FACTUM (Returnable June 12, 2017)

Transcription

1 Court File No. 31-0R T ONTARIO SUPERIOR COURT OF JUSTICE (IN BANKRUPTCY AND INSOLVENCY) IN THE MATTER OF THE BANKRUPTCY OF MF GLOBAL CANADA CO., OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO FACTUM (Returnable June 12, 2017) BORDEN LADNER GERVAIS LLP Bay Adelaide Centre, East Tower 22 Adelaide St. W. Toronto, ON M5H 4E3 JAMES D.G. DOUGLAS / LSUC #20569H Tel: (416) Fax: (416) jdouglas@blg.com ROGER JAIPARGAS / LSUC # 43275C Tel: Fax: (416) rjaipargas@blg.com EVITA FERREIRA / LSUC# 69967K Tel: Fax: (416) eferreira@b1g.com Lawyers for KPMG Inc., in its capacity as Trustee of MF Global Canada Co., a bankrupt

2 Court File No. 31-OR T ONTARIO SUPERIOR COURT OF JUSTICE (IN BANKRUPTCY AND INSOLVENCY) IN THE MATTER OF THE BANKRUPTCY OF MF GLOBAL CANADA CO., OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO PART I OVERVIEW 1. The Trustee has brought this motion to seek an Order substantially in the form of order attached at Tab 4 of the Motion Record, for, inter alia, the following relief: (a) advice and directions in connection with the payment of the CIPF Top-Up Claim, as agreed to by the Trustee and CIPF; (b) that there shall be no levy payable to the Superintendent of Bankruptcy in respect of the payment of the CIPF Top-Up Claim; (c) that upon payment by the Trustee of the CIPF Top-Up Claim to CIPF, CIPF shall have no further claims against the estate of MI Global Canada; (d) approving the Ninth Report dated May 26, 2017, and the activities and actions of the Trustee as set out therein; (e) approving the Statement of Receipts and Disbursements for the period November 4, 2011 to April 30, 2017; (f) approving the Fourth Report of the Independent Cost Counsel dated February 22, 2017; (g) approving the accounts of the Trustee for the period from June 1, 2016 to December 31, 2016 (the "Trustee Fee Period"), for fees in the amount of $64,988 and disbursements in the amount of $7,917 (plus applicable HST on the foregoing 2

3 amounts) for services rendered and recorded during the Trustee Fee Period; (h) approving the accounts of BLG for the period from June 1, 2016 to December 31, 2016 (the"blg Fee Period"), for fees in the amount of $92,609 and disbursements in the amount of $1,719 (plus applicable HST on the foregoing amounts) for services rendered and recorded during the BLG Fee Period; (i) approving the accounts of Gardiner Roberts LLP, as Independent Cost Counsel appointed by Order of Mr. Justice Campbell dated November 23, 2012, for the period from November 20, 2012 to April 5, 2015 and for the period from May 5, 2015 to February 28, 2017 (collectively, the "ICC Fee Periods"), including fees in the amount of $77,009 and disbursements in the amount of $ (plus applicable HST on the foregoing amounts) for services rendered and recorded during the ICC Fee Periods; and (j) such further and other relief as counsel may advise and this Court may permit. 2. On November 4, 2011, KPMG Inc. was appointed as trustee-in-bankruptcy ("Trustee") of MF Global Canada Co. ("MF Global Canada") by Order of Mr. Justice Campbell (the "Bankruptcy Order"). MF Global Canada was, prior to the making of the Bankruptcy Order, a securities firm within the meaning of Part XII of the Bankruptcy and Insolvency Act, R.S.C. 1985, c B-3 (the "BIA"). 3. The Canadian Investor Protection Fund ("CIPF") is a "customer compensation body" as defined at section 253 of the BIA. As a customer compensation body, CIPF is given specific recognition of its unique role in respect of a bankruptcy under Part XII of the BIA, including the power to file an application for a bankruptcy order pursuant to section 256(1)(c) of the BIA, the right to be consulted by the Trustee and the right to act as an inspector in a Part XII bankruptcy pursuant to section 264 of the BIA. 4. CIPF issued the application for the Bankruptcy Order. 5. On April 23, 2014, CIPF filed a proof of claim on a without prejudice basis with the 3

