, adding that everything seemed to be settled.
• The OSB should focus on the IOTA project and the "170" reports.
• Jean-Louis did not want to request a disciplinary investigation since he had already done so.
• As for the interest account and the approximate $33,000, the "T" had paid back approximately $19,000 and the difference had been settled.
• Regardless, the difference was tax refunds and it was partly justified and settled just the same.

Michel told me that he and Sylvie Laperrière thought that Jean-Louis was not a credible witness in this case, with the position he has taken on the contents of the audit report, and that he will never be able to testify properly. Furthermore, with the decision handed down in Metivier et al., Sylvie is obviously going to ensure that all the established processes are followed and that if Jean-Louis does not request a disciplinary investigation, she will not take it upon herself to initiate it.

I vehemently expressed my disagreement with this decision. I acknowledged that if those who are accountable, such as Raymond Villemure, Patricia Alferez and Jean-Louis Boucher, refuse to assume responsibility, it is not up to Sylvie to do it for them.

As for Jean-Louis' position regarding the audit report, I informed Michel that Jean-Louis had already told me that he felt there was nothing new in the report, and that he knew all that. I added that, if he knew about it, why he didn't do anything! In addition, we had a brief conversation last week about Macleod and the $33,000. I told Jean-Louis about my meeting with Michel Leduc on the case. Rita Lamontagne was also present. I mentioned to him about the inquiry that was held on the approximate $14,000, the difference between the $33,000 and the $19,000 that was paid back, to find out whether he had come to some kind of understanding on this amount, and he said no. He also said that the account balance was the only thing discussed.

So I do not understand Jean-Louis' position on the audit report, the change in his information and the fact this was all done without any previous discussion.

I tried to reach Sylvie Laperrière and left a message on her voicemail. Then she left me a message informing me that she received the information on the Brown case, and that the incidents were very serious. She wanted to talk and suggested that we reserve some time at St-Sauveur to do that.
RH

[50] Ms. Laperrière was asked whether she recalls his conversation. Her answer was 'I recall that conversation, but do I fully recall it, I don't know".

A. Bank Balances of Estate and Insolvency Files Deposited in an "Interest Account"

[51] In the monitoring report prepared by Barry Schur dated August 17, 2001 he identified the operation of the interest account. In his comments he recommended this account be closed.

[52] The account had originally been established in 1998 to maximize dividends to creditors in ordinary administration files. The trustee was required to prepare a statement of receipts and disbursements ("SRD") and at that time the bank froze the interest in the estate. By using the interest account the trustees were able to provide continued interest to the benefit of all of the creditors.

[53] In preparing the SRD, an estimate was made as to the amount of interest which would accrue until the estate was completed and dividends paid. The estimate of accrued interest was added to the actual interest earned at the commencement of the preparation of the SRD.

[54] As sometimes the interest was either too much or too little, the interest account was used to adjust the interest in the estate.

[55] After it was recommended that the account be closed, the trustees wrote to Claude Leduc, the District Assistant Superintendent at the Office of the Superintendent in Bankruptcy. The letter read in part as follows:

…The monitors state that we should not be including the estimated interest in the ordinary accounts that the interest account should be closed and the funds in this account should be forwarded to the Superintendent of Bankruptcy as undistributed assets. This matter was discussed with the monitor at some length, and while he agreed with some of our arguments, he said the final decision rests with you. We'd like to discuss this matter with you in more detail.

[56] According to the evidence of Allen MacLeod, which I accept, he arranged to meet with Mr. Leduc to discuss the matter. He met with him on September 24, 2001 as noted in Mr. Allen MacLeod's daybook. There was no follow-up confirmation, but according to Allen MacLeod, Mr. Leduc authorized them to continue with the interest account.

[57] Claude Leduc testified at the hearing and all he could say was he did not recall any meeting. He could not deny that such a meeting took place. He did say, however, he did not think he would have authorized the continuation of the interest account.

[58] Mr. Leduc has been retired for a number of years and, unfortunately, all his files and records were either destroyed or lost. As a result, he had no way in which to refresh his memory or to verify or reject the evidence of Allen MacLeod. I therefore accept the evidence of Allen MacLeod and conclude they were authorized to continue the interest account until they received notice in March of 2003 from Jean-Louis Boucher, then a senior analyst with the OSB, to close the account and to forward all monies to the Superintendent of Bankruptcy.

[59] Although there is some issue as to whether the trustees forwarded all of the monies, I am satisfied with the explanation given by Allen MacLeod that any discrepancy was as a result of adjustments made to the estates.

