COURT FILE NO.: 31-OR-207854-T

DATE: 20121207

ONTARIO

SUPERIOR COURT OF JUSTICE

(COMMERCIAL LIST)

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT , R.S.C. 1985, c. C-36, AS AMENDED

AND IN THE MATTER OF THE BANKRUPTCY OF MF GLOBAL CANADA CO.,

OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO

HEARD: October 10, 2012

BEFORE: C. CAMPBELL J.

COUNSEL: Craig J. Hill and James Szumski , for KPMG Inc., in its capacity as trustee in bankruptcy of MF Global Canada Co.

Harry Underwood , for Friedberg Mercantile Group Ltd.

Brian Empey , for Canadian Investor Protection Fund

REASONS FOR DECISION

[ 1 ] KPMG, Trustee in bankruptcy of MF Global Canada (“MF Canada”) seeks directions with respect to the calculation of “net equity” of one of MF’s largest customers, Friedberg Mercantile Group Ltd. [Friedberg].

[ 2 ] The term “net equity” appears in Part XII, s. 253 of the Bankruptcy Insolvency Act which deals with insolvency of securities firms.

[ 3 ] The Trustee is of the view that Friedberg’s “net equity” is the amount that would be owed by MF Canada to Friedberg as a result of the liquidation by sale or purchase at the close of business on the date of bankruptcy of MF Canada of all security positions in Friedberg’s accounts. This would include amounts in respect of securities transactions entered into prior to the date of bankruptcy but not settled until after the date of bankruptcy.

[ 4 ] Friedberg asserts that its net equity should be calculated to include adjustments after the date of bankruptcy for any daily (or other) mark-to-market variance in the value of future contracts held in its accounts at the date of bankruptcy. Friedberg complains that as the largest customer of MF Canada it will not receive the same treatment as all of the other similarly situated customers of MF Canada if the Trustees’ position on this motion is accepted.

[ 5 ] The difference between the two positions is approximately $12 million which is in effect the claim of Friedberg on this motion.

[ 6 ] The definition of net equity as it appears in section 253 of Part XII of the BIA reads as follows:

“net equity” means, with respect to the securities account or accounts of a customer maintained in one capacity, the net dollar value of the account or accounts, equal to the amount that would be owed by a securities firm to the customer as a result of the liquidation by sale or purchase at the close of business of the securities firm on the date of bankruptcy of the securities firm, of all security positions of the customer in each securities account, other than customer name securities reclaimed by the customer, including any amount in respect of a securities transaction not settled on the date of bankruptcy but settled thereafter, less any indebtedness of the customer to the securities firm on the date of bankruptcy including any amount owing in respect of a securities transaction not settled on the date of bankruptcy but settled thereafter, plus any payment of indebtedness made with the consent of the trustee after the date of bankruptcy;

[ 7 ] The Trustee’s method of calculating net equity treats all securities (including futures contracts) equally and the Trustee asserts is consistent with the object of Part XII of the BIA and is supported by the plain language and historical development of Part XII. The Trustee’s position is that the Friedberg approach would significantly increase the cost, uncertainty, and delay of administering a securities firm bankruptcy.

[ 8 ] Not surprisingly Friedberg takes the opposite position and says that the Trustee’s position is contrary to the plain language of Part XII of the BIA , contrary to the policy objectives of Part XII of the BIA and contrary to the over arching principles of fairness, reasonableness and equity applicable to bankruptcy proceedings generally.

[ 9 ] Friedberg is a securities and commodity brokerage firm headquartered in Toronto and a member of the Investment Industry Regulatory Organize station of Canada (IROC), the Canadian Investor Protection Fund (CIPF), and all Canadian exchanges and is a family owned business.

[ 10 ] MF Canada was Friedberg’s clearing broker with respect to futures position accounts. It would appear that Friedberg was by far MF Canada’s largest customer. Friedberg’s position is that it relied upon the services of MF Canada for all of its futures and options on futures business for Friedberg’s Canadian clients.