4 Trustee in respect of certain claims it has advanced in the MF Global Canada Estate. On August 29, 2016, Regional Senior Justice Morawetz issued an Order approving the components of CIPF's claim related to the costs of administration and assistance with estate matters, as further set out below at paragraphs 9 and Goodmans LLP, counsel to CIPF, delivered a letter dated May 4, 2017 (the "Goodmans Letter") to Borden Ladner Gervais LLP ("BLG"), counsel to the Trustee, detailing the remaining claims advanced by CIPF in the estate of MF Global Canada, as set out in the ninth report of the Trustee dated May 26, 2017 (the "Ninth Report"). 7. The Trustee has reviewed the claims advanced in the Goodmans Letter with the inspectors, who have authorized the Trustee to bring a motion for advice and directions in connection with the payment of certain claims advanced by CIPF in the estate of MF Global Canada, in the amount of $1,927,521.86, plus interest thereon up to the date of payment to CIPF, as described in the Ninth Report (the"cipf Top-Up Claim"). 8. The Trustee recommends that the Court authorize the Trustee to pay to CIPF the CIPF Top-Up Claim, as that would be a fair and equitable result given the circumstances under which the claim arose, the unique role that CIPF has played in the MF Global Canada bankruptcy and the support that CIPF provided to the Trustee in the administration of the estate of MF Global Canada. PART II FACTS 9. One of the primary outstanding items in the administration of the estate from a claim perspective, as described in the eight report of the Trustee dated August 19, 2016 (the "Eighth Report") and the Ninth Report, is the resolution of the claim filed by CIPF on April 23, 2014, in the total amount of $2,789,117, which claim asserted a priority over unsecured creditors. The components of CIPF's claim are as follows: a. Costs of Administration - $56,344 CIPF retained BLG to prepare materials to obtain the Bankruptcy Order in respect of MF Global Canada. Pursuant to 4

5 s.136(1)(b) of the BIA, such disbursements rank in priority to the claims of unsecured creditors; b. Assistance with estate matters - $322,768 At the beginning of the estate's administration, CIPF retained Goodmans LLP to, amongst other things, assist it in providing assistance to the Estate. Such assistance was requested by the Trustee and included, inter alia, the following: i. assisting with the transfer of the majority of customer accounts to RBC Dominion Securities Inc. (the "RBCDS Transaction"), pursuant to the Account Transfer and Support Agreement between the Trustee and RBC Dominion Securities Inc. ("RBCDS") dated November 17, 2011 (the "Transfer Agreement") and the Account Transfer, Vesting and Approval Order dated November 14, 2011 (the "Support Order"). A copy of the Transfer Agreement and the Support Order are attached to the Ninth Report as Appendix "D" and Appendix "E" respectively; ii. the provision of liquidity and financial support to the Trustee to effect the RBCDS Transaction; iii. negotiating the cross-border settlement with the Securities Investor Protection Act Trustee of MF Global Inc.; iv. various settlements with creditors involving the Trustee and CIPF; and v. Court appearances in support of the steps taken by the Trustee in the administration of the estate. c. "Top ups" paid by CIPF to customers - $30,106 These amounts were paid by CIPF to customers that were excluded from the RBCDS Transaction notwithstanding that these customers would have qualified to be included in this

6 transaction (the Trustee's inability to access certain customer information on a timely basis was the reason these accounts were excluded); and d. "Top ups" paid by CIPF to customers pursuant to tri-partite settlement agreements - $2,379,899 These customers were initially excluded from the RBCDS Transaction as the cash balances required to transfer the accounts exceeded CIPF's coverage limits. The "top up" amounts were paid by CIPF to the customers after consultation with the Trustee, and pursuant to three party settlements between the Customer, the Trustee and CIPF. Ninth Report at para In the Eighth Report, the Trustee recommended to the Court that it approve the reimbursement of CIPF for components (a) and (b) of their claim, as noted above, which was accepted by the Court pursuant to an Order made by Regional Senior Justice Morawetz on August 29, 2016 (the "Fee Approval Order"). A copy of the Fee Approval Order is attached to the Ninth Report as Appendix "F". The Trustee subsequently paid components (a) and (b) of the CIPF claim in two separate distributions on August 31, 2016 and January 23, 2017, in the amount of $379,112, plus post judgment interest at the rates specified under s. 127 of the Courts of Justice Act. Ninth Report at para The Goodmans Letter restated CIPF's claim in relation to the "top up" payments made by it as referenced in sub-paragraphs 9(c) and (d) above. The claim for these payments is in respect of amounts paid by CIPF to five former customers of MF Global Canada, whose accounts were transferred as part of the RBCDS Transaction at less than their full net equity value at the date of transfer, thereby giving rise to the customers' claims against CIPF, which in turn gave rise to CIPF's claim for what it characterizes as the "Excluded Top-up Claims". The five former customers of MF Global Canada were Thi Dong Tam Phan ("Phan"), Synergy Applied Numerics ("Synergy"), HyLife Ltd. ("HyLife"), XL Foods Inc. ("XL Foods") and Munday Home Sales Ltd. ("Munday" and collectively, the "Excluded Five"). The aggregate net amount claimed by CIPF in respect of the 6

