PricewaterhouseCoopers Inc. and Robert Brochu and Serge Morency and Serge Morency & Associates Inc. — January 19, 2005

Professional Conduct Decision

Canada
Ottawa, Ontario

In the Matters of the Professional conduct of the Trustees:
PricewaterhouseCoopers Inc.
(hereinafter referred to as: PwC Inc.)
and
Robert Brochu
and
Serge Morency
and
Serge Morency & Associates Inc.
(hereinafter referred to as: SMA Inc.)
and
Michel Leduc, Senior Analyst For The Office of the Superintendent of Bankruptcy

Counsel for the Trustees:
Alain Robitaille for trustees PricewaterhouseCoopers Inc. and Robert Brochu
Daniel O'Brien for trustees Serge Morency and Serge Morency & Associates Inc.

Counsel for senior analyst, Michel Leduc:
Messrs Roger Simard and Robert Monette

Overview of Proceedings on Record:

In the case before me, I am requested to rule, on the one hand, on the application to [TRANSLATION] "withdraw the complaints and allegations made against PwC Inc. and Robert Brochu" and, on the other, to [TRANSLATION] "order the termination of proceedings" against Serge Morency and SMA Inc.

As part of the correspondence subsequently exchanged between the parties, counsel for the analyst saw fit to request that the applications by the trustees be dismissed and that a new delegate be appointed.

Furthermore, counsel for the Senior Analyst, in a letter dated November 26, 2004, advised the parties and the undersigned that the Senior Analyst's superior, Alain Lafontaine, had decided that the Senior Analyst, Michel Leduc, [TRANSLATION] "would no longer pursue the proceedings concerning the professional misconduct of the concerned trustees" and requested that I [TRANSLATION] "take official notice of their decision" and declare that "these professional misconduct matters were closed as a result of the withdrawal."

Later, in a letter dated November 30, 2004, Alain Robitaille, counsel for PwC Inc. and Robert Brochu requested this time that I "formally dismiss the disciplinary complaints" against his clients and order the publication of my ruling under the appropriate heading of the Superintendent of Bankruptcy Newsletter.

Finally, in a letter also dated November 30, 2004, Daniel O'Brien, counsel for Serge Morency and SMA Inc., requested me to make a ruling [TRANSLATION] "exonerating his clients of responsibility with regard to any grievance, offence, recorded offence or complaint for want of justification."

The Facts:

The allegations of misconduct by the trustees in question have been recorded in the reports of the Senior Analyst dated respectively January 16, 2001, in the case of PwC Inc. and Robert Brochu, and January 18, 2001, with regard to Serge Morency and SMA Inc.

On May 8, 2001, I delegated to Jean-Claude Demers the responsibility of presiding over the hearing of the case and, depending on the outcome of the hearing, to exercise the powers referred to in section 14.01 of the Bankruptcy and Insolvency Act (BIA).

It should be noted that, at the outset, this case also involved another trustee, Eric Métivier, who, however, has reached a settlement with the Senior Analyst, which was duly sanctioned by delegate Demers on January 29, 2004. As a result trustee Métivier is no longer a party to the case before me.

The three disciplinary reports dealt with the circumstances surrounding the administration of the bankruptcy of the Auberge Jacques Cartier in which the five trustees had been involved in various capacities. Mr. Demers, as delegate, had ordered a joint hearing of the matters related to Auberge Jacques Cartier.

With the parties' consent, the hearing was suspended pending the results of the judicial challenge against the constitutional validity of the Superintendent of Bankruptcy's jurisdiction in matters of professional conduct of trustees. This issue was laid to rest by a judgement of the Court of Appeal # 200-09-004077-027 dated October 30, 2003, upholding the validity of the provisions of sections 14.01 and 14.02 of the BIA.

The hearing of the present matter resumed in Québec City before Delegate Demers on January 26, 2004, and came to a sudden halt on January 29, 2004, after the examinations and cross-examinations of the Senior Analyst and the two lawyers called as witnesses to testify for trustee Eric Métivier.

The transcript of the hearing together with the subsequent correspondence exchanged among the parties reveal that, in the course of the evening of January 27, 2004, following that day's adjournment of the hearing, delegate Demers joined the Senior Analyst Leduc, whose cross-examination had just come to an end that afternoon, his counsel and the auditor (of the Office of the Superintendent of Bankruptcy) who was to take the stand and be examined the next morning, in order to share the evening meal. This all happened unbeknownst to the trustees involved or their counsels.

The following morning, when the hearing resumed, delegate Demers, having realized the extent to which the previous events could be compromising informed the parties and their counsels of these events.

