Ronald J. McMahon — January 18, 2002

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.

Canada
Ottawa, Ontario

In the matter of the professional conduct of
Ronald J. McMahon
holder of a trustee licence for the province of British Columbia

Counsel for the Trustee:
Mr. Edward Hinkson, Mr. Ritchie Clark q.c.

Counsel for the Senior Analyst:
Mr. Marcel Gauvreau

The Proceedings:

This proceeding arose from the issuance of a report (hereinafter referred to as the "S. 14.02 Report") dated , by Mr. Evan DeBoice, Senior Disciplinary Analyst for the Office of the Superintendent of Bankruptcy, pursuant to section 14.02 of the Bankruptcy and Insolvency Act (herein after referred to as "BIA"). A first conference call took place on to establish the key issues of facts, the list of possible witnesses, the time required for the hearing and possible dates for such hearing. After exchanges of correspondence and a subsequent conference call on it was determined that a preliminary hearing would take place on and to consider an objection raised by Mr. Clarke to the Superintendent's jurisdiction over the matters raised in the report and further that the hearing on the report would be tentatively scheduled for , and .

Following the hearing of and , I issued a decision dated ruling that the Superintendent had jurisdiction to hear the matter as raised in the report. My ruling has since been the object of judicial review proceedings before the Federal Court of Canada.

As there had been no court order staying the proceedings on the S. 14.02 Report pending the examination of the jurisdictional issue by the Federal Court, I proceeded with hearing matters arising from the report as scheduled on , and . At the start of the hearing on February 28 counsel for trustee McMahon, moved to have the proceedings adjourned until the Federal Court ruled on the jurisdictional issue. The application was dismissed in view of the fact that the parties had been aware of my jurisdictional ruling for some time and had been advised that the hearing would proceed unless a staying order was issued by the Federal Court. Since there has been a ruling finding that jurisdiction existed and since the said ruling stands unless and until a higher Court rules otherwise, the public interest required that the Superintendent carry on his duties in accordance with the provisions of the BIA.

After the parties had completed their evidence and prior to submitting their arguments, the issue was raised by Mr. Gauvreau, as to whether in light of the recently revised discipline process, that has since then been published broadly on , the arguments should also contain representations of the possible sanction or whether counsels should await a finding by the undersigned on the exact wrongdoing committed by Mr. McMahon before making any such representations.

Mr. Hinkson added that in is experience the question of sanction is generally addressed only after there has been finding of whether there has been any breach at all and, only after such finding has been made is the issue of sanction argued as need be.

I believe that there may be exceptional circumstances where for reasons of equity and fairness and in view of the complexity of the matters raised in a particular case, the undersign or his delegate may wish to come to a finding of facts before hearing the parties or the sanctions. However, this approach is not mandated by the BIA which prescribes that any notice regarding the conduct of a trustee under S. 14.02 BIA should clearly spell out the specific licensing sanction that should result from the alleged wrongdoings. The new discipline process does not change that, but only specifies that the sanction recommended by the senior analyst while communicated to the trustee at the outset would be made known to the Superintendent or the hearing delegate at the hearing.

There would be nothing wrong for the undersigned or his hearing delegate to enquire about the sanction(s) that the senior analyst is recommending at the start of the hearing or even during a preparatory conference if it was felt that such information would be of assistance for case management purposes.

Such an approach is entirely consistent with S. 14.02(1) BIA which provides that:

"Where the Superintendent intends to exercise any of the powers referred to in subsection 14.01(1), the Superintendent shall send the trustee a written notice of the powers that the Superintendent intends to exercise and the reasons therefor and afford the trustee a reasonable opportunity to be heard"

Clearly S. 14.02(1) set a duty upon the Superintendent himself or his delegate appointed through delegation instrument issued pursuant to S. 14.01(2) to advise the trustee not only of alleged wrongdoings against him or her but also of the specific licensing authority the Superintendent or his delegate would be considering as appropriate. In fact failure to do so would probably constitute a breach of the Superintendent or his delegates duties that would taint the whole process.

