SUPERIOR COURT OF JUSTICE - ONTARIO
COURT FILE NO.: 31-1951725
DATE: 20151112
RE: In the Matter of the Bankruptcy of e3m Investments Inc.
BETWEEN: Jean-Marc Ridel, Nadine Suzanne Josephine Ridel and Marc H. Ridel, Appellants
AND:
Schwartz, Levitsky, Feldman, Inc. – Trustee, Respondent
BEFORE: Penny J.
COUNSEL:
Philip Anisman for the Applicants
Martin Greenglass for the Respondent
HEARD: October 29, 2015
ENDORSEMENT
Overview
[1] This is an appeal under s. 81 of the Bankruptcy and Insolvency Act from the disallowance by the Trustee of the appellants’ claim that funds held in an account of e3m Investments Inc. were held in trust for the benefit of the appellants and were, accordingly, not property of e3m on the date of its bankruptcy.
[2] The sole issue before the Trustee and on this appeal is whether the appellants have established the three certainties required for the formation of a trust:
(i) certainty of the intention to create a trust;
(ii) certainty of the subject matter of the trust; and
(iii) certainty of the objects of the trust.
[3] Specifically, the argument before me focused on the first requirement, certainty of intention, and whether the facts disclose an intention on the part of the settlor to create a trust for the benefit of the appellants.
[4] For the reasons that follow, the appeal is dismissed. The evidence does not support the certainty of intention required to establish a trust over the funds in the e3m account. The trustee correctly denied the claim.
Background
[5] e3m was an investment dealer registered with the Ontario Securities Commission and a member of the Investment Industry Regulatory Organization Of Canada. Robert Goldberg is the president, controlling shareholder and chief executive officer of e3m.
[6] In April 2013, the appellants obtained judgment against e3m for breach of contract, negligence and breach of fiduciary duty. The amount of the Judgment, including costs and interest, was approximately $750,000. e3m appealed this Judgment in May 2013.
[7] The Judgment appeared on e3m’s books as a contingent liability which resulted in a deficiency of $550,000 in e3m’s estimated regulatory capital.
[8] In July 2013, e3m sold substantially all of its assets to Caldwell Securities Ltd. Payment was to be made in installments based on amounts brought in from e3m’s former accounts with Caldwell over time. The transaction was contingent on Mr. Goldberg being employed by Caldwell as a broker to look after these accounts.
[9] Because Mr. Goldberg would continue as an officer of e3m, the parties had to obtain an exemption from the OSC to permit his dual registration with e3m and Caldwell.
[10] An application for an exemption to permit Mr. Goldberg to be dually registered was filed by e3m and Caldwell with the OSC in August 2013.
[11] In discussions with the OSC following the filing of the exemption application, e3m disclosed the existence of the Judgment and its appeal from the Judgment. It also disclosed that IIROC had requested that e3m and Mr. Goldberg both remained registered pending the outcome of the appeal. This disclosure led to questions about e3m’s ability to satisfy the Judgment and the amount e3m expected to realize on the sale of its assets.
[12] The OSC was concerned about whether:
(i) e3m would have liquid assets sufficient to satisfy the Judgment;
(ii) the assets would be preserved for the benefit of the Ridel’s who held the Judgment; and
(iii) there were other financial commitments of e3m that had to be satisfied and, if so, where the money would come from and how it would affect e3m’s ability to satisfy the Judgment.
[13] Over the month of August 2013, e3m and the OSC, each represented by counsel, negotiated terms and conditions that would be imposed in connection with e3m and Mr. Goldberg’s exemption application.
[14] Ultimately, the OSC staff advised e3m that it was only prepared to recommend to the Director of Compliance and Registration that she grant the exemption if it was subject to the terms and conditions proposed by the OSC. Mr. Goldberg, on behalf of e3m, agreed to the terms and conditions. A decision of the Director of the OSC granting the exemption, subject to the terms and conditions, was issued later that day. The terms and conditions became effective on September 9, 2013 when the sale of e3m’s assets to Caldwell closed.
