1991 S.H. 80055 IN THE SUPREME COURT OF NOVA SCOTIA TRIAL DIVISION BETWEEN: NsC CORPORATION LIMITED Applicant and ABN AMRO BANK CANADA Respondent HEARD BEFORE: The Honourable Mr. Justice Gordon A. Tidman PLACE HEARD: Halifax, Nova Scotia DATE HEARD: September 28, 1992 DECISION DATE: September 28, 1992 (Orally) COUNSEL: Mr. Frederick Black, for the Applicant Mr. David Coles, for the Respondent 1991 S.H. 80055 IN THE SUPREME COURT OF NOVA SCOTIA TRIAL DIVISION BETWEEN: NsC CORPORATION LIMITED and ABN AMRO BANK CANADA Respondent TIDMAN, J.: (Orally) This is an application by NsC Corporation Limited (NsC Corp) for an order prohibiting the law firms of Boyne, Clarke and Blake, Cassels & Graydon from acting as counsel for the Trustee of the estate of the bankrupt NsC Diesel Power Corporation (NsC Diesel). The application was heard as contested chambers application (application inter partes) on September 10th and 11th, 1992. The application was scheduled to also deal with an application by NsC Corp to annul the bankruptcy of NsC Diesel and failing that an order under Section 38 of the Bankruptcy Act authorizing the applicant as creditor of the bankrupt estate to carry an action for damages to which the creditor claims the bankrupt is entitled against ABN Amro Bank Canada (Bank) and others. By agreement of the parties the hearing was restricted to the issue of the law firms of Boyne, Clarke and Blake, Cassels Graydon continuing to act for the Trustee. The respondent Bank as creditor petitioned NsC Diesel Corp into bankruptcy. The law firm of Blake, Cassels Graydon, based in Toronto has acted for and continues to act for the Bank in its dealings with the bankrupt estate. Boyne, Clarke act as agent for Blake, Cassels in relation to the interests of the Bank in Nova Scotia. By motion carried unanimously at the first meeting of the Inspectors of the bankrupt estate, Boyne, Clarke and Blake, Cassels Graydon, counsel for the respondent Bank, were appointed solicitors also for the bankrupt estate. The Bank has guaranteed payment of the Trustee's fees and disbursements, including legal fees. The applicant, NsC Corp is the sole shareholder of the bankrupt and claims to be creditor of the bankrupt. The applicant complains that there are significant areas where the interests of the Bank conflict with the interests of the applicant and other creditors of the bankrupt and thus the Trustee, who must act in the best interests of all the creditors, should not be advised by counsel for the Bank. The respondent concedes that there are areas of potential conflict with the law firms acting for both the Bank and Trustee, but submits that if conflict arises the Trustee would seek independent counsel on the conflicting matter. The respondent argues that to order the Trustee to retain other counsel at this time would create great financial burden because of the time required by new counsel to acquaint itself with information already in the knowledge of present counsel. BACKGROUND The financial difficulties of the bankrupt company have been ongoing for some time during the course of which this court under the provisions of the Companies Creditors Arrangement Act appointed Ernst Young Inc., the present Trustee, as custodian of the property of NsC Diesel Corp, the present bankrupt. Failure of the company to have its creditors accept plan of arrangement under the Act resulted in Ernst Young, the custodian, being appointed, again by this court, receiver of the assets of the company. Failure of the receiver to effect sale of the company's plant and equipment resulted in the termination of the receivership under the Companies Creditors Arrangement Act. Under the terms of debenture issued by the Company to the Bank, the Bank subsequently foreclosed on the principal assets of the Company. It also petitioned the Company into bankruptcy. During the course of these various proceedings, there have been many related applications and actions by the Bank against the applicant and by the applicant against the Bank and the Trustee. Throughout all of these various proceedings the firms of Blake, Cassels Graydon and Boyne, Clarke have acted as counsel for both the Bank and the Trustee. Mr. Black, the president of NsC Corp, although not lawyer, has represented the applicant throughout these actions and applications. Although the Trustee is now represented by the Bank's solicitors, throughout the proceedings under the Companies Creditors Arrangement Act, Ernst Young as custodian and receiver was represented by another law firm. DISCUSSION It is immediately apparent that there are three areas where the interests of the bankrupt estate conflict with those of the Bank. First, there is the question of the validity of the Bank's charge against certain assets of the bankrupt. Secondly, whether the Trustee should commence an action against the Bank on behalf of the bankrupt. Thirdly, but perhaps more correctly as part of the second area of conflict, whether the applicant is, in fact, creditor of the bankrupt which it must be in order to avail itself to the provisions of Section 38 of the Bankruptcy Act. The Trustee recognizes those areas of conflicts as is evidenced by paras 8,9,10 of the affidavit of Ross D. Landers, vice‑president of the Trustee sworn on September 4, 1992 and used in support of its opposition to this application i.e. 8. THAT mindful that there may ultimately be conflict of interest as regards the bank's security, the inspectors at the first meeting unanimously carried motion authorizing the trustee to obtain independent legal advice on that issue at the appropriate time. 9. THAT the Trustee, Ernst Young Inc., has not sought the opinion of, nor relied in its conduct of the bankruptcy upon, Boyne Clarke or Blake Cassels vis‑a‑vis the claim of NSC Corporation Limited as against the ABN AMRO Bank, but rather when requested to join the action has sought particulars from Mr. Black which the latter has failed to provide. 