Wekerle (Re), 2015 ONSC 1260

Court File and Parties

COURT FILE NO.: 31-OR-208055-T

DATE: 20150225

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: IN THE MATTER OF THE BANKRUPTCY OF MICHAEL ANTHONY WEKERLE OF THE CITY OF TORONTO IN THE PROVINCE OF ONTARIO

BEFORE: Mr. Justice H. Wilton-Siegel

COUNSEL: Catherine Francis, for the Applicant, Rohit Sehgal

James H. Grout, Deborah E. Palter and Asim Iqbal, for the Respondent

HEARD: February 20, 2015

ENDORSEMENT

[1] The applicant Rohit Sehgal (the “applicant”) commenced an application for a bankruptcy order in respect of Michael Wekerle (“Wekerle” or the “debtor”) which was scheduled to be heard on February 20, 2015. The debtor brought a motion to dismiss the application. Shortly before the hearing, the debtor paid the amount of USD$1,092,988.19 and provided an accounting, which the applicant had yet to verify. As a result, the applicant sought an adjournment of the bankruptcy application and the debtor’s motion, together with an order that the debtor undergo an examination under Rule 39.03 of the Rules of the Civil Procedure in respect of his motion. At the conclusion of the hearing, I advised the parties that both motions would be denied for written reasons to follow. This Endorsement sets out my reasons for the dismissal of the motions.

[2] This litigation arises as a result of Wekerle’s non-payment of monies due under a promissory note executed by Wekerle in the applicant's favour respecting their joint purchase, together with a third party, of a condominium in New York City (the “Condominium”).

[3] The relevant provisions of the promissory note are as follows:

Maturity. Upon sale of 195 Hudson Street, Unit 2C, New York, New York 10013 (the “Condominium”), the Borrower, in payment of any and all amounts owing under this Note, will repay the principal sum then outstanding plus one-third (1/3) of the amount by which the proceeds of sale of the Condominium (less expenses associated with such sale) exceed Three Million Dollars ($3,000,000.00) in the lawful money of the United States of America.

Limitation of Recourse. Notwithstanding anything to the contrary contained in this Note or any document ancillary thereto (including any mortgage or other security), (i) the liability of the Borrower hereunder shall be limited to the amount of one-third (1/3) of the net realized sale proceeds of the Condominium (the “Realizable Property”) and (ii) the Lender will only have recourse to the Realizable Property, and no other property of the Borrower, real or personal, for the payment of funds which may be payable by the [sic] under this Note and any documentation ancillary thereto (including for greater certainty any mortgage or other security), and will not otherwise enforce a deficiency judgment or seek other recourse against the Borrower or any other assets that it may hold an interest in.

[4] There is an issue of contractual interpretation regarding the operation of the limited recourse provisions in section 4 of the promissory note that is significant for the determination of both motions. The debtor suggests that these provisions limit the applicant’s rights to the proceeds of sale of the Condominium, and if paid or otherwise transferred to a third party, to a tracing of such proceeds. I do not think that the parties could reasonably have intended such an interpretation for a number of reasons.

[5] First, the parties intended the applicant to be secured by way of a mortgage on the Condominium but this proved impossible, or was impossible according to Wekerle, due to the by-laws of the condominium corporation. More significantly, on the debtor’s interpretation, the applicant would lose any right to payment of the promissory note if the debtor misappropriates the proceeds by paying them to a third party creditor who had no notice of the source of the monies and of the promissory note. I do not think that either party would have intended that a misappropriation of the sale proceeds by the debtor would have extinguished the applicant's right to payment. In addition, because monies are fungible, a tracing exercise of monies, as envisaged by the debtor, is neither feasible nor practical.

[6] Accordingly, I conclude that the promissory note should be interpreted as an unsecured obligation of the debtor to pay the applicant the amount due thereunder upon the sale of the Condominium, subject to a limitation in the maximum amount payable equal to one-third of the proceeds of sale of the Condominium.

[7] I will address the applicant’s motion and the debtor’s motion in that order.

[8] The applicant acknowledges that, given the Court’s interpretation of the operation of the promissory note, there are no questions to be put to Wekerle on a Rule 39.03 examination that would be relevant to his motion. The debtor’s motion is based entirely on the legal consequences of the promissory note. If interpreted as described above, there are no additional relevant facts that the applicant needs to elucidate from the debtor to assert the applicant’s defence to the debtor's motion. Accordingly, the applicant’s motion for an order that the debtor attend an examination under Rule 39.03 is dismissed.

[9] The debtor argues in support of his motion that, by virtue of the limited recourse provisions of the promissory note referred to above, the applicant’s remedies are limited to pursuing the monies received from the sale of the Condominium. The debtor argues that the applicant’s application for a bankruptcy order, which seeks an assignment of all of the debtor’s assets, is therefore inconsistent with such limited recourse provisions. The debtor says that, because the applicant is not entitled to claim against the remainder of the debtor’s assets, the applicant does not have standing to bring the application for a bankruptcy order.

[10] I do not accept this argument. It is based on the debtor’s interpretation of the promissory note. Having rejected that interpretation in favour of the interpretation described above for the reasons set out above, I think it necessarily follows that the debtor's argument that the applicant has no standing to bring the application for a bankruptcy order must fail. Under the terms of the promissory note, the applicant remains an unsecured creditor of the debtor from the time the debtor receives the proceeds of sale of the Condominium until the time of payment in accordance with the note. The applicant therefore has standing to bring the application. On this basis, the debtor’s motion to strike the application for a bankruptcy order is also dismissed.

[11] In the circumstances, the parties are agreed that the hearing of the application for a bankruptcy order should be adjourned pending the filing of any additional materials by either of the parties and cross-examinations. I will remain seised of this matter.

[12] Costs of the motions heard today are reserved for the judge hearing the application for a bankruptcy order.

Wilton-Siegel J.

Date: February 25, 2015