SUPERIOR COURT OF JUSTICE - ONTARIO

COURT FILE NO.: 05-CL-5945
Formerly Court File No. 98-CV-156217

DATE: 20151113

RE: MENDLOWITZ & ASSOCIATES INC. IN ITS CAPACITY AS TRUSTEE IN BANKRUPTCY OF JAY CHIANG, KOREA DATA SYSTEMS (USA), INC., AND KOREA DATA SYSTEMS CO. LTD. Plaintiffs

AND:

JAY TIEN CHIANG AND CHRISTINA CHIANG, Defendants

BEFORE: MARROCCO A.C.J.S.C.

COUNSEL:
Catherine L Francis and Mark A Freake, for the Plaintiff Mendlowitz & Associates Inc. in its capacity as Trustee in Bankruptcy of Jay Chiang

Scott C Hutchison, for the Plaintiffs Korea Data Systems (USA), Inc. and Korea Data Systems Co. Ltd.

J. Thomas Curry, for the Respondent Jay Chiang

Scott McGrath and Hilary Book, for the Respondent Christina Chiang

HEARD: October 21, 2015

Christina Chiang Motion to Enforce Settlement

[1] Christina Chiang moves for an order requiring Mendlowitz and Associates Inc., in its capacity as Trustee in Bankruptcy of Jay Chiang, to pay WeirFoulds LLP in trust C$300,000, pursuant to a settlement agreement between Ms. Chiang and the Trustee. Ms. Chiang also seeks costs of this motion.

[2] Korea Data Systems (USA), Inc. supports Christina Chiang’s position on this motion. Jay Chiang takes the same position as the Trustee and opposes the motion.

[3] On October 2, 2013, Mendlowitz and Associates Inc. and Christina Chiang entered into a Memorandum of Agreement which settled outstanding issues between them. As part of the settlement, the Trustee agreed that Christina Chiang was entitled to her reasonable costs resulting from my trial decision released July 9, 2012, and Christina Chiang subordinated any such costs in excess of $300,000 to the fees and expenses of the Trustee and its counsel.

[4] On April 29, 2014, Christina Chiang was awarded $665,990.96 in costs payable jointly and severally by the Estate of Jay Chiang, Korea Data Systems (USA), Inc. and Korea Data Systems Co. Ltd. It was also determined that, to the extent any payment of costs to Christina Chiang came out of the Estate in Bankruptcy of Jay Chiang, the Trustee was entitled to seek recovery of such payment from Korea Data Systems (USA), Inc. and Korea Data Systems Co. Ltd. It was also determined that WeirFoulds LLP was entitled to a solicitor’s lien in respect of the costs order, and that—pursuant to section 136(1)(b)(III) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3—this lien had priority over any claim of the unsecured creditors.

[5] Korea Data Systems (USA), Inc. appealed the costs order. However, on April 13, 2015, prior to the appeal being heard, Korea Data Systems (USA), Inc. and Christina Chiang entered into Minutes of Settlement. I was advised during the course of argument that Christina Chiang and Korea Data Systems (USA), Inc. agreed to keep virtually all of the terms of the Minutes of Settlement confidential. The parties did confirm that their settlement was a global settlement of all matters between them and that, as part of the settlement, Christina Chiang agreed to limit her claim for costs to $300,000. Beyond this admission, no other information concerning the terms of the settlement was requested or provided.

[6] Four days later on April 17, 2015, counsel for Christina Chiang wrote to the Trustee demanding payment of $300,000 from the Estate of Jay Chiang. Counsel for the Trustee then wrote to counsel for Korea Data Systems (USA), Inc. demanding $300,000 to pay the costs award. Korea Data Systems (USA), Inc. refused, maintaining the Trustee had sufficient funds in hand. As a result, there is an impasse concerning the payment of Christina Chiang’s costs.

