CITATION: Friedberg Mercantile Group Ltd. v. MF Global Canada Co., 2016 ONSC 1398

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

DATE: 20160302

SUPERIOR COURT OF JUSTICE - ONTARIO

IN THE MATTER OF THE BANKRUPTCY OF MF GLOBAL CANADA CO., OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO

RE: Friedberg Mercantile Group Ltd., Plaintiff

AND:

The Bankruptcy Estate of MF Global Canada Co., Defendant

BEFORE: Penny J.

COUNSEL: Malcolm Mercer and Kelly Peters for the Plaintiff

James D.G. Douglas and James Gibson for the Defendant (KPMG, in its capacity as Trustee in Bankruptcy of MF Global Canada)

HEARD: December 21, 22 and 23, 2015

ENDORSEMENT

Overview

[1] This is an application for the determination of whether Friedberg has a claim against the bankrupt estate of MF Global Canada.

[2] Following the worldwide bankruptcy of MF Global in 2011, Friedberg made a priority claim against the “customer pool fund” established by the Trustee of MF Global Canada under Part XII of the Bankruptcy and Insolvency Act. The Trustee ultimately transferred to Friedberg all of the securities and cash held by MF Global Canada on Friedberg’s behalf except for certain foreign futures contracts which had been liquidated by foreign commodity futures exchanges as a result of the MF Global bankruptcy.

[3] Friedberg’s priority claim against MF Global Canada for the value of the “net equity” associated with those foreign futures contracts was allowed in part by the Trustee. The Trustee disallowed Friedberg’s claim for the post-bankruptcy increase in value of the liquidated foreign futures contracts. The Trustee’s decision in this regard was upheld by C. Campbell J. in reasons of December 7, 2012 (2012 ONSC 6995).

[4] In round numbers, Friedberg recovered a total of about $92 million in cash and securities. The amount disallowed by the Trustee was about $12 million (all figures are USD).

[5] Friedberg now seeks, in this proceeding, to establish a claim for its losses resulting from the post-bankruptcy increase in value of the liquidated foreign futures contracts. It seeks to assert this claim against the “general fund” established by the Trustee out of MF Global Canada’s residual assets under Part XII of the BIA (that is, assets which were surplus to the priority payments to customers). There are two aspects of Friedberg’s claim which remain unresolved:

(1) some of the foreign futures contracts were liquidated in the days immediately prior to the bankruptcy of MF Global Canada (the “Pre-DOB Liquidated Foreign Contracts”). While Friedberg has been paid the proceeds of liquidation of these contracts, the cost to Friedberg of replacing those contracts exceeded the amount of the liquidation proceeds (due to the post-bankruptcy increase in value of those contracts). Friedberg claims this difference; and

(2) the remainder of the foreign futures contracts which remained outstanding vested in the Trustee on the date of MF Global Canada’s bankruptcy (the “Vested Foreign Contracts”). These contracts also, however, were liquidated by the relevant foreign commodity futures exchanges in the days immediately following MF Global Canada’s collapse. Friedberg has been paid an amount equal to the notional proceeds of liquidation of these contracts as if these contracts had been liquidated on the date of MF Global Canada’s bankruptcy. Again, however, the cost to Friedberg of replacing those contracts exceeded the amount of the notional liquidation proceeds (due to the post-bankruptcy increase in the value of those contracts). Friedberg claims this difference as well.

[6] There are, as a result of these outstanding claims, three basic issues to be resolved:

(1) as a matter of law, having made a successful claim for the value of its net equity against the “customer pool fund”, can Friedberg now assert a residual claim for its alleged “non-net equity” losses against the “general fund”?

(2) if yes, does Friedberg have a claim provable in bankruptcy against the “general fund” concerning the Pre-DOB Liquidated Foreign Contracts or the Vested Foreign Contracts? and

(3) if yes, should this court grant an equitable priority to Friedberg over the claims of ordinary creditors made against the “general fund”?

[7] By agreement of the parties, this claim proceeded by way of an application to this court based on pleadings, affidavits, out-of-court cross examinations, an agreed statement of fact and a joint book of documents. Thus, the parties are content that this record shall determine whether or not Friedberg has a claim against the general fund and accept any “imperfections” associated with their choice of procedure. Also by agreement of the parties, the questions before the court on this application relate to liability only. The question of the quantum of Friedberg’s possible claim (based, in part, on issues relating to Friedberg’s mitigation obligations) is for another day.

Background

[8] Until the end of October 2011, MF Global Canada was the leading futures commodity broker in Canada. MF Global Canada provided execution and clearing services for exchange traded and over-the-counter derivative products as well as for non-derivative foreign exchange products and securities in the cash market.

[9] MF Global was one of the world’s largest futures commodity brokers. MF Global Canada was an indirect subsidiary of MF Global Holdings and an affiliate of MF Global US. On October 31, 2011, MF Global Holdings filed for protection under Chapter 11 of the U.S. Bankruptcy Code. On that day, the U.S. Securities Investor Protection Corporation also sought the appointment of a trustee under the Securities Investor Protection Act over MF Global US. A trustee was appointed and an order was issued for the liquidation of MF Global US.

[10] MF Global Canada relied for some of its capital requirements on funds and securities held in its accounts with MF Global US and BNY Mellon Clearing LLC. After the insolvency of MF Global US, MF Global Canada was unable to access collateral held in its omnibus account with MF Global US. BNY Mellon also refused to allow MF Global Canada access to funds held in its omnibus account with BNY Mellon.

[11] MF Global Canada’s inability to access this capital resulted in a capital deficiency which MF Global Canada was unable to rectify. As a result, on November 1, 2011, MF Global Canada’s membership with the Investment Industry Regulatory Organization of Canada (“IIROC”) was suspended and MF Global Canada was ordered to cease all dealings with the public.

[12] MF Global Canada was also a member of the Canadian Investor Protection Fund (“CIPF”). The accounts of eligible customers are protected by the CIPF for losses of property resulting from a broker’s insolvency up to a limit of $1 million per customer for any combination of cash and securities. As a result of MF Global Canada’s financial difficulties and the IIROC suspension, the CIPF served an application for a bankruptcy order against MF Global Canada on November 2, 2011.

[13] MF Global Canada consented to the issuance of a bankruptcy order and the appointment of KPMG as trustee on November 4, 2011.

