Todd Y. Sheriff — June 10, 2004

Professional Conduct Decision

In the Matter of Professional Discipline Proceedings Under the Bankruptcy and Insolvency Act Respecting Todd Y. Sheriff, an Individual Licensed Trustee, and Segal & Partners, Inc., a Corporate Licensed Trustee.

I

Todd Y. Sheriff and Segal & Partners, Inc. (collectively the "trustees") have moved as follows and I paraphrase:

1. A declaration that sections 14.01, 14.02 and 14.03 of the Bankruptcy and Insolvency Act ("the "Act" or "BIA") are inoperative as against them in this case.

An order that proceedings taken against them by the Senior Analyst be stayed on the basis that applications of the sections mentioned above would contravene their rights pursuant to sections 7 and 11 of the Canadian Charter of Rights and Freedoms (the "Charter").

1. In addition or in the alternative to the relief sought in paragraph 2 above, an order that the proceedings against them be stayed on the basis that the application of the discipline provisions in this case would contravene their entitlement to a fair hearing in accordance with the principles of natural justice and administrative fairness.
2. In the alternative to a stay on the grounds set out above, an order that the proceedings be adjourned pending judicial review by the Federal Court of Canada of the Delegate's decision in the case of Sam Lévy & Associés Inc. and Sam Lévy, and pending an application for judicial review by Jean Guy St. Georges and St. Georges. Herbert Inc., which raises similar questions.
3. An order staying the proceedings against them on the basis that the Superintendent has failed to disclose material documents in a timely fashion, or at all.
4. In the alternative to the above, an order requiring the Superintendent to produce certain notes and documents (described more fully in the motion).
5. In the further alternative to the request for notes, an order requiring that any such notes maintained by Ann Speers (the Senior Analyst in the case) be produced to the Delegate for a determination as to whether the notes are privileged or irrelevant.
6. Costs of this motion as determined by the Delegate.
7. Such further and other relief as the Delegate may deem just in the circumstances.

II

Some background is in order.

In September 2002, Ann Speers, the Senior Analyst, pursuant to a general delegation from the Superintendent of Bankruptcy concerning the application of section 14.02(1) of the Act, provided "information about the failure of [the trustees] to carry out their statutory duties properly in the administration of estates under the Act". A short time later, in October 2002, the Superintendent appointed me his Delegate to hear and determine the Senior Analyst's allegations and "to render and deliver a decision and supporting reasons in writing to [the] trustee[s] within three months of the conclusion of the hearing."

Following this delegation, I invited counsel for the parties (in a letter dated November 18, 2002) to join me in a telephone conference "in order to have a preliminary discussion about the conduct of this case."

The telephone conference took place, and so did a number of subsequent telephone conversation which resulted, eventually, in the hearing of the above motion which took place on June 3, 2004. The reasons for the delay were two-fold: first, the trustees requested additional time because an earlier complaint against them had not yet been concluded, and second, because in June 2003 counsel for the trustees suffered a serious illness which prevented him from dealing with the matter for several months.

The "earlier complaint" mentioned above concerned allegations made by the Senior Analyst in the first of two reports against the same trustees, and it was heard by the Superintendent in May and June 2002. At that time, counsel for the trustees moved for the dismissal of the proceedings (or, alternatively, to have the matter referred to an adjudicator other than the Superintendent), by reason that the Superintendent's office had failed to comply with certain procedural guidelines. The motion was granted in part on September 3, 2002, with the result that the Senior Analyst was ordered "to resubmit forthwith an amended version of the second report." In his Decision, the Superintendent stressed that, "[e]ven though the second report was presented as a supplementary report, it is based on an audit report which itself is independent and unrelated to the facts, circumstances and allegation referred to in the first report," and that "the second report stands on its own and … there is no direct link to the first report except that it involves the same trustees."

It is this second report, an amended version of which was duly resubmitted by the Senior Analyst, which I have been delegated to examine. It is, however, relevant to add that with respect to the first report the Superintendent found certain deficiencies in the administration of estates, and he ordered the parties "to set up a conference call … to hear their representations on the materiality of the various breaches found against the trustees" and to hear "their arguments as to sanctions that should be imposed on the trustees' licenses."

Following this Decision (and I quote from the trustees' factum), "the trustees independently learned of material evidence which, it turned out, the SDA [Senior Disciplinary Analyst] had withheld despite the fact that it [sic] had known of the evidence and its relevance prior to and during the first hearing."

I need not set out in detail what the undisclosed evidence consisted of. Suffice it to say at this point that the trustees immediately moved, among other things, to stay the first proceedings, and while their motion was not ultimately successful, it is worth noting that in his Decision the Superintendent confirmed that "the general duty of disclosure provided by the rules of natural justice extends to the Senior Analyst presenting a report explaining why there is reason to take one or more of the measures described at s. 14.01 of the BIA regarding the license of a trustee." Having so directed himself, he found that, "in the circumstances of this case, the failure to communicate [certain information] … constituted a breach of the duty to disclose to the trustees all relevant information available to the SDA." But that was not the end of the matter because, despite this finding, the Superintendent also found that, on a balance of probabilities, his decision would not have been different had the fresh evidence been before him. His earlier conclusion that breaches of the relevant rules had occurred therefore stood.