The Terms and Conditions
[15] Because the terms and conditions lie at the heart of the trust claim, it is necessary to review them, along with the parties’ conduct after the OSC Decision, in some detail.
[16] Para. 3 of the terms and conditions required e3m to “accumulate and maintain” sufficient liquid assets in an account, called the Accumulating Account, to satisfy the Judgment plus costs and interest. The terms and conditions required e3m to direct Caldwell to pay all proceeds from the purchase transaction into the Accumulating Account. The terms and conditions prohibited any distribution of assets from the Accumulating Account prior to the satisfaction of the Judgment except with the consent or approval of the OSC and IIROC. e3m was also required to provide monthly account statements for the Accumulating Account to the OSC and to provide the OSC with written evidence of the final determination of the subject matter of the Judgment, including any appellate court decision or negotiated settlement. Mr. Goldberg undertook to comply with, and to ensure that e3m complied with, the terms and conditions and acknowledged that failure to do either of these might lead to the suspension of his registration.
[17] The Director’s Decision to grant the exemption referred to a number of representations by the applicants on which the grant of the exemption was based. The two material representations are that “e3m is entering the Proposed Transaction as a result of a capital deficiency arising out of an Ontario Superior Court judgment against it” and that “e3m has agreed to certain terms and conditions being placed on its registration after the Proposed Transaction closes.” This included:
(1) e3m shall accumulate and maintain sufficient assets to satisfy the Ontario Superior Court judgment against it, and no distribution of these assets up to the amount of the judgment will be made prior to the satisfaction of that judgment except by consent or approval from the OSC and IIROC; and
(2) on an ongoing basis, e3m will provide evidence of the accumulation and maintenance of these assets that is satisfactory to the OSC.
[18] It had been understood by the OSC that e3m was to transfer immediately $100,000 into the Accumulating Account from funds that would otherwise have gone to its operating account. When this was not done, the OSC demanded the immediate transfer of the funds into the Accumulating Account. The funds were deposited as requested in December. In January 2014, e3m requested that the OSC and IIROC permit the $100,000 to be transferred back into e3m’s operating account to enable it to meet ongoing expenses. This request was not granted.
[19] Later that month, e3m made additional requests for permission to take funds out of the Accumulating Account. In one case there was a request for $1,800 to pay a settlement with a former client and in another, for $2,500 to allow e3m to make a settlement offer to a former employee. Mr. Goldberg also requested funds from the Accumulating Account to cover employee payroll and termination obligations to e3m’s employees and for funds to pay rent and telephone expenses. All these requests were denied.
[20] In February 2014, Mr. Goldberg requested about $55,000 to cover the expense of preparing tax materials for approximately 330 former e3m clients for the 2013 tax year. The OSC staff reduced this amount to $21,500, which they identified as reasonable and expected costs for completing the tax reporting process at e3m. Following an undertaking from Mr. Goldberg, in which he agreed that the funds would only be used to pay for the clients’ tax reporting costs and that e3m would transfer any excess funds back to the Accumulating Account, the OSC and IIROC consented to the release of $21,500 from the Accumulating Account. There was a review of the expenses after the fact, following which the OSC found $1,600 of excess and required that amount to be returned to the Accumulating Account.
[21] Also in February 2014, e3m made representations to the OSC in connection with an application for an exemption from the payment of participating fees to the OSC. In its submissions, e3m represented that the sale of e3m’s assets to Caldwell was made as a result of a capital deficiency arising out of the obligation to satisfy a monetary award under a judgment of the Ontario Superior Court in favour of the Ridels. The proceeds of sale, it said, “are intended to accumulate and maintain sufficient funds to satisfy the judgment.” It went on to say that e3m’s registration was maintained “solely for the purpose of complying with the terms and conditions relating to the accumulation and maintenance of these funds in an ‘Accumulating Account’ for the benefit of the judgment creditors, and their eventual distribution.”
e3m’s Bankruptcy
[22] In November 2014, the Court of Appeal for Ontario denied e3m’s appeal and granted the Ridel’s cross-appeal, which had the effect of increasing trial costs awarded to the Ridel’s. These were ordered on January 5, 2015. e3m filed an assignment in bankruptcy on January 20, 2015. The statement of affairs showed available cash of $546,837, substantially all of which was held in the Accumulating Account.