[14] A significant amount of the trading carried out by MF Global Canada on behalf of its customers concerned futures contracts traded on exchanges outside of Canada. In those cases, the execution and clearing of a trade had to be carried out by a clearing member of the U.S. or foreign exchange in issue. MF Global Canada was not a member of any U.S. or foreign exchange. Thus, it engaged other futures brokers to carry out foreign trades on its behalf.

[15] MF Global Canada carried out U.S. and foreign futures trading through an omnibus agreement with MF Global US. In turn, MF Global US engaged MF Global UK to carry out trades on exchanges outside of the U.S. MF Global UK then executed and cleared trades on the exchanges for which it was a member (for example the London Metals Exchange) or engaged an ultimate clearing broker (usually another MF Global entity) to execute and clear trades for other exchanges (for example, the Singapore exchange).

[16] MF Global US and MF Global UK, therefore, acted as intermediary brokers in the execution and clearing of trading for all of the foreign futures contracts in issue in this proceeding. Each of the foreign futures contracts was in the name of the ultimate clearing broker, whether MF Global UK or another clearing broker.

[17] Friedberg is a futures broker for its own customers. Friedberg was also MF Global Canada’s largest customer. Friedberg did not execute or clear any of trades in respect of the foreign futures contracts in issue on its own behalf. Instead, it engaged MF Global Canada to provide execution and trading services which were carried out through MF Global US and MF Global UK. Friedberg’s relationship with MF Global Canada was governed by detailed, standard form contracts used by MF Global Canada for all of its customers. These contracts are similar to the contracts used by Friedberg in its relationships with its own customers.

Commodity Futures Contracts

[18] The specific issues in dispute on this application turn, to some extent, on the unique features of futures contracts. It is therefore necessary to describe what a commodity futures contract is and how it operates. This description is largely taken from the agreed statement of facts.

[19] A commodity futures contract is an agreement to buy or sell a commodity at a predetermined later date. Commodity futures contracts are standardized by the exchange on which they trade according to the quality of the commodity, the quantity of the commodity and the delivery time and location of the commodity. The only variable is price.

[20] The futures contract may provide for physical delivery of the referenced commodity or for a final cash settlement. Very few futures contracts settle by physical delivery, however. 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”).

[21] A unique feature of futures contracts (and of the settlement and clearing process that governs them) is what is called the “daily cash settlement” process that applies to futures contracts. Details may vary but, essentially, the typical settlement and clearing procedures of each commodity exchange require that at the end of each trading day (and sometimes more frequently) the relevant exchange determines the gain (or loss) in respect of each futures contract based on the “mark to market” value since the last settlement calculation (referred to in the industry as “settlement open trade equity” or “settlement OTE”).

[22] 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. Any such gains or losses in settlement OTE must be settled to the customer’s account, also on a daily basis. “Gains” must be paid into the customer’s account each day. “Losses” must be withdrawn from the customer’s account each day. If the customer’s cash account is not sufficient to cover any “loss”, enough of the customer’s position must be sold to generate sufficient cash to cover the daily cash settlement required.

[23] Thus, not only do the market values of the futures contracts fluctuate (as is the case with an ordinary equity investment) but the gain or loss resulting from that fluctuation must be settled, or paid, on a daily basis.

[24] It is common ground that the daily cash settlement requirement is a mandatory risk control measure imposed by most modern clearing houses and exchanges which is designed to limit the risk of non-performance on the futures contract when it comes time for the parties to that contract to fulfill their obligations.

The Foreign Futures Contract Liquidations

[25] On October 31, 2011, MF Global US and MF Global Holdings entered into U.S. insolvency proceedings. MF Global UK was also placed under insolvency administration the same day. By November 2, 2011, all of the relevant affiliates of MF Global acting as clearing brokers with respect to the foreign futures contracts had been placed into insolvency proceedings in their jurisdictions.

[26] The insolvency of these clearing brokers which held the foreign futures contracts amounted to an event of default under the rules of the relevant foreign exchanges. Accordingly, beginning on November 1, 2011, the exchanges began to liquidate the foreign futures contracts held by MF Global Canada’s clearing brokers. Except for positions on the London Metals Exchange, all of the foreign futures contracts were liquidated prior to November 4, 2011, the date of MF Global Canada’s bankruptcy. These were the Pre-DOB Liquidated Foreign Contracts.

[27] It appears that as a result of the volume and complexity of foreign futures contracts and the speedy, cascading pace of the financial collapse of MF Global, even after its appointment the Trustee was not immediately aware of the identity and location of all of the foreign futures contracts held by MF Global Canada. As a result, even after foreign futures contracts legally vested in the Trustee, the Trustee was not in a position to issue instructions or take action immediately. This institutional or informational delay, for lack of a better term, resulted in the London Metals Exchange liquidating foreign futures contracts after the Trustee’s appointment (this likely occurred in late November/early December 2011).

[28] It is not controversial that none of the foreign futures contracts were liquidated on the instructions of MF Global Canada or the Trustee. Nor did Friedberg ever give any instructions to liquidate any of the foreign futures contracts. Rather, it is common ground that the foreign futures contracts were liquidated as a result of the default and close-out procedures and processes governing the relevant foreign exchanges. The parties agree that but for the insolvency of MF Global Holdings and MF Global US and UK, none of the foreign futures contracts would have been liquidated under the applicable rules of the foreign exchange.

[29] As noted above, all of the futures contracts in Canada and the U.S., including any cash associated with open trade equity post-bankruptcy, were transferred by the Trustee to Friedberg or its chosen broker. In addition, regarding the liquidated foreign futures contracts, the Trustee allowed Friedberg’s priority claim for net equity (that is, valued on the date of actual pre-bankruptcy liquidation or on the date of bankruptcy) against the customer pool fund in the amount of about $27 million.

[30] The issues in dispute in this proceeding involve a possible value of about $12 million, asserted by Friedberg as a claim against the general fund. This claim is not subject to any legislative priority in Friedberg’s favour. Friedberg seeks to assert a claim against the general fund as a general creditor. Friedberg seeks, however, for reasons I will outline below, an order granting it an “equitable” priority over other general creditors for its claim against the general fund.

Does Part XII of the BIA Permit Friedberg to Make a Claim Against the General Fund At All?