7 Excluded Top-up Claims is $2,410,006, together with interest at the statutory rate of 5% per annum from the date that the top up payments were made by CIPF to the date of payment of the claim by the Estate. Ninth Report at para The Trustee accepts and adopts as substantially correct the facts as detailed in the section of the Goodmans Letter entitled "Background". More particularly, the Trustee agrees that both it and CIPF shared the view at the date of bankruptcy of MF Global Canada that an early bulk transfer of the customer accounts of MF Global Canada was in the best interests of the customers and the estate. A significant proportion of the securities held in the customer accounts of MF Global Canada were futures contracts which were subject to daily and potentially volatile fluctuations in value and to daily cash calls or cash deposits in relation to those fluctuations in value. As a result, the value of the "net equity" of a customer's account at the date of bankruptcy for the purposes of Part XII of the BIA could vary significantly from the value of the account holdings calculated on the same basis at the date of transfer of the account to a new dealer, which variance would likely only be exacerbated by the passage of time. Ninth Report at para Neither RBCDS nor any other securities dealer was prepared to accept a bulk transfer of the MF Global Canada customer accounts at less than full value at the date of transfer, with no margin deficiencies. The fluctuations in value described in paragraph 12 above, coupled with the fact that the Trustee was limited under Part XII of the BIA to transferring the customers' net equity at the date of bankruptcy, meant that a bulk transfer to RBCDS could only be executed with the liquidity and financial support of CIPF. Moreover, in light of the uncertainties of asset recovery in the estate at the time of the RBCDS Transaction, the Trustee determined that it could only provide irrevocable funding for the bulk transfer equal to 80% of the customers' net equity at the date of bankruptcy. Ninth Report at para Accordingly, and at the request of the Trustee, CIPF agreed to provide financial support for the remaining 20% of the customers' net equity at the date of bankruptcy and for the 7

8 difference between the value of the customers' net equity at the date of bankruptcy and the full value of the customers' accounts, with no margin deficiencies, at the date of transfer (i.e., effectively, "net equity" at the date of transfer), provided that the aggregate of these two amounts fell within CIPF's coverage limit of $1 million. Ninth Report at para In order to provide the financial support referred to in paragraph 14 above, CIPF extended its coverage period for all MF Global Canada customers from the date of bankruptcy, being the date to which CIPF coverage would normally apply, to the date of transfer of the accounts pursuant to the RBCDS Transaction. This exposed CIPF to claims by all MF Global Canada customers up to its coverage limit of $1 million, not only for any shortfall in the customer pool as at the date of bankruptcy, but also for the difference between the value of the customers' net equity at the date of bankruptcy and the value of their net equity at the date of transfer, regardless of whether the customers qualified for the RBCDS Transaction. Ninth Report at para The RBCDS Transaction allowed the Trustee, with the financial support of CIPF, to move the vast majority of the MF Global Canada customer accounts, at full value and with no margin deficiencies, in a bulk transfer to RBCDS on or about November 17, The bulk transfer was completed in accordance with the terms of the Transfer Agreement. Pursuant to the Support Order, the Court authorized the Trustee to enter into the Transfer Agreement and to complete the RBCDS Transaction. Insofar as CIPF provided financial and liquidity support to the Trustee in order to complete the Transfer Agreement, the Support Order further granted CIPF a claim against the "customer pool fund" as defined in section 261 of the BIA and a priority charge (subject to express exceptions) against all of the property of the Estate vested in the Trustee. The terms of the financial and liquidity support arrangements between the Trustee and CIPF were subsequently memorialized in the Indemnity, Funding and Reimbursement Agreement between the Trustee and CIPF dated March 5, 2012 (the"support Agreement"). Ninth Report at para The accounts of HyLife, XL Foods and Munday did not qualify for full financial support 8

9 from CIPF in relation to the RBCDS Transaction by virtue of the fact that the aggregate size of the financial support required to fund each of their individual account transfers at the date of transfer exceeded the CIPF coverage limit. Accordingly, they were designated as "Excluded Accounts" under the Transfer Agreement and were not covered by the terms of either the Support Order or the Support Agreement. The accounts of Phan and Synergy, on the other hand, would in retrospect have qualified for financial support from CIPF in relation to the RBCDS Transaction, but were nevertheless similarly designated as Excluded Accounts under the Transfer Agreement because the Trustee was missing information in respect of the accounts at the relevant time and was therefore unable to accurately quantify the value of the accounts and any shortfalls in net equity at the date of bankruptcy or the date of transfer. Ninth Report at para Due to the fact that CIPF had extended its coverage period for all MF Global Canada customers to the date of transfer under the RBCDS Transaction and due to CIPF's concerns about whether therefore the claims of the Excluded Five might exceed its coverage limit, the Trustee and CIPF agreed that the Trustee would transfer the accounts of HyLife, XL Foods and Munday to RBCDS at the value of their net equity at the date of bankruptcy, subject to the CIPF $1 million coverage limit. In the case of Phan and Synergy, the accounts were transferred to RBCDS at the estimated value of their net equity at date of bankruptcy. In other words, the accounts of the Excluded Five (the "Excluded Five Accounts") were not transferred to RBCDS at the value of their net equity at the date of transfer as was the case with the other MF Global Canada customer accounts that were subject to the bulk transfer. Ninth Report at para As matters turned out, the estate recovery was sufficient to allow the Trustee to ultimately fund 100% of all customers' claims at the higher of either the net equity at the date of bankruptcy or the net equity at the date of transfer to RBCDS. However, since the Trustee only funded the Excluded Five Accounts for transfer purposes up to 100% of the value of their net equity at the date of bankruptcy (except in the case of Munday where CIPF's coverage limit of $1 million resulted in Munday receiving less than 100% 9