Clearly, the BIA does not require a definitive finding of facts before the arguments on the licensing measures could be submitted. In my view, such an approach is consistent with paragraph 14.02(2)c) BIA which states:

"At a hearing referred to in section (1), the Superintendent … (c) shall deal with the matters set out in the notice of the hearing as informally and expeditiously as the circumstances and consideration of fairness permit;"

Again, clearly the BIA prescribes a process that should be as informal and expeditious as possible subject to providing the trustee a full opportunity to be heard, to contradict the evidence submitted by the senior analyst and make representations as to the nature of the alleged wrongdoing and submit any mitigating circumstances that could influence the Superintendent or his delegate in deciding the matter.

Again, it does not mean that in exceptional circumstances, due to the complexity of the case including the number of alleged wrongdoings it may not be appropriate to split the process by first coming to a finding of facts and then, in a second phase call a further hearing of the parties to determine the proper licensing powers to be applied. Such an approach is certainly not mandatory and it should be left to the discretion of the presiding officer in a case by case approach.

Overall I would be concerned that a systematic approach of splitting the hearing would be an additional element that moves these hearings further away from the administrative process envisaged by the BIA to deal with licensing matters and closer and closer to a formal judicial process akin to a criminal procedure which was never intended by Parliament in dealing with such matters.

The S. 14.02 report:

The circumstances that caused the Senior Analyst to exercise his delegation under section 14.02(1) of the BIA are described in his report. The investigation that led to the S. 14.02 Report was triggered by a complaint initiated by representatives of the firm Smythe Ratcliffe Chartered Accountants ("srcA"), namely Messrs. William R. (Bill) Wright and R.E.G. (Bob) Cole. The complaints were formulated orally during a meeting held on with representatives from the Office of the Superintendent of Bankruptcy ("OSB") in Vancouver. In a note addressed to his supervisor, Mr. Bill Millar, the subject matter of which reads "Subject Ronald George McMahon, Trustee licence #01062, Allegation of theft from Receiving trust funds" and dated , the author, Mr. William Bill summarized the allegations made by "srcA" and his preliminary findings. The note, which forms attachment 2 to the S. 14.02 Report, cast the allegations alternatively as "unauthorized removal of funds from a receivership trust account", as removal of "the sum of US$ 25 000" and refers to an apparent suspicion "that Mr. McMahon had stolen US$ 25 000 from the trust account". In a letter dated October 15, 1999, Mr. Drake (who had been hired by "srcA" to manage the receivership file on their behalf after Mr. McMahon had left the firm) wrote to Mr. McMahon seeking either a reimbursement of the funds plus interest to the receivership trust account or a proper explanation for the transaction.

The complaint was referred to the Senior Analyst, Mr. Evan DeBoice, who wrote the present S. 14.02 Report. On April 28, 2000, he advised Mr. McMahon that he would be investigating his conduct with respect to his administration as receiver manager of 46 214 B.C. Limited the general partner of Monticello Camelback Limited partnership.

The report alleged that the trustee had contravened Rules 36 and 48 of the BIA, which are part of the Code of Ethics for trustees and read as follows:

36. Trustees shall perform their duties in a timely manner and carry out their functions with competence, honesty, integrity and due care.

48. Trustees who hold money or other property in thrust shall

  1. hold the money or property in accordance with the laws, regulations and terms applicable to the trust; and
  2. administer the money or property with due care, subject to the laws regulations and terms applicable to the trust.

In the course of preparing his final report Mr. DeBoice had sought explanations from both Mr. McMahon and his counsel, Mr. Ritchie Clark. The essence of the explanations provided by Mr. McMahon were summarized in a letter dated May 30, 2000 addressed by Mr. Clark to Mr. DeBoice, which is found in attachment 19 of the S. 14.02 Report.

The facts:

According to the report, Mr. McMahon has failed to comply with the standards applicable to the administration of trust funds.