[ 11 ] On the date of MF Canada’s bankruptcy, in accordance with the instructions of Friedberg given to and accepted by MF Canada up to that time, Friedberg had, it asserts, or should have had a total of 24,062 futures contracts in its accounts with MF Canada. With the exception of two futures contract positions, all of these positions were held on behalf of Friedberg’s customers.

[ 12 ] MF Canada was an indirect subsidiary of its US parent which filed for bankruptcy protection in the United States on October31, 2011, when a trustee was appointed under the Securities Investors Protection Act (SIPA) in the US and an order made for its liquidation

[ 13 ] MF Canada was a member of CIPF, such that the accounts of its customers, if eligible, were protected by CIPF for losses of property resulting from the insolvency of MF Canada, up to a limit of $1 million per customer for any combination of cash and securities. As a result of its financial difficulties and IIROC suspension, an Application for Bankruptcy Order was issued against MF Canada by CIPF on November 2, 2011.

[ 14 ] On November 4, 2011, MF Canada consented to the immediate issuance of a Bankruptcy Order and KPMG Inc. was appointed as Trustee. MF Canada was, prior to the date of bankruptcy, a “securities firm” within the meaning of section 253 of the BIA , such that the Trustee has a mandate to administer the estate of MF Canada in accordance with the BIA , including Part XII thereof.

[ 15 ] Following the issuance of the Bankruptcy Order, the Trustee began its review of the affairs of MF Canada. By that time, the customers of MF Canada had been unable to deal with their customer accounts for five business days. The Trustee therefore concluded that the most immediate issue to be addressed was to negotiate the transfer of substantially all of the customer accounts to a new securities firm.

[ 16 ] On November 17, 2011, the Trustee and RBC Dominion Securities (“RBCDS”) entered into a transfer agreement pursuant to which the majority of the customer accounts were transferred to RBCDS. The form of the Transfer Agreement was approved by an Order of this Court, dated November 14, 2011.

[ 17 ] Pursuant to s. 261 (1) of the BIA the various securities and cash invested in the trustee on bankruptcy.

[ 18 ] The Trustee asserts that to enable it to transfer all of the collateral in the customer accounts up to the date of transfer, the Trustee and CIPF reached an understanding whereby CIPF agreed to provide financial support to the Trustee. This financial support made it possible for the Trustee to provide RBCDS with 100% of the collateral in the customer accounts up to the date of transfer for all accounts that were fully protected by CIPF.

[ 19 ] As a result of the transfer of all collateral in the customer accounts up to the date of transfer, there were some customers who received more or less than the net equity value of their accounts if calculated as at the date of bankruptcy. These differences arose because commodity futures positions are adjusted daily based on mark-to-market valuations and corresponding cash settlements. The Trustee concluded, however, that a liquidation of the commodity futures positions at the date of bankruptcy would have been impractical, could have adversely affected a number of customers and could have had a deleterious effect on the market, contrary to the purpose of Part XII of the BIA .

[ 20 ] The position of the trustee is that the Friedberg proof of claim in the amount of approximately $40 million included all of the daily mark-to-market adjustments and corresponding cash settlements for those commodity future contracts, including adjustments which occurred between the date of bankruptcy and the valuation date selected by Friedberg.

[ 21 ] With respect to a particular type of securities - futures contracts – there is a daily exchange of profits/losses between the parties to a futures contract, based on mark-to-market valuations of the underlying commodity, index or other subject matter of the contract. It is agreed that this is a mandatory risk control measure imposed by most modern clearinghouses and exchanges which is designed to limit the risk of non-performance on a futures contract when it comes time for the parties to that contract to fulfill their obligations.

[ 22 ] The background to this process and the position of Friedberg is set out in paragraphs 25-29 of the Affidavit of Enrique Z. Fenig, sworn July 20, 2012 and filed by Friedberg in the Dispute Proceedings.

25. A commodity futures contract is an agreement to buy or sell a commodity at a pre‑determined later date. Commodity futures contracts are standardized by the exchange on which they trade according to the quality, quantity and delivery time and location for each commodity. The only variable is price.