Part XII of the BIA

[31] Part XII of the BIA governs the bankruptcy of securities firms. Prior to the enactment of Part XII, customers of bankrupt securities firms had historically been required to raise trust and tracing claims in respect of securities held by the firm on their behalf, which proved difficult and time-consuming for all concerned. As Mesbur J. stated in Ashley v. Marlow Group Private Portfolio Management Inc. (2006), 2006 CanLII 31307 (ON SC), 22 C.B.R. (5th) 126 (Ont. S.C.J.) at para. 30, “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 entitlements to them.” To avoid these problems, the aim of Part XII was to simplify and streamline the administration of a bankrupt securities firm’s estate and to permit an administration that was less time-consuming, complex, uncertain, and costly to both investors and creditors.

[32] The scheme of the BIA can be described briefly as follows. Section 261(1) provides that all of the securities and cash owned by or held for the securities firm or held by the securities firm for the account of customers, vests in the trustee at the date of bankruptcy. The trustee must then establish a customer pool fund consisting of these securities and cash. Thus, instead of having an ownership claim to the specific securities or cash, customers of the securities firm are treated as creditors with a priority claim against the customer pool fund. The amount of the customer’s claim is equal to their “net equity.”

[33] Net equity is defined in s. 253 as the net value of the customer’s account that would result from the liquidation by sale or purchase of all securities held in that account at the close of business on the date of bankruptcy.

[34] Section 262 establishes a special scheme of priorities for the distribution of the assets of the bankrupt securities firm. The trustee first ensures that the costs of administration are satisfied. Then, the trustee distributes the cash and securities in the customer pool fund to customers pro rata in proportion to their net equity. The trustee may do this by returning securities in kind or by distributing cash equal to the value of the customer’s securities at the date of bankruptcy. Funds from the customer pool fund are paid out to customers in priority to other creditors.

[35] If securities are returned in kind, the consequences of post-bankruptcy fluctuations in the market value of the securities are born by the recipient customer. Otherwise, under the scheme of Part XII the customer’s recovery is not affected by the post-bankruptcy performance of the specific securities that were held for that customer pre-bankruptcy. This is because the amount of a customer’s priority claim, being restricted to “net equity”, is fixed on the date of bankruptcy.

[36] Once the net equity claims of customers are satisfied, the trustee must allocate any remaining balance in the customer pool fund to the general fund. The general fund is then distributed to preferred creditors, ratably to customers with unsatisfied net equity claims and then to various other creditor classes. Any surplus remaining in the general pool fund after satisfaction of creditors may be allocated to the bankrupt firm.

The Decision of C. Campbell J.

[37] As noted earlier, the issue of the scope of Friedberg’s claim to priority under the customer pool fund was initially resolved by the Trustee, then on appeal to Justice Campbell The decision of Justice Campbell is important background for the understanding and analysis of the first issue. It is, however, as will be seen below, not entirely dispositive of the Friedberg claim in this case. This is because the motion before Justice Campbell dealt with whether the post-bankruptcy loss asserted by Friedberg could be brought into the definition of ‘net equity’ for purposes of priority distribution from the customer pool fund. The present claim of Friedberg deals with the separate question of whether Friedberg’s post-bankruptcy loss may be claimed by way of a claim provable in bankruptcy against the general fund, in respect of which Friedberg asserts no statutory priority.

[38] The motion before Justice Campbell was framed as a motion for directions about the calculation of Friedberg’s net equity. The question was whether post-bankruptcy gains in the value of futures contracts held by MF Global Canada for Friedberg’s clients formed part of ‘net equity’ under s. 253, Part XII of the BIA and, in particular, the meaning of the phrase “including any amount in respect of a securities transaction not settled on the date of bankruptcy but settled thereafter”.

[39] Friedberg argued that a futures contract involves a series of daily cash settlements 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.

[40] The application of Part XII of the BIA was further complicated in this case because the Trustee entered into tripartite arrangements with Royal Bank of Canada Dominion Securities and the CIPF, by which all of the futures contracts held by MF Global Canada (other than the Friedberg contracts) were transferred to RBCDS, with CIPF underwriting the value of those securities. The CIPF was given a court-ordered priority over the customer pool fund to recover any amount it was required to pay.

[41] Justice Campbell concluded that the interpretation of “net equity” advanced by the Trustee was the preferred approach. According to that approach, Friedberg’s net equity is the amount that would be owed by MF Global 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 Global 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.

[42] Although there were discussions during the five-year statutory review of the BIA that took place in 2002 about amending the definition of “net equity” to enable customers to benefit from any increase in the value of securities occurring between the date of bankruptcy and the distribution date, that suggestion was rejected by some as directly contradictory to the overall structure of Part XII. The definition of net equity was not amended to allow for post-bankruptcy adjustments.

[43] The Trustee’s method of calculating net equity, Justice Campbell held, treats all securities (including futures contracts) equally, is consistent with the objects of Part XII of the BIA and supported by the plain language and historical development of Part XII. This approach facilitates efficient administration of a securities firm, as contemplated by Part XII, and reduces cost, uncertainty and delay in the administration of a securities firm bankruptcy. 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.

[44] The Friedberg interpretation 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. The Friedberg approach was inconsistent with the goals and purposes of Part XII because it would:

(i) allow futures customers to obtain special treatment in respect of their futures contracts based on the type of security which they hold; and

(ii) impede the efficient and timely administration of the estate.

Such a result would directly contradict 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.

[45] Justice Campbell went on to find that priority disputes under the BIA often result in some creditors getting less than the full value of their claim. The concept of the customer pool is to permit the individual clients of a securities firm to be treated as a group. The fact that one customer, such as Friedberg, does not recover all of its loss does not mean that it is being disadvantaged in approach vis-à-vis other securities holders.

[46] One of the results of Justice Campbell’s conclusion is that any post-bankruptcy changes to the value of any securities in Friedberg accounts relate only to the value of the customer pool fund and do not accrue to the benefit of, or amend the value of the net equity of, Friedberg.

The Freidberg Argument

[47] Essentially, Friedberg accepts and relies upon the conclusion of Justice Campbell that the right of individual customer’s to claim specific securities has been eliminated by the operation of Part XII of the BIA. The result of the application of Part XII of the BIA, so interpreted, nevertheless caused a “loss” because the value of Freidberg’s contracts increased post-bankruptcy and it did not receive the return of its foreign futures contracts from the Trustee.