[23] The Trustee asked the OSC to remove the terms and conditions on e3m’s registration to permit the Trustee to take possession of the funds in the Accumulating Account. In response, the OSC staff wrote to counsel for the Trustee and counsel for the Ridels. In that letter, the OSC staff asserted that the Accumulating Account was “to be funded and maintained by e3m for the benefit of the Ridels” but that it was not clear to OSC staff “whether, as matter of law, the funds in the Accumulating Account were trust funds for the purposes of paragraph 67(1)(a)” of the BIA.
[24] Ultimately, at a 9:30 appointment on the Commercial List, it was ordered that the matter should proceed by way of a proof of claim filed by the Ridels under s. 81 of the BIA, which the Trustee would deny, and that the Ridel’s would thereafter come before the Ontario Superior Court of Justice by way of an appeal from the Trustee’s disallowance. That is, in fact, how the matter proceeded and how it now comes before this court.
The Ridel’s Position
[25] The Ridels’ position is quite straightforward. Subsection 67(1)(a) of the BIA provides that property held by a bankrupt in trust for another person is not property of the bankrupt divisible among its creditors. The funds in the Accumulating Account were beneficially owned by the Ridels. The funds are not, therefore, available to the bankrupt’s estate.
[26] The creation of a trust requires certainty of intention, certainty of subject matter and certainty of object. To satisfy these requirements, it is not necessary that the word “trust” be used. It is sufficient that the three certainties are satisfied in substance by the terms of the relevant documents and conduct of the parties.
[27] Mr. Anisman argues that the three certainties have all been established:
The proceeds of sale, together with the additional $100,000 required to be transferred into the Accumulating Account were segregated funds. They remain there still, with the exception of the funds for producing tax filing documents for 330 former e3m clients There is no doubt what the “subject matter” of the trust is.
The “object” of the trust was always the Ridels. It was their Judgment. The OSC Decision and the terms and conditions were directed at preserving assets of e3m for the satisfaction of the Ridel’s Judgment.
The OSC Decision, the terms and conditions requiring the creation and maintenance of the Accumulating Account and the pre- and post- closing conduct of the OSC and e3m all demonstrate, it is argued, that the funds were “intended” to be held in trust for the Ridels.
Analysis
[28] Since the real battle ground of this appeal is the certainty of intention to create a trust, I will expand on the appellants’ argument on that issue.
[29] Mr. Anisman argues that it is sufficient if the parties intended to enter into an arrangement that objectively constitutes a trust. Neither the lack of any express reference to a trust nor the subjective intentions of the parties are relevant or determinative. It is not, it is argued, even necessary for the parties to know that their arrangement has the effect of creating a trust, Underhill and Hayton, Law Relating to Trusts and Trustees (18th) at pp. 111 and 113.
[30] The appellants rely heavily on the fact that funds were segregated for their benefit by virtue of the terms and conditions imposed by the OSC. They rely on the decision of the House of Lords in Twinsectra Limited v. Yardley and Others, [2002] UKHL 12 where Lord Hoffman wrote (at para. 74):
The question in every case is whether the parties intended the money to be at the free disposal of the recipient... His freedom to dispose of the money is necessarily excluded by an arrangement that the money shall be used exclusively for the stated purpose.
[31] They argue, accordingly, that the terms and conditions imposed by the OSC required the money to be kept separate and apart and that the money was manifestly not at e3m’s free disposal. The proceeds (at least up to the maximum level of the Judgment) had to be used exclusively for the “stated purpose” of preserving the assets of e3m for the satisfaction of the Ridels’ Judgment.