26. A financial index or currency futures contract works the same way.

27. A futures contract may provide for physical delivery of a particular commodity or currency, or for a final cash settlement. The month during which delivery or settlement is to occur is specified. For example, a December futures contract is one providing for delivery or settlement in December. However, even in the case of futures contracts providing for delivery, very few actually settle that way. In almost all cases, the party realizes its gain (or loss) by buying or selling an offsetting futures contract prior to the delivery date (referred to in the industry as a “Liquidating Trade”).

28. A fundamental aspect of futures contracts and the settlement and clearing process that governs them, which aspect is a key element of the disagreement between Friedberg and the Trustee, is the daily cash settlement process that applies to futures contracts.

29. In accordance with the settlement and clearing procedures of each exchange, at the end of each trading day (if not more frequently) the relevant exchange determines the gain (or loss) in respect of each futures contract, based on the price changes (if any) since the preceding settlement. The resulting gain or loss is received or paid, as the case may be, by the clearing member on behalf of the customer that holds the contract through the clearing and settlement mechanisms of the exchange on a daily basis. The process is known in the industry as daily cash settlement. For example, if an individual had a $100 gain as a result of the day’s price change, that amount would be paid through the relevant clearing house and immediately credited to the customer’s brokerage account. Like any other cash in the customer’s account, it may then be withdrawn or otherwise freely used by the customer. On the other hand, if the individual suffered a $100 loss, that amount would be withdrawn from the individual’s account and paid to the relevant clearing house .

[ 23 ] On June 22, 2012, the Trustee issued a Notice of Partial Disallowance to Friedberg, allowing its Proof of Claim in the amount of US$27,560,230. The balance of the Friedberg claim was disallowed on the basis that:

(a) US$13,000 related to a claim for interest on collateral posted with MF Canada, which claim does not form part of the “net equity” of a customer as such term is defined in section 253 of the BIA;

(b) US$1,020,281 related to a claim for mark-to-market adjustments on certain foreign commodity futures contracts that had in fact been liquidated prior to the date of bankruptcy, crystallizing their value at the time of liquidation; and

(c) US$11,108,218 related to a claim for mark-to-market adjustments on the balance of the commodity futures contracts during the period between the date of bankruptcy and November 16, 2011, which adjustments do not form part of the “net equity” of a customer as such term is defined in section 253 of the BIA.

ISSUES

The issues raised by this motion are:

(a) Whether the net equity of Friedberg should be calculated without adjustment, after the date of bankruptcy, for daily (or other) mark-to-market variance in the value of the futures contracts previously held in the Friedberg accounts, which have vested in the Trustee and form part of the customer pool fund in the MF Canada bankruptcy;

(b) Whether the net equity of Friedberg has been properly valued by the Trustee at US$27,560,230;

[ 24 ] This motion is, in essence, about the interpretation of the definition of “net equity” in section 253 of the BIA .

[ 25 ] The parties agree on the approach to the statutory interpretation of “net equity”. The first formulation of the “Modern Principle” of statutory interpretation taken from the second edition of Driedger’s text and cited most frequently by the Supreme Court of Canada is this:

Today there is only one principle or approach, namely, the words of an Act are to be read in their entire context, in their grammatical and ordinary sense harmoniously with the scheme of the Act, the object of the Act, and the intention of Parliament. [1]

[ 26 ] Part XII of the BIA sets out a special regime for the administration of the bankruptcy of a securities firm. At a high-level, the purpose of this special regime is to simplify and streamline the administration of a bankrupt securities firm’s estate by eliminating many of the ownership, trust and tracing claims that have been historically asserted against the assets of an insolvent securities firm by its customers. As noted by Mesbur J. in Ashley :

Part XII of the Bankruptcy and Insolvency Act was enacted to simplify and streamline the administration of a bankrupt securities firm’s estate. Before Part XII, administration of these estates was time‑consuming, complex, uncertain, and costly to both investors and creditors. Customers of the bankrupt firm would raise trust and tracing concepts, which proved difficult to determine. Often, while waiting for adjudication of these trust claims, the Trustee would have to continue to hold potentially volatile securities, whose value could plummet, while customers battled over their entitlement to them.

Ashley v. Marlow Group Private Portfolio Management Inc. [2]

[ 27 ] Given that purpose the role of the court is to ensure that interpretation of the individual provisions of Part XII are consistent with the broad public purpose utilizing the approach to statutory interpretation. Where the parties differ however, is in their respective application of the statutory interpretation of “net equity”.