[48] Friedberg argues that if a trustee chooses to distribute securities to customers out of the customer pool fund, customers will not suffer a loss in respect of those securities. Similarly, if the trustee chooses to make a cash distribution instead and the market price of the securities has fallen, customers will not suffer any loss because the distribution will be more than enough to pay for replacement securities (absent a shortfall in the customer pool fund, which did not occur in this case). However, a distribution of cash from the customer pool fund will not fully compensate customers when prices rise. Such customers will suffer a loss. This is because the cost of replacing the securities exceeds the value of the realization on the date of bankruptcy.

[49] Part XII of the BIA does not expressly exclude a claim against the general fund for losses resulting from the inability or failure of the trustee to distribute the customer’s securities in specie which are not covered by the customer pool fund due to the statutory definition of ‘net equity’. Indeed, s. 254(1) of the BIA suggests the opposite by declaring that customer claims in respect of their securities to be treated “as if customers were creditors in respect of such claims”. “Creditors” (that is, someone with a claim provable in bankruptcy) may make claims against the general fund.

The Trustee’s Argument

[50] The Trustee advances three arguments in support of its argument that Friedberg has no right to make a claim against the general fund.

[51] First, the Trustee argues that a customer’s entitlements are limited to those provided under Part XII of the BIA. A customer is entitled under s. 262(1)(b) to a priority claim against the customer pool fund in the amount of its net equity. Once that net equity claim is satisfied, the customer’s entitlement in respect of its cash and securities is exhausted.

[52] The BIA determines the status and priority of claims of creditors in accordance with its provisions in order “to ensure the equitable distribution of a bankrupt debtor’s assets among the estate’s creditors”. Friedberg is seeking an additional statutory entitlement beyond its net equity claim which is not provided for in Part XII.

[53] Second, Friedberg’s claim may only be asserted against the assets of the general fund in accordance with the priority scheme set out in s. 262(3)(b)(iii) – “Property in the general fund shall be allocated in the following priority…to creditors in proportion to the values of their claims”. To be a creditor, the claimant must have a claim provable in bankruptcy. Friedberg’s alleged loss resulted from the fact of the bankruptcy and the vesting of all securities held by MF Global Canada in the Trustee. Friedberg’s claim can not fall within the definition of a claim provable in bankruptcy under s. 121 of the BIA because the mere vesting of securities in the Trustee did not create any “loss” for the customer. Customers are afforded a claim for the liquidation value of their securities as of the date of bankruptcy when the securities vest in the Trustee. In replacement for their securities, the customers are given a statutory entitlement to claim the market value of those securities on the date of bankruptcy. There is no “loss” as result of the vesting of the securities in the Trustee, as one asset is simply replaced by another, particularly in circumstances like this one where a customer (Friedberg) has received a distribution equal to its full net equity.

[54] Third, Friedberg’s present claim is a collateral attack on Justice Campbell’s decision which rejected the “post-bankruptcy loss” portion of Friedberg’s original claim against the customer pool fund. In particular, the Trustee relies upon the findings in Justice Campbell’s decision that Part XII is “self-contained to the extent that it provides for a pool of recovery from liquidation of securities of a securities firm” and that any post-bankruptcy increases to the value of any securities in MF Global Canada’s Friedberg accounts could accrue “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.” The Trustee takes the position that this language constitutes a definitive finding that Friedberg could never, under any circumstances, claim a loss associated with the post-bankruptcy increase in value of its liquidated futures contracts apart from its status as a customer.

Analysis

[55] I am not satisfied that Friedberg is prohibited from trying to make a claim as an ordinary creditor against the general fund on the basis of these arguments. In accordance with Justice Campbell’s findings, Friedberg received the full amount of its net equity under s. 262(1)(b). There was, after all priority payments were made under s. 262(1), surplus in the customer pool fund which was transferred to the general fund.

[56] Because Friedberg received the full amount of its net equity entitlement, it cannot now make a claim against the general fund under s. 262(3)(b)(i) as a customer with an unsatisfied net equity claim. I see nothing, however, in the language of Part XII of the BIA which would prohibit Friedberg from trying to make a claim against the general fund (assuming such a claim could be established as a s. 121 claim provable in bankruptcy, which I will return to below) under s. 262(3)(b)(iii).

[57] I do not agree that the loss for which Friedberg seeks to make a 262(3)(b)(iii) claim is necessarily precluded by the legislation. Such a claim may or not be successful, depending on proof that it is a claim provable in bankruptcy, but it is not a claim which is prohibited as a matter of law. Whether Friedberg has a claim provable in bankruptcy will be considered in the next section of these reasons.

[58] It is well settled that the expression “debt, liability or obligation” is a broad concept in the application of the BIA. It is also well settled that if events occur after the bankruptcy which affect the value of a claim, those events may be taken into account. The fact that an obligation existing before bankruptcy has not crystallized into a claim until after bankruptcy is not relevant. The very nature of contingent claims, which are clearly recognized under s. 121, is that they depend upon whether some future event does or does not occur.

[59] Finally, I do not agree that the claim sought to be made here is a collateral attack on the order of Justice Campbell. The issue decided in Justice Campbell’s December 7, 2012 endorsement is a different issue than the issue raised in this action. The passages from Justice Campbell’s endorsement relied on by the Trustee were made in the context of defining the scope of Friedberg’s “net equity”. Friedberg’s claim in this action has nothing to do with net equity. Friedberg is not making a claim against the general fund as a customer with a residual net equity claim under s. 262(3)(b)(i). That would clearly be precluded on the basis of Justice Campbell’s endorsement. Friedberg’s allowed net equity claim was paid in full. In this action, Friedberg is making a claim as a general creditor against the general fund for a loss that falls, as Justice Campbell found, outside the priority net equity claims available to customers of bankrupt securities firms under Part XII of the BIA.

[60] For these reasons, it is necessary to turn to the second issue before the court; whether Friedberg has a claim provable in bankruptcy.

Does Friedberg Have a Claim Provable in Bankruptcy?

[61] As noted earlier, some of Friedberg’s foreign futures contracts were liquidated before MF Global Canada’s bankruptcy (Pre-DOB Liquidated Foreign Contracts) and some were liquidated following MF Global Canada’s date of bankruptcy (Vested Foreign Contracts). In both cases, Friedberg asserts a residual loss which results from the fact that these foreign futures contracts increased in value post-bankruptcy. The loss claimed is the difference between the value of the foreign futures contracts on the date of bankruptcy (or date of liquidation in the case of the pre-bankruptcy liquidations) and the price paid by Friedberg to replace those contracts. This loss is the amount of Friedberg’s net equity claim that was denied by Justice Campbell in his December 2012 endorsement.