[60] On March 31, 2003 Jean-Louis Boucher wrote to Donald MacLeod confirming that they received the monies and there was a balance of $1,126.00 owing in order to close the account. In that letter, he concludes by stating:

This should conclude our concerns relating to the accumulation of undistributed funds in the account called interest.

[61] On that basis, I find that there was no impropriety or misconduct on behalf of the trustees in the operation of the interest account.

B. Applications For Trustee Discharge While Having A Bank Balance In The Estate Account

[62] The allegation is that after the date of the order discharging the trustee, amounts were withdrawn from some estates and insolvency files to be deposited in the interest account. This is contrary to the provisions of the Bankruptcy Act and the Rules which provides that undistributed funds must be forwarded to the Superintendent prior to the application for discharge order by the trustee.

[63] In addition, there's an allegation that withdrawals totalling $1160.54 were made in three estates under the responsibility of Allen W. MacLeod. This amount was deposited in the interest account after the trustee was discharged.

[64] In two other estates under the responsibility of Allen W. MacLeod, amounts were remitted to the OSB as undistributed assets but only after the trustee were discharged.

[65] Allen MacLeod, in his evidence, admits there were balances in those estates as detailed at the time of the trustees' application for discharge. But this was as a result of an administrative error. There was no prejudice to any creditor as they all received the full amount of the dividends.

[66] With regards to the other two estates the amount in issue is $74.58 and $24.74. Once again, this was an administrative error and the funds were forwarded to the Superintendent of Bankruptcy. It's interesting to note the age of the estates referred to under this section. There are five estates over a span of five years in the age from six to twelve years. Even Ms. Laperrière agrees that they were "a little old".

[67] Mr. MacLeod, in his evidence, testified as to the number of estates that their firm handled. Filed as an exhibit was a breakdown showing that they handled 2177 estates, which included 89,268 transactions and the dollars transacted were $21,595,694.41. When one looks at the volume of transactions and estates, the allegations against MacLeod appear to be taken out of context. It would almost appear that OSB is searching to find some irregularity, no matter how small, in order to support their allegations of misconduct.

[68] I accept Mr. MacLeod's evidence that the irregularities as set forth in these allegations were as a result of administrative errors, and that there was no prejudice to the estates or the creditors, nor any benefit to the trustees. Technically, there may be a breach of the Bankruptcy Act and Rules. However, it was certainly unintentional.

C. Surplus From The Consolidated Trust Account For Summary Administrations Deposited In An "Interest Account"

[69] Based upon information contained in 2003 audit report indicated that funds deposited in the interest account included a $2381.20 surplus transferred from the consolidated trust account for summary administrations in December 1999. The transfer of $2391.20 was done to correct the difference recognized in November 1999 bank reconciliation. No cheque or bank statement was was ever produced in support of this allegation.

[70] The trustee in response to this allegation explained the software program they use known as ISS, which had numerous problems. In fact the trustees called a witness, Rick Sack, who testified as to the problems associated with this software program. It was not confined to these trustees, but was common to all trustees. One way of correcting the problems was by journal entries and that is what was done in this case. A journal entry was made transferring the surplus from the consolidated trust fund for summary administrations to the interest account.

[71] This was identified in Mr. Hunter's report of August 19, 2004 and was recommended that the trustees refrain from using journal entries as a tool to reconcile the books with the bank balances. After this recommendation, the trustees ceased using journal entries and assumed that was the end of the matter.

[72] As his method of accounting was first identified by Mr. Hunter and once identified, was ceased by the trustees, I find no misconduct on behalf of the trustees.

D. Moneys Withdrawn For Various Uses From An "Interest Account"

[73] The allegations under this section of the report relate to the 2003 audit report, where they identified withdrawal from the trust bank account entitled "interest account", contained monies coming from various estates. In view of my decision in paragraph A relating to a finding that the trustees were authorized to maintain the interest account for a definite period and when directed to cease they closed the account. Since they did so, I find no misconduct on behalf of the trustees.

[74] A specific allegation relating to matters under this section are set out in paragraphs 42 to 50 of Ms. Laperrière's report.

42. According to the 2003 Audit Report and the Investigation, the trustee did not issue a complete and accurate Statement of Receipts and Disbursements ("SRD") in the estate of Harold Thomas Graham McKay and in the Division I proposal of Peter Alan Kent Fallis by not reporting the full amount of interest received by the trustee. Also, in the estate of Stephanie Marion Smith which was under the responsibility of Allen W. MacLeod, after the final SRD was issued by the trustee, no additional GST was issued to report a $398.00 BIA refund received by the trustee and payments made to the solicitor of the estate and to a courier totalling $259.63. Furthermore, the trustee withdrew the balance of $138.37 without the required permission.