10 of the value of its net equity at the date of bankruptcy), this left CIPF exposed to claims by the Excluded Five for the difference between the value of their net equity at the date of bankruptcy and the value of their net equity at the date of transfer to RBCDS, subject to the CIPF coverage limit of $1 million. These claims were paid by CIPF as outlined in the Goodmans Letter, thereby giving rise to the equitable claim by CIPF against the estate as detailed in that letter. Ninth Report at para The total of the claims or top up payments made by CIPF to the Excluded Five was $2,410,006. However, the net amount claimed by CIPF against the estate in respect of the top up payments is $1,927,522, due to the fact that an overpayment of $482,484 was made by the Trustee to HyLife at the time of the RBCDS Transaction which, as further particularized in the Goodmans Letter, CIPF agreed to reimburse the Trustee for at the time of the settlement of HyLife's claim. Ninth Report at para The amount claimed by CIPF after conversion to Canadian currency is $1,927,522. In making this conversion, CIPF has used the exchange rate applicable at the date that the top up payments to the Excluded Five were actually made, as opposed to the exchange rate applicable at the date of bankruptcy. The benefit to the estate of using the exchange rate applicable at the date of payment is approximately $54,000. Similarly, CIPF is claiming interest on the amounts paid to the Excluded Five at the rate of 5% per annum, but only from the date the payments were actually made as opposed to from the date of bankruptcy. Ninth Report at para CIPF is also seeking the payment of its claim without a deduction on account of the levy payable to the Superintendent of Bankruptcy pursuant to s.147(1) of the BIA. Ninth Report at para On May 18, 2017, the Inspectors of the MF Global Canada estate approved, subject to Court approval, the Trustee's recommendation to admit components (c) and (d) of the CIPF claim with interest at the statutory rate of 5% per annum from the date that the top 10

11 up payments were made by CIPF to the date of payment of the claim by the estate. Ninth Report at para 30. PART III ISSUES 24. The issues on this motion are: (a) Should this Court authorize and direct the Trustee to pay the CIPF Top-Up Claim? (b) If so, should this Court authorize and direct the Trustee to pay the CIPF Top-Up Claim without a deduction on account of the levy payable to the Superintendent of Bankruptcy pursuant to section 147(1) of the BIA? PART IV ARGUMENT A. Payment of CIPF Top-Up Claims Deference to Trustees on Motions for Advice and Directions 25. Section 34(1) of the BIA provides a mechanism by which the trustee may apply to the Court for directions in relation to any matter affecting the administration of the estate of the bankrupt. The court will give its directions in writing, if any, that "appear proper in the circumstances". BIA, s. 34(1). 26. Where the trustee has offered a solution in its motion for directions, courts have deferred to the trustee, particularly where the relief sought was not prejudicial to any of the creditors. In Re Poisson, the Saskatchewan Court of Queen's Bench agreed with the trustee and granted the request for equitable relief on the ground that it did not prejudice any of the creditors of the bankrupt's estate. The Court also deferred to the trustee's judgment where the solution proposed was practical: 19 The solution proposed by the trustee offers a practical resolution to this matter. It provides flexibility to the court to fashion an order which does justice to the parties while at the same time preserves the integrity of the bankruptcy process. Re Poisson, 2000 CarswellSask 316, 17 CBR (4') 292 at paras 18-20; see also Re

12 Cattell, 1991 CarswellBC 479, 6 CBR (3d) 178 at paras The Courts have recognized the importance of accepting the proposed solution by a trustee where it is equitable and is in line with common sense and reason. In considering a motion brought under section 34 of the BIA, the Saskatchewan Court of Queen's Bench noted the following in (Trustee of) v Nelson: It is well established that in exercising its discretion a court must balance three things: the interest of the creditors in being paid, the interest of the rehabilitation of the bankrupt and the integrity of the bankruptcy process and the public's perception of it (see for example Re Shakell (1988), 70 C.B.R. (N.S.) 270 (Ont. S.C.)). In an oft-quoted passage, the court in Re Crowell (1989), 74 C.B.R. (N.S.) 121 (N.S.T.D.), said that the whole matter must be looked at in "the light of reason, common sense and humanity", having regard to the fundamental policy of the Act. Nelson (Trustee of) v Nelson, 1995 CarswellSask 868, 186 Sask R 314 at para In particular, where the trustee is administering a bankrupt's estate with surplus income, Justice Iacobucci, writing for the majority in Marzetti v Marzetti, recognized the broad discretion that should be given to trustees. Marzetti v Marzetti, [1994] 2 SCR 765, 1994 CarswellAlta 346 at para 86. Trustee's Recommendation given CIPF's Assistance to MF Global Canada Estate 29. The Trustee is prepared to support the CIPF Top-Up Claim due to the fact that CIPF would not have been exposed to the claims made by the Excluded Five for the top up payments had CIPF not acceded to the Trustee's request for financial support as referred to in paragraph 14 above and therefore extended its coverage period for all customers of MF Global Canada to the date of transfer under the RBCDS Transaction. Ninth Report para General equitable and restitutionary principles require that CIPF be repaid the amounts that it has advanced to or on behalf of the Trustee in the administration of the MF Global Canada estate. Goldin, Re, 2003 CarswellOnt 2626, 65 OR (3d) 691 at paras