10. THAT in accord with practice, professional ethics, and the responsibilities of the Trustee under the Bankruptcy Act, particulars substantiating any claim the bankrupt might have as against ABN AMRO Bank Canada would be tabled with the Inspectors including recommendation to obtain independent legal advice as to whether there was merit in proceeding, anticipated costs of such action, etc. Mr. Landers, who was cross‑examined on his affidavits filed on behalf of the respondent, says that it is in accord with general practice that counsel for the petitioning creditor (in this case the Bank) be nominated as solicitors for the bankrupt estate. He says that it is also general practice that if conflicting interests arise the Trustee would then seek independent legal advice on such matters. Although that may be the general practice of trustees in bankruptcy, it is practice fraught with difficulty. This, of course, is so because the Trustee represents the interests of all the creditors which from time to time will in all probability conflict with the interests of the petitioning creditor. In such situation the Trustee of the bankrupt estate for obvious reasons must not take legal counsel from solicitors acting for the petitioning creditor. The general practice which Mr. Landers describes seems to be accepted as being practical and expedient in the administration of bankrupt estates and as such the court would not go so far as to say that such practice is in and by itself improper. What the court must consider is whether under all of the circumstances of this case the bankrupt estate should not be represented by counsel for the petitioning creditor. must first of all consider whether the court has jurisdiction over either counsel or the Trustee enabling it to grant the order sought by the applicant. The decision to appoint Boyne, Clarke and Blake, Cassels Graydon was made not by the Trustee but by the Inspectors of the estate on the advice of the Trustee. Section 119(2) of the Bankruptcy Act gives the court specific power to review decisions of the Inspectors. It provides: 'The decisions and actions of the inspectors are subject to review by the court at the instance of the trustee or any interested person and the court may revoke or vary any act or decision of the inspectors and it may give such directions, permission or authority as it deems proper in substitution thereof or may refer any matter back to the inspectors for reconsideration. R.S., c.B‑3, s. 94." This application comes about at the insistence of NsC Corp. As sole shareholder of the bankrupt find that the applicant qualifies as an interested person. The court has inherent jurisdiction over counsel as officers of the court and having such has the power to order counsel not to act for party because of conflict of interest. In support of the application, the applicant asks the court to consider the Supreme Court of Canada decision in MacDonald Estate v. Martin Rossmere Holdings (1970) Ltd. (1990 CanLII 32 (SCC), 121 NR 1) (December 20, 1990). In that case, counsel was removed from the record on the grounds that lawyer in the firm which represented party was at one time an articling clerk and lawyer in the firm representing the opposing party. The application for removal was made by the opposing party who was successful in doing so. The circumstances in that case, however, are different from those now before the court. In this case counsel has the consent of the petitioning creditor to act for the bankrupt estate. While the MacDonald Estate case is helpful in examining the conflict issue, this is not case involving the classic conflict issue. The question to be determined here is whether the estate can be properly represented by counsel, who also act for the petitioning creditor and have the consent of that party to act. Indeed, in this case, it is the wish of the petitioning creditor that its counsel also act for the Trustee. In my view, this case may be resolved by dealing with the courts supervisory power over the Trustee and Inspectors given by the provisions of the Bankruptcy Act. Section 119(2) of the Act previously referred to makes it clear that the court may review decisions of the Inspectors. Since the Trustee was appointed by the court, the Trustee by virtue of that circumstance alone is subject to supervision by the court. The second and third areas of conflict in which the Trustee must decide whether the estate should sue the Bank is most troublesome. Section 38 (1) of the Bankruptcy Act provides: "Where creditor