Editor's Note: Please see the apology at the bottom of this story.
When Robert Murphy wheeled a seniors housing development into bankruptcy court in 2003, the Toronto architect hoped the move would resolve creditor and shareholder feuds that were paralyzing the project.
After six years and dozens of complaints to regulators and the courts, the Toronto architect's dream of a sprawling seniors complex near Woodstock, Ont., is dead. The 225-acre site, called Sally Creek, was sold and a court-appointed trustee and his lawyers are claiming staggering fees of nearly $700,000 from $2.5-million of cash remaining.
How can this be? The answer should strike fear into anyone who thinks bankruptcy court is merely a pit stop where troubles are shed like worn tires. In Mr. Murphy's case, the problem proved to be the very trustee he appointed to ensure the restructuring stayed on track.
The architect's uphill battle to draw attention to the conduct of Sally Creek's trustee and lawyers is a cautionary tale about how trustees can abuse their enormous influence over owners and creditors when companies land in insolvency proceedings.
To date, regulators have taken no disciplinary action against the trustee, Toronto-based veteran Edward White. Mr. Murphy has spent years filing complaints with regulators, politicians and professional insolvency organizations about the trustee's conduct. Adding an extra layer of drama to the case, Mr. White is a cottage neighbour and former friend to whom Mr. Murphy turned for help when Sally Creek became entangled in shareholder and creditor disputes.
After six unsuccessful years of complaining about Mr. White's conduct, Mr. Murphy finally got traction this past year when he took his case to two Ontario courts. Judicial officials in the courts ruled that the trustee put his interests first, racked up bills for undocumented services, failed to invest idle cash, lied to regulators and, in the words of one judge, allowed his lawyers in the case to "run amok."
The Office of the Superintendent of Bankruptcy, which oversees trustees, said in a statement that it "fully investigated" Mr. White following a complaint, but "no further action was deemed necessary." The regulator said it recently reopened the case because "new information has since come to light."
Mr. White did not respond to a request for comment. His lawyer, Graham Phoenix, declined to comment because a pending appeal of a lower court's ruling on his fees at Sally Creak is due to be heard by the Ontario Court of Appeal later this year.
Bobby Sachdeva, an insolvency expert and Mr. Murphy's lawyer, said he is disappointed by the superintendent's response to his client's years-old complaints. He said the regulator has had a year to respond to a scathing judgment by Toronto Bankruptcy Registrar Scott Nettie last June, which blamed "arrogance and greed in an attempt to run up fees" for Mr. White's conduct.
"This case troubles me," Mr. Sachdeva said, "because people involved in bankruptcies or insolvencies are extremely vulnerable. They depend on a trustee for guidance and expertise. … When you have trustees or lawyers doing things they should not do, it is a distasteful process. I think the regulator here did not want to deal with the distasteful aspects of this case."
Legal challenges against bankruptcy trustees in Canada are rare. Trustees are typically appointed by creditors and they have a duty to act as an impartial referee overseeing the interests of all parties including creditors, owners and employees. They often enjoy close ties with judges who rely on them for updates and supervision of broken companies.
There are few reported cases of abuses by trustees and for those who have complaints, the obstacles are huge. Most people do not have the resources or stomach to challenge trustees who enjoy a special relationship with the courts.
Mr. Murphy, however, is not most people. The architect has mortgaged his house and drained his retirement savings. His wife, Beverly, has also returned to work. These sacrifices funded a six-year legal battle against Mr. White.
"When you make a decision to start a fight like this, there is no going back. It didn't have to be this complicated," Mr. Murphy said.
The architect said he was so determined to seek redress because most of his personal wealth is tied up in the failed Sally Creek project. He claims he is owed more than $2-million in compensation under the terms of his contract with the project's developers.
From the beginning, the odds were against him. He lost a legal battle to stop the sale of the land. The trustee, Mr. White, disallowed his claim to the lost compensation. He fought unsuccessfully to derail a costly arbitration. And just about everyone he complained to turned a deaf ear.
The architect's luck started to change last summer when the first of two judicial officials who heard the complaints slammed Mr. White's conduct. Mr. Nettie reduced Mr. White's claim for fees of $240,000 to $1 after he found "a glaring paucity of evidence" to support the bill. He said the extraordinary fee reversal was justified because the trustee had put his interests ahead of creditors and pursued "a shallow and misguided attempt to run up professional fees."
Madam Justice Ruth Mesbur of the Ontario Superior Court ruled in February that Mr. White "mismanaged the estate in significant ways and engaged in conduct that was both unprofessional and sloppy." Despite these findings, she ruled that the trustee and his lawyers were entitled to some compensation for their work. She awarded Mr. White $88,158, or 37 per cent of his fees.
Mr. Murphy has appealed Judge Mesbur's decision to raise the fees, which, if allowed, would be paid from the Sally Creek assets. If the Court of Appeal of Ontario allows the trustee to charge fees to Sally Creek, Mr. Murphy's notice of appeal said it "would encourage this trustee and others to wage similar scorched earth campaigns against creditors."
Apology
An article entitled "When bankruptcy trustees 'run amok,' " published on page B6 of the June 24, 2009, edition of The Globe and Mail, contained a statement that judicial officials have ruled that Mr. Edward White, who is a licensed trustee in bankruptcy, "lied to regulators." That is incorrect. A statement to that effect was made by a Registrar in Bankruptcy. No other judicial official has made any such statement. The Registrar's statement was specifically disapproved by Justice Ruth E. Mesbur of the Ontario Superior Court of Justice on Mr. White's appeal of the Registrar's decision. Justice Mesbur also reversed the decision of the Registrar on several other issues. Her decision is under appeal by Mr. Robert Murphy, who was quoted at length in our June 24 article. The Globe and Mail regrets its error and apologizes to Mr. White.