43. In the consumer proposal of David Andrew Henry Clarke, which was under the responsibility of Donald A. MacLeod, the SRD dated June 17, 2002 reported $25,325.00 as being paid by the debtor when in fact, only $24,475.00 was paid as shown on the Detail Trial Balance of the estate. The difference of $850 was the $832.75 transferred from the Interest Account and additional interest paid to the estate. Also, the SRD reported $194.51 as interest earned while according to the Detail Trial Balance the actual interest earned as of June 17, 2002 was $212.49.

44. Finally, the trustee appears to have calculated his fees based on the incorrect total paid by the debtor and the incorrect amount of interest. Fees withdrawn amounted to $2,426.98 rather than the sum of $2,196.03 which would be allowable on the $24,475.00 actually paid by the debtor and interest of $212.49 which was actually earned. Further, the SRD listed the fees withdrawn as $2,237.63 which does not correspond with the correct fee calculation of the fees actually withdrawn. The administrator Donald A. MacLeod knew or ought reasonably to have known that the SRD issued in this consumer proposal was false.

45. In the receivership of Sarah Clothes Ltd. in which D. & A. MacLeod Ltd. acted as receiver, the final SRD was issued in December 1995. After this date, there were additional receipts totalling $3,309.68 and additional disbursements totalling $472.92. However, no final report and statement of accounts was ever issued.

46. On or about July 24, 1998, the trustee Allen W. MacLeod issued, in the bankruptcy of Harold Thomas Graham McKay, a final Statement of Receipts and Disbursements that did not contain a complete account of the amount of interest received by the trustee, showing interest earned of $11,213.89 instead of $12,477.88, thereby contravening section 13.5 and subsection 152(1) of the Act and Rules 36 and 39.

47. On or about September 20, 1999, the trustee Allen W. MacLeod signed, in the Division I proposal of Peter Alan Kent Fallis, a final Statement of Receipts and Disbursements that did not contain a complete account of the amount of interest received by the trustee, showing interest earned of $416.31 instead of $729.42, thereby contravening section 13.5 and subsection 152(1) of the Act and Rules 36 and 39.

48. The trustee Allen W. MacLeod did not issue, in the bankruptcy of Stephanie Marion Smith, an amended or a supplementary Statement of Receipts and Disbursements, to report a $398.00 GST refund received by the trustee, a $250.00 payment made to the solicitor of the estate and a $9.63 payment to a courier. The trustee also withdrew the balance of $138.37 without the required permission after the final Statement of Receipts and Disbursements was issued on August 9, 2001, thereby contravening section 13.5, subsections 25(1.3) and 152(1) of the Act and Rules 36 and 39.

49. On or about June 17, 2002, in the consumer proposal of David Andrew Henry Clarke, Donald A. MacLeod signed a Statement of Receipts and Disbursements showing that $25,325.00 was paid by the debtor when the actual amount paid was $24,475.00, that $194.51 in interest was earned when the actual amount earned was $212.49, and showing $2,237.63 as Trustees Fees & Disbursements while the actual fees taken were $2,426.98 and ought to have been $2,196.03. By signing a document that did not contain a complete and accurate account of all moneys received and remuneration claimed, which the administrator knew or ought to have known was false he thereby contravened section 13.5 and subsection 152(1) of the Act and Rules 36, 39 and 45.

50. D. & A. MacLeod Company Ltd., acting as receiver in the receivership of Sarah Clothes Ltd., did not issue a final report and statement of accounts to disclose additional receipts and disbursements received after the final Statement of Receipts and Disbursements was issued in December 1995, thereby contravening subsection 246(3) of the Act.

[75] The explanation given by Mr. MacLeod was that allegation 46 and 47 was an error made by his staff, for which he takes responsibility. Allegation 48 related to legal fees paid to counsel. At the time of signing the SRD he thought they were correct and accurate. The trustees did not benefit from any of these administrative errors. I am satisfied with Mr. MacLeod's explanation and find there is no misconduct on the part of the trustees. If the offenses under the Bankruptcy and Insolvency Act are absolute offenses, then of course there'd be no defense to the allegations. A mere mistake or accounting error would not be a proper defense to satisfy the allegations. As I have indicated earlier, I find it hard to accept that these offenses are absolute. It would place trustees in a very unique position above all other professionals who are only human and subject to human error. I am sure no professional can allege that they have never made a mistake during their career. As has been pointed out, the trustees have not financially benefited from any of these mistakes. They may have used some creative accounting techniques to adjust the estates, but it would also appear that no creditor or debtor has suffered.