13 31. CIPF is a "customer compensation body" as defined at section 253 of the BIA. As a customer compensation body, CIPF is given specific recognition of its unique role in respect of a bankruptcy under Part XII of the BIA, including the power to file an application for a bankruptcy order pursuant to section 256(1)(c) of the BIA, the right to be consulted by the Trustee and to act as an inspector in a Part XII bankruptcy pursuant to section 264 of the BIA. BIA, ss. 253, 256 and The liquidity support provided by CIPF not only benefitted the customers of MF Global Canada, who were able to have their losses and disruption minimized, but the Trustee as well by being able to effect the RBCDS Transaction while at the same time being able to maintain the Holdback to protect itself, both for its fees and against potential liability. Goodmans Letter at The payments made by CIPF with respect to the Excluded Five Accounts were not made gratuitously. The Trustee decided to transfer the Excluded Five Accounts and CIPF was, as a result, required to pay the amounts of the CIPF Top-Up Claim, regardless of the fact that the Excluded Five Accounts were initially intended to be excluded from the RBCDS Transaction. Goodmans Letter at The Trustee as well as this Court should be guided by the principles set out in Alary, Re regarding when it is appropriate to use its discretion to make a payment. In Alary, Re, the Court held that when exercising its discretion in bankruptcy and insolvency proceedings, the Court should be guided by the following factors: what is just and equitable in the particular circumstances from the perspective of the creditors and the bankrupt; (ii) discretion should properly balance the interests of the parties and any prejudice; (iii) the Court's exercise of discretion must be reasonable; (iv) the Court must not erode confidence in, or frustrate the purposes of, the insolvency legislation; and (v) the Court should endeavor to provide certainty to other commercial parties when 13

14 addressing a similar situation. Alary, Re, 2016 BCSC 2108, 2016 CarswellBC 3189 at para Considering the factors set out above, the Trustee submits that, similar to Alary, Re, while there is no specific provision in the relevant legislation that provides clear guidance on the relief sought, "from a public policy perspective, and based on a proper interpretation of the Bankruptcy and Insolvency Act, the Court should exercise its discretion in favour of an order" authorizing and directing the Trustee to pay the CIPF Top-Up Claim. Alary, Re, 2016 BCSC 2108, 2016 CarswellBC 3189 at para Moreover, there is a surplus in the estate of MF Global Canada. There are no creditors competing with CIPF for payment and all creditors will be paid what they are owed, with interest. It would be inequitable if the shareholder of MF Global Canada were to be paid any portion of the surplus when CIPF has not been repaid the amounts that it advanced for the benefit of the administration of the estate and the customers of MF Global Canada. Goodmans Letter at Given that there is a surplus in the estate, the Trustee also submits that interest should be paid on the amounts to be repaid to CIPF. The Trustee is of the view that the appropriate interest rate is that which is being paid to the other creditors of the MF Global Canada estate, being 5% per annum, which is the amount prescribed by the BIA. The interest payable to CIPF would only start on the dates that CIPF made the payments giving rise to the CIPF Top-Up Claim to the date of repayment by the Trustee. The Trustee also supports CIPF's claim for interest because it is reasonable in duration in light of the expenditures made by CIPF to settle the top up claims of the Excluded Five. Goodmans Letter at 11; Ninth Report at para The Trustee recommends that the Court authorize and direct the Trustee to pay to CIPF the CIPF Top-Up Claim with 5% interest per annum from the dates that CIPF made the payments to the date that CIPF is-repaid, as that would be a fair and equitable result given (i) the circumstances under which the claim arose, (ii) the unique role that CIPF has played in the MF Global Canada bankruptcy and (iii) the support that CIPF provided to 14

15 the Trustee in the administration of the MF Global Canada estate and its customers. B. Payment of CIPF Top-Up Claim Without Deduction of Superintendent's Levy 39. The Trustee submits that the CIPF Top-Up Claim is not a "claim provable" in bankruptcy under section 121 of the BIA. Instead it is a remedial claim against the MF Global Canada estate for repayment of amounts advanced during the administration of the estate. As such, the Trustee is of the view that the levy of the Superintendent of Bankruptcy pursuant to section 147 of the BIA is inapplicable here. Goodmans Letter at Section 147(1) of the BIA provides that the levy of the Superintendent is applicable to "all payments, except the costs referred to in subsection 70(2), made by the trustee by way of dividend or otherwise on account of the creditor's claims..." The definition of "creditor", pursuant to section 2 of the BIA, is "a person having a claim provable as a claim under this Act". Since only payments "on account of the creditor's claims" are subject to the Superintendent's levy, and a "creditor" means a person with a "claim provable", it follows that only those persons with a "claim provable" must bear the levy. BIA, s. 147(1). 41. The Trustee submits that the CIPF Top-Up Claim is not a "claim provable" within the meaning of section 121(1) of the BIA, which provides as follows: Claims provable 121 (1) All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt's discharge 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. BIA, s. 121(1). 42. The CIPF Top-Up Claim arose as a result of payments made by CIPF after the date of bankruptcy, on account of the Trustee including the Excluded Five Accounts in the RBCDS Transaction. The Trustee submits that the CIPF Top-Up Claim is a remedial claim against the MF Global Canada estate for repayment of amounts advanced during 15

