John Hainsworth Todd and Todd McMahon Inc. (British Columbia) — May 27, 2005
Professional Conduct Decision
What is a professional conduct decision?
An investigation into a Licensed Insolvency Trustees (LIT)'s professional conduct is initiated when there is information to suggest that the LIT has not properly performed the duties of a trustee or there has been improper administration of an estate or lack of compliance with the Bankruptcy and Insolvency Act (BIA).
In some cases, the findings are sufficiently serious to support a recommendation for sanctions against the LIT's licence (cancel or suspend a LIT's licence (subsection 13.2(5) of the BIA) or impose conditions or limitations (subsection 14.01(1) of the BIA)).
The professional conduct decision is deemed to be a decision of a federal board, commission or tribunal and may be judicially reviewed by the federal court.
In the Matter of
John Hainsworth Todd
Holder of a Trustee Licence
for the Province of British Columbia
Todd McMahon Inc.
Holder of a Corporate Trustee Licence
For the Province of British Columbia
Decision under the Bankruptcy and Insolvency Act
In Respect of Professional Conduct
I. The Proceedings
This professional conduct case came on before the undersigned Delegate for proof and hearing on the merits on Wednesday, , in Vancouver. The hearing ended on the afternoon of Tuesday, , and, by agreement, all the evidence on the second, or penalty, phase, was also heard, in addition to that on the first, or responsibility, phase, before argument on the liability phase only.
After hearing the arguments on responsibility of counsel for the Senior Analyst — Professional Conduct ("The SA") followed by that of counsel for the individual and corporate Trustees ("Todd" and "TMI"; "Todd" often referring to both, depending on the context), it was agreed that counsel for the SA would file a written rebuttal on what had become the main argument for Todd, to wit: the delay from 2002, when the OSB commenced its investigation, until 2004, when the SA's report (the equivalent of a statement of claim in a civil case) was served and filed. Todd's counsel had argued that this delay resulted in an injustice and inability to make a full answer and defense or have a fair trial, contrary to principles of administrative law, due primarily to Todd's memory loss caused by the passage of time. After this written rebuttal by counsel for the SA, counsel for Todd would then also have the opportunity to reply in writing.
These written submissions having been served and filed as agreed, and having had the opportunity to study the file and the submissions of the parties, I am now in a position to render my judgment on responsibility, and to decide whether I should dismiss or stay the proceedings on the grounds urged, or reject this defense.
If I find that the Trustees' responsibility has been established, and reject the argument based on delays and natural justice, the parties have agreed to file written arguments on the sanction to be imposed, followed by a telephone conference to complete oral arguments, and I will then render judgment on this second issue of sanction.
It should be noted that there is still pending before the Federal Court a motion by the Trustees for prohibition to stay the present proceedings, which counsel for Todd says is based on the same delay, but from the perspective of Section 7 of the Charter, an issue which is not raised before me, just as the administrative law principles on undue delay raised here are apparently not before the Federal Court.
In , the parties had agreed that the hearing before me would take place commencing , for one week (this was the earliest that counsel for Todd stated he was free after the week of , which was not available to the SA because of an important meeting in the OSB).
A few weeks before , counsel for Todd advised that he had reserved the date of in Federal Court to present a motion for an interim stay in the present case, associated with a motion for prohibition, which he would serve on or . Accordingly, I agreed to postpone the commencement of this hearing to Monday , to avoid unnecessary preparation and travel if the stay were granted.
When Todd's motion was neither served nor presented as undertaken, and upon inquiry by me, I was informed by Todd's counsel that he had not done so because he had not had sufficient time to prepare his material. He advised me that his motion would, however, be presented on or instead. I had expressed my disappointment at his not having served his Federal Court motion, as promised, on or , by an email sent by me on .
The Trustee's motion was not presented on or , which again created uncertainty with regard to travel, etc., for the new date of we had agreed on. (The SA had to travel to Vancouver from Toronto, her counsel from Ottawa, the clerk from Ottawa and the undersigned Delegate from Montreal).
We were also informed by counsel for Todd of his intention to present before me a motion for recusal, based on an alleged reasonable apprehension of bias on my part, resulting from my e-mail of . When I learned that his motion for a stay was finally being presented by telephone conference before Mr. Justice Noël of the Federal Court on Friday , we again agreed to postpone the hearing until , to avoid unnecessary travel, etc., if the stay were granted. In addition, we agreed that I would hear the motion for recusal by telephone conference on Monday , so as not to delay the onset of the hearing on the merits, if the stay and recusal were both refused.