F. Unauthorized Fee in a Consumer Proposal

[76] In this case, the trustee calculated his fee based upon the wrong amount in the estate. The wrong amount was as a result of an NSF cheque in the amount of $850 being returned, and therefore amending the amount shown in the SRD. The alleged overcharge is $230.95 in excess of the tariff. In defense, the trustees rely upon rule 129(1)(c) of the general rules made under the Bankruptcy and Insolvency Act, which provides a trustee a percentage fee to be calculated on the monies distributed to creditors. The trustees denied that any unauthorized fees were taken. I accept their position in relation to this allegation.

G. Clearing Account Used To Post Estate Transactions

[77] Under this heading, Ms. Laperrière reviews a number of estates in paragraphs 54 to 60. The details of the estates are as follows:

54. The 2003 Audit Report indicated that, in November 1999, the bank reconciliation of the consolidated trust account for summary administrations ("summary CBA") indicated a surplus of $2,381.20 in the bank over the total of the "Summary of Estates Balance" report. A sub-account named "Clearing Account" was created in the summary CBA and the surplus was transferred to this account in December 1999.

55. The 2003 Audit Report provided further details about the operation of that sub-account which was used by the trustees from December 1999 until March 2003. The report reviewed transactions related to two specific estates, Roxanne Lynn St-Jacques and Vivian June Schroeder, which were under the administration of Allen W. MacLeod, and two other specific estates, Mildred Colleen Fischer and Andrew Roger Perrin, which were under the administration of Donald A. MacLeod.

56. In the bankruptcy of Roxanne Lynn St-Jacques, the Detail Trial Balance of the estate indicates that a G.S.T. refund in the amount of $152.00 was deposited by the trustee into the estate account in June 1998 and returned to the debtor in June 2000 with cheque #28656. However, according to the Detail Trial Balance of the "Clearing Account", that cheque was cancelled in March 2001 and re-issued to the debtor on the same date with cheque #32104. The 2003 Audit Report also indicated that although the cheque cleared the bank, the trustee was not able to provide the processed cheque. However, the two entries made in the "Clearing Account" should have been made in the Detail Trial Balance for the estate.

57. As indicated in the 2003 Audit Report, a similar situation occurred in the bankruptcy of Vivian June Schroeder where the trustee returned 3 G.S.T. refunds totalling $232.00 to the debtor with cheque #35008 in November 2001. In the Clearing Account, that cheque was cancelled in October 2002 and re-issued on the same date but payable to the Receiver General for Canada. The 2003 Audit Report also indicated that the cheque cleared the bank but it could not be found in the file.

58. In the bankruptcy of Mildred Colleen Fischer, the Detail Trial Balance of the estate indicates that the debtor was refunded a $278.26 surplus amount in the payments made under her conditional order of discharge with cheque #24017 in September 1999. However, this cheque was voided in June 2000 as noted by the auditor on the Detail Trial Balance and posted first as a deposit to the "Clearing Account" then as a cheque payable to Mrs. Fischer and finally as a cancelled cheque leaving a balance of $278.26 in the "Clearing Account". In this case, it seems that Mrs. Fischer was never refunded the amount of $278.26.

59. In the bankruptcy of Andrew Roger Perrin, the Detail Trial Balance of the estate indicates that a G.S.T. refund in the amount of $14.14 was refunded to the debtor in June 2000 with cheque #28087. However, the $14.14 then appears in the "Clearing Account" which was used instead of the estate Detail Trial Balance to post that cheque that was cancelled in March 2001 as well as another cheque #32102 re-issued for the same amount which was also cancelled in March 2001.

60. This accounting procedure by which some estate transactions were posted in a "Clearing Account" was contrary to a sound accounting practice which requires that all transactions related to an estate be posted in the specific estate account. The posting of such transactions in a "Clearing Account" did not comply with the requirement of the Directive No. 5 on Estate Funds and Banking that the summary CBA be maintained in good order and that an estate ledger for a trust account contains all the transactions related to that specific estate.

[78] Allan MacLeod, in his evidence, explains the operation of the clearing account. This account was opened in December 1999 to correct ongoing ISS software errors. It was considered a temporary account to correct the ISS mistakes and to bring the balance of the consolidated trust account into alignment with the bank balance.