requests the trustee to take any proceeding that in his opinion would be for the benefit of the estate of bankrupt and the trustee refuses or neglects to take the proceeding, the creditor may obtain from the court an order authorizing him to take the proceeding in his own name and at his own expense and risk, ..." NsC Corp has requested the Trustee to bring such an action against the Bank. The Trustee has not refused to do so, but has discussed the matter with its counsel who are also counsel for the Bank. The Trustee, first of all, is not satisfied that NsC Corp is creditor of the bankrupt, thus having the capacity to make the request of the Trustee, and secondly, states it has insufficient information in order to determine whether the estate should bring an action against the Bank. In response to the applicant's request, the Trustee by letter to the applicant dated June 12, 1992 stated: "Please be advised that the Trustee has insufficient information to consider your request. Accordingly, we would request that you provide us with full particulars of your claim including copies of relevant documents in order that we may assess the claim and present the issue to the estate inspectors for their consideration." The applicant says he refuses to provide that information to the Trustee because to do so would be to provide it to counsel for the opposing party which, for obvious reasons, he does not wish to do. Mr. Landers says that he would pass on any information received from the applicant to the Inspectors along with recommendation that they obtain independent legal advice as to the merits of proceeding against the Bank. Mr. Landers says he would not pass on any information to the estate's counsel which he believes they should not have. do not, at all, doubt the integrity of Mr. Landers, however, to do as he says would not only present to him the difficult decision of having to decide what of that received information he should provide to the estate's counsel, but more importantly he would be in possession of information necessary for the proper administration of the estate which he could not provide to his own counsel. This conflict of interest is so blatant that it demands the removal of present counsel for the bankrupt estate. Although Mr. Landers says that he would seek independent legal advice on this issue the Trustee should not be in position where it could even appear to be influenced by the Bank in making that decision. If counsel for the Bank continue to act for the estate there would be an appearance of influence. Mr. Coles for the respondent Bank submits that the mere existence of claim by shareholder of creditor as against the petitioning creditor cannot per se be grounds for removing counsel. To so decide, he argues, would mean that any shareholder of bankrupt need only commence spurious law suit in order to cause financial hardship to the petitioning creditor or generally to disrupt bankruptcy proceedings. The court does not suggest the mere existence of such claim is per se grounds for removing counsel. Before ordering the removal of counsel all relevant circumstances must be considered by the court and after doing so here it is obvious to me that because of the many conflicting interests present counsel should not continue to act for the estate. Mr. Coles further submits that removal of counsel for the estate would add additional expense in briefing new counsel which may result in the Bank refusing to fund the bankruptcy. He says that would be to the detriment of all creditors of the estate. Although it is true that to date there have been long and protracted insolvency proceedings, am not satisfied that it would be prohibitively expensive to brief new counsel on what has transpired up to now. For instance, Ernst Young as Custodian Receiver under the CCAA were represented by another law firm, who, no doubt, have extensive knowledge of what has transpired in the past. As well, legal advice required by the estate presumably would be no more expensive whether it is obtained from new or present counsel. As to whether the Bank may refuse to fund the bankruptcy, say this. Any petitioning creditor who agrees to guarantee payment of the Trustee's fees and disbursements must do so with the understanding that the Trustee will in most cases require legal advice and that such advice must be independent because it is for the benefit of all the creditors of the estate. Mr. Coles asks the court to consider the decision of Preston, J. in Canada Deposit Insurance Corp. v. Commonwealth Trust Co. (4 CBR (3d) 16) (B.C. Supreme Court). In that case, trust company, after several years in the process of liquidation, was being wound up under the provisions of the British Columbia Winding Up Act. The majority shareholder of the trust company applied for removal of counsel for the sole remaining creditor of the trust company. The grounds were that law firm who merged with the firm representing the creditor had once acted for the former liquidators of the trust company. The application was dismissed. In dismissing the application, the court pointed out that the complaint was not from the former client of counsel as was the case in MacDonald Estate v. Martin (supra). At pg. 30 of the