[7] On or about July 13, 2015, the Trustee provided a Draft Report Summarizing Receipts and Disbursements in the Matter of Jay Chiang’s Bankruptcy. This report indicates that the receipts exceed disbursements by $47,810.28. This difference meant that the Trustee did not have sufficient funds to pay Christina Chiang’s costs. In a Report dated October 16, 2015, the Trustee subsequently advised that the Estate was entirely out of funds.

[8] The Trustee is holding $500,000 outside the Estate. These funds were provided to pay, among other things, the Trustee’s fees, legal fees and Estate costs. There is an issue concerning the availability of these funds to satisfy Christina Chiang’s $300,000 costs order.

[9] The Trustee has indicated that payment of Christina Chiang’s costs from this sum of money will leave the Trustee without sufficient funds to pay for legal fees already incurred, future legal fees and the Trustee’s own fees. Payment will also leave the Trustee without security for its litigation with BLG. For approximately 15 years, BLG represented the Trustee, Korea Data Systems (USA), Inc. and Korea Data Systems Co. Ltd. in the matters arising from Jay Chiang’s 1998 assignment in bankruptcy.

[10] After the Trustee had retained independent counsel and in order to avoid the expiration of a limitation period, the Trustee sued BLG for breach of contract, negligence, negligent misrepresentation, conflict of interest, breach of the duty of loyalty, breach of confidence, breach of fiduciary duty, full indemnity for all professional costs and full indemnity for all costs orders made against the Trustee or the Estate of Jay Chiang. BLG responded by defending against the claim and making a counterclaim against the Trustee for contribution and indemnity for any amounts which BLG may be found to be responsible to the Estate of Jay Chiang.

[11] Relations between the Trustee and Korea Data Systems (USA), Inc. are further complicated by the various indemnities which have been issued to the Trustee and Mr. Mendlowitz personally over the years when the Trustee, Korea Data Systems (USA), Inc. and Korea Data Systems Co. Ltd. were represented by the same counsel.

[12] Specifically, the Trustee and Mr. Mendlowitz received the following indemnities:

• An indemnity from Korea Data Systems (USA), Inc. in September 2000. This indemnity provided that Korea Data Systems (USA), Inc. would defend and indemnify Mr. Mendlowitz against all claims made against him by Christina Chiang and others due to his actions as a Trustee in the Bankruptcy of Jay Chiang.

• An indemnity from KDS Korea Data Systems Canada Inc., dated April 4, 2000, which promised to defend and indemnify Mendlowitz and Associates Inc. against any and all claims asserted in action 00-CL-3835 (the “Fraudulent Conveyances Action”). This corporation agreed to be bound by the September 2000 indemnity. KDS Korea Data Systems Canada Inc. no longer exists, and, if it were revived, the company would have no assets. The only evidence concerning the ownership of this company was provided by Mr. Hui who indicated that he did not own this company and that he thought it was owned by Korea Data Systems Co. Ltd.

• The Trustee received an undated undertaking concerning damages to the “responding parties” signed by John Hui on behalf of Korea Data Systems (USA), Inc. The undertaking was likely attached to an application for a Mareva injunction which undoubtedly had a date on it.

• On March 4, 2009, Korea Data Systems (USA), Inc. gave a further indemnity to the Trustee that extended previous indemnities to include costs, expenses and damages incurred as a result of the undertakings made to the Hong Kong Supreme Court.

• On July 29, 2010, John Hui gave his personal undertaking to abide by any order concerning damages that the court may make if it appeared that the granting of the order by Justice Farley caused damage to the responding parties for which Korea Data Systems (USA), Inc. or Mr. Hui (in his personal capacity) ought to compensate the responding parties.

• On February 28, 2011, the trials for the Enforcement Action and the Fraudulent Conveyances Action commenced before me. On that same date, in his personal capacity, John Hui agreed to extend his personal guarantee to the indemnities provided by Korea Data Systems (USA), Inc. to a maximum of $500,000.

[13] It should be noted that Korea Data Systems (USA), Inc. has no assets. In regards to the security for the March 4, 2009 indemnity, it made available $500,000 from the proceeds of the sale of 10 Cortina Court, Richmond Hill. This property was Christina Chiang’s home before it was seized and sold by Korea Data Systems (USA), Inc. and Korea Data Systems Co. Ltd.

