COURT OF APPEAL FOR ONTARIO

CITATION: Ridel v. e3m Investments Inc., 2016 ONCA 522

DATE: 20160630

DOCKET: C61568

Rouleau, van Rensburg and Benotto JJ.A.

In the Matter of the Bankruptcy of e3m Investments Inc.

BETWEEN

Jean-Marc Ridel, Nadine Suzanne Josephine Ridel and Marc H. Ridel

Applicants (Appellants)

and

Schwartz, Levitsky, Feldman Inc. - Trustee

Respondent (Respondent)

Philip Anisman, for the appellants

Martin Greenglass, for the respondent

Heard: June 20, 2016

On appeal from the order of Justice Michael A. Penny of the Superior Court of Justice, dated November 12, 2015.

ENDORSEMENT

[1] The appellants are judgment creditors of e3m Investments Inc. (“e3m”), which is bankrupt. They assert a trust claim over certain funds held in the name of the bankrupt in an “Accumulating Account” on the direction of the Ontario Securities Commission (the “OSC”). The parties agreed that the matter would proceed in court through the disallowance of the claim by e3m’s Trustee in Bankruptcy, and an appeal to a judge of the Superior Court (referred to here as the “motion judge”) under s. 81 of the Bankruptcy and Insolvency Act, R.S.C. 1985 c. B-3, (the “BIA”). The dismissal of that appeal is the subject of the appeal to this court.

[2] For the reasons that follow the appeal is dismissed.

[3] e3m was an investment dealer registered with the OSC and a member of the Investment Industry Regulatory Organization of Canada (“IIROC”). The appellants were former clients of e3m. In April 2013 they obtained a judgment against e3m of approximately $750,000, including costs and interest (the “Ridel Judgment”). e3m appealed.

[4] e3m treated the Ridel Judgment as a contingent liability, which resulted in a deficiency of $550,000 in its estimated regulatory capital.

[5] As a result of the judgment, and pending the hearing of its appeal, e3m, in July 2013, agreed to sell its client accounts to Caldwell Ltd. (“Caldwell”), with the consideration payable in instalments. The transaction required the consent of the OSC and an exemption to permit Robert Goldberg, e3m’s president, to be employed and registered with both Caldwell and e3m.

[6] The OSC issued terms and conditions on e3m’s registration when it granted the exemption (the “OSC Decision”). The terms and conditions, which were negotiated between legal counsel for the OSC and e3m (and without any involvement of the appellants), required e3m to direct Caldwell to pay all proceeds from its purchase of e3m’s assets, which were estimated at the time to be $750,000, into e3m’s Accumulating Account at Caldwell. e3m also agreed to transfer $100,000 from its operating account into the Accumulating Account.

[7] The OSC Decision terms and conditions referred to e3m’s representation that it would accumulate and maintain sufficient assets to satisfy the Ridel Judgment, and that no distribution of these assets up to the amount of the judgment would be made prior to the satisfaction of that judgment except by consent or approval from the OSC and IIROC. The terms and conditions became effective on the closing of the sale of e3m’s assets to Caldwell in September 2013.

[8] In November 2014, e3m lost its appeal of the Ridel Judgment. The appellants were successful in their cross-appeal and the amount of the judgment was increased. In February 2015, e3m made an assignment in bankruptcy. In its statement of affairs, e3m recorded cash of $546,837, substantially all of which was in the Accumulating Account.

[9] The motion judge considered whether the funds in the Accumulating Account were trust funds which belonged to the appellants, rather than monies of e3m divisible among the bankrupt’s creditors (including the appellants).

[10] The motion judge was satisfied that the Accumulating Account met two of the required three certainties for a trust. There was certainty of subject matter – the proceeds of sale of e3m’s customer accounts and $100,000 contributed by e3m were transferred into the Accumulating Account and segregated. There was certainty of the object of the trust – to preserve assets of e3m for the satisfaction of the appellants’ judgment.