CDIC case Preston, J. states: “The strict nature of the rule enunciated by the Supreme Court of Canada in MacDonald Estate v. Martin has application only when client applies to ensure the sanctity of confidential information communicated to his or her solicitor within solicitor‑and‑client relationship. If were to extend this rule to circumstances in which the application is made by someone who was never the client of the law firm sought to be discharged, would have to ignore the historical foundation of the rule." agree with that statement urged upon me by Mr. Coles but the court must in this case, as have already stated, consider its supervisory responsibility in relation to the bankrupt estate. The court in the CDIC case, in fact, assumed supervisory jurisdiction over the winding up process as well as over the estate solicitors. The court, in that case found, however, that there were no grounds for dismissing counsel since any information counsel could have obtained was not confidential. In the case now before the court, the question is not whether counsel for the estate is in possession of confidential information, but rather whether counsel can serve two masters whose interests may be in conflict. As well, the Trustee owes duty of fairness not only to all the creditors but also to the bankrupt. Mr. Coles has also referred the court to Royal Bank of Canada v. Vista Homes Ltd. et al (54 C.B.R. 124) (Oct. 11, 1984) B.C.S.C. In that case, creditors of company in receivership applied to the court to restrict the receiver in disposing of assets secured by debenture. The receiver had been appointed by the debenture holder under the terms of the debenture. The creditors complained that the receiver felt greater or special duty to the debenture holder. The court refused to restrict the receiver. The receiver, until shortly before the application, had relied for legal advice upon counsel for the debenture holder, but had obtained other counsel by the time the court application proceeded. It should be noted that in the Royal Bank case, the receiver was not appointed by the court. MacDonald, J. pointed out the distinction between the obligations of receiver appointed by the court as opposed to receiver appointed under the terms of debenture. At page 125 MacDonald, J. states: "A clear distinction must be drawn between the duties and obligations of receiver‑manager appointed under the terms of debenture and one appointed by the court. In the latter case, the authority of the. receiver‑manager is derived from the court and not the instrument. He becomes an officer of the court and acts in fiduciary capacity to all parties involved in the litigation: Ostrander v. Niagara Helicopters Ltd. (1973), 1973 CanLII 467 (ON SC), O.R. (2d) 281." In addressing the complaint of the creditors that the Trustee felt greater or special duty to debenture holders, MacDonald, J. in the Royal Bank case felt that their concerns had been addressed by three events, the last and what he considered most important was that the receiver had retained independent counsel. At page 127 MacDonald, J. points out the advantages of independent counsel where creditors are of the view that the Trustee is favouring the debenture holder. "... can formulate no practical way of forcing the receiver‑manager to listen to the advice of the applicants, nor could they suggest practical solution to me. On this question as well, the retainer of an independent solicitor to represent the receiver‑manager will be an important development. That solicitor is not embroiled in the controversies between the parties to this action. In light of the fiduciary obligations of the receiver‑manager to all parties, and with the more complete information which should not be available to the applicants, lines of communication can be established through that solicitor. He will be more mindful of the duties and obligations of the receiver‑manager to all parties than were the solicitors for the plaintiff." The last paragraph applies precisely to the situation in the case at bar where relations are strained between the applicant and all other parties including counsel. Unlike the Royal Bank case where the receiver was appointed by the debenture holder here the Trustee was appointed by the court and is subject to the courts supervision. Under all of the circumstances to which I have referred I am of the view that the Trustee should not be represented by counsel for the Bank and I would so order. Costs shall be in the cause. J. Halifax, Nova Scotia 1991 S.H. 80055 IN THE SUPREME COURT OF NOVA SCOTIA TRIAL DIVISION BETWEEN: NsC CORPORATION LIMITED and ABN AMRO BANK CANADA Respondent DECISION OF TIDMAN, J.: (Orally)
This was an application for an order prohibiting the law firm that represented the respondent bank from acting as counsel for the trustee of the bankrupt company's estate. The applicant argued that there were significant areas where the interests of the bank conflicted with interests of the creditors. The trustee, who must act in the best interest of all creditors, should not be advised by the bank's counsel. Granting the order. The court, applying its supervisory powers, found the trustee should not be represented by the bank's counsel. On Appeal.