[14] Given the history of this matter, it is reasonable to conclude that an agreement about the extent and application of these indemnities is unlikely.

[15] The trial decision awarding Christina Chiang costs was released on July 9, 2012. The October 2, 2013 Memorandum of Agreement, referred to above, recites that “the Trustee and … Christina Chiang wish to resolve all outstanding matters between them including cost claims, potential damage claims…” The endorsement fixing Christina Chiang’s actual costs award was released six months later on April 29, 2014.

[16] The October 2, 2013 Memorandum provides in Paragraph 9(a) that Christina Chiang agrees not to seek any “costs, damages or other relief against the Trustee or Benny Mendlowitz in their personal capacities, whether in the existing proceedings or in any new proceedings, whether now known or unknown, if such claims are in any way related to the proceedings described herein… including but not limited to claims for nondisclosure, breach of duties and/or abuse of process, and all such claims are hereby released.”

[17] To the extent Christina Chiang is awarded costs or damages against the Estate, Paragraph 9(b) provides “she will subordinate any such claims or awards in excess of $300,000 to the fees and expenses of the Trustee and its counsel…”

[18] Paragraph 10 provides that “… nothing in this agreement in any way releases Christina’s Chiang’s claim for costs of the 2011 Trial against the Trustee… or the assets of the estate.” The paragraph goes on to provide that “For greater certainty, the Trustee shall not be liable to Christina Chiang for costs of the 2011 Trial to the extent such costs exceed the assets of the Estate together with monies the Trustee currently holds or may in the future hold as indemnity for his or his counsel’s fees, after payment of the fees of the Trustee and its counsel.” This paragraph, while limiting the Trustee’s exposure, has no effect on the subordination provisions set out in Paragraph 9(b).

[19] When Paragraphs 9(b) and 10 are read together in the context of the entire Memorandum of Agreement, the only logical conclusion is that $300,000 of Christina Chiang’s costs are not subordinated to the fees and expenses of the Trustee and its counsel.

[20] It was clear on July 9, 2012 that Christina Chiang had been successful at trial and had been awarded costs. It was clear on October 2, 2013 that any costs award in favour of Christina Chiang, up to and including $300,000, was not subordinated by her agreement. It was clear on April 17, 2015 that Christina Chiang had costs, which everyone agreed totaled $300,000. The decision not to set aside $300,000 was a decision in which Christina Chiang did not participate.

[21] If I were to acquiesce in the Trustee’s position as advanced on this motion, I would be rewriting Paragraphs 9(b) and 10 of the October 2, 2013 Memorandum of Agreement, because I would be subordinating the entire amount of Christina Chiang’s costs claim to the Trustee’s fees and expenses.

[22] The Trustee’s decision to enter into a Memorandum of Agreement with Christina Chiang was a prudent decision. Prior to that agreement, the Trustee’s exposure to Christina Chiang was significant. The costs order with which we are concerned is no windfall for Christina Chiang or anyone else. The funds with which we are concerned come from the sale of Christina Chiang’s family home, but they will not go to her. WeirFoulds LLP, who have the solicitor’s lien, have acted in this matter since 2009 without being paid and have indicated that they will not charge Christina Chiang more than the costs awarded. Responsibility for addressing the exposure faced by the Trustee, and possibly Mr. Mendlowitz personally (as a result of the administration of the Estate in Bankruptcy of Jay Chiang), cannot fairly be permitted to consume the entire amount of the costs order in favour of Christina Chiang.

[23] Accordingly, there will be an order requiring Mendlowitz and Associates, in its capacity as Trustee in the Bankruptcy of Jay Chiang, to pay WeirFoulds LLP $300,000 in trust pursuant to the Memorandum of Agreement entered into between Christina Chiang and the Trustee. There is no point in complicating the Trustee’s difficulties in this matter by making an adverse costs order on this motion. There will be no order concerning costs.

Marrocco A.C.J.S.C.

Date: 20151113