Faced with this ruling, the trustees asked the Federal Court of Canada to review the Superintendent's Decision, and the application is likely to be heard later this month.

I have set out the history of the first case in some detail because counsel for the trustees has argued before me that it is relevant because, first, I should adjourn the present proceedings until the Federal Court will have dealt with the matter, second, because there has again been a failure to disclose all relevant information, and that the cumulative effect of the two instances demonstrates "consistent conduct" on the part of the Senior Analyst, and third, without casting aspersions on my integrity, a reasonable person may have an apprehension of BIAs on the part of a Delegate who now knows a great deal about the previous case involving the same parties.

III

Let me say at once that I agree with the Superintendent's finding that the report which is now before me (the "second report") "stands on its own" and has "no direct link to the first report except that it involves the same parties." And while I do know more than I would normally know about a previous case involving the parties before me, I am capable, by reason of my training and experience, not to be influenced in any way by what transpired in that case.

As to the possible "cumulative effect" of nondisclosure of relevant material — if, indeed, there was nondisclosure in the second case, a topic which I will examine later — I find, with respect, the argument to be fallacious: there either was or there was not lack of disclosure. If there was not, that is the end of the matter; and if there was, I will deal with it and draw the required conclusions. It would be wrong, however, for me to be influenced by what happened in the first case, just as it would be wrong for me, as I said above, to be influenced in any way by the Superintendent's findings as to whether or not a breach has occurred. Each case must stand or fall on the particular evidence, and while I fully adopt the rules set out by the Superintendent concerning the duty to disclose, his findings of fact are a different matter and I will leave it at that.

Was there a failure to disclose in the case now before me?

Counsel for the trustees suggests that there was, and I refer not only to his oral argument, but also to his factum, and more particularly paragraphs 39 & ff. As he points out, it was discovered during cross-examinations conducted in the course of the judicial review application "that there may be additional relevant information relating to this matter." Accordingly, on February 13 2004, counsel for the trustees wrote to counsel for the Senior Analyst requesting further disclosure. This request was repeated on March 3^rd. Two weeks later, the trustees received a binder of disclosure documents. These documents, again according to counsel for the trustees (paragraph 44), indicate that the Senior Analyst may have communicated with the person who conducted an audit at his clients' office, leading to "a reasonable apprehension that the audit was tainted by virtue of that communication" since "the auditor is supposed to be completely independent of the discipline arm of the Superintendent's office."

The disclosure provided in March also indicated that an individual, "who the trustees understand to be an official receiver," has "more info" with respect to Lezette Armshaw, a former employee accused by the trustees of misappropriation of funds, and about another employer of Ms. Armshaw, where similar misappropriations may have occurred. Again, it is argued that this should have been disclosed.

When this was discovered, counsel for the trustees again wrote to counsel for the Senior Analyst asking for further disclosure. In response, a third set of material was furnished, including a "draft issue paper relating to the administration of third party funds which reveals that this issue has 'generated questions and controversy'." This observation, it is argued, would clearly be of importance to "the trustees' defence with respect to the administration of third party funds" since it is "arguably exculpatory."

Accepting everything that is alleged concerning the lack of timely disclosure, I nevertheless conclude that these are not grounds to stay the proceedings. As was held by the Supreme Court of Canada in Dixon v. The Queen (1998), 122 C.C.C. (3d) 1 at 16, the appropriate remedy for a failure to disclose is, at trial, "an order for production or an adjournment." We are now not even at trial, and I have no evidence before me at this point that any further undisclosed material exists. Indeed, I have the Senior Analyst's affidavit, dated May 26, 2004, that she had complied with all requests for disclosure, even though some of the documents transmitted have "a lack of relevance to the matters in issue." (I interject to say that while that may be the Senior Analyst's view, the question of relevance is ultimately a matter for the Delegate and I will rule on the issue, should it arise, at the appropriate time.)

The affidavit also mentions material on which privilege is claimed. It was decided at the hearing that I will be provided with these documents so that I can examine this claim. If privileged, I will return them to the Senior Analyst; if not, and if the documents are relevant, I will transmit them to the trustees.

IV

I turn now to the other issues raised, and I shall deal with them in the order they are mentioned in the motion.

Jurisdiction to hear a constitutional issue

The trustees move that I declare the relevant sections of the Bankruptcy and Insolvency Act inoperative in the case against them. This is opposed not only by the Senior Analyst, but also by the Attorney General of Canada, who submits that I lack jurisdiction to even consider the matter.

Despite the able argument of counsel for the Attorney General, I remain of the view that I do have the necessary jurisdiction to entertain the question, and I refer to my Decision of December 4, 2003, in the case of Sam Lévy et al., a copy of which is in the hands of counsel. Since the issue was identical (although the argument was not), I see no need to repeat what I then said. I must point out, however, that my Decision is under judicial review by the Federal Court.

