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Trustee’s Entitlement to Fees from Trust Property not Owned by the Bankrupt

The recent decision in Re Michie, 2020 BCSC 1611, addresses the entitlement of a trustee in bankruptcy to claim its fees and disbursements from property not owned by the bankrupt, in priority to the person entitled to the property, where such property has come into the trustee's possession and control in the course of the bankruptcy.

Jodie Guthrie was the former wife of James Michie. Dawn Lanelle Michie, the bankrupt, was a subsequent wife, but they too were divorced.

Ms. Guthrie commenced proceedings against Mr. Michie challenging the transfer of certain lands to Ms. Michie as a fraudulent conveyance. Ms. Guthrie was successful in that action and obtained an order that she was entitled to pursue her claim as a judgment creditor of Mr. Michie and register judgments against him on the title to the subject property even though the property was in the bankrupt's name.

The property went into foreclosure resulting in some $108,000 being paid into court. On Ms. Michie's bankruptcy, the Trustee obtained an order that the funds be paid out of court. Ms. Guthrie filed a proof of claim under section 81 of the Bankruptcy and Insolvency Act claiming an interest in the funds to the amount of her yet unquantified costs award against Mr. Michie. The Trustee disallowed the claim.

Ms. Guthrie unsuccessfully appealed the disallowance to the Supreme Court, but was then successful before the Court of Appeal. The Court of Appeal ordered that the net sale proceeds be made available to Ms. Guthrie to the extent necessary to enforce her costs order and any other judgment against Mr. Michie, that she have her costs out of the bankruptcy estate, that the Trustee recover its costs out of the bankruptcy estate and directed all other matters to be determined by the Supreme Court.

Ms. Guthrie obtained a certificate of costs for $74,808.58 and claimed $90,808.31 from the estate with accrual of interest. The Trustee claimed fees and disbursements of $95,445.06. It proposed to pay to Ms. Guthrie only $13,888.75 from the proceeds held by the Trustee. The issue come before the court to resolve whether Ms. Guthrie or the Trustee should have priority for their respective claims.

Mr. Justice Gomery, in a somewhat Solomon judgment, found that the Trustee was entitled to be paid for 50% of its fees and disbursements from the funds in the estate with the balance of the funds being paid to Ms. Guthrie, subject to deduction of an amount to be paid under a garnishing order served on the Trustee.

Mr. Justice Gomery, after a review of the law related to when a trustee in bankruptcy could have access to trust assets that do not form part of the estate to cover the trustee's work, summarized the principles as follows:

a) The general rule is that the trustee does not have access to trust assets to fund its own work. b) As an exception to the general rule, the court has jurisdiction to grant a trustee in bankruptcy a charge over assets administered by the trustee, even where they do not form part of the estate divisible among creditors, to secure payment of the trustee's fees and reasonable disbursements. c) Whether a charge should be granted and, if so, its extent is discretionary. d) In exercising its discretion, the court may consider: i. Whether the trustee was required to address the ownership of the assets in the course of the administration of the estate; ii. Whether the trustee took the initiative or otherwise positively contributed to the resolution of an uncertain situation; iii. The work done by the trustee and the public interest in the orderly administration of bankrupt estates; iv. The interests of the persons entitled to the assets in question and their actions; and v. The interests of justice.

Given that the Trustee was ultimately unsuccessful before the Court of Appeal, but had an arguable point since it was successful before the Supreme Court; it was not in the interests of justice that the Trustee should have a full indemnity. Accordingly, Mr. Justice Gomery concluded that the Trustee should be entitled to 50% of its fees and disbursements.

Why the Decision Matters for Trustees

The decision emphasises the importance of trustees taking care when dealing with property for which there is disputed ownership. They should not assume that they will be entitled to recover their fees and disbursements, either in whole or in part, in priority to the party entitled to such property.

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