[62] Because Justice Campbell excluded these claims from Friedberg’s net equity claim under Part XII, s. 262(1), and because there is no other special statutory entitlement available to Friedberg, it is common ground that Friedberg can only succeed with these claims if they constitute a claim provable in bankruptcy under s. 121 of the BIA.

[63] Section 121 provides:

(1) All debts and liabilities, present or future, to which the bankrupt is subject on the date on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt’s discharged by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act.

(2) The determination of whether a contingent or unliquidated claim is a provable claim and the valuation of such claim shall be made in accordance with section 135.

[64] In Newfoundland and Labrador v. AbitibiBowater Inc., 2012 SCC 67 the Supreme Court highlighted three essential elements of a provable claim:

(i) there must be a debt, liability or an obligation to a creditor;

(ii) the debt, liability or obligation must be incurred before the debtor becomes bankrupt; and

(iii) it must be possible to attach a monetary value to the debt, liability or obligation.

[65] Contingent claims, such as those which depend upon an event that has not yet occurred, are provable claims in bankruptcy by virtue of the “debts and liabilities, present or future…to which the bankrupt may become subject before the bankrupt’s discharge” language contained in s. 121. Contingent claims may be barred if they are “too remote or speculative”, Confederation Treasury Services Ltd. (Bankrupt), Re (1997) 1997 CanLII 3091 (ON CA), 96 O.A.C. 75 (C.A.).

Pre-DOB Liquidated Foreign Contracts

[66] As summarized briefly above, the October 31, 2011 insolvency proceedings involving MF Global US, MF Global Holdings and MF Global UK triggered a series of defaults under the rules of various foreign exchanges. Beginning on November 1, 2011, these foreign exchanges began to liquidate the foreign futures contracts held by MF Global Canada’s foreign clearing brokers. With the exception of contracts on the London Metals Exchange (which are dealt with under the ‘Vested Foreign Contracts’ section below), all of the non-US foreign futures contracts held by MF Global Canada were liquidated prior to November 4, 2011, the date of MF Global Canada’s bankruptcy. Friedberg’s claim with respect to its loss on these liquidations is about $1 million (the amount of Friedberg’s loss is not the subject of this stage of the proceeding. By common agreement, all issues of quantum are reserved for another day. These numbers are merely estimates subject to many contingencies).

Friedberg’s Position

[67] Friedberg’s argument in support of its claim for losses resulting from the liquidation of the pre-DOB foreign contracts starts with the proposition that Friedberg was an agent for its customers, who were principals. Friedberg contracted with MF Global Canada on behalf of disclosed principals. MF Global Canada was Friedberg’s agent. MF Global Canada further delegated its responsibilities with respect to foreign futures contract trading to MF Global US which, in turn, further delegated non-US foreign futures contract trading to MF Global UK and so on. MF Global Canada owed common law duties to Friedberg as its agent including: 1) to obey and perform; and 2) to perform with care and skill.

[68] Friedberg relies on the well-settled principle that, as a general rule, a subagent is accountable only to the agent who employs him, and that agent in turn to his principal so that a subagent taking on the conduct of the principal’s business from the agent is not liable to account to the principal and, even if the subagent is negligent, he cannot be sued by the principal. An agent who employs a subagent is responsible to the principal for negligence and other breaches of duty by the subagent.

[69] Thus, says Friedberg, the liability of MF Global Canada to Friedberg is not affected by the engagement of MF Global US or MF Global UK. If duties were breached, it matters not to MF Global Canada’s liability whether the duties were breached by MF Global Canada or by its subagents.

[70] There are three respects in which Friedberg argues that it has a claim provable in bankruptcy, all based on contractual and common law duties of agents to principals:

(i) MF Global Canada breached a duty to perform with care and skill when it failed to maintain and hold Friedberg’s foreign futures contracts until instructed by Friedberg to liquidate them;

(ii) MF Global Canada breached a duty to perform and obey when it failed to transfer Freidberg’s accounts to another broker when instructed to do so; and

(iii) MF Global Canada breached a duty to perform with care and skill when it misrepresented to Friedberg, days prior to MF Global’s bankruptcy, that MF Global was “financially robust”.

(i) Failure to Hold Until Instructed to Sell

[71] At its most basic level, Friedberg’s argument is that, as Friedberg’s agent, MF Global Canada had an obligation to buy futures contracts when instructed, to hold them, and then to sell them only when instructed to do so. That obligation was breached when, without instructions, the Friedberg foreign futures contracts were sold.

[72] Friedberg argues that the fact that the liquidations were in accordance with the rules of the foreign exchanges involved is no defence. Foreign exchange rules requiring liquidation were engaged because MF Global Canada’s subagents, MF Global US and MF Global UK, went into bankruptcy proceedings and their accounts, including with Friedberg, were frozen. At common law, MF Global Canada is responsible for its subagents’ breaches. For this reason, Friedberg argues, the continuing obligation to hold its foreign futures contracts until instructed to sell was breached. This was the breach of an ongoing obligation undertaken pre-bankruptcy and, therefore, falls within the scope of a claim provable in bankruptcy.

(ii) Failure to Transfer Accounts

[73] MF Global Inc. was one of the largest global commodities futures brokers in the world. Its collapse, while enormous and devastating, was not entirely unforeseen. As reported by Mr. Giddens, Trustee for the SIPA-sponsored liquidation of MF Global Inc., in his June 2012 Report of the Trustee’s Investigation and Recommendations filed in the United States Bankruptcy Court, Southern District of New York in, on September 1, 2011 MF Global disclosed a net capital deficit and a $183 million capital infusion required of it by the Financial Industry Regulatory Authority in the US. This did not garner much national attention until October 17, 2011 when the Wall Street Journal published an article about MF Global. After this, events rapidly came to a head. On October 24, 2011, Moody’s Investors Service downgraded MF Global’s credit rating to near-junk status. Then, on October 25, 2011 MF Global held its third quarter earnings call during which it announced a $119 million write-off of deferred tax assets, signaling increased doubt about near-term prospects for profitability. The next day, S&P put MF Global on “Credit Watch Negative”. On October 27, 2011 Moody’s cut MF Global to junk status. Together with the downgrades of MF Global’s credit rating and growing concerns about the large sovereign debt portfolio, this news contributed to a major loss of market confidence. A classic run on the bank ensued.