16 the administration of the estate, and not a "claim provable" to which the levy of the Superintendent would normally apply. 43. For the foregoing reasons, the Trustee submits that the levy of the Superintendent contemplated by section 147 of the BIA is inapplicable to the CIPF Top-Up Claim. PART V RELIEF REQUESTED 44. The Trustee requests that this Court grant the Order in the form included at Tab 4 of the Motion Record. ALL OF WHICH IS RESPECTFULLY SUBMITTED this 2nd day of June, g rmaks James D.G. Douglas / Roger Jaipargas / Evita 1-rreira Lawyers for KPMG Inc., in its capacity as Trustee of MF Global Canada Co., a bankrupt 16

17 SCHEDULE "A" LIST OF AUTHORITIES 1. Re Poisson, 2000 CarswellSask 316, 17 CBR (4th) Re Cattell, 1991 CarswellBC 479, 6 CBR (3d) Nelson (Trustee of) v Nelson, 1995 CarswellSask 868, 186 Sask R Marzetti v Marzetti, [1994] 2 SCR 765, 1994 CarswellAlta Goldin, Re, 2003 CarswellOnt 2626, 65 OR (3d) Alary, Re, 2016 BCSC 2108, 2016 CarswellBC 3189.

18 SCHEDULE "B" STATUTES Bankruptcy and Insolvency Act, RSC 1985, c B-3, as amended Trustee may apply to court for directions 34 (1) A trustee may apply to the court for directions in relation to any matter affecting the administration of the estate of a bankrupt and the court shall give in writing such directions, if any, as to it appear proper in the circumstances. To report to court after three years (2) Where an estate has not been fully administered within three years after the bankruptcy, the trustee shall, if requested to do so by the Superintendent, report that fact to the court as soon as practicable thereafter, and the court shall make such order as it considers fit to expedite the administration. Notice to Superintendent's division office (3) The trustee must send notice to the Superintendent's division office of the day and time when any application for directions made under subsection (1) is to be heard and of the day and time when the trustee intends to report to the court as required by the Superintendent under subsection (2). Claims provable 121 (1) All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt's discharge 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.

19 Contingent and unliquidated claims (2) The determination whether a contingent or unliquidated claim is a provable claim and the valuation of such a claim shall be made in accordance with section 135. Debts payable at a future time (3) A creditor may prove a debt not payable at the date of the bankruptcy and may receive dividends equally with the other creditors, deducting only thereout a rebate of interest at the rate of five per cent per annum computed from the declaration of a dividend to the time when the debt would have become payable according to the terms on which it was contracted. Family support claims (4) A claim in respect of a debt or liability referred to in paragraph 178(1)(b) or (c) payable under an order or agreement made before the date of the initial bankruptcy event in respect of the bankrupt and at a time when the spouse, former spouse, former common-law partner or child was living apart from the bankrupt, whether the order or agreement provides for periodic amounts or lump sum amounts, is a claim provable under this Act. Levy payable out of dividends for supervision 147 (1) For the purpose of defraying the expenses of the supervision by the Superintendent, there shall be payable to the Superintendent for deposit with the Receiver General a levy on all payments, except the costs referred to in subsection 70(2), made by the trustee by way of dividend or otherwise on account of the creditor's claims, including Her Majesty in right of Canada or of a province claiming in respect of taxes or otherwise. Rate of levy (2) The levy referred to in subsection (1) shall be at a rate to be fixed by the Governor in Council and shall be charged proportionately against all payments and deducted therefrom by the trustee before payment is made.

20 Definitions 253 In this Part, customer includes (a) a person with or for whom a securities firm deals as principal, or agent or mandatary, and who has a claim against the securities firm in respect of a security received, acquired or held by the securities firm in the ordinary course of business as a securities firm from or for a securities account of that person (i) for safekeeping or deposit or in segregation, (ii) with a view to sale, (iii) to cover a completed sale, (iv) pursuant to a purchase, (v) to secure perfoiiiiance of an obligation of that person, or (vi) for the purpose of effecting a transfer, (b) a person who has a claim against the securities firm arising out of a sale or wrongful conversion by the securities firm of a security referred to in paragraph (a), and (c) a person who has cash or other assets held in a securities account with the securities firm, but does not include a person who has a claim against the securities firm for cash or securities that, by agreement or operation of law, is part of the capital of the securities firm or a claim that is subordinated to claims of creditors of the securities firm; (client) customer compensation body means a prescribed body and includes, unless it is prescribed to be excluded from this definition, the Canadian Investor Protection Fund; (organisme d'indemnisation des clients)

