Canada: Did You Get What You Paid For? The Exercise Of Judicial Discretion When Assessing Professional Fees In A Bankruptcy And Insolvency Context

Last Updated: October 3 2014
Article by Brett Kenworthy

Bankruptcy and insolvency professionals should take note of two recent Ontario Superior Court decisions that put professional fees in the spotlight. TNG Acquisition Inc. (Re), 2014 ONSC 2754 [Commercial List] ("TNG Acquisition") and Bank of Nova Scotia v. Diemer, 2014 ONSC 365 ("Diemer"), saw Brown J. and Goodman J., respectively, reduce fees for court-appointed officers and their legal counsel on the basis that the amounts sought were unreasonable in consideration of the work performed. This exercise of judicial discretion signals a shift that the courts are live to this issue, and are increasingly willing to scrutinize the fees of court officers and their counsel. This article identifies the key takeaways from these recent decisions and offers practical advice for lawyers and court-appointed officers.

Principles for the Approval of Fees:

Diemer and TNG Acquisitions demonstrate the exercise of judicial discretion when assessing the fees of court-appointed officers. This exercise of judicial discretion is guided by principles of reasonableness and fairness. In Bakemates International Inc. (Re), [2002] O.J. No. 3569 (Ont. C.A.), the Ontario Court of Appeal held that the onus is on a receiver to demonstrate that the amount of its fees are fair and reasonable when the court's approval of its fees is sought. Further, in Belya v. Federal Business Development Bank, [1983] N.B.J. No. 41 (N.B.C.A.), the New Brunswick Court of Appeal held that a receiver's compensation must be a fair and reasonable measure of its services, and that those services should be administered as economically as possible.

Diemer:

In Diemer, a January 2014 decision, the court-appointed receiver and its legal counsel ("Counsel"), sought an order approving the fees and disbursements of Counsel in the amount of $255,955. In reducing this amount to $157,500, Goodman J. held that, notwithstanding the initial receivership order permitting Counsel to charge its standard rates, the fees charged were not appropriate given the simple nature of the receivership.

Goodman J. took several factors into consideration. First, the nature and extent of the value of the assets handled should have a linear relationship with the fees sought: in general, the lower the value of the assets, the lower the cost of administering the assets. Second, Goodman J. considered whether there were complications or difficulties encountered during the receivership, as this would provide support for a claim for higher costs. Third, Goodman J. considered the cost of comparable services when performed in a prudent and economical manner. In this respect, Goodman J. noted that legal fees from London-area lawyers are lower than their colleagues in Toronto, and since this receivership was administered in the London area, a representative London rate should be used for the comparison of the claim for Counsel's fees.

Of interest, Goodman J. also commented that Counsel had not updated the court on its accrued costs generated supporting the receiver in administering the receivership. Goodman J. noted that while there is no obligation for Counsel to routinely seek the court's approval for its fees, it would be prudent to do so in matters where costs are running high relative to the value of the assets being administered. Goodman J. also took issue with the fact that senior partners did not delegate sufficiently in what he regarded as a simple matter, where junior lawyers or staff could have competently performed the necessary work. Finally, Goodman J. commented that red flags are raised when too many lawyers are charging on one file, especially when it is a straightforward receivership.

It must be noted that the decision of Goodman J. is currently under appeal.

TNG Acquisition:

In TNG Acquisition, a May 2014 decision, a trustee in bankruptcy (the "Trustee") sought an order authorizing the former Chief Restructuring Officer to distribute costs to the company's monitor (the "Monitor"), appointed under the Companies' Creditors Arrangement Act (Canada), and the Monitor's legal counsel. The costs were associated with the Trustee's request about certain events which took place during the Monitor's term and the retrieval of related documentation. Brown J., of the Commercial List, referred to this task as an "archive-retrieval request."

While Brown J. found that the time spent to obtain, review and deliver the documentation was reasonable, the fees charged for such work were not. He referred to the court's discretion to review the reasonableness of the fees charged and significantly reduced the amount to be distributed.

Specifically, Brown J. took issue with the seniority and rates of professionals tasked to complete the work. He held that if a partner or senior manager elects to perform work of a clerical or administrative nature, then he or she should bill at clerical or administrative rates. Counsel's fees of over $800/hour, when "measured against the simplicity of the request," were held to render the submitted costs unreasonable.

Further, the Monitor's charge of 9% of total costs, allocated to cover "administrative expenses," was found to be unreasonable. Brown J. held that administrative costs are generally contemplated in the hourly rates of professionals and both the Monitor and its counsel's costs were significantly reduced.

Practical Application of Diemer and TNG Acquisition:

The courts have demonstrated an active willingness to exercise discretion in the approval of fees claimed in respect of bankruptcy and insolvency matters. Accordingly, professionals in this field should keep the following in mind:

First, be careful and precise when preparing and providing information contained in fee affidavits. That goes for both legal counsel, as well as other professionals submitting accounts for approval.

Second, ensure that work is performed by individuals with the appropriate skill level and billing rates for a particular task. In short, delegate to the appropriate person for the task. Clerical and administrative tasks should not be performed by senior professionals, or, in the event that timelines or other factors necessitate that this work be performed by a more senior professional, appropriate rates that reflect the level of skill required for the work performed should be applied.

Third, pass fees regularly as the file progresses, rather than waiting until the end of the matter to seek approval of professional fees.

Fourth, the practice of allocating administrative expenses as line items in invoices to account for general overhead expenses may need to be revised or eliminated. Brown J. noted that 9% of total costs is unreasonable and should instead be reflected in the hourly rates charged. Professional services providers may need to review the manner in which these costs are defrayed in order to ensure that they can be recaptured without the possibility that the courts will refuse to accept such costs.

Finally, geographic location (for the purposes of generating comparative local professional fees) and the nature of the proceedings are factors that will be considered when fees are reviewed in order to determine whether the assets are being administered as economically as possible.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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