CITATION: MF Global Canada Co. (Re), 2016 ONSC 4032

COURT FILE NO.: 31-OR-207854-T DATE: 20160617

SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)

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

BEFORE: HAINEY J.

COUNSEL: Edward Babin and Julia Webster, for the Appellant, Joachim Wappler Edmond Lamek and Kyle Plunkett, for KPMG Inc., in its capacity as trustee in bankruptcy of MF Global Canada Co.

HEARD: January 5 and April 22, 2016

ENDORSEMENT

Background

[1] This is a motion by Joachim Wappler (“Wappler”) appealing a Notice of Disallowance issued on September 19, 2014 by KPMG Inc., the trustee in bankruptcy of the estate of MF Global Canada Co. (“MFGC”). MFGC was adjudged bankrupt on November 4, 2011 at which time KPMG Inc. was appointed its trustee in bankruptcy (“Trustee”).

[2] Prior to MFGC’s bankruptcy, Wappler held an account at MFGC containing open gold and silver futures contracts. All of the futures contracts in Wappler’s account at MFGC vested in the Trustee on November 4, 2011, the date of MFGC’s bankruptcy.

[3] At the end of the day on November 3, 2011, which was the day before MFGC’s bankruptcy, Wappler’s account had a net positive balance of $102,655. The net positive balance of his account the following day, at the time of MFGC’s bankruptcy, was $60,915.

[4] After MFGC’s bankruptcy, Wappler’s account was controlled by the Trustee. According to Wappler, the account was “essentially frozen”. His advisor at MFGC, John Kurgan (“Kurgan”), was unable to conduct any trades in Wappler’s account during this period.

[5] On November 17, 2011 all of MFGC’s accounts, including Wappler’s account, were transferred to RBC Dominion Securities (“RBC”) pursuant to a court-approved transfer order (“Transfer Order”).

[6] Because Wappler did not respond to margin calls in respect of his account, RBC liquidated his account on November 23, 2011 and realized a loss of $164,834 (“Deficiency”).

[7] Wappler filed a Creditor Proof of Claim with the Trustee on May 2, 2012 in which he claimed a total of $267,500. His claim was made up of the net positive balance in his account at MFGC on November 3, 2011 of $102,655 and the subsequent Deficiency in his account at RBC of $164,834.

[8] On this motion Wappler claims for the net positive value in his account as of November 3, 2011 of $102,655 or, in the alternative, for the net positive value in his account as of the date of MFGC’s bankruptcy of $60,915.

Positions of the Parties

[9] Wappler submits that the loss in the value of his account between November 3, 2011 and November 4, 2011 was MFGC’s fault. He further submits that the loss in the value of his account after MFGC’s bankruptcy was the responsibility of the Trustee who controlled the account.

[10] The Trustee disallowed Wappler’s claim on September 19, 2012. The Trustee’s reasons for the disallowance of his claim can be summarized as follows:

• Wappler’s net equity claim in the estate of MFGC as of the date of MFGC’s bankruptcy was $60,915.

• Pursuant to the Transfer Order the Trustee transferred all of MFGC’s accounts to RBC on November 17, 2011.

• As of the date of its transfer to RBC Wappler’s account had a net positive balance of $30,765. This was the amount held by RBC to the credit of Wappler as of November 18, 2011.

• Wappler’s account was under-margined both before and at the time of the transfer of the account from the Trustee to RBC. Wappler failed to respond to margin calls from MFGC prior to the date of MFGC’s bankruptcy. He also failed to respond to further margin calls from RBC after his account had been transferred to it. Accordingly, pursuant to Wappler’s customer account agreement with MFGC and the Transfer Order, RBC liquidated Wappler’s account and realized a loss of approximately $164,834. This amount was owed by Wappler to RBC after his account was liquidated (“Wappler Debt”).

• In accordance with the court-approved Transfer and Support Agreement between the Trustee and RBC, the Trustee paid the Wappler Debt to RBC. In exchange, RBC assigned the Wappler Debt to the Trustee.

• In response to Wappler’s claim the Trustee asserts its right of set-off with respect to the Wappler Debt against any amount owing by the Trustee to Wappler. This includes the net equity value of Wappler’s account as of the date of MFGC’s bankruptcy.

[11] Wappler submits that any loss that arose in his account after MFGC’s bankruptcy was due to the mismanagement of MFGC’s bankrupt estate by the Trustee. Wappler maintains, therefore, that he is not responsible for the losses in his account with RBC that led to the Wappler Debt.

[12] Wappler submits that if Kurgan had been able to trade in Wappler’s account after November 3, 2011 he would not have suffered a loss of $102,655 or realized the deficiency in his account with RBC of $164,834.04. Wappler argues that the court should exercise its discretion pursuant to ss. 37 and 192 of the Bankruptcy and Insolvency Act (“BIA”) and order that his claim of $102,665 be allowed. He also seeks a declaration that the Wappler Debt of $164,834 is not his responsibility and cannot be set off against his claim.