[11] The motion judge found, however, that there was no certainty of intention that the funds were to be held in trust for the appellants. It was the appellants’ onus to prove such intention. The motion judge concluded that neither e3m nor the OSC intended to create a trust. Although the funds were held in a single-purpose, separate account, the OSC terms and conditions were in the nature of a “status quo preservation order” to ensure that the funds were not dissipated pending e3m’s appeal of the judgment. In reaching this conclusion the motion judge noted that the terms and conditions and other contemporaneous documents did not refer expressly to a “trust”, and that the OSC’s and IIROC’s authority under the terms and conditions to consent to specific expenditures was not consistent with the intention to create a trust.

[12] The appellants submit that the motion judge made two fundamental errors that dictated the outcome of the case. First, in focusing on the OSC’s role in creating the trust, he concluded that the OSC Decision and the terms and conditions were put in place in the face of a reasonable, if not high, likelihood that e3m was or would be insolvent if the appeal were unsuccessful. The appellants say that e3m was not in fact insolvent and had given assurances about its solvency, which the OSC relied on in granting the exemption. Second, having found that e3m was facing a situation of insolvency, the motion judge expressed doubt about the jurisdiction of the OSC to create a preference for certain judgment creditors of a registrant over the interests of other creditors in a bankruptcy. The appellants say that this was an improper collateral attack on the OSC Decision. The appellants also contend that e3m’s bankruptcy occurred many months after the OSC Decision, and that requiring money to be put aside for the appellants would not, in the circumstances, have constituted a preference.

[13] In our view, the appellants make too much of the motion judge’s expression of concern about the scope of the OSC’s authority. The onus was on the appellants to establish that the monies in the Accumulating Account, an account held by Caldwell in the name of e3m, were held in trust for the appellants.

[14] While the motion judge expressed doubt about the OSC’s jurisdiction to require terms and conditions that would have the effect of preferring the interests of the appellants over other creditors of e3m, his decision does not rest on this concern, or his view that e3m was likely insolvent. Rather, he considered a number of factors in concluding that the necessary intention had not been proven.

[15] The motion judge found that the OSC’s own position on the issue was ambiguous. There was nothing in the documentation drawn by counsel for any of the parties that referred to the Accumulating Account as a “trust” account. After issue had been joined, the OSC took the position that the Accumulating Account was to be funded and maintained for the benefit of the judgment creditors, but did not take the position that it was a trust fund. He noted that the judgment creditors, for whose benefit the trust was allegedly established, were unaware of the arrangements that had been put in place. The motion judge referred to the wording of the terms and conditions in the OSC Direction: there was an obligation to “accumulate and maintain” assets to satisfy the Ridel Judgment but the ultimate entitlement to the funds was not addressed. And, while the terms and conditions required that “no distribution of assets from the Accumulating Account” would be made prior to the satisfaction of the judgment without the consent or approval of the OSC and IIROC, in fact the OSC and IIROC consented to a distribution from the account to fund the preparation and mailing of income tax slips to 330 e3m clients. The ability of the OSC and IIROC to permit the funds to be used for essentially any purpose they might deem appropriate within their regulatory mandate was fundamentally inconsistent with an intention to create a trust in favour of the appellants.

[16] Contrary to the appellants’ submission, there was no error in principle in the motion judge’s consideration of these factors. His conclusion that the necessary intention to create a trust had not been established, was open to the motion judge, and is unassailable. He did not base his decision on any conclusion that the OSC would have been acting outside its authority in requiring a trust or on the fact that a trust would have the effect of preferring the appellants over other creditors of e3m at a time of insolvency. Rather, he examined the evidence as to intention and concluded that it had not been made out.

[17] The appeal is accordingly dismissed. Costs to the respondent in the sum of $17,000, inclusive of disbursements and applicable taxes.

“Paul Rouleau J.A.”

“K. van Rensburg J.A.”

“M.L. Benotto J.A.”