On , Mr. Justice Noël heard the motion for a stay and reserved judgment, to be rendered on the morning of . On , I heard the motion for recusal and reserved judgment, to be rendered by me at the outset of the hearing on the merits on , after which the hearing would proceed if I refused to recuse myself. On , Mr. Justice Noël dismissed the motion for an interim stay, and on , I dismissed the motion for recusal and we began the hearing on the merits.
II. The Facts — Chronology
In 1999, the individual Trustee, "Todd", was consulted by the debtors Gary Davies ("GD") and April Davies ("AD") because of substantial liabilities they had incurred as guarantors of certain debts for their corporation ("Alda") which had gone bankrupt, and in particular a debt due to "AFC", in which the unsecured portion turned out eventually to exceed $200,000. Their intention was to declare bankruptcy because of these guarantees, and not because of their personal debts. However, Todd persuaded them to make a joint consumer proposal under the BIA, since their personal debts were less than the maximum permitted ($75,000 each), and he seems to have assumed that the contingent liabilities represented by their guarantees did not have to be taken into account for this purpose.
At the time Todd had recently left a corporate trustee where he had been employed, and had not yet been given the right to use his licence to practice as an individual. In addition, he was in the process of setting up on his own for the very first time in partnership with another trustee named McMahon, through a new corporation, Todd McMahon Inc. ("TMI") which had not yet received its licence to practice as a corporate trustee, which was only issued in .
For some reason, Todd felt the matter was quite urgent. He therefore decided to contact a friend, an individual trustee ("Orrell") who was then employed by Deloitte Touche Inc. ("Deloitte") a corporate trustee. Orrell trusted Todd implicitly, and was naively persuaded to allow the consumer proposal to be made with Deloitte as Administrator, and to sign on its behalf, as the responsible individual trustee, any documents prepared and presented for signature by Todd. Deloitte, however, knew nothing of this arrangement; no file was ever opened in the offices of Deloitte, and all the documents were drafted by Todd, who also sent them out to creditors, the OSB, etc. Todd soon stopped having them signed by Orrell, and began substituting on the documents his own name or that of TMI, without ever amending the proposal to change the Administrator in a legal fashion. He seems to have assumed that simply having in his possession a document signed by the debtors authorizing the change of Administrator was sufficient, but in fact no amendment had taken place, although Todd had promised Orrell that the substitution of Todd for Deloitte would occur within a few weeks at most. Orrell trustingly assumed that Todd had done what was necessary to change the Trustee, whereas in fact Deloitte remained technically as such until 2003, when Deloitte (with whom Orrell was no longer associated) was obliged to take legal proceedings at considerable expense to have itself replaced by Todd and/or TMI, retroactively to the original filing of the proposal in the name of Deloitte as Administrator/Trustee.
Notwithstanding all of this, Todd continued to insist for a long time that he had become the Administrator in 1999 and was not required to call a meeting of creditors to ratify the change of Administrator, nor to notify them, nor to notify the OSB, and that simply changing the name on subsequent documents did the trick. This is but one example of the many sins of omission and commission, and violations of the BIA and/or regulations committed by Todd.
Todd was aware from the beginning that the main purpose of the proposal was to protect the debtors from large potential claims by some creditors of Alda, for whom the debtors had signed guarantees, particularly that of AFC. Todd had a complete list of Alda's vendors in his possession (which he attached to the documents filed with the OSB, and removed from those sent to the creditors) but made no inquiries to determine which creditors of Alda had guarantees and for how much. Documents filed and prepared by him, such as the initial Statement of Affairs filed with the OSB, clearly refer to guarantees of unknown amounts, but he deleted this reference (with correction fluid) from the statement sent to the creditors. Some documents prepared by him refer to an attached page containing a short list of creditors of Alda who had guarantees, but this one page document seems never to have been attached to the documents filed with the OSB or sent to the creditors; it also mysteriously disappeared from Todd's own file, and has not been seen since by anyone else, although it is vouched for by the credible evidence of GD, who says that it specifically included AFC (which turned out to have an unsecured six figure claim). Todd arbitrarily decided not to treat any such guarantees as debts for the purpose of compiling the list of creditors (he stated at one point that it was not his practice to include contingent claims) which of course made that list shorter, as it only included personal debts, which were not the reason for the proposal in the first place; but this did have the advantage of reducing the total indebtedness below the maximum for consumer proposals.