[32] The appellants also rely heavily on the decision of David Vaughan QC sitting as a Deputy Judge of the High Court in Re Branston & Gothard Ltd., [1999] 1 All ER (Comm) 289. In that case, a brokerage went into receivership. The brokerage had a substantial overdraft with its bank. At some point, in the expectation there would be a surplus over the amount required to cover all client owned monies, the bank transferred a large sum to itself to offset its overdraft. It was later realized that there would be a deficiency in the client accounts. The bank was asked to return the money. It declined to do so on the basis that the funds were not trust funds beneficially owned by the clients of the brokerage but the brokerage’s own monies.
[33] Vaughan QC found as a fact that that the account had been established “to ensure that those monies would be available” to cover any deficiency in client accounts. In the circumstances of that case, he was able to conclude that the monies paid into the relevant account were to be held in trust for the investor clients “to the extent that such monies are required to make good any deficiencies in the client cash and investments held by the firm.”
[34] The appellants argue that there is a close parallel between Branston and the facts of this case. Notwithstanding the forceful arguments of Mr. Anisman, I am unable to agree with this submission.
[35] The dispute in this case is not about the applicable law but about the application of settled trust principles to the facts. In such circumstances, it is trite, but true, to say that each case must turn on its particular facts.
[36] In Branston the regulatory regime dictated the outcome. The rules of the Securities and Futures Authority in England were established to provide “an adequate level of protection for investors.” Brokers were required to hold “client money” separate from the firm’s own monies in designated client bank accounts.
[37] It is clear from the SFA rules that the broker held client money in a fiduciary capacity. There were detailed rules governing the broker’s handling of and accounting for client money. Among them was a requirement that client money could only become firm money when the client had been paid in full. In other words, only money surplus to the full amount required to repay client money could pass to the firm.
[38] Thus, the monies provided by clients to the broker were, and had always been, trust funds required to be treated as such. Client money held by the broker was, under this regulatory scheme, indistinguishable from client funds required to be held in a lawyer’s trust account under the Law Society of Upper Canada rules and regulations.
[39] In those circumstances, I can heartily endorse Vaughan QC’s conclusion. Indeed, no other was available on the facts.
[40] The facts are very different here. In this case, there is no question of “client funds” being paid to e3m for investment purposes which were then required to be held by e3m in a fiduciary capacity. The plaintiffs obtained a damage award in a civil claim for breach of contract, negligence and, in one specific case, breach of fiduciary duty for failure to supervise an employee of the firm properly. At the point in time the Judgment was granted, the plaintiffs were unsecured, judgment creditors of e3m, nothing more.
[41] Thus, the background, overarching regulatory regime which dictated the result in Branston is not engaged in this case. The only issue is whether, post-Judgment, the conduct of the OSC and Mr. Goldberg on behalf of e3m gave rise to the imposition of a trust on the ordinary course earnings of the firm which were, by virtue of the OSC Decision and the terms and conditions, required to be paid into the Accumulating Account.
[42] I conclude that the OSC Decision and the terms and conditions do not evidence an intention to create a trust. The regulatory steps taken were investor protection measures to be sure. But they were more in the nature of a “status quo preservation order” to ensure the funds were not dissipated prior to any resolution of e3m’s appeal. If, alternatively, there was a trust at all, it was not a trust for the exclusive benefit of the Ridels, but one limited solely to the preservation of funds pending a future determination of entitlement. The following factors lead me to this conclusion.
[43] Mr. Anisman displayed some uncertainty about who the settlor of the alleged trust was. e3m agreed to the terms and conditions only because it had to. The same applies to the OSC Decision. Thus, the relevant underlying intention was the intention of the OSC, not e3m, yet the underlying funds belonged to e3m. In the end, Mr. Anisman resolved this ambiguity by arguing that whether opposed or not, e3m did agree, ultimately, to the terms and conditions and to the OSC Decision. e3m, therefore, intended the result, whatever it was, of these regulatory measures. It was, accordingly, a kind of joint or common intent initiated by the OSC and acquiesced in by e3m. However characterized, it is clear that e3m had no independent intention to create a trust. It simply did what it was told to do by the OSC to get what it wanted - the exemption to allow Mr. Goldberg to maintain two registrations.