[ 28 ] In short the Trustee asserts that its definition of “net equity” is the only one that makes sense otherwise the Trustee is under a different and perhaps impossible burden in dealing with individual contracts particularly those that involve future contracts.

[ 29 ] For Friedberg, is submitted that the effect of the Trustees’ position is to treat one class of securities customers, namely Friedberg, differently from those individuals who had futures contracts transferred to RBCDS, the effect of which is to deny Friedberg the priority to which it is entitled as against unsecured creditors under the BIA .

[ 30 ] There is no issue that pursuant to s.261 of the BIA and upon bankruptcy the property of a security firm vests in the Trustee and that all securities held by MF Canada, including all of the futures contracts in the Friedberg accounts, are automatically vested in the Trustee and form part of the customer pool fund.

[ 31 ] The Trustee submits that the rights of individual customers to claim specific securities is completely eliminated. This is also relevant to the concept of tracing the post‑bankruptcy adjustments to the value of securities.

[ 32 ] The allocation of priority in the customer pool is provided for in section 262 of the BIA as follows:

262. (1) Cash and securities in the customer pool fund shall be allocated in the following priority:

( a ) for costs of administration referred to in paragraph 136(1)( b ), to the extent that sufficient funds are not available in the general fund to pay such costs;

( b ) to customers, other than deferred customers, in proportion to their net equity; and

( c ) to the general fund.

(2) To the extent that securities of a particular type are available in the customer pool fund, the trustee shall distribute them to customers with claims to the securities, in proportion to their claims to the securities, up to the appropriate portion of their net equity, unless the trustee determines that, in the circumstances, it would be more appropriate to sell the securities and distribute the proceeds to the customers with claims to the securities in proportion to their claims to the securities.

[ 33 ] The position of the Trustee is that the intention of the definition of net equity is for the quantum of the claim of each customer to be referenced to the market value of the securities purchased and held for the customer by the securities firm as at the date of bankruptcy less any amounts owing by the customer to the securities firm.

[ 34 ] In Re Portus Alternative Asset Management Inc . [3] it was held Part XII of the BIA presumes that the bankrupt securities firm purchased securities with funds received by it from its customers. “The intention of the definition of “net equity” is for the quantum of the claim of each customer to be the market value of the securities purchased and held for him or her by the securities firm as at the date of bankruptcy less any amounts owing by the customer to the securities firm.”

[ 35 ] It is to be noted that there was no reference in Re Portus to futures contracts.

[ 36 ] The Trustee places emphasis on that portion of the definition of net equity that goes on to stipulate that, included in the liquidation value, is “ …any amount in respect of a securities transaction not settled on the date of bankruptcy but settled thereafter… ” (the “Settlement Language”).

[ 37 ] I accept the scheme of Part XII the definition of “net equity” and the allocations provided for in s. 261 and 262 work in a fully understandable way when applied to security transactions that are not futures contracts.

[ 38 ] In such circumstances according to the Trustee it follows that when a securities firm is placed into bankruptcy, there could be a number of securities trades in which the trade date falls before the date of bankruptcy, but the settlement date falls after the date of bankruptcy. In these circumstances, the buyer and seller have entered into a binding agreement to trade cash for securities before the date of bankruptcy, but will not settle their obligations until after the date of bankruptcy. To ensure that the cash and securities resulting from these trades are properly accounted for in the calculation of net equity for the relevant customer, the definition of “net equity” therefore provides that the trustee should include any securities transaction not settled on the date of bankruptcy but settled thereafter. This is referred to by the Trustee as the “Trade Interpretation”.

[ 39 ] Friedberg relies for its position on what it says is the unique nature of futures contracts, namely, the obligation for daily cash settlement. The Friedberg position is distinctly set out in the following paragraph from its factum.

In accordance with the settlement and clearing procedures of each exchange at the end of each trading day (if not more frequently). The relevant exchange determines the gain (or loss) in respect of each futures contract, based on the price changes (if any) since the preceding settlement. The resulting gain or loss is received or paid, as the case may be, on a daily basis by the clearing member on behalf of the customer that holds the contract and through the clearing and settlement mechanisms of the exchange. The process is known in the industry as daily cash settlement.