Even among the personal creditors who did receive notice and filed claims, those opposed to the proposal were sufficient in value (over 25%) to trigger a meeting of creditors to vote on the proposal; yet Todd ignored this and decided that no meeting was necessary and that the proposal was deemed to have been approved.
As a result, when the debtors had finally fulfilled all their obligations under the proposal in 2001, by paying some $7,000 (they had been informed by Todd that the proposal had been accepted) Todd paid a dividend to those creditors who had filed proofs of claim, issued a certificate of full payment by the debtor and closed his file to all intents and purposes. He even went so far as to accept a claim by a Mr. Vozza, who had lent money to Alda some years before, which was not properly documented as to the alleged guarantee and contained no attached appendix "A" as required by the Rules; Todd simply confirmed verbally with GD that the amount was correct, and that it was guaranteed by GD. This reduced the amount payable to the other creditors by about 50%, and it is still unclear whether the debt, in the amount claimed, was really owing by GD personally, or was only a debt of Alda, for which GD felt personally responsible, because it was a loan from a friend and not just a debt to a supplier. At one point, Todd undertook to reimburse to the estate the amount of the dividend paid to Vozza, but he has never done so.
AFC only discovered the existence of the proposal in 2001 when it attempted to sue GD on his guarantee, and was advised by Todd that its claim had allegedly been wiped out. AFC then took proceedings to annul the proposal (it eventually relented insofar as AD was concerned and withdrew as against her) and in GD's proposal was accordingly annulled by Madam Justice Boyd of the B.C. Supreme Court. In her decision, Justice Boyd found that GD and AD had disclosed to Todd all their liabilities; including the claim of AFC, under their personal guarantees; that Todd had never taken any steps to inform the creditors or the OSB that the proposal was wrongly filed; that AFC had not received notice of the proposal as it should have; etc. It was this activity by AFC that triggered the OSB's investigation (the files had been confused because the computer was rejecting documents not bearing the name of Deloitte as administrator) Deloitte only discovered late in 2002, after Orrell had left the firm, that it had been and still was the Administrator of the proposal, and it then filed a notice of motion in for an order substituting TMI and Todd for Deloitte, retroactively to 1999, which was granted in the same month, while Todd was still writing Deloitte that no such order was necessary, as everyone knew he was the Administrator.
When the preliminary investigation in 2002, conducted by the local OSB Division Office in Vancouver, determined that there seemed to be grounds for disciplinary action, the matter was referred to the SA for this purpose, and after a more thorough examination to determine what should be alleged by way of infractions, and what documents should be attached, etc. she finalized her report in 2004 and these proceedings were at once commenced.
To sum up, the relevant facts and essential allegations of the SA's report have been established by clear and convincing proof, or by admissions, or both. Thus, if the defense based on undue delay should fail, liability has been established, and it would only remain to determine the penalty or sanction in respect of the trustee's conduct.
III. The Issue of the Delay from 2002 to 2004
While Todd's original position was to justify his behaviour as reasonable and appropriate in the circumstances, over time he virtually ceased defending his conduct, and his position evolved to become one based on the alleged prejudice caused by the lapse of time between 2002 (when the SA got the file with a view to deciding whether and what disciplinary action should be taken) and 2004, when her report (introductive of these proceedings like a statement of claim) was officially served and filed. He now says, in effect, that his inability to explain his behaviour in 1999 results from the lapse of time, and that due to such factors as loss of memory, etc., he cannot now give a satisfactory explanation. His responses to questions from his own lawyer as to why he did and did not do certain things were frequently that he could not recall or did not remember. One might ask whether perhaps such answers are not somewhat disingenuous and self-serving in the circumstances, since the documentary evidence is clear, and supported by the credible evidence of other witnesses and his own admissions.
However, assuming that a failure to recall his motives in respect of his own acts does result, at least in part, from a lapse of time, it would appear that the period from 1999 to 2002 (for which he alone is responsible, since the matters involved only came to the attention of the OSB in 2002, due to the intervention of other parties, as we have seen) would be a far more probable cause than the delay after 2002. Any confusion in the documents, either in his file or those of the OSB, and any gaps in his own file, would again be due solely to his own failure to keep proper records, and to drafting documents in different ways so that it became extremely difficult to understand what estate or which trustee was involved, some documents being altered by him and no longer identical to others.
At one point, Todd's counsel also complained about the inadequacy of the disclosure made by the SA and the confused nature of the file containing multiple copies of documents, etc. It should be noted that full and complete disclosure was in fact made of the entire file, and that any confusion resulted from Todd's own actions.