[44] Whichever is the case, the role of the OSC in creating the Accumulating Account raises a fundamental problem. The whole point of e3m’s sale of assets to Caldwell was because e3m could not afford to pay the Judgment. The OSC was concerned about e3m’s ability to pay the Judgment and about e3m’s liability to other creditors as well. The OSC Decision and the terms and conditions were put in place, therefore, very much in the face of a reasonable, if not high, likelihood that e3m was, or would be, insolvent if e3m’s appeal were unsuccessful. This seems to me implicit in the OSC’s concerns and in all that was done following the Judgment in the context of e3m’s application to the OSC for an exemption.
[45] The appellants argue that the evidence does not support the risk of insolvency in August of 2013. They do so on the basis of representations by e3m and Mr. Goldberg to the OSC to the effect that the realization of the firm’s assets was going to be sufficient to pay all e3m’s debts, including the Judgment.
[46] There is no evidence of documentary or other support for e3m’s representation. The available evidence is that the Judgment resulted in a capital deficiency of $550,000. The inference to be drawn is that a sale of e3m’s assets was required to avert an immediate insolvency.
[47] Further, there is no evidence the OSC actually relied on this representation. It is not reflected in the terms and conditions or, more importantly, in the recital of representations which forms the bulk of the OSC Decision. Para. 8 merely states:
e3m is entering the Proposed Transaction as a result of a capital deficiency arising out of an Ontario Superior Court judgment against it. Although e3m is appealing this judgment, the Proposed Transaction will allow e3m to accumulate and maintain sufficient assets to satisfy this judgment. In addition, e3m is required to remain registered as an investment dealer and a dealer member of IIROC in the interim before this judgment is satisfied.
[48] Indeed, if the OSC had accepted the suggestion implicit in the appellants’ argument - that e3m was going to be fine and see to the payment of all its creditors - there would have been no need or purpose for the terms and conditions at all.
[49] There is no question that, so far as it went, the OSC Decision fell within the ambit of the OSC’s jurisdiction over capital market regulation generally and compliance and registration matters specifically. I have considerable doubt, however, about the OSC’s jurisdiction in the context of compliance and registration matters, to create, without express legislative authority, what is in effect a preference for certain judgment creditors of a registrant over the interests of other creditors in a potential bankruptcy.
[50] The ambiguity of the OSC’s position in all of this is manifest in at least two ways. First, in August 2013 when these arrangements were being negotiated and made, both sides were represented by experienced counsel. Nowhere in all the contemporaneous communications, drafts or documents, is the Accumulating Account ever referred to as a trust account nor are the funds to be paid into that account ever referred to as trust funds. This, of course, is not a requirement but, especially with experienced lawyers involved, it is a relevant factor.
[51] Second, after e3m filed its assignment and after issue over the legal consequences of the OSC Decision, the terms and conditions and the Accumulating Account had been joined, the OSC was remarkably non-committal. Following the Trustee’s demand, the OSC reiterated that the Accumulating Account was to be funded and maintained for the benefit of the Judgment creditors. However, the OSC assiduously took no position on whether the funds were trust funds. While I accept Mr. Anisman’s submission that subjective intentions, before or after the creation of a trust, are not dispositive of anything and of limited evidentiary weight, the OSC’s deferential attitude on the very existence of the Ridels’ alleged beneficial interest in the funds is, in my view, a highly relevant fact.
[52] The terms and conditions themselves refer consistently throughout only to e3m’s obligation to “accumulate and maintain” sufficient assets to satisfy the Judgment. The terms and conditions do not address, at all, the ultimate disposition of those assets or the conditions under they will or will not become payable to the Judgment creditors.