The circumstances of such failure arose in the administration of trust funds on behalf of the receivership of Montebello Camelback Limited Partnership ("MCLP"). The evidence shows that on August 23, 1995, Smythe McMahon Inc. ("SMI") was appointed by the Supreme Court of British Columbia as Receiver Manager of four numbered companies which were respective general partner of four limited partnerships that included "MCLP".

From August 23, 1995 to June 28, 1999, Mr. McMahon, holder of a trustee license under the BIA, was the sole administrator and manager of the receivership appointment on behalf of "SMI" which itself was controlled by "srcA". After June 1999, Mr. William Drake, another licensed trustee, was retained by "SMI/srcA" to carry the administration of the receiverships in replacement of Mr. McMahon.

The report reveals, and this is confirmed by oral evidence provided at the hearing, that on Friday May 30, 1997, Mr. McMahon gave instructions for a wire transfer of US$50,000 to Capital Title Group including bank charges from the "MCLP" receivership US trust account. The US$50,000 represented respective equal share of investments of $25,000 each made by Mr. McMahon and by Mr. Liverant in debentures issued by Capital Title Group.

On Monday June 2, 1997, a deposit of CAN$34,337.30 was credited to the "MCLP" receivership Canadian trust account. In the detailed balance books and records, the said amount is referenced as "re Capital Title — cr fr. Liverant / JTS". In his testimony, Mr. McMahon explained that he was one of the directors and officers of JTS who could sign cheques on JTS accounts with a cosignature. Apparently the other authorized signatories were Mr. Norm Ratcliffe and Mr. Rick Henshaw who were both partners at "srcA". "srcA" was apparently controlling JTS Mortgage Investment Corporation. In the case at hand, Mr. McMahon testified that, to the best of his recollection, the CAN$34,337.30 cheque had been signed by himself and Mr. Henshaw. His testimony was not disputed on this point. No further explanation were offered at the hearing as to the relationship between srcA, its partners, JTS and MCLP, nor to what extent srcA was aware, supportive or even instrumental in channelling unrelated funds through the MCLP trust account.

Mr. McMahon further testified that at all times he intended to keep the receivership trust account whole and that he had intended to deposit the Liverant portion of the investment on the same day as the funds were wired to Capital Title Group but that because of the late time it could not be done on Friday but was done the following Monday.

Mr. McMahon further testified that the transactions were conducted in that manner for reasons of convenience to both himself and Mr. Liverant as well as to the receivership. In taking advantage of the receivership US trust funds he claims that they saved the 2% that is normally charged for converting money from Canadian to US dollars and that by reimbursing the receivership trust account in Canadian dollars the "MCLP" estate avoided paying the fees to convert US dollars to Canadian dollars. He also testified that because of some deadlines it was speedier to use the receivership US trust fund account as a channel to complete his and Mr. Liverant's personal investment in Capital Title Group.

The use of a trust fund account to channel personal funds or funds unrelated to the trust is an improper use of the account even though there is no prejudice to the beneficiary of the trust. During his testimony, Mr. McMahon stated that for him the transactions were merely a matter of bookkeeping and convenience (to both Mr. Liverant and the receivership estate) but on further questioning he recognized that he should not have used the receivership account as he did.

As for the treatment of his personal part of the investment, that triggered the complaint from srcA against Mr. McMahon, it appears that despite his best intention, Mr. McMahon, as of the date of this hearing, has failed to reimburse either the receivership trust account or srcA, the successor receiver.

Mr. McMahon testified that at the time the US$50 000 funds were wired from the receivership trust account to Capital Title Group the receivership had work in progress that exceeded his portion of the amount wired. He points out to the receivership order of Mrs. Justice Quijamo and more specifically to clauses (e) and (b) of pages 3 and 4 respectively of the order which allowed the payment of fees to the receiver as well as other disbursements to pay for the administrative expenses of the receivership. Such payments were not subject to any prior or formal authorization, though they were, as a matter of course, subject to taxation at the end of the administration. The Court could tax down the amount of fees causing the receiver to reimburse some funds, but that does not mean that such funds would have been improperly withdrawn without authorization.