After a short adjournment, counsels requested that delegate Demers order forthwith the dismissal of all of the complaints in light of the [TRANSLATION] "glaring weakness of the evidence supporting the complaints." After hearing representations from the parties on this motion, delegate Demers raised a number of issues relating to the investigation process, the delay in giving notice to the trustees that they were the subject of a disciplinary investigation and the breach of procedure to a process which the Office of the Superintendent of Bankruptcy committed itself to. Furthermore, he expressed his astonishment at a number of facts revealed during examination and cross-examination and at the documentary evidence submitted during the hearing, so much so that he suggested the Senior Analyst reassess his file. As a matter of fact, delegate Demers was questioning whether or not the Senior Analyst and his counsel had [TRANSLATION] "met the burden of proof that was incumbent upon them."

Before ruling on these issues, delegate Demers believed that he first had to decide whether or not he still had jurisdiction to preside over the hearing given the previous evening's events which could have tainted the perception of impartiality which he had to maintain as an adjudicator.

It is in that context that delegate Demers once again postponed the hearing until the next day, indicating that he would make a decision on these issues upon resumption of the hearing.

When the hearing resumed, and as he was about to read his decision, delegate Demers was interrupted by Mr. Roger Simard, counsel for the Senior Analyst, who advised him that he no longer represented the Senior Analyst and that he had been replaced by Mr. Robert Monette who then appeared as counsel for the Senior Analyst.

Delegate Demers then continued to read his decision in which he stated that he did have jurisdiction to continue hearing the case and, as he was about to read the part of his decision dealing with issues of procedural fairness and the rules of natural justice, he was this time interrupted by Robert Monette who stated that he was mandated to ask him to recuse himself from the case on the grounds that he could no longer maintain the appearance of impartiality necessary to perform his duties. After hearing representations from the parties, delegate Demers came to the conclusion that, faced by the same request from all parties to the case, his only choice was to recuse himself from the case and he refused to continue reading the decision which he had prepared on the issues of procedural fairness.

It is under these circumstances that this matter is once again before me and I have now to decide to either appoint a new delegate or to allow the request from the trustees to order the dismissal of the allegations regarding their professional conduct or, in the alternative, to take official notice of the decision made by the Senior Analyst Michel Leduc's supervisor to not pursue this case and seeking to have the case ordered closed.

Analysis of the transcripts of the hearing held from January 26 to 29, 2004, and of the correspondence between the undersigned and the parties to the case from February 4 to December 9, 2004.

In order to rule on the various requests before me, I believe that I must consider the advancement of the case and of the evidence submitted to date. In light of the exceptional circumstances of this case, I must determine whether or not the process has been tainted with irregularities to the extent that a termination of the proceedings would be justified, and whether or not the Senior Analyst has sufficiently met the burden of proof incumbent upon him to conclude that it is possible to continue these proceedings in a way that would not constitute a denial of justice to the parties nor compromise public interest.

This approach is not, in my opinion, substantially different from the one usually followed in any case involving matters of professional conduct where, before making a determination as to the need for a hearing, I ascertain that the report is prima facie sufficient to warrant the exercise of one of the powers specified in section 14.01 of the BIA, provided that the alleged facts are found to be true.

It must be noted that at the time delegate Demers recused himself, the examination and cross-examination of Senior Analyst Michel Leduc were completed. From then on, there was only one more witness to hear in support of the disciplinary reports, i.e., the auditor who performed an audit of the trustee Métivier's activities between September 22, 1996, and December 12, 1997, and whose report was only released two years later in January 2000. This audit made it possible to collect documentary evidence from the trustee's Métivier relating to the allegations surrounding the administration of the bankruptcy of Auberge Jacques Cartier. As noted by delegate Demers himself, it is unlikely that the testimony of the auditor would have added much to that of Senior Analyst Leduc. The auditor certainly would have provided further details on this or that aspect of the facts relating to the disciplinary reports and he would have undoubtedly corroborated the evidence given by Senior Analyst Leduc.

Again, at the time of the recusal of delegate Demers, counsel for the trustee had completed the examination of two lawyers knowledgeable in the area of insolvency on the practices followed in connection with the sales of secured assets and the type of agreement that is occasionally entered into between the trustee in bankruptcy and the secured creditor to ensure the realization of secured assets. Counsel for the Senior Analyst had also completed his cross-examinations of the two testifying lawyers.