[79] In his reply evidence he described the operation of account is being used for:

(1) to make correcting entries related to ISS software errors;

(2) to clear stale dated cheques and remit the amount of such stale dated cheques to the OSB; and

(3) to remit monies on behalf of bankrupts.

[80] The amount of the total hundred transactions in the account was closed in October 2001. In his reply he addresses each of the estates that are set forth in the allegation. His final comment is as follows:

No monies were lost from the clearing account, no monies were received by the trustees from the clearing account and the account was maintained in a transparent and orderly fashion.

H. Co-Mingling Of Funds In Consolidated Trust Accounts

a) Summary estates converted to ordinary in the consolidated trust account for summary administrations.

[81] Under directives issued by the OSB from time to time, the trustees were required to maintain separate trust bank accounts for ordinary administration of estates. They were allowed to maintain a consolidated bank account for summary administrations estates.

[82] From time to time some of the files were converted to an ordinary administration. These files required the trustee to establish a separate trust account for that estate. The allegations set forth in paragraph 63 to 69, identifying specific estates alleged that the trustee failed to follow the directives and establish the separate trust account.

[83] These estates were also identified in reports issued by the OSB in 1997, 2001, 2002 and 2003. The estates cover between 1994 and 2003. The allegations appear to be that they did not proceed quickly enough in opening up the new trust account. In allegation 69 they state:

The trustee Allan W. MacLeod did not fully cooperate with representatives of the Superintendent by not implementing the corrective measures required further to the Monitoring and Audit reports regarding the opening of a separate bank account immediately after the conversion of a summary estate, thereby contravening section 13.5 of the Act and Rule 37.

[84] Mr. MacLeod's response to this allegation was that it represented a very small portion of the estates, which were being administered by them. For example, in 1997 they had 475 ordinary estates in 2423 summary administration estates. When asked as to what percentage the allegations are in relation to the summary estate, his response was "it is 100^th of 1%."

[85] If the trustee is guilty of any misconduct it is the fact he did he did not move quickly enough to establish a separate trust account. Mr. MacLeod's comment in his reply is:

While these accounts were not immediately converted due to administrative oversight, the estates identified earned an equal amount of interest prior to conversion and there was no prejudice to any of the shareholders, including creditors.

b) Division 1 proposals in the consolidated trust account for consumer proposals.

[86] The allegations under this subheading relate to the 2003 audit report and the investigation, where it indicated that some division one proposals were administered in the consolidated trust account for consumer proposals. This is contrary to subsection 25(1) of the Act which requires that the trustee deposit in a bank all monies received for estates in a separate trust account for each estate. The allegation identifies two estates.

[87] The trustee in his reply admits this was administrative error, which took place some 9 to 10 years ago. He points out that the effect of opening these estates in the consolidated bank account was an administrative error but it did not prejudice or compromise the administration the estate nor did it prejudice the consolidated bank account for consumer proposals.

I. Disbursements Claimed For Services Performed By A Related Person

[88] In the estate of William John Rowsome the SRD indicated a disbursement in the amount of $341.06 for the preparation of the income tax returns for 1997, 1998 and 1999. According to the 2003 audit report, remuneration claimed by the trustee in the SRD also included the time spent for the preparation of these income tax returns. This is in contravention of both the Act and the Directives on the use of related persons to perform services for bankrupt estates and cost chargeable to the estate.

[89] The explanation given by Mr. MacLeod at the hearing was somewhat confusing. In addition, he also addressed this issue in his reply. He points out that upon an application for discharge the bankrupt received a conditional order of discharge. The bankrupt was delinquent in complying with the order and did not make any payments toward satisfying the order of the Deputy Registrar in Bankruptcy. The bankrupt also neglected to file the post-income tax returns for the tax returns for 1997, 1998 and 1999.

[90] The trustee met with the bankrupt and agreed to prepare the outstanding income tax returns. As a result, there was a substantial tax refund. It is the trustee's position that the completion of these returns was outside of the administration of the estate and that the directive does not apply.

[91] I'm not satisfied that the evidence establishes the charges for the preparation of the income tax returns was a disbursement included in the SRD and in contravention of the Act. I am prepared to give the trustee the benefit of the doubt in this matter.

J. "Third Party Account" Used To Post Estate Transactions"

[92] The 2005 special audit report identifies the third party account was used to post estate transactions which is contrary to Directive five on third-party deposits and guarantees that stipulates that it shall only contain funds received by the trustee as indemnification. The report goes on to provide more detail relating to a real estate transaction. The trustee admits that he made a mistake and that this money should have been posted in the trust account.