[74] It was in this context that, on October 25, 2011, Friedberg began a conversation, via e-mail, with MF Global Canada about finding Friedberg another “potential broker custodian to hold” Friedberg’s positions

[75] On October 31, 2011, after the close of business and following orders made in the United States and the United Kingdom putting MF Global US and MF Global UK into insolvency proceedings, Friedberg directed that it’s MF Global accounts be transferred to a new broker, FC Stone.

[76] As a result of the insolvencies and regulatory orders which cascaded throughout MF Global over the next four days, this transfer did not take place.

[77] The transfer was eventually made, as set out in some detail in the Agreed Statement of Facts, by the Trustee on November 22, 2011.

[78] Friedberg argues that it would normally have expected such a transfer to take place within two days. Had this been done, it says, the liquidations which gave rise to this claim would not have occurred and Friedberg would not have suffered any loss.

(iii) The Alleged Misrepresentation

[79] On October 26, 2011, Mr. Stephane Rozier of MF Global Canada sent an e-mail to Mr. Gordon of Friedberg. It began:

Hi Danny,

I thought you might like to see this:

Please see the attached summary of the robust financial position at MF Global…. [emphasis added]

[80] This was four days before the financial collapse of MF Global. Friedberg argues that this representation must have been false and was intended to be relied upon. As a result of this misrepresentation, Friedberg argues that it was induced not to take urgent action to transfer its accounts. Had this misrepresentation not been made, again, the liquidations which gave rise to Friedberg’s claim would not have occurred and Friedberg would have suffered no loss.

The Trustee’s Position

[81] The Trustee’s main argument in respect of all these allegations is that liability for the conduct of downstream futures contract brokers was, contrary to the common law, expressly disclaimed in Friedberg’s contract with MF Global Canad.

[82] Regarding the delayed transfer of Friedberg’s accounts, the Trustee argues that the freezing of Friedberg’s accounts was beyond MF Global Canada’s control. MF Global US and UK were, on October 31, 2011, already in bankruptcy proceedings and their accounts were frozen. MF Global Canada’s accounts were frozen on November 1 by virtue of the IIROC order made that day. In any event, even at the best of times, the Trustee’s evidence establishes, MF Global Canada could not have effected the requested transfer before its own bankruptcy took place on November 4, 2011.

[83] Regarding the alleged misrepresentation, the Trustee argues that Friedberg’s evidence does not establish that there was any misrepresentation at all. There is no evidence that any of the financial information in the attachment to the October 26, 2011 e-mail was wrong. Further, any reliance on the reference to MF Global having a “robust financial position” could not reasonably have been relied upon in the circumstances. Friedberg was an extremely sophisticated player in the futures contract business. It actively followed financial reporting minute by minute and must have been aware of the October 17, 2011 Wall Street Journal article, the October 24, 2011 Moody’s Investors Service downgrade, the October 25, 2011 $119 million write-off of deferred tax assets and the October 26, 2011 announcement by S&P putting MF Global on “Credit Watch Negative”.

Analysis

[84] In the view I take of this matter, it is not necessary to resolve the disputes over whether the transfer of Friedberg’s accounts to a new broker could or could not have been reasonably accomplished before MF Global Canada's bankruptcy on November 4, 2016 or whether the alleged misrepresentation about MF Global’s robust financial condition was the cause of Friedberg’s loss. I say this because, at the end of the day, Friedberg’s foreign futures contracts were liquidated without instructions and through no fault of Friedberg. The how and why of these liquidatons is largely irrelevant. Events, in this case, overtook the normal procedures.[^1]

[85] At its core, Friedberg bargained for the purchase of these foreign futures contracts and for them to be held until it authorized their sale. This did not happen in the case of the pre-bankruptcy liquidations because of the insolvency of MF Global US and MF Global UK. At common law, MF Global Canada is liable for the acts of its subagents. The real issue in this case is whether, as argued by the Trustee, the agreement Friedberg had with MF Global Canada abrogated the common law and legitimately disclaimed all responsibility for downstream conduct by the foreign futures exchange agents.

[86] The essence of the Trustee’s argument runs as follows. Where there is a written contract between a principal and agent, the court must examine the terms of that contract to determine the scope of the agent’s duties. In this case, the relevant agreement relied upon by the Trustee is a 2003 customer agreement between Friedberg and MF Global Canada’s predecessor, Refco. The customer agreement provides, in para. 25 under the heading, “ERRORS AND OMISSIONS”:

In accepting orders, [MF Global Canada] shall have the right to exercise discretion as to which exchange and as to which exchange member clearing firm the orders will be executed through. Nevertheless, [MF Global Canada] shall not be responsible to [Friedberg] for errors, omissions, or acts, of the exchange member clearing firm or floor brokers selected by the exchange member clearing firm. [MF Global Canada] has the right to impose trading limits or to refuse to accept any order at their discretion. [Emphasis added]

[87] The customer agreement does not refer to any obligation to ensure that all downstream intermediary brokers act in compliance with the applicable rules and regulations, in order to avoid liquidation. In any event, ensuring such regulatory compliance would be, to all intents and purposes, impossible.

[88] Friedberg accepts that MF Global Canada was fulfilling its ongoing obligations to purchase and hold futures contracts in accordance with Friedberg’s instructions until October 31, 2011. The pre-bankruptcy liquidations between October 31, 2011 and November 4, 2011 were not the result of anything MF Global Canada did but the result of the consequences of bankruptcy proceedings involving MF Global US and UK.

[89] Since, by contract, MF Global Canada disclaimed any liability for errors, omissions or acts of subagent exchange member clearing firms, which includes MF Global US and UK and MF Global UK’s subagents, the common law principles that would normally apply were displaced.

[90] There is, according to the Trustee, no pre-bankruptcy debt or liability that could qualify as a claim provable in bankruptcy within the meaning of s. 121 of the BIA concerning the pre-DOB liquidated foreign contracts.

[91] Friedberg responds by arguing that the June 2003 agreement was superseded by new customer agreements executed in October 2009 which contain a different limitation of liability. The 2009 limitation is narrower and does not capture the circumstances in issue here. That provision, in the October 2009 omnibus account agreement, states:

MF Global will not be responsible for delays in the transmission or execution of orders due to breakdown or failure of transmission or communication facilities or to any other cause or causes beyond MF Global’s reasonable control or anticipation.