[ 40 ] Friedberg counsel provides the example that if an individual had a $100 gain as a result of the day’s price change, that amount would be paid through the relevant clearing house and immediately credited to the customer’s brokerage account. Like any other cash in the customer’s account, it can then be withdrawn or otherwise freely used by the customer. On the other hand, if the individual suffered a $100 loss, that amount would be withdrawn from the individual’s account and paid to the relevant clearing house. If there are insufficient assets in the account, the customer must pay the deficiency, failing which the position would be closed out.

[ 41 ] In short, Friedberg asserts a futures contract involves a series of daily cash settlements to which the customer, its broker and the other clearing member are legally bound to make throughout the term of the contract. This critical feature distinguishes futures contracts from other types of securities, such as shares or bonds. With these other types of securities, a party may have an unrealized capital gain or loss (be “in the money” or “out of the money” at a particular time), but no daily settlement is involved. In these other situations, a settlement obligation only arises if the party elects, at its discretion, to buy or sell the security at some point in time.

[ 42 ] The difference in treatment between Friedberg and other customers of MF Canada arose as a result of the transfer agreements between the trustee and RBCDS. Friedberg did not receive the identical treatment as other customers since its account with MF Canada exceeded $1 million and was therefore not eligible for top up provided for by CIPF.

[ 43 ] In essence that is one of the major complaints of Friedberg that other customers were in effect supported by the CIPF backstopping. The effect of different treatment as submitted by Friedberg is that other customers of MF Canada were assured the conclusion of their contracts with less risk to their position than was the position of Friedberg.

[ 44 ] Friedberg relies on the statement in the Trustees Sixth Report that, “… to ensure that the cash and securities resulting from these trades are properly accounted for in the calculation of net equity for the relevant customer, the definition therefore provides that the trustee should consider any securities transaction not settled on the date of bankruptcy but settled thereafter”. Friedberg agrees and submits, for the precisely the same reason, that post-bankruptcy settlement obligations under pre-filing futures contracts must be taken into account too.

[ 45 ] Friedberg goes on to urge that if the Trustee’s interpretation is correct, the words “securities transaction” in s. 253 must be read to refer only to a trade of the nature describe by the Trustee. However, the words “securities transaction” are also used in section 95 of the BIA . As used in that section, it is very clear according to Friedberg that “securities transaction” is much broader than the trade of, for example, a share, and includes futures contracts.

[ 46 ] Further, Friedberg asserts that if the intention of the legislation was as suggested by the Trustee, the expressly-defined term “open contractual commitment” (or perhaps more directly the words “purchase or sale of a security”) would have been used instead of “securities transaction”. That defined term (or the straightforward phraseology) would have far better captured the narrow interpretation it is suggested that the Trustee seeks to apply

[ 47 ] Part of the objections of Friedberg comes from the description in the Trustees Sixth Report that it encountered significant difficulty organizing the bulk transfer to RBCDS and, to overcome the difficulty, it sought “financial support” from CIPF. According to the Trustee, the difficulty stemmed from the requirement of RBCDS that the value of all customer property and collateral, as of the date of transfer, be transferred.

[ 48 ] The Trustee apparently found this requirement problematic because, based on the Trustee’s view of the calculation of “net equity”, the Trustee believed that customers would be receiving more (or less) than the net equity value of their accounts if transferred on this basis – such differences arising “by reason of the fact that futures positions are required to be adjusted based on daily marked-to-market valuations and corresponding cash settlements”.

[ 49 ] The complicated arrangements with CIPF involved a transfer by the Trustee of post-bankruptcy settlement to RBCDS with CIPF notionally agreeing to “cover” this amount. However, the Friedberg complaint is that the arrangements also included a feature, not described in the Sixth Report, whereby CIPF was given a claim to and court-ordered priority over the customer pool fund to recover any amount it covered, ranking only behind other customer net equity claims. In effect, the complaint asserts Trustee arranged for the post-bankruptcy contract settlement for all other customers to be paid out of the customer pool fund assuming there were sufficient funds to do so, despite the Trustee’s interpretation of “net equity” as it applies to Friedberg.