K. Moneys not Deposited Forthwith

[93] This allegation relates to the Deady estates. The trustee, after meeting with the bankrupts, received two payments totalling $1,000. The trustee issued a receipt from an unnumbered inter-office memo, but the funds were not deposited or posted on the detailed trial balance of the estates. An inquiry was made and the trustee realized he made a mistake. He took full responsibility for the error and deposited the moneys.

[94] When Ms. Laperrière asked Mr. Hunter if he could attend at the offices of the trustee to conduct a special audit, he was directed to look at the delay in the administration of two estates. One of these estates was Browne and the other was 595880 Ontario Limited. The complaint in Browne was withdrawn. They therefore relied on the Rudda estate, which had been identified in the 2003 audit.

a) Estate of Mary Elizabeth Ann Rudda was filed on September 2, 1987

[95] There was one large creditor of the estate namely Cantu Furniture. If Cantu had been successful with their claim, they would have recovered all of the proceeds of the estate. The trustee disputed Cantu's claim. It wasn't until much later that the trustee was successful in challenging the creditors claim and having it disallowed.

[96] Peter Hargadon Q.C. acted as counsel for Mrs. Rudda. He brought an application before the Deputy Registrar in Bankruptcy to annul the bankruptcy. This was a rather unique type of application and he was successful in his motion. As a result Mrs. Rudda received approximately $70,000.

[97] Counsel for the OSB attended the annulment hearing before the Deputy Registrar in Bankruptcy. They did not oppose the annulment; however, they raised other issues. The transcript before the Deputy Registrar was filed as an exhibit and it's fair to say that the OSB was not well received.

[98] There is no question that the trustee did not administer this estate in a timely manner and with due care. Interestingly enough, Mrs. Rudda attended the hearing and testified in support of the trustee. If the trustee had proceeded more quickly, Mrs. Rudda probably would not have received anything. The delay was to the benefit of Mrs. Rudda.

b) Estate of 595880 Ontario Limited filed on September 22, 1989

[99] One of the creditors in this estate was the Honourable Justice Bernard Manton. The estate was finally completed in 2004. Between the period of 1989 and 2004 Justice Manton wrote numerous letters, not only to the trustee but to the OSB. In addition, he also had his Member of Parliament write to the OSB. Although the OSB threatened to invoke sanctions against the trustee, they never took any real action. Notwithstanding all of the pressure, the trustee did not proceed in a timely manner. The trustee admits that the estate was not administered in a timely fashion, but would rely upon the fact that Justice Manton, as an inspector of the estate, approved the SRD without qualification, and that in addition, they received a letter of comment from the OSB approving the administration of the estate. I do not find this relieves the trustee of his responsibilities.

[100] I find that the trustee is in contravention of paragraphs 115 and 116 of Ms. Laperrière report.

Conclusion

[101] I find the trustees operated the interest account with the consent of the OSB and as such there is no contravention of any provisions of the Act, Rules or Directives.

[102] With reference to allegations B, E, H, J, and K, these were all as a result of administrative error. If I am wrong in the interpretation of the nature of the contraventions, and they are absolute, then the trustee's are in contravention of the various sections of the Act. The fact the trustees made administrative errors would have to be taken into consideration under the sanction section of this hearing.

[103] Regarding C, D, F, G, and I, I find no contravention of the Act, Rules, or Directives by the Trustees.

[104] In the delay in the administration of the two estates, I find the trustee is in breach of the provisions of the Act and Rules and did not complete the estates in a timely manner.

Costs:

I will receive written submissions from the parties regarding the question of costs. The submissions should address the following:
a) Do I have jurisdiction to award costs against the OSB?
b) If so, should costs be awarded against the OSB?
c) What scale should be applied, and how much should costs be fixed at?

Sanctions:

If the OSB is seeking sanctions against the trustee, what sanctions are they requesting?

Time:

Counsel for the Trustee shall file an deliver their written submissions on cost on or before December 19, 2008. Counsel for the OSB shall serve and file their submissions on costs on or before January 12, 2009. Counsel for the Trustee will have 10 days to file a reply.

Regarding sanctions, counsel for the OSB shall file and deliver their submissions on or before December 19, 2008. Counsel for the Trustee shall file and deliver their submissions on or before January 12, 2009. Counsel for the OSB will have 10 days to file a reply.

DATED at Ottawa this 1^st day of December, 2008.

The Honourable James B. Chadwick, Q.C.
Delegate