The heart of the allegations made against the trustees resides in the signing of an agreement between the trustee in bankruptcy of the Auberge Jacques Cartier and the Receiver acting for the secured creditors, under which the trustee in bankruptcy delivered possession of the secured assets to the Receiver and agreed to eventually sell the assets at some time in the future upon request from the Receiver without claiming any costs, fees or additional amount. The same agreement provided that the trustee could retain as compensation the entire income generated by the operation of the hotel between March 1, 1993 and July 13, 1993. According to the evidence heard during the hearing, the equity accrued in this manner for the body of creditors amounted to more than $150,000, even though the affected assets were sold on September 23, 1994 for the amount of $2.5 million thereby leaving the secured creditors with a loss in excess of $3.5 million. The agreement also contained a so-called confidentiality clause to the effect that its contents could not be disclosed to third parties without the written consent of the parties to the agreement.

It seems that the sale that took place on September 23, 1994, was made by the trustee upon request from the Receiver pursuant to the agreement of July 13, 1993. It also seems that this sale was designed to benefit from Section 45 of the Québec Labour Code, as it then stood, which put an end to the union certification linked to that business as a result of judicial sale or sale by trustee in accordance with the case law firmly established to this effect at the time. As a result of a legal challenge by the union claiming the transfer of the union certification upon the sale, the Court of Appeal of Québec in a decision issued on April 11, 1997 (#200-09-00889-961) concluded that in the circumstances surrounding this case, the trustee in bankruptcy merely acted as a facade in an attempt to prevent the transfer of certification. Accordingly, the Court of Appeal rejected the judicial sale characteristics of the sale made by the trustee and determined that union certification followed the sale of the business into the hands of the buyer.

As for trustees PwC Inc. and Robert Brochu, the Senior Analyst's report alleges against them the following breaches as a result of having entered into such an agreement:

With respect to the actual sale of the business corporation which took place 14 months later, i.e., on September 23, 1994, the Senior Analyst's report makes the following allegation:

At this stage it should be reminded that in order to establish an offence under section 247 of the BIA, the Senior Analyst had to prove that the Receiver did not act honestly or in good faith, nor in a commercially reasonable manner with regards to the management of the assets of the bankrupt.

The unchallenged evidence in this case shows that the bankruptcy of the Auberge Jacques Cartier occurred at a time when the relations between the debtor and the secured creditors were very acrimonious. The evidence shows that the debtor took several steps to delay the realization of their securities. As the file continued to move forward, a joint interim receiver was appointed in order to better protect all the parties concerned. This procedure, which is rather unusual, demonstrates in a way the lack of mutual trust between the debtor and the creditors. During the period following the bankruptcy, the evidence shows that discussions took place between the trustee in bankruptcy and the Receiver in order to transfer possession of the secured assets to the latter for the benefit of the secured creditors.

Nothing in the evidence submitted to delegate Demers or in the transcripts of oral evidence supports the allegation of an atmosphere of complacency, cooperation or complicity raised by the Senior Analyst. During cross-examination, Senior Analyst Leduc recognized that the agreements were clearly beneficial to the body of creditors for whom the trustee SMA Inc. acted in a fiduciary capacity. Is it worth mentioning again that the agreement dated July 13, 1993, allowed the body of creditors to benefit in equity valued of more than $150,000 whereas the secured creditors themselves had to deal with a loss exceeding $3.5 million as a result of the sale of the secured assets several months later.

There is nothing in the examination or cross-examination of the Senior Analyst nor in his investigation that would support the allegation that the agreement had been signed for the [TRANSLATION] "purpose of artificially conferring upon the sale the characteristics of a judicial sale." His testimony makes no reference to any discussion relating to union certification by the parties at the time when the agreement was signed. He confirms that he was unaware of any offer to purchase which might have been made at the time the agreement was signed, that is more than one year before those that were filed in September 1994.

Under cross-examination by counsel for PwC Inc. and Robert Brochu, the Senior Analyst admitted that PwC Inc. acted in good faith, while expressing the opinion that the trustee, in spite of his good faith, did not act honestly and in conformity with the usually reasonable commercial practices.

On the question of "dishonesty", the Senior Analyst simply stated his opinion without referring to any fact or circumstance which his investigation would have allowed him to bring forward in order to support this opinion.

As to the breach of the duty to deal with the property of the bankrupt in a commercially reasonable manner, the witness admits that he does not have the necessary skills to evaluate and describe what acting in a commercially reasonable manner might be. His testimony reveals that his investigation was confined to discussions with work colleagues and that he did not see fit to seek further information from practitioners, creditors or inspectors with regard to current commercially reasonable practices or what would be considered reasonable or not.