The constitutional validity of certain sections of the Act

The same goes for the merits of the motion, and I refer to a second Decision given by me in the same case, on December 19, 2003, where I dismissed a motion identical to the motion now before me. Once again, rather than repeat my reasons, I content myself by referring to the Decision, which is also in the hands of counsel. In the result, this part of the trustees' motion is dismissed.

Stay of proceedings: sections 7 and 11 of the Charter

For the reasons set out by me in the interlocutory Decision in Lévy, mentioned above, I do not consider that, prima facie, the discipline provision of the Act contravene sections 7 and 11 of the Charter. As I said then, and as was pointed out by the Quebec Court of Appeal in Métivier, [2003] R.J.Q. 3035, once a decision is made that the sections in question are not intrinsically offensive, further consideration cannot take place "sans égard à la pratique établie." The question is therefore premature, and I reserve the right to the trustees to raise again this point should subsequent proceedings in this case give rise to an argument that Charter rights were not observed. That said, I need not now decide whether or not the Charter even applies, particularly in the case of the corporate trustee. It is a bridge that I will cross should the need to do so arise.

Stay of proceedings: the principles of natural justice and administrative fairness

I do not intend to dwell on this point at this stage. In my respectful view, the impugned sections of the BIA are not intrinsically offensive, and once again I would adopt what was said in Métivier. It may well be that in the course of the hearing questions concerning natural justice and administrative fairness may arise. Should that be the case, I will deal with them then rather than enter now into theoretical discussions in an evidentiary vacuum.

The request to have the present proceedings stayed by reason that they violate the Charter or contravene the principles of natural justice is therefore dismissed.

Adjournment pending the judicial determination of certain constitutional issues

The trustees suggest that the present proceedings be stayed (or adjourned) pending the outcome of the judicial reviews instituted both by the Attorney General of Canada and by the respondents in the case of Sam Lévy et al. The questions raised in that case (to which one other case has already been joined) are identical to two of the points raised in the matter now before me: 1. Does a delegate have the power to entertain constitutional issues? and, 2. Are sections 14.01, 14.02 and 14.03 of the Act inoperative vis-à-vis trustees charged with violations of the Act or regulations?

In Lévy, I ruled on May 4, 2004, that "a decision [on these questions] by a court of superior jurisdiction would … be welcome," and I therefore, for this and other reasons, postponed the hearings sine die. (This Decision is now subject to a judicial review requested by the Attorney General of Canada: Federal Court of Canada, Ottawa registry, No. T-1069-04.)

While it is tempting to say that what is good for one case is also good for another, the analogy does not apply because two particular factors distinguish Lévy from the case at bar. The first is that in Lévy the trustees faced allegations involving more than 100 alleged violations spread out over a number of years. The documentary evidence, including the analyst's report, fills 18 loose-leaf binders, and the parties agree that the hearing would last at least four weeks (which I suspect may be an optimistic estimate). The cost for preparation alone would be enormous. While time expended and expenses involved should not by themselves be determining factors, I did take that into account in granting the postponement.

But there is more, and I quote from my Decision in Lévy:

In the case now before me, the Respondents have been enjoined by the Superintendent from taking new cases. This order remains in effect, and their practice is therefore restricted to the completion of cases now on hand. Furthermore, even this right is subject to certain conservatory measures, including the necessity to have an official cosign all cheques issued by the trustees. The public is therefore protected, and this removes some of the urgency.

In the result, I postponed further hearings sine die, pending the outcome of the litigation now before the Federal Court of Canada.

In the present case, these factors are lacking. The Senior Analyst alleges far fewer violations, and the estimated time for hearing is two weeks. I am not aware of any order restricting the trustees' activities, and I must therefore presume that they are free to carry on their professional activities. I do not, therefore, consider it appropriate to adjourn the hearing until the judicial reviews in Lévy have been completed, which may be many months away.

Confidentiality and relevance of certain documents

As noted earlier, the Senior Analyst claims that certain documents in her possession are confidential and, in any case, often irrelevant. I will take these claims under advisement, and I will decide the questions raised once I have received and reviewed the documents in question.

Conclusion

I note that the trustees have asked for a judicial review of the Superintendent's Decision in the first case. I am told that this application may be heard before the end of this month. While, as I said before, the two cases — the first and the second — are unrelated save that they concern the same parties, I will fix the date at which this case will proceed in consultation with counsel at the end of the month since the Federal Court's decision (if it is given by then) may have some bearing on the conduct of the parties.

I therefore invite counsel to join me in a conference call at 4 o'clock in the afternoon on June 30, 2004, and I will make the necessary arrangements for this call. Should the time and date be inconvenient, I invite counsel to inform me well before the date so that other arrangements can be made.

The trustees' motion asks for costs. As agreed at the hearing, I do not have jurisdiction to entertain this request.

I thank all counsel for their helpful arguments, both written and oral.

Given in Toronto this 10^th day of June, 2004.

Hon. Fred Kaufman, Delegate

Counsel for the Senior Analyst: Allan Matte, Industry Canada Legal Services

Counsel for the trustees: Craig R. Colraine and Joanna Birenbaum, Birenbaum, Steinberg, Landau, Savin & Colraine LLP

Counsel for the Attorney General of Canada: Valerie Anderson, Department of Justice