[92] Friedberg says what happened in this case is not subject to this exclusion because the problem giving rise to Friedberg’s loss did not result from any delay in the transmission or execution of an order.

[93] A great deal of minute parsing of the language of these agreements occurred in the written and oral submissions. The Trustee argues that the 2003 customer agreement operated as a ‘master agreement’, contemplating subsequent account agreements which, unless specifically waiving or varying particular terms in the 2003 master agreement, would be subject to the master agreement.

[94] Friedberg disagrees, taking the view that the language of these agreements is such that the 2003 customer agreement does not operate as a master agreement holding sway over the subsequent 2009 account agreements.

[95] In my view, Friedberg is precluded from taking the position it now does by its own evidence in this proceeding. One of Friedberg’s deponents in this proceeding was Mr. Enriques Z. Fenig. He swore an affidavit on July 20, 2012. At para. 36, Mr. Fenig deposed that Friedberg’s relationship with MF Global Canada was governed by the agreements between them and industry practice. He went on attach as exhibits F, G and H, respectively, copies of the relevant agreements. These include the June and October 2003 customer agreements which contain the broad limitation of liability quoted above. Mr. Fenig passed away and was never cross-examined. Another deponent for Friedberg, Mr. Gordon, was cross-examined. Mr. Gordon accepted that the 2003 agreements continued to govern the parties’ relationship after Refco changed its name to MF Global.

[96] Having, in its evidence, accepted that the 2003 customer agreements governed the parties’ relationship, Friedberg cannot now to be heard, in argument, to take a different position.

[97] In any event, I agree with the Trustee that the 2003 customer agreement appears to have been intended to operate as an umbrella agreement for all relationships with the customer, subject to subsequent account-specific agreements which, unless they explicitly changed the customer agreement, would govern the individual account agreements as well. The limitation of liability in the 2003 umbrella or master agreement is not inconsistent, and can be read together with, the subsequent 2009 account agreements. There is, as a result, no basis to read the subsequent 2009 account agreement’s limitation language as superseding the language of the 2003 customer agreement.

[98] Friedberg’s argument on this issue depends upon visiting the pre-bankruptcy defaults of MF Global US and UK on MF Global Canada in accordance with the common law.

[99] The customer agreement covering the relationship between Friedberg and MF Global Canada, however, specifically excludes liability for the errors, omissions and acts of downstream futures exchange brokers retained by MF Global Canada. The parties specifically contracted out of the common law on this point.

[100] Friedberg argues as well, however, that the distinction between the corporate entities involved in this case should be disregarded because they were all part of the same corporate family. I cannot agree.

[101] There is no basis for conflating the distinct corporate personalities involved here merely because they share common ownership. While MF Global operated to some extent as an integrated whole, in many respects it did not.

[102] Friedberg’s only contractual relationships were with MF Global Canada. Friedberg did not have a direct contractual relationship with any of the other entities in the MF Global group. Friedberg was aware that MF Canada was legally separate from other MF Global entities. The October 2003 agreement specifically contemplates that downstream agents for which MF Global Canada will not be liable includes its affiliates.

[103] As well, MF Global Canada was operationally and financially separate from MF Global in a number of different ways:

MF Global Canada was an unlimited liability corporation incorporated under the laws of the province of Nova Scotia, not a division or branch of MF Global operating in Canada;

MF Global Canada had its own board of directors and officers;

the assets and liabilities of MF Global Canada were accounted for separately from those of other entities in the MF Global group;

MF Global Canada was subject to Canadian securities laws and a separate regulatory regime administered by the IIROC and Canadian securities administrators and regulators.

[104] I do not think Friedberg has advanced any viable legal theory upon which the separate corporate personality of MF Global Canada can simply be ignored. For example, Friedberg has not shown, nor has it attempted to show, that it can meet the test for piercing the corporate veil. The fact that MF Global promoted its global reach as a reason for using MF Global entities to conduct foreign futures contract business is, in my opinion, an insufficient basis for ignoring the distinct legal personalities of these entities.

[105] For these reasons, I find that the pre-bankruptcy liquidations do not give rise to a claim provable in bankruptcy within the meaning of s. 121 of the BIA.

Vested Foreign Contracts

[106] Friedberg accepts that once the contracts vested in the Trustee upon MF Global Canada’s bankruptcy, Friedberg ceased to have any interest in those specific contracts. Nevertheless, Friedberg lost the benefit of those contracts as a result of MF Global Canada’s bankruptcy. MF Global Canada had, pre-bankruptcy, a contractual obligation to hold Friedberg’s contracts and only liquidate them upon Friedberg’s instructions. As a result of MF Global Canada’s bankruptcy, it was unable to fulfill that obligation. The contracts were liquidated without direction from Friedberg; indeed, without Friedberg’s knowledge. Because the value of the contracts sold rose post-bankruptcy, Friedberg’s cost of replacing those contracts exceeded what it recovered in its net equity claim.

[107] Friedberg’s ‘non-net equity’ loss with respect to its claim on these liquidations is said to be about $11 million.

[108] The Trustee argues that Friedberg has no claim because it suffered no loss. This is because, it argues, Friedberg has the same limitation of liability vis-à-vis its clients as MF Global Canada had with respect to Friedberg; that is, an exclusion of liability for the errors, omissions and acts of downstream agents. The Trustee argues that because Friedberg had no liability to its clients for the loss associated with the liquidated contracts (all London Metals Exchange contracts), it had no obligation to repurchase those contracts at a higher price post-bankruptcy in order to make its clients whole.

Analysis

[109] The frailties of Friedberg’s claim for losses resulting from the pre-bankruptcy liquidations (caused by the bankruptcy proceedings not of MF Global Canada but of MF Global Canada’s subagents) are not present here.

[110] This group of contracts all vested in the Trustee upon MF Global Canada’s bankruptcy. The Trustee was able to transfer most of the securities which vested to MF Global Canada’s customers in specie. Any post-bankruptcy gain or loss with respect to such securities was therefore for the customer’s account.

[111] In the case of the London Metals Exchange contracts, however, the London Metals Exchange liquidated the contracts in the days immediately following MF Global Canada’s bankruptcy. As a result, these contracts could not be transferred to the customer in specie because they were gone.