[53] This failure to address ultimate entitlement to the funds is another indication that a trust, where beneficial ownership was allegedly to lie unambiguously with the Judgment creditors, was not intended.
[54] It is also the case that the appellants were, at the time, unaware of the negotiations leading to the terms and conditions or of the OSC Decision and were unaware that they were to be the beneficiaries of this alleged trust. Again, while notice is not required, the appellants’ distance from all these arrangements is a relevant factor.
[55] One of the strongest planks in the appellants’ argument is that the funds were required to be segregated. There is no doubt that the funds were required to be, and were, segregated. But, as Megarry J. said in Re Kayford Ltd., [1975] 1 All ER 604, the existence of a separate account is a “useful (although by no means conclusive) indication of an intention to create a trust.”
[56] In this case, the establishment of a separate account is equally consistent with an interim intention to preserve the funds pending a future determination of entitlement. As might be expected, the onus of establishing a claim to or in property is, under s. 81 (3) of the BIA, on the claimant. In the circumstances, therefore, where the “non-trust” explanation for a separate account is at least equally as plausible as the “trust” explanation, the creation of a separate account cannot, on its own, be regarded as having established any intention to create a trust.
[57] The same thing can be said for the limitations imposed on e3m’s ability to use or gain access to the funds in that account.
[58] The appellants rely on the requirement, embedded in the terms and conditions, that “no distribution of assets from the Accumulating Account will be made prior to the satisfaction of” the Judgment without the consent or approval of the OSC and IIROC. The appellants also refer to the repeatedly denied requests of e3m for access to the funds to pay other, ongoing obligations.
[59] The OSC did accede to one such request, however. That was for funds to prepare and send out income tax slips to 330 e3m clients at a cost of some $20,000.
[60] Mr. Anisman argues that the payment of these funds is not inconsistent with a trust in favour of the Ridels because the OSC and IIROC were expressly allowed by the terms and conditions themselves to permit funds to be distributed. This, he says, is analogous to a power of revocation or encroachment and does not detract from the Ridels’ beneficial interest in the contents of the Accumulating Account.
[61] I am unable to agree. The power of the OSC and the IIROC to consent to the distribution of funds from the account is, on its face, absolute. It is unconstrained by any enumerated considerations or factors. It can be exercised without notice to or consideration of the Ridels. Neither the OSC nor the IIROC were trustees. The IIROC had essentially nothing to do with the negotiation of the terms and conditions or with the OSC Decision. Each of their relationships with the so-called trust was of a purely regulatory, not fiduciary, nature.
[62] While some claimants were not favoured by the exercise of this discretion, 330 of e3m’s other clients were. I find the absolute 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 is fundamentally inconsistent with an intention to create a trust in favour of the Ridels.
[63] I also find this level of discretion lodged with what are essentially strangers to the trust to be inconsistent with the required certainty of object, since it is by no means clear who, in the exercise of the unconstrained and apparently unlimited jurisdiction conferred upon the OSC and the IIROC to consent to payments out, is meant to benefit from this alleged trust.
[64] It is for these reasons that the appeal is dismissed. I find there was no certainty of intention to create a trust. The funds in the Accumulating Account are not trust funds. They are the property of the bankrupt and are, therefore, available to the Trustee for satisfaction of the obligations of the estate.
Costs
[65] Both parties submitted bills of costs at the conclusion of argument. Had he been successful, Mr. Anisman would have sought costs on a partial indemnity basis of about $124,000. Mr. Greenglass submitted a partial indemnity bill seeking costs of about $50,000.
[66] There is no reason why the normal rule, where costs follow the event, should not apply. In the circumstances, I find the Trustee’s bill eminently reasonable and fix costs, payable forthwith by the appellants, in the amount of $50,000 (inclusive of all fees, disbursements and taxes).
Penny J.
Date: November 12, 2015