21 customer name securities means securities that on the date of bankruptcy of a securities firm are held by or on behalf of the securities firm for the account of a customer and are registered or recorded in the appropriate manner in the name of the customer or are in the process of being so registered or recorded, but does not include securities registered or recorded in the appropriate manner in the name of the customer that, by endorsement or otherwise, are negotiable by the securities firm; (valeur mobiliere immatriculee) deferred customer means a customer whose misconduct, either in the customer's capacity as a customer or otherwise, caused or materially contributed to the insolvency of a securities firm; (client responsable) eligible financial contract [Repealed, 2007, c. 29, s. 101] hold, in relation to a security, includes holding it in electronic form; (detenir) net equity means, with respect to the securities account or accounts of a customer, maintained in one capacity, the net dollar value of the account or accounts, equal to the amount that would be owed by a securities firm to the customer as a result of the liquidation by sale or purchase at the close of business of the securities firm on the date of bankruptcy of the securities firm, of all security positions of the customer in each securities account, other than customer name securities reclaimed by the customer, including any amount in respect of a securities transaction not settled on the date of bankruptcy but settled thereafter, less any indebtedness of the customer to the securities firm on the date of bankruptcy including any amount owing in respect of a securities transaction not settled on the date of bankruptcy but settled thereafter, plus any payment of indebtedness made with the consent of the trustee after the date of bankruptcy; (capitaux nets) open contractual commitment means an enforceable contract of a securities firm to purchase or sell a security that was not completed by payment and delivery on the date of bankruptcy; (contrat en cours) securities firm means a person who carries on the business of buying and selling securities from, to or for a customer, whether or not as a member of an exchange, as principal, or agent or mandatary, and includes any person required to be registered to enter into securities transactions

22 with the public, but does not include a corporate entity that is not a corporation within the meaning of section 2; (courtier en valeurs mobilieres) security means any document, instrument or written or electronic record that is commonly known as a security, and includes, without limiting the generality of the foregoing, (a) a document, instrument or written or electronic record evidencing a share, participation right or other right or interest in property or in an enterprise, including an equity share or stock, or a mutual fund share or unit, (b) a document, instrument or written or electronic record evidencing indebtedness, including a note, bond, debenture, mortgage, hypothec, certificate of deposit, commercial paper or mortgage-backed instrument, (c) a document, instrument or written or electronic record evidencing a right or interest in respect of an option, warrant or subscription, or under a commodity future, financial future, or exchange or other forward contract, or other derivative instrument, including an eligible financial contract, and (d) such other document, instrument or written or electronic record as is prescribed. (valeur mobiliere ou titre) Applications re securities firm 256 (1) In addition to any creditor who may file an application in accordance with sections 43 to 45, an application for a bankruptcy order against a securities firm may be filed by (a) a securities commission established under an enactment of a province, if (i) the securities firm has committed an act of bankruptcy referred to in section 42 or subsection (2) of this section within the six months before the filing of the application and while the securities firm was licensed or registered by the securities commission to carry on business in Canada, and

23 (ii) in the case in which the act of bankruptcy was that referred to in subsection (2), the suspension referred to in that subsection is in effect when the application is filed; (b) a securities exchange recognized by a provincial securities commission, if (i) the securities firm has committed an act of bankruptcy referred to in section 42 or subsection (2) of this section within the six months before the filing of the application and while the securities firm was a member of the securities exchange, and (ii) in the case in which the act of bankruptcy was that referred to in subsection (2), the suspension referred to in that subsection is in effect when the application is filed; (c) a customer compensation body, if (i) the securities firm has committed an act of bankruptcy referred to in section 42 or subsection (2) of this section within the six months before the filing of the application and while the securities firm had customers whose securities accounts were protected, in whole or in part, by the customer compensation body, and (ii) in the case in which the act of bankruptcy was that referred to in subsection (2), the suspension referred to in that subsection is in effect when the application is filed; and (d) a person who, in respect of property of a securities firm, is a receiver within the meaning of subsection 243(2), a receiver-man-ager, a liquidator or any other person with similar functions appointed under a federal or provincial enactment relating to securities that provides for the appointment of that other person, if the securities firm has committed an act of bankruptcy referred to in section 42 within the six months before the filing of the application.

24 Interpretation (2) For the purposes of paragraphs (1)(a) to (c), (a) the suspension by a securities commission referred to in paragraph (1)(a) of a securities firm's registration to trade in securities, or (b) the suspension by a securities exchange referred to in paragraph (1)(b) of a securities firm's membership in that exchange constitutes an act of bankruptcy if the suspension is due to the failure of the firm to meet capital adequacy requirements. Service on securities commission (3) If (a) a securities exchange files an application under paragraph (1)(b), or (b) a customer compensation body files an application under paragraph (1)(c), a copy of the application must be served on the securities commission, if any, having jurisdiction in the locality of the securities firm where the application was filed, before (c) any prescribed interval preceding the hearing of the application, or (d) any shorter interval that may be fixed by the court and that precedes the hearing of the application. Trustee to consult customer compensation body 264 Where the accounts of customers of a securities firm are protected, in whole or in part, by a customer compensation body, the trustee shall consult the customer compensation body on the administration of the bankruptcy, and the customer compensation body may designate an inspector to act on its behalf.