Todd has also testified that he was in a very difficult personal situation in 1999: his wife had just left him (also abandoning her mother, since deceased, who lived with them, and continued to live with Todd after his wife's departure, as well as leaving him with the responsibility for their two unruly teenage children who were in trouble with the law). He also says that he had just opened his own office as a trustee for the first time (he had always been an employee in a corporate trustee) and thus apparently lacked both experience in administering and properly documenting estates on his own (it will be recalled that he was setting up shop with McMahon, and their corporation TMI was awaiting a corporate licence). From his own testimony, one could conclude that he was depressed, confused and not coping in 1999. This evidence may have been primarily designed to mitigate any sanctions to be imposed, but could also provide a partial explanation for his behaviour, which shows a consistent lack of judgment imputable to incompetence, negligence, or both. His two character witnesses, professionals and friends, who say they know nothing of the facts in this case, describe him as a competent and ethical person, which could lead to the inference that his behaviour in this file was totally out of character, from their point of view.
From all the evidence before me, including Todd's own testimony and that of his character witnesses, I can only conclude that the delay from 2002 to 2004 probably caused him no prejudice whatsoever, apart form the lapse of time itself, and did not contribute to any inability on his part to make a full answer and defense, or cause him any injustice, and would not, in the circumstances of this case, constitute a ground for dismissing or staying these proceedings under the principles of administrative law relating to natural justice and a fair hearing. On the contrary, any inability to defend himself fully and completely can only result from his own acts and omissions, commencing in 1999, causing a three year hiatus before the OSB was even aware that there was a question of professional misconduct to consider pursuing against him.
Even if the two year delay from 2002 to 2004 had caused Todd a prejudice (which has not been established by the evidence) this delay would not be unreasonable in the circumstances, and probably resulted from a number of factors; for example: the fact that the SA was responsible for other files as well as this one, with a higher priority, e.g., due to the existence of conservatory measures affecting a trustee's right to practice (no such measures were in place in the present case); the complexity and confusion in the file due to the strange actions of Todd and the changes made arbitrarily and unilaterally by him in the documents which were thus difficult to locate and collate; and the fact that proceedings were still in progress as late as 2002 and 2003 with respect to AFC and Deloitte.
The defense based on a violation of the Trustees' right to a fair hearing in accordance with the principles of natural justice is therefore rejected, and a stay of proceedings is refused.
I find that the essential facts alleged in the SA's report have been proved, and, in particular, the following allegations of misconduct:
- As to the Individual Trustee:
- The Trustee retained possession of the file and trust funds, and administered the estate, without any appointment to do so.
- The Trustee failed to provide the OSB and the creditors with a copy of the proposed amendment replacing Deloitte as administrator.
- The Trustee failed to convene a meeting of creditors to consider the amendment to the proposal, as required by the BIA.
- The Trustee failed to convene a meeting of creditors to vote on the proposal, although voting letters against the proposal were sufficient to force such a meeting, and acted as if the proposal had been accepted, contrary to the BIA.
- The Trustee materially altered the Statement of Affairs sworn to by the debtors and filed with the OSB, contrary to the Code of Ethics, before sending it to the creditors.
- The Trustee failed to notify every creditor of the proposal, contrary the BIA and the rules.
- The Trustee failed to comply with the BIA by accepting the claim of John Vozza instead of adequately reviewing and disallowing it.
- The Trustee did not carry out his functions with competence and due care, causing prejudice to the creditors, the debtors, Deloitte, and Orrell, contrary to the Code of Ethics.
- As to the Corporate Trustee:
- The Trustee retained possession of the file and the trust funds, and administered the estate without any appointment to do so.
- The Trustee paid a dividend to John Vozza who had not filed a valid proof of claim.
- The Trustee did not carry out its functions with competence and due care, contrary to the Code of Ethics.
Consequently, I now order the parties to serve and produce their memoranda on the sanction or penalty phase as follows: that of the SA within two weeks of the date of the present decision, and the reply of the Trustees within two weeks after receiving that of the SA. The SA will have a further week after reception of the Trustees' reply for written rebuttal. I will then convene a telephone conference for oral argument, and will render my decision on the penalty thereafter.
Signed at Montreal this
The Honourable Perry Meyer, Q.C.
Delegate of the Superintendent of Bankruptcy
This document has been reproduced as submitted by the delegate of the Superintendent of Bankruptcy.
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