[112] Nothing in Part XII of the BIA precludes a person in Freiburg’s shoes from making a non-net equity claim against the general assets of the estate. Like any other creditor, however, a claim of this nature can only be made under s. 121, which requires that the claim be a claim provable in bankruptcy

[113] The three requirements set out in AbitibiBowater are met. There was an obligation which predated the bankruptcy – the obligation to hold the contract until instructed to sell.

[114] I am unable to find any material distinction between Friedberg’s foreign futures contracts and any other pre-bankruptcy contract with a bankrupt which requires ongoing performance. When a contract calling for ongoing performance is breached due to the bankrupt’s failure to provide ongoing performance of that obligation, subject to the requirement that it not be too remote or speculative, the counterparty has a claim provable in bankruptcy against the bankrupt’s estate.

[115] The trustee argues that it is not possible to attach a monetary value to the breach of that obligation because it is too speculative, in that price fluctuations cannot be foreseen. There is a suggestion as well that allowing such a claim would enable Friedberg to speculate on the market at the expense of the estate. I cannot agree. The fluctuations in the market are known on a daily basis. Friedberg is subject to the common law obligation to reasonably mitigate its damages. The fact that the claim involves or may involve pending litigation is not sufficient to bring a claim within the “too remote or speculative” category.

[116] I do not think this situation represents any special risk of ‘cherry picking’ or of shedding the risk of market fluctuations onto the estate. Sometimes a breach of contract may leave the other contracting party better off, in which case it will not sue as it has suffered no damages. If the breach of contract has caused damages, however, the counterparty may sue. Where the party responsible for the breach is bankrupt, that suit must be asserted as a claim provable in bankruptcy against the assets of the estate, subject to pro-rationing with other general creditors who have provable claims.

[117] I also cannot agree with the Trustee’s argument that Friedberg has no claim because it had no legal obligation to replace the liquidated London Metals Exchange contracts.

[118] Friedberg had a contract with MF Global Canada. Friedberg had an account with MF Global Canada. Friedberg is, in my view, able to make a claim for a loss resulting from liquidations conducted in breach of that contract irrespective of whether or not it has indemnity obligations to third parties or defences to such obligations. In any event, Friedberg is not reasonably required to insist upon its strict legal rights vis-à-vis its own clients. Friedberg had a significant financial interest in making its customers whole as opposed to taking the risk of litigating customer claims in reliance upon its standard form limitation of liability.

[119] For these reasons I find that Friedberg has, with respect to the vested contracts, a claim provable in bankruptcy under s. 121 of the BIA.

Should Friedberg’s Claims Be Granted an Equitable Priority?

[120] In addition, Friedberg seeks an equitable priority for its claim against the general fund. It relies on two grounds:

(a) an order for an equitable priority is “in keeping with the spirit and purpose of Part XII of the BIA” to protect customers from losses incurred as a result of the securities firm bankruptcy; and

(b) in connection with the bulk transfer by the trustee of MF Global Canada’s customer accounts and account positions to a new brokerage firm, the court made an order in favour of the CIPF, giving it a priority for its costs of backstopping the transfer to the new brokerage in the interests of the customers. Friedberg says it is entitled to the same protection.

[121] The request for an equitable priority order is dismissed.

[122] Part XII provides a comprehensive code governing how the assets of a bankrupt securities firm are to be distributed, having regard to the challenges raised by customer claims. In that regard, under s. 262(1) customers are granted a priority claim over other creditors with respect to the value of their net equity at the date of bankruptcy.

[123] Unlike the case of Re Portus Alternative Asset Management Inc. (2007), 2007 CanLII 44814 (ON SC), 37 C.B.R. (5th) 120 (Ont. S.C.J.), relied on by Friedberg, there is no functional gap that arises in the distribution scheme under Part XII that merits a departure from its express language. The BIA expressly addresses the circumstance in which there is a surplus after customers’ net equity claims have been satisfied. Those funds are transferred to the general fund. They are then available to general creditors who demonstrate they have a legitimate claim provable in bankruptcy. Indeed, not only is there no “gap”, but Friedberg is asking the court to confer upon Friedberg’s residual claim against the general fund precisely the priority it enjoyed with respect to its net equity claim. Not only is this contrary to the express provisions of Part XII, it is also directly contrary to Justice Campbell’s order and reasons of December 7, 2012 (in which Friedberg’s claim for a priority for these losses was denied).

[124] Friedberg’s request for priority treatment for its residual claim is in part a ‘me too’ argument. The CIPF received a priority, so Friedberg should get one as well. Is also a ‘sour grapes’ argument. Friedberg unsuccessfully opposed the CIPF receiving a priority for its costs of backstopping the transfer of MF Global Canada’s accounts in the hearing before Justice Campbell.

[125] The CIPF occupies a role in the operation of the scheme of Part XII of the BIA which is totally unlike the position occupied by Friedberg. The CIPF is a non-profit, industry-supported entity that operates in the public interest to backstop securities firm losses for the protection of the investing public.

[126] Justice Campbell found that 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. Justice Campbell found that the CIPF priority was founded, conceptually at least, in the language of Part XII itself where, in s. 262(1)(a), reference is made to a priority for the “costs of administration”.

[127] Here, Friedberg’s decision to replace the foreign futures contracts cannot be viewed as a cost of administration of the estate. On the contrary, it was done gratuitously and without any consultation with the Trustee. The fact that Friedberg chose to make payments to ensure that its customers benefited from post-bankruptcy increases in the value of the liquidated foreign futures contracts was not directed towards the administration of the bankrupt estate, or the protection of MF Global Canada’s customers generally but at preserving Friedberg’s own business relationships with its customers, for its own financial benefit.

[128] For these reasons, Friedberg’s request for an equitable priority is dismissed.

Conclusion

[129] In conclusion, Friedberg’s claim against the general fund for losses associated with the Pre-DOB Liquidated Foreign Contracts is dismissed. Friedberg’s claim against the general fund for losses associated with the Vested Foreign Contracts is allowed. Friedberg’s request for an equitable priority for its claim against the general fund is dismissed.

Costs

[130] I urge the parties to reach an accommodation on the question of costs. In the absence of agreement, any party seeking costs shall do so by filing a brief submission (not to exceed three typed double-spaced pages) together with a Bill of Costs within 10 days. Any party wishing to respond to such request shall file a responding submission (subject to the same page limit) within a further seven days.

Penny J.

Date: March 2, 2016

[^1]: That said, I would not have found MF Global Canada responsible for the delay in the transfer or for any misrepresentations.