[ 50 ] In my view the tri-parte agreement between RBCDS/CIPF and the Trustee was designed to do what the Trustee sought-namely, to have an expeditious orderly disposition of all security contracts whether or not they involved futures contracts.

[ 51 ] In support of its position Friedberg relies on the process under United States bankruptcy law. In the material it filed on the motion the (Fenig Affidavit) is a description of the explicit and complex provisions which with regulations the Commodities Future Trading Commission (CFTC) (US) does permit the calculations of net equity that takes into account the post bankruptcy settlement of open commodity contracts.

[ 52 ] What has become known as the Adjustment Interpretation is, however, acknowledged to be consistent with the calculation of net equity for commodity broker bankruptcies in the U.S. established by the CFTC. As noted in the Fenig Affidavit:

(a) the United States Bankruptcy Code (the “US Bankruptcy Code”) contains a separate chapter of provisions that govern the liquidation of a commodity broker. Commodity brokers may not seek relief under any other chapter of the US Bankruptcy Code, and the US Bankruptcy Code’s commodity broker liquidation provisions are the exclusive framework for the liquidation of a commodity broker under the US bankruptcy law;

(b) the US Bankruptcy Code’s commodity broker liquidation provisions are, however, subject to the provisions of the US Commodity Exchange Act (“CEA”) and the regulations promulgated by the CFTC;

(c) the CEA expressly provides that, notwithstanding any provision of the US Bankruptcy Code, the CFTC may promulgate regulations regarding the liquidation of commodity brokers under the US Bankruptcy Code and the calculation of customer “net equity” in connection with such liquidation proceedings. The US Bankruptcy Code likewise acknowledges that the definition of “net equity” contained in the US Bankruptcy Code is subject to CFTC regulations. In sum, the US Bankruptcy Code provides the framework for commodity broker liquidations, but that framework is enhanced and modified by the CEA and CFTC regulations;

(d) in this regard, section 190.07 of the CFTC regulations defines “net equity” and includes an extensive sequence of steps to follow to calculate a customer’s “net equity”. It is clear that the calculation takes into account Settlement OTE arising post-bankruptcy. Statements of the CFTC with respect to the appropriate means for calculating “net equity”, made when the regulations were first introduced, perhaps best emphasize the intention to take into account post‑bankruptcy Settlement OTE and are instructive. In this regard, the CFTC has stated that:

“In order to determine what amounts may be transferred on behalf of, or distributed to, customers in a commodity broker bankruptcy, net equity must be calculated. Under the [Bankruptcy] Code, this calculation is more complex for commodity customers than it would be for securities customers, because property held by a commodity broker on behalf of commodity customers must be valued as of the date of its return or transfer and not as if it had been liquidated as of the filing date. Net equity therefore will fluctuate during the entire period that the debtor’s estate contains open commodity contracts, and indeed will not become final until the final net equity determination date described in the proposed definitions (§ 190.01(s)). [4]

(e) Indeed, the CFTC recently affirmed its position with respect to treatment of open commodity contracts in calculating net equity in a position brief filed in MF Inc.’s US liquidation proceeding, stating that:

“A customer’s net equity will fluctuate during the entire period that the debtor’s estate contains open commodity contracts. Unlike a securities account, which is typically valued as if it had been liquidated on the filing date, commodity contracts must generally be valued as of the date they are returned to the customer or transferred to an account at a different brokerage. Bankruptcy, 48 Fed. Reg. at 57546. Such value may change on a daily basis until the final net equity determination is made under the rules. Id. [5]

[ 53 ] The Trustee’s response to this argument is two-fold:

1. The United Sates Regulatory regime makes specific provision for the interpretation urged by Friedberg to be applicable under section 253 of the BIA which does not contain such language.

2. That the Part XII amendments to the BIA were made sometime after and with specific knowledge of the US regulatory regime.

3. To put the Trustee in the position urged by Friedberg might have disastrous consequences or the bankrupt estate as a whole.