The testimony by Mr. McMahon that the receiver's work in progress exceeded the amount of US$25 000 has not been disputed by any of the witnesses including the Senior Analyst, Mr. Wright of srcA or Mr. William Drake, who prepared the final accounts of the receiverships. Considering the order of Mrs. Justice Quijamo and considering further that Mr. McMahon was the sole administrator of the receivership on behalf of srcA the receiver, and that the amount of work in progress exceeded the amount wired to Capital Title Group representing the share of Mr. McMahon in the total amount wired, I therefore conclude that the receivership estates, subject to final taxation of accounts, did not suffer prejudice as a result of the various transactions.

This does not mean that the actions of Mr. McMahon were proper in terms of dealing with trust funds. In fact, Mr. McMahon admitted so much in his testimony, in that the funds should have been paid out into an account on behalf of the receiver and only then could have been wired to the Capital Title Group. Under the current entry in the books of the receivership estates, a reasonable person would conclude that it was the receivership estates that invested US$50 000 in Capital Title and rather than Mr. McMahon and Mr. Liverant personally. Such a manner of proceeding obscures the beneficiary of transactions and exposes the receivership estate to unnecessary risks and is conducive of funds commingling. As such, the actions of Mr. McMahon were contrary to the normal standards applicable to licensed trustees or any administrator of trust funds for this matter.

The dispute goes beyond what has been described so far. The firm "srcA" claims that there had been a misappropriation of trust fund by Mr. McMahon and that it had to reimburse the receivership trust account as a result. The evidence also shows that "srcA" filed a claim with its insurance company and received a payment in the amount of CAN$37 000. No evidence was provided to explain the reason for the payment, the nature of the claim submitted nor the provision(s) of the insurance policy under which the payment was made. No evidence was provided as to the representations made to the insurer; during his testimony Mr. Wright suggested that the claim was handled by Mr. Drake while Mr. Drake, during his testimony suggested he had little to do with the insurance and that the claim was mostly handled by others at "srcA". All we have from the record is that a claim was made that resulted in a payment to Smythe Ratcliffe on May 16, 2000 which in turn had repaid an equivalent amount into the receivership account. As of the time of the hearing, Mr. McMahon stated that no steps have been taken to recover the funds against him. Mr. Hinkson suggested that the reimbursement to the receivership was not necessary but was convenient to the firm as it allowed srcA to reverse billings by Mr. McMahon and excluded him from future billing under the partnership agreement.

Throughout their testimonies both Mr. Wright on behalf of "srcA" and Mr. McMahon pointed out the acrimonious relationship that existed between Mr. McMahon and the firm. At the time of the incidents surrounding the Camelback Receiverships Mr. McMahon was the managing partner for the firm, he was the sole administrator of the receivership for which he could sign all cheques out of the trust fund without any other signature required. It appears from the evidence that, for reasons unknown to the undersign, the relationship between Mr. McMahon and the firm deteriorated to the point where Mr. McMahon was requested to resign from the firm. Mr. McMahon effectively resigned on February 28, 1999. That triggered a series of claims and counterclaims to which Mr. Wright and Mr. McMahon alluded in their testimonies without providing much specific details. It is sufficient to say that the firm alleges that Mr. McMahon has misappropriated several hundreds of thousands of dollars over and above the amounts involved in the Camelback receivership, while Mr. McMahon claims that the firm owes him a substantial amount on account of work in progress accumulated at the time of his resignation as well as funds accumulated in his capital account. Both parties have referred their claims to their respective attorneys but no statement of claims nor counterclaims had been filed by either party at the time of this hearing and the senior analyst's report does not refer to any other possible wrongdoings of Mr. McMahon in relation to any estates that were under his administration at any time.

I believe the above evidence provides important background to the relationship between Mr. McMahon and "srcA" and should be considered in reviewing the complaint filed by Mr. Cole and Mr. Wright on behalf of "srcA" against Mr. McMahon. It imposes a duty of great care and caution in reviewing the said complaint and drawing any conclusion against the party complained of. I would expect that the allegations are supported by facts and corroborated by independent evidence and that the facts are so persuasive that to overlook them would substantially offend reason.