On the other hand, the unchallenged evidence given by Mr. Larochelle, counsel for trustee Métivier, obtained during examination of the two lawyers specialized in matters of insolvency, establishes that it was common practice for trustees at the time and still today to negotiate their respective positions with the secured creditors in order to generate equity for the body of creditors. The witnesses expressed the opinion that in the circumstances pertaining to the Auberge Jacques Cartier, the trustee entered into an agreement beneficial to the body of creditors and that they believed such practice perfectly acceptable legally and ethically. Here again, the evidence was unchallenged and gave rise to no objection from the analyst or his counsel, and thus must be held as reliable.

This is so especially in light of the examination of Senior Analyst Leduc who stated clearly on several occasions that the impact of the agreement signed on July 13, 1993, on the rights of unions and their certification was of little importance with the allegations which he raised against the concerned trustees. This part of his testimony is especially surprising given that it is the reading of a press article summarizing the decision rendered by the Québec Court of Appeal relating to the issue of union accreditation that caused him to solicit a mandate to investigate. In such circumstances, I fail to see how there could have been a breach of the duties provided for under section 247 of the BIA on the part of PwC Inc. and Robert Brochu.

I therefore find that the evidence of the Senior Analyst established in the file amounts to nothing more than unsubstantiated allegations and that he did not meet the burden of proof with respect to the alleged offences.

As regards the use of a non-disclosure clause which he claims to be in violation of the BIA, the Senior Analyst admits that the existence of the agreement was made known to the creditors at the first creditors' meeting, acknowledges that the agreement was brought to the attention of the union and he is unable to identify anybody against whom the non-disclosure clause would have been invoked. In their testimony, the two lawyers called as witnesses testified that this type of clause did not affect the duty of the trustee to report to and advise the creditors for whom he was acting in a fiduciary capacity. Their evidence contradicts that of Senior Analyst Leduc in that they stated that it is not unusual for this type of non-disclosure clause to be inserted in business contracts, even if one of the witnesses did state that he never includes such clauses in his contracts given their lack of usefulness.

In view of the Senior Analyst's admission regarding his lack of experience in the area of commercial dealings and of the fact that he did not, as part of his investigation, make any inquiries about commercial practices, I find as a fact that the evidence given by the two lawyers called as witnesses is conclusive in that it is not unusual for such non-disclosure clauses to be included in cases similar to the one at hand. And here again, counsel for the analyst did not raise any objection as to the type of evidence submitted.

As to the legality of such a non-disclosure clause, that is obviously a question of law. It should however be noted that in his investigation, the Senior Analyst seems to give no weight at all to the consistent opinion of the three lawyers acting for the parties with regard to the validity of such a clause from both legal and ethical points of view. I also note that the evidence shows that the Senior Analyst did not see fit to seek a formal independent legal opinion on this question as part of his investigation.

I hesitate to make any finding as to whether or not such a clause is legal in the absence of any clear legislative text and given the numerous legal opinions in which, in my opinion, the trustees involved in this case had reasonable grounds to believe they could rely on. I also note that the evidence shows that this non-disclosure clause did not in fact compromise the overriding fiduciary duties of the trustees towards the creditors and the various insolvency officials such as the Official Receiver and the Bankruptcy Registrar.

It might have been relevant to determine whether or not the trustees were under any duty towards the employees and the union of the business cooperation and if this duty had been detrimentally affected by the agreement signed on July 13, 1993, and by the sale that occurred on September 23, 1994. However, this issue is irrelevant to the case at hand since the Senior Analyst testified that he did not consider it when raising the alleged offences in his report.

As to the offence which allegedly occurred as a result of the sale made on September 23, 1994, I find the testimony given by the Senior Analyst leaves much to be desired. Under examination and cross-examination, the Senior Analyst expressed his opinion that the agreement dated July 3, 1993 resulted in the trustee relinquishing all of his ownership, possession and management rights with regard to the secured assets and other rights resulting from the deed of trust. He acknowledged not having read the deed of trust especially as regards the fiduciary duty to transfer any surplus from the realization to the debtor or his successors (in this case, the trustee in bankruptcy). He testified that the allegations raised in his report are the result of discussions with his work colleagues and with lawyers for the Office of the Superintendent of Bankruptcy while indicating that he never received a formal legal opinion about the legal documents on which these allegations are based. The evidence does, however, show that four lawyers did express separate opinions supporting the validity, from legal and ethical points of view, of the agreement signed on July 13, 1993, and of the sale made on September 26, 1994.

For these reasons, I must again find that the Senior Analyst did not meet the burden incumbent upon him to prove the allegations made against the trustees PwC Inc. and Robert Brochu as to the sale that occurred on September 26, 1994.

Conduct of investigation:

Several issues were raised by the trustees as to the process followed during the investigation, the delays incurred in the course of the investigation and the belatedness of the notice given to the trustees informing them of the investigation.