[ 54 ] As noted above, under section 261 of the BIA all the securities contracts vest in the Trustee in order to put the Trustee in a position to liquidate or transfer.

[ 55 ] The Trustee urges that the concept of providing customers with the benefit of post‑bankruptcy adjustments in value (which is the underlying concept in the Adjustment Interpretation) was the subject of discussion among insolvency professionals and industry groups during the five-year statutory review of the BIA that took place in 2002. In its Report on the Administration of the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act dated September 2002 (the “2002 Report”), Industry Canada recommended that the definition of “net equity” be amended “to make sure that customers benefit by any increase in the value of securities occurring between the date of bankruptcy and the distribution date.” [6]

[ 56 ] The Trustee reports that the National Bankruptcy and Insolvency Section of the Canadian Bar Association responded to the recommendation of Industry Canada, noting that the proposed amendment was inconsistent with the scheme of Part XII and would result in unequal treatment for certain securities holders:

“Net equity” is determined on the basis of the net dollar value of the accounts “on the date of bankruptcy of the securities firm”. Industry Canada suggests the definition of “net equity” be clarified to make sure that customers benefit from any “increase” in the value of securities occurring between the “date of bankruptcy” and the “distribution date”. The definition of “net equity” clearly states that it is to be determined at the date of bankruptcy, so we do not see any reason to amend the definition.

The issue appears to have been raised as a result of section 262(2) which states that, to the extent that securities of a particular type are available in the customer pool, the trustee shall distribute them to customers with claims to such securities, in proportion to their claims to such securities, up to the appropriate portion of their net equity. There is no suggestion that a customer would suffer any decrease based on the performance of the securities after the date of bankruptcy.

All customers are unable to deal with the securities in their accounts after bankruptcy and all bear the risk of the rise and fall of the value of the securities while being administered by the trustee. However, the recommendation seems to suggest that one group of customers would receive different treatment.

That result would be directly contradictory to the overall structure of Part XII, which removes concepts of “trust” and “ownership” and pools all securities and cash for the benefit of all customers and permits the trustee to sell any securities at any time.” [7]

[ 57 ] The definition of “net equity” was not amended to allow for post‑bankruptcy adjustments, either through the five-year statutory review in 2002 or through any subsequent amendments to the BIA . First, the position that the existing definition of “net equity” did not include any allowance for post‑bankruptcy adjustments was specifically identified by Industry Canada. Secondly, the concept of amending the BIA to provide for post‑bankruptcy adjustments to net equity for the customers was clearly articulated to be inequitable and inconsistent with the objectives of Part XII. Lastly, the inequitable treatment would be exacerbated by any interpretation that would make post‑bankruptcy adjustments available to only one type of security holder (i.e. futures contracts) but not others (i.e. equity and bond holders).

CONCLUSION

[ 58 ] I have come to the conclusion that the interpretation of “net equity” advanced by the trustee is to be preferred to that proposed by Friedberg and what the Trustee labels as the Trade Interpretation of net equity does address a timing issue that is applicable to all securities transactions, and it does treat all customers in the same fashion and does facilitate efficient administration of a securities firm consistent with the other provisions of Part XII of the BIA .

[ 59 ] The Trustee’s interpretation permits the transfer of customer accounts at the earliest opportunity to another broker which is then in a position to make appropriate decisions which the Trustee has neither the experience nor expertise to do.

[ 60 ] Otherwise in the absence of liquidation the Trustee would be causally responsible for losses on futures contracts if the customer pool was not sufficient to cover individual customers’ losses.

[ 61 ] I accept the submission of the Trustee that the Friedberg position would impose a narrow interpretation on the broad settlement language included in the definition of “net equity” that would change the principles of statutory interpretation and the realities of Part XII.

[ 62 ] The Adjustment Interpretation is inconsistent with the goals and purposes of Part XII by (i) allowing Futures Customers to obtain special treatment in respect of their futures contracts based on the type of securities which they hold; and (ii) impeding the efficient and timely administration of the estate.

[ 63 ] Priority disputes under the BIA will often result in some creditors getting less than the full value of their claim. Part XII does segregate the value of securities of customers of a securities firm. The concept of the customer pool is to permit individual securities creditors to be treated as a group.