In a letter dated October 15, 1999, Mr. Drake, the new receivership administrator for "srcA", asked for an explanation of the transaction or alternatively sought the reimbursement of the US$25 000, Mr. Drake's letter shows an understanding of the transaction that he had acquired from a discussion from Mr. Ratcliffe of "srcA". He apparently never spoke to Mr. Liverant nor did the Senior Analyst. The letter of October 15 does not discuss accumulated work in progress nor the authority to withdraw professional fees in accordance to the receiver's appointment order.

In a meeting dated , Mr. Wright and Mr. Cole of srcA explained their complaint against Mr. McMahon to Mr. Bill and Mr. Millar of the Vancouver Division Office of the Superintendent of Bankruptcy. The gist of the complaint, as summarized in attachment 2 to the Senior Analyst's report, points to the removal of funds without authority and for his own benefit, it even suggests that the US$25 000 had been stolen from the trust account, yet there is no evidence that the matter had been referred to the proper authorities for investigation of a possible criminal offence.

In fact the evidence from Mr. McMahon corroborated by Mr. Drake and Mr. Wright confirms that the work in progress was at least equal to the amount wired and that Mr. McMahon, as the sole administrator of the receivership for "srcA", could alone and without any prior authorization sign cheques, make payments and transfer funds from the trust account.

From this I can only conclude that as the sole person authorized to administer the receivership Mr. McMahon had full authority to withdraw funds and that, subject to taxation, the beneficiaries of the receivership estates had no remedy against the actions of Mr. McMahon. This, of course, may not have been the same as between Mr. McMahon and the firm "srcA". It may be that Mr. McMahon had no authority from "srcA" to use the funds as he did. But to come to a definitive conclusion on this matter would have required a lot more evidence than what has been produced at the hearing. The partnership agreement would have been useful as well as the governance framework within the firm, the practice for managing "srcA" receivables, the existence of possible exceptions, the circumstances when they could be used, etc… In absence of such evidence and in view of the background to the relationship between the plaintiff srcA and its former managing partner Mr. McMahon, I cannot draw any conclusion as to whether the conduct of Mr. McMahon was unbecoming of a trustee in bankruptcy.

In the circumstances, I find that there has been no persuasive evidence that Mr. McMahon misappropriated funds from the firm srcA, nor that he has failed to reimburse funds owed to srcA without legitimate reasons. I cannot conclude, even if I had jurisdiction to do so, which is doubtful, against Mr. McMahon in this point. The present forum is not the one to adjudicate on disputes between partners or former partners, such jurisdiction belongs to the Civil Courts.

The recommendations

The Senior Analyst recommended that the licence of Mr. McMahon be cancelled. In coming to that recommendation, counsel for the Senior Analyst pointed out that until the letter of his counsel, Mr. Clark, dated , Mr. McMahon had not been forthcoming in providing an explanation for the transaction and book entries in support thereof. Mr. Gauvreau, the counsel for the Senior Analyst suggested that the proper way for Mr. McMahon to proceed would have been to withdraw the funds and deposit them in the firm's trust account. In proceeding as he did Mr. McMahon contravened Rule 36 and 48 of the Bankruptcy and Insolvency Act (BIA). Counsel for the senior analyst referred to a number of decisions made by the British Columbia Law Society as well as the decisions of former trustees Kroeker and Gallant under the BIA. Counsel for the Senior Analyst pointed further to the fact that Mr. McMahon has a prior licensing record where his licence was restricted for 6 months in 1999, he finally pointed out the fact that Mr. McMahon has not reimbursed the funds.

Counsel for Mr. McMahon, Mr. Hinkson, points out that a licence cancellation should require a higher degree of proof than any other type of licensing action given the effect on the professional activities of the trustee. He referred to case law suggesting that the degree of probability is closely linked to the nature of the allegation and the subject matter; the evidence must be clear and convincing.