Analysis

Wappler’s Claim for $102,655.96

[13] Wappler’s claim to the net positive balance in his account on the day before MFGC’s bankruptcy is based upon an allegation that MFGC breached its contractual duty to Wappler during this 24-hour period and thereby prevented Kurgan from liquidating Wappler’s account on November 3, 2011 when it had a net value of $102,655.96. There is no evidence to support this assertion. Mr. Babin, on behalf of Wappler, submits that I should draw an inference that Kurgan would have done something to prevent the net value of Wappler’s account from declining from approximately $102,000 to approximately $60,000 over this 24-hour period. Kurgan gave no evidence explaining what he would have done to prevent this loss. There is no evidentiary basis upon which I could reasonably draw such an inference. I find that the decline in the value of Wappler’s account during this period was due to market forces and not the result of a contractual breach by MFGC.

[14] For these reasons I find that Wappler’s claim for the net positive balance in his account on November 3, 2011 fails. There was no error on the part of the Trustee in disallowing this aspect of Wappler’s claim.

Wappler’s Claim for $60,915

[15] Wappler submits, in the alternative, that he is entitled to the net positive balance in his account as of the date of MFGC’s bankruptcy which was $60,915.

[16] The starting point for my analysis of this aspect of his claim is Part XII of the BIA. It provides that upon the bankruptcy of a securities firm, all cash and securities held by the firm are to be placed in a customer pool fund. Cash and securities in the customer pool fund are to be allocated to former customers in proportion to the net equity in their accounts.

[17] Net equity is defined in s. 253 of the BIA. The interpretation of net equity in the context of MFGC’s bankruptcy was settled in MF Global Canada Co. (Re), 2012 ONSC 6995, in which C. L. Campbell J. held that for the purposes of MFGC’s bankruptcy proceedings, net equity is to be calculated as the amount owed by MFGC to an account holder as a result of the liquidation by sale or purchase at the close of business of all security positions in an account on the date of the bankruptcy. Wappler relies upon the fact that the Trustee has acknowledged that as of the date of MFGC’s bankruptcy, Wappler had a net positive balance in his account of $60,915. He, therefore, claims to be entitled to payment of this amount by the Trustee.

[18] The Trustee submits that Wappler is not entitled to payment of any amount because Wappler ignored margin calls in respect of his account. MFGC made a margin call on October 28, 2011 in the amount of $326,872. There was a second margin call on November 1, 2011 in the amount of $255,850. As a result, the total margin calls outstanding in respect of Wappler’s account as of November 1, 2011 was $582,722. Wappler did not respond to these margin calls. Wappler was, therefore, indebted to MFGC in this amount pursuant to the terms of his customer account agreement with MFGC at the date of MFGC’s bankruptcy.

[19] Because Wappler’s indebtedness to MFGC arising from the margin calls at the date of MFGC’s bankruptcy exceeded the net positive balance in his account of $60,915, I have concluded that Wappler is owed nothing from the customer pool fund pursuant to Part XII of the BIA.

[20] Further, there is no evidentiary basis to find that either the Trustee or RBC mismanaged Wappler’s account as he alleges. Wappler’s account was handled in the same manner as all other MFGC’s customers’ accounts following its bankruptcy.

[21] In the alternative, the Trustee submits that if I find that any amount is owed by the Trustee to Wappler, it is subject to a set-off because the Wappler Debt exceeds his claim for $60,915. I agree with this submission for the following reasons.

[22] Section 97(3) of the BIA provides that the law of set-off applies to claims made against the estate of a bankrupt. This includes Wappler’s claim against MFGC’s bankrupt estate.

[23] Paragraph 4 of Wappler’s account agreement with MFGC specifies that any securities held on his behalf are “subject to a general lien and right of set off for liabilities of the Customer to MF Global”.

[24] Accordingly, contractual set-off applies to Wappler’s claim against the Trustee. I find that Wappler is responsible for the Wappler Debt under the terms of his customer account agreement with MFGC. The Wappler Debt was validly assigned to the Trustee. It exceeds the amount of Wappler’s claim of $60,915. The BIA and Wappler’s customer account agreement with MFGC permit the Trustee to set off the Wappler Debt of $164,834 against Wappler’s claim of $60,915. The Trustee, therefore, owes nothing to Wappler.

Conclusion

[25] For these reasons I have concluded that there was no error on the part of the Trustee in disallowing Wappler’s claim.

[26] Wappler’s motion is, therefore, dismissed.

Costs

[27] I urge counsel to settle costs. If they cannot they may schedule a 9:30 a.m. appointment before me to address this issue.

HAINEY J.

Date: June 17, 2016