[ 64 ] In my view Part XII is self-contained to the extent that it provides for a pool of recovery from liquidation of securities of a securities firm. The fact as it is turned out that one customer, namely, Friedberg does not recover all of its loss does not mean that it is being disadvantaged in approach vis-à-vis other securities holders.

[ 65 ] For example customers of MF Canada with losses of less than $1 million would be covered by CIPF. Similarly other customers’ losses which exceeded $1 million would not be covered by the CIPF beyond the $1 million figure.

[ 66 ] In the result, I direct that the Trustee calculate the net equity of Friedberg in its capacity as a customer of MF Canada such that:

(i) the Trustee shall calculate the net dollar value of the Friedberg Accounts equal to the amount that would be owed by MF Canada to Friedberg as a result of the liquidation by sale or purchase at the close of business of MF Canada on the date of bankruptcy of all security positions in the Friedberg accounts;

(ii) the Trustee shall include in the calculation of Friedberg’s “net equity” any amount in respect of securities transactions (as referenced in the BIA) not settled on the date of bankruptcy but settled thereafter;

(iii) the Trustee shall not adjust Friedberg’s “net equity” in respect of any daily (or other) mark-to-market variance in the value of any securities that have vested in the Trustee and form part of the customer pool fund in the MF Canada bankruptcy;

[ 67 ] Further I direct that any changes to the value of any securities in the Friedberg accounts that occurred after the date of bankruptcy relate only to the value of the customer pool fund established by the Trustee, but do not accrue to the benefit of, or amend the value of the “net equity” of, Friedberg.

[ 68 ] I conclude that the “net equity” of Friedberg is US$27,560,230.

[ 69 ] If this direction is not sufficient to deal with all of the matters at issue or is the question of costs requires resolution I may be spoken to.

C. CAMPBELL J.

Released: December 7, 2012

COURT FILE NO.: 31-OR-207854-T

DATE: 20121207

ONTARIO SUPERIOR COURT OF JUSTICE (COMMERCIAL)

BETWEEN:

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT , R.S.C. 1985, c. C-36, AS AMENDED AND IN THE MATTER OF THE BANKRUPTCY OF MF GLOBAL CANADA CO., OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO

REASONS FOR DECISION

C. CAMPBELL J.

Released: December 7, 2012

[1] G.R. Jackson and J. Sarra, “Selecting the Judicial Tool to get the Job Done: An Examination of Statutory Interpretation, Discretionary Power and Inherent Jurisdiction in Insolvency Matters” in Annual Review of Insolvency Law 2007 (Toronto: Thomson Carswell, 2008) citing E.A. Driedger, The Construction of Statutes (Toronto: Butterworths, 1974), at p. 67.

CCH Canadian Ltd. v. Law Society of Upper Canada , 2004 SCC 13 , [2004] SCC 13 , [2004] 1 S.C.R. 339 , at ¶ 9 , citing E.A. Driedger, Construction of Statutes , 2d ed (Toronto: Butterworths, 1983), at p. 87.

[2] (2006), 2006 31307 (ON SC) , 22 C.B.R. (5 th ) 126 [ Ashley ] at ¶ 30 (Ont. S.C.J.) .

[3] (2007), 2007 44814 (ON SC) , 37 C.B.R. (5 th ) 120 (Ont. S.C.J.) at ¶ 29

[4] See 48 Fed. Reg. 57,535,57,546 (Nov. 21, 1981)

[5] See Brief of the Commodity Futures Trading Commission Pursuant To The Court’s November 17, 2011 Order, In re MF Global, Inc. , United States Bankruptcy Court for the Southern District of New York, Case No. 11-2790 (MF) SIPA, Docket No. 72 (December 12, 2011).

[6] Industry Canada, Report on the Administration of the Bankruptcy and Insolvency Act and the Companies’ Creditors Arrangement Act (Ottawa: Industry Canada, 2002) at p. 49.

[7] Canadian Bar Association, Insolvency Law Reform: Submission to Industry Canada, Canadian Bar Association (Ottawa: Canadian Bar Association, 2005) at pp. 47-48.