The evidence on the record shows that the main facts giving rise to the allegations of professional misconduct took place during the period from July 13, 1993 to September 26, 1994. However, it is only in the spring of 1997 that representatives from the Office of the Superintendent of Bankruptcy were informed of a decision by the Court of Appeal of Québec to the effect that the trustee had acted as a mere facade and that the Court rejected the judicial sale characteristics of the sale made by the trustee with the result that the union certification of the business sold by the trustee was transferred into the hands of the buyer. According to the evidence given by the Senior Analyst, an article in a legal periodical summarizing the judgement of the Court of Appeal was the subject of a debate within the Office of the Superintendent of Bankruptcy at the time. However, he is unable to provide any detail on the outcome of this debate, and did not see fit to inquire about it. In fact, it is only on August 9, 1999, that Senior Analyst Leduc came across an unlabelled folder containing the news clipping in question. According to his evidence, he became sufficiently troubled from reading this news clipping to request and obtain on the same day verbal authorization from his superior to start an investigation into the potential professional misconduct of the trustee. The terms of reference of the investigation were confirmed in writing by his superior one week later, according to evidence given by the Senior Analyst.

Yet, it took nine months from that period in time, i.e. until May 30, 2000, and more than three years from the time that the grounds for opening an investigation were brought to the attention of the Office of the Superintendent of Bankruptcy, for the trustees to be officially informed that an investigation of their professional conduct was underway.

Without any explanation, these delays seem excessive and unreasonable. The Senior Analyst provided no relevant reason for such delays, other than perhaps the fact that the investigation had been initiated prematurely since his file did not contain the basic information normally available whenever an investigation of this nature is initiated. Such an explanation, in my opinion, only serves to further undermine the quality of the process followed in this particular case.

Talks leading to the recommendations:

To this day, I have yet to receive the initial recommendations that the Senior Analyst provided to the trustees as part of the transmittal of his reports to them. However, counsel for the trustees in the correspondence that followed the recusal of delegate Demers took the initiative to share with me the various discussions that took place between the Senior Analyst and his counsel. Counsel for trustees Serge Morency and SMA Inc. even submitted to me an affidavit from his client reporting on the settlement discussions in which the Senior Analyst and his counsel were proposing a license restriction for a period of two weeks to be limited to corporate files only. This offer followed an initial offer of a two-month restriction suggested on the previous day. It should be noted that according to stenographed notes, the initial recommendation was for a fifteen-month suspension.

In the case of trustees PwC Inc. and Robert Brochu, counsel indicated that the last offer of settlement proposed by the Senior Analyst and his counsel stated [TRANSLATION] "that any allegations against PricewaterhouseCoopers and Robert Brochu were withdrawn. As for Robert Brochu, it is proposed that a letter be addressed to him by the Deputy Superintendent, Alain Lafontaine, stating his obligation to comply with deadlines for submission of the various reports required by the Act, the rules or the instructions. This letter was to be kept confidentially on file by the Superintendent unless a repeat offence occurred."

In a letter dated June 15, 2004, counsel for the Senior Analyst, who at the time had requested the appointment of a new delegate, expressed concern about the fact that representatives from the trustees disclosed the contents of discussions that took place without prejudice. However, he did not challenge the contents of these discussions.

The reason I am referring to the circumstances above is that they provide a good indication that the Senior Analyst felt indeed that he had failed to meet the burden of proof with respect to the allegations he made against the trustees.

Findings:

After reviewing this case, I find that Senior Analyst Leduc has demonstrated a serious lack of diligence throughout his investigation, that he has shown carelessness and lack of judgement which has affected the integrity of the investigation and of the hearing conducted in this case, and has seriously undermined the credibility of the Office of the Superintendent of Bankruptcy as a whole. Obviously, Mr. Leduc shall no longer lead investigations into the professional conduct of trustees in the future.

As a result of the foregoing:

• I find that the Senior Analyst did not meet the burden of proof incumbent upon him and order the dismissal of all the complaints brought against the trustees PricewaterhouseCoopers Inc., Robert Brochu, Serge Morency & Associates Inc., and Serge Morency, as formulated in the disciplinary report;
• I find that the investigation process and the hearings in this case to be so flawed as to bar any further proceedings, in light of the duty of procedural fairness which is binding on the Superintendent and his delegates pursuant to the provisions of paragraph 14.02(2)(c) of the BIA;
• I take official notice of the withdrawal of the proceedings that were initiated;
• I order the publication of this decision in accordance with the process published for this particular purpose by the Office of the Superintendent of Bankruptcy.

Dated at Ottawa, this 19^th Day of January, 2005

Marc Mayrand
Superintendent of Bankruptcy