The need for more collective action to serve the LIT profession

By Douglas Hoyes, BA, CPA, CA, CIRP, LIT, CBV, Co-founder, Hoyes, Michalos & Associates Inc. and Howard Manis, Senior Counsel, Manis Law

One of the most fundamental duties a trustee or consumer proposal administrator performs is to verify the proofs of claim submitted by creditors. In most LIT firms, this task is performed by clerical staff, not senior LITs.

It is common for proofs of claim to contain an inaccuracy - the date of insolvency may be incorrect, or the documentation to support the claim may be inadequate. In most cases, the LIT's clerical staff contacts the creditor and advises them of the deficiencies, and a revised claim is submitted and admitted.

But what do you do if the creditor's representative, when advised by your junior staff that their proof of claim contains errors, yells at your staff, threatens to file a complaint with the OSB, and get them fired? Trustees have "thick skins"; we are used to being yelled at. Junior clerical staff may not have “adapted” to the same extent, and regardless, should not have to tolerate abuse.

When confronted with an erroneous proof of claim and a belligerent creditor, the LIT has two options. The easy option is to admit the claim. You know it's inaccurate, but it's a "victimless crime." The intransigent creditor will receive an excessive dividend, but probably not by a material amount, and the other creditors will receive less than their fair share. However, since the other creditors are big banks and credit card companies, does it matter? The LIT's tariff is based on the amount of the funds distributed, not on whom the funds are distributed to, so the path of least resistance is accepting the claim and moving on.

The correct option is to formally disallow the claim. The disallowance process is cumbersome and costly. The trustee is required to send a registered letter or courier to the creditor (a cost for which the LIT is not reimbursed in a summary administration bankruptcy or consumer proposal), and if the creditor objects to the disallowance, a court hearing on the disallowance is required (requiring attendance by the LIT or their counsel, which again is not generally a reimbursable expense).

It's easy to see why an LIT might opt for the first option and take the path of least resistance.

Which brings us to the sad saga of Magical Credit. They are an “alternative lender,” and their “Director of Legal Services” objected when advised that their proofs of claim were inaccurate. The claim itself was not professionally prepared. It was not prepared in crayon, but the general presentation was close. There were numerous errors. The objections to legitimate inquiries made by clerical staff were belligerent and inappropriate. The creditor refused to amend the claim and a disallowance was issued.

A disallowance hearing was scheduled, but realizing that a hearing with a belligerent creditor would not be productive, we invoked Rule 15.01(2) of the Rules of Civil Procedure. We requested that the Associate Justice rule that Magical Credit must be represented by counsel and not merely by an unqualified employee.

After multiple hearings over 12 months, on April 6, 2022, Associate Justice Jean ordered that Magical Credit must be represented by counsel. On March 24, 2023, Justice Steele presided over Magical's appeal of AJ Jean's decision (in front of 40 observers at the virtual hearing, many of whom were LITs from across Canada. It appears that our firm was not the only firm they had interactions with) and on April 28, 2023, Justice Steele issued a decision dismissing Magical's appeal. On September 7, 2023, Magical sent Notices of Abandonment to the various courts in Ontario where Magical had objected to the disallowances, and this sad saga officially ended.

The full decision can be found on Canlii: https://canlii.ca/t/jx6tk.

What lessons can be learned from this sordid saga?

Given that the court process extended over two years, at a significant cost in time and legal fees to the trustee (some of which were recovered from a substantial cost award against Magical), should a trustee close their eyes and allow creditors to do what they wish? That is a reasonable conclusion, but do we want to work in a profession where the rules are not followed?

If an LIT won't object to an inaccurate proof of claim, a relatively trivial matter, would an LIT an LIT would object to more objectionable conduct (such as a bankrupt underestimating their income to reduce their surplus obligations or hiding assets)?

If LITs won't do their job, do we need LITs? Perhaps all insolvencies could be administered electronically by the OSB, eliminating the need for LITs. Or perhaps unlicensed, unregulated debt consultants, who already control a significant portion of the market, could take over all aspects of file administration.

In the short term, ignoring inaccurate proofs of claim makes our lives easier. In the long term, IF we don't serve a useful function, we can be regulated out of existence.

Canadians are carrying record levels of debt. Many of them will be unable to service that debt, and will be faced with wage garnishments, frozen bank accounts, and other collection activities.

Who will they turn to for help?

• Not for profit credit counsellors (all of whom are required to be licensed as collection agents)?
• Unlicensed, unregulated debt consultants who charge a high up-front fee and provide questionable service?
• Or licensed insolvency trustees with many years of training and practical experience who must follow a code of conduct and are regulated by the federal government?

Debtors are best served by competent, licensed, regulated professional advisors, but LITs will only continue to exist if we perform our duties as set out in the BIA and directives.

The Magical saga would have ended sooner if every LIT firm had disallowed every proof of claim they received from Magical. Instead, Magical felt emboldened by the fact that they were able to bully some LITs, and as a result the saga lasted two years longer than it should have.

This is not to say that all trustees acted inappropriately. As noted at the beginning of this article, proofs of claim are processed by junior staff. They do not have a mechanism to communicate with other trustee firms when faced with these issues, so it is possible that everyone assumed these were isolated incidents, and therefore no further action was required.

The profession, perhaps through CAIRP, should develop an online discussion forum (Reddit for LITs) so that as issues arise, we can instantly communicate with our colleagues and band together to solve problems quickly.

When we work together, we all benefit. Justice Steele ruled in our favour because we had the facts on our side, but it didn't hurt our case that she saw 40 LITs in the courtroom.

When Licensed Insolvency Trustees put our competitive differences aside to work for the common good, we all benefit, and that spirit of cooperation, where appropriate, should be encouraged. That spirit of collaboration, even in the face of competition, was evident when CAIRP was formed. This is another area where we can use it to our advantage.