Mr. Hinkson further points out that "SCRA" had a financial interest in making its allegations against Mr. McMahon; according to counsel, by alleging that Mr. McMahon had misappropriated funds from the receivership account, it was able to reverse billings made by Mr. McMahon and submit new bills so as to exclude Mr. McMahon from sharing in the benefit from those billings.

Mr. Hinkson argues that as to the receivership there was no mishandling of trust funds on the part of Mr. McMahon and that with respect to dealing with funds vis-à-vis the firm, this matter is beyond the jurisdiction of the Superintendent of Bankruptcy. He argues that the dispute between Mr. McMahon and the firm belongs to another forum, as such a dispute is a private one between a firm and a previous partner and has no impact on the public confidence in the insolvency system.

Any wrongdoing by Mr. McMahon in the circumstances of this case should be viewed as insignificant and inconsequential according to Mr. Hinkson and should not warrant anything more than a reprimand or a short suspension.

Decision:

Having found that Mr. Ronald McMahon holder of a trustee licence has:

  • Improperly wired funds out of the receivership trust account directly to a third party with the purpose of completing a personal investment for himself and an associate, one Mr. Liverant;
  • failed to maintain books and records of the transaction that reflected accurately the handling of the trust funds, particularly as it related to his share of the investment;
  • allowed a third party, namely Mr. Liverant, to channel funds through a trust account, for the benefit of the said Mr. Liverant, allowing thereby the commingling of trust funds with third party funds jeopardizing the characterization of the trust funds; and
  • used the funds deposited in the trust account of Montebello Camelback Partnership for his personal benefit.

Considering that, while the actions of Mr. McMahon were improper, they did not cause a financial prejudice to the trust account beneficiaries as the share of Mr. Liverant's investment was reimbursed on the next business day, while Mr. McMahon's share represented an amount equal or inferior to the work in progress accumulated by Mr. McMahon in administering the receivership at the date the funds were wired;

Considering that Smythe Ratcliffe Chartered Accountant (and its legal predecessors) was the court appointed receivers to Montebello Camelback Partnerships Ltd;

Considering that Smythe Ratcliffe Chartered Accountant, the Court appointed receiver was allowed to draw fees for the administration of the receivership without any authorization;

Considering that Mr. McMahon was the sole administrator on behalf of Smythe Ratcliffe Chartered Accountant and, as such, was authorized to draw fees in accordance with the receivership Court order; and

Considering that when he withdrew funds out of the receivership trust account, Mr. McMahon did not require specific authorization from Smythe Ratcliffe Chartered Accountant; and

Whereas the issue of whether, vis-à-vis Smythe Ratcliffe, Mr. McMahon was allowed to use the fees withdrawn as he did is a matter of governance within the firm of Smythe Ratcliffe Chartered Accountants;

Whereas the issue of whether Mr. McMahon should have reimbursed the firm and whether he failed to do so for no legitimate reason is a matter between the firm and Mr. McMahon to be adjudicated by the proper authorities under the partnership agreement or by the Civil Court having jurisdiction on these matters;

Whereas Mr. McMahon has been the object of the exercise of licensing powers in February 1999, which resulted in the restriction of his licence for a period of 6 months;

Whereas Mr. McMahon's wrongdoings occurred in relation to a Court appointed receivership not subject to the provisions of Part XI of the Bankruptcy and Insolvency Act (BIA);

Whereas Mr. McMahon's wrongdoing occurred in relation to activities similar in nature to those which are usually performed by licensed trustees under the BIA;

Whereas the provincial legislation pursuant to which the Court appointed a receiver to Montebello Camelback Partnership required the receiver to be a trustee licensed under the BIA; and

Whereas the actions of Mr. McMahon with respect to the handling of trust funds offended the basic rules applicable to trustees in the administration of trust funds.

I hereby order that the licence of the trustee Mr. Ronald McMahon be suspended for a period of two months starting .

Ottawa,

originally signed by


Marc Mayrand
Superintendent of Bankruptcy

This document has been reproduced as submitted by the Superintendent of Bankruptcy.
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