25 Bankruptcy and Insolvency General Rules, CRC, c 368, as amended Rate of Levy 123 (1) Subject to subsection (2) and (3), the rate of levy payable on all payments, pursuant to section 147 of the Act, is (a) five per cent, if the amount of payments is $1,000,000 or less; (b) five per cent of the first $1,000,000, plus one and one-quarter per cent of the amount in excess of $1,000,000, if the amount of payments exceeds $1,000,000 but is not more than $2,000,000; or (c) five per cent of the first $1,000,000, one and one-quarter per cent of the second $1,000,000, plus one-quarter of one per cent of the amount in excess of $2,000,000, if the amount of payments exceeds $2,000,000. (2) The rate of levy payable in a proposal is (a) five per cent, if the amount of payments is $1,000,000 or less; (b) five per cent of the first $1,000,000, plus one and one-quarter per cent of the amount in excess of $1,000,000, if the amount of payments exceeds $1,000,000 but is not more than $2,000,000; or (c) five per cent of the first $1,000,000, one and one-quarter per cent of the second $1,000,000, plus zero per cent of the amount in excess of $2,000,000, if the amount of payments exceeds $2,000,000. (3) The rate of levy payable for an estate under summary administration is (a) 100 per cent, if the amount of payments is $200 or less; or (b) 100 per cent of the first $200 plus zero per cent of the amount in excess of $200, if the amount of payments exceeds $200. (4) The rate of levy set out in subsection (3) applies to all estates under summary administration for which the final statement of receipts and disbursements has been received by the Division Office on or after the date of coming into force of that subsection.

26 Court File No. 31-OR T IN THE MATTER OF THE BANKRUPTCY OF MF GLOBAL CANADA CO., OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO ONTARIO SUPERIOR COURT OF JUSTICE (IN BANKRUPTCY AND INSOLVENCY) PROCEEDINGS COMMENCED AT TORONTO FACTUM (Returnable June 12, 2017) BORDEN LADNER GERVAIS LLP Bay Adelaide Centre, East Tower 22 Adelaide St. W. Toronto, ON M5H 4E3 James D.G. Douglas / LSUC #20569H Tel: (416) Fax: (416) jdouglas@blg.com Roger Jaipargas / LSUC #43275C Tel: (416) Fax: (416) rjaipargas@b1g.com Evita Ferreira / LSUC #69967K Tel: (416) Fax: (416) eferreira@b1g.com TOR01: : v2 Lawyers for KPMG Inc., in its capacity as Trustee of MF Global Canada Co., a bankrupt

27 Court File No. 31-0R T ONTARIO SUPERIOR COURT OF JUSTICE (IN BANKRUPTCY AND INSOLVENCY) IN THE MATTER OF THE BANKRUPTCY OF MF GLOBAL CANADA CO. OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO BOOK OF AUTHORITIES (Returnable June 12, 2017) BORDEN LADNER GERVAIS LLP Barristers and Solicitors Bay Adelaide Centre, East Tower 22 Adelaide St. W. Toronto, Ontario M5H 3Y4 James D.G. Douglas Tel: (416) Fax: (416) LSUC No H Roger Jaipargas Tel: (416) Fax: (416) LSUC No C Evita Ferreira Tel: (416) Fax: (416) LSUC No K Lawyers for KPMG Inc., in its capacity as The Trustee of MF Global Canada Co., a bankrupt

28 Index

29 Court File No. 31-0R T ONTARIO SUPERIOR COURT OF JUSTICE (IN BANKRUPTCY AND INSOLVENCY) IN THE MATTER OF THE BANKRUPTCY OF MF GLOBAL CANADA CO. OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO LIST OF AUTHORITIES 1 Re Poisson, 2000 CarswellSask 316, 17 CBR (4th) Re Cattell, 1991 CarswellBC 479, 6 CBR (3d) Nelson (Trustee of) v Nelson, 1995 CarswellSask 868, 186 Sask R Marzetti v Marzetti, [1994] 2 SCR 765, 1994 CarswellAlta Goldin, Re, 2003 CarswellOnt 2626, 65 OR (3d) Alary, Re, 2016 BCSC 2108, 2016 CarswellBC 3189.

30 Tab 1

31 Poisson, Re, 2000 CarswellSask CarswellSask 316, 17 C.B.R. (4th) 292, 192 Sask. R CarswellSask 316 Saskatchewan Court of Queen's Bench Poisson, Re 2000 CarswellSask 316, 17 C.B.R. (4th) 292, 192 Sask. R. 3o8 In the Matter of the Bankruptcy of Lane Michael Poisson Registrar Herauf Counsel: Lane Michael Poisson, bankrupt. James M. Peltier, for bankrupt. Joseph A. Okolita, Trustee (Cameron-Okolita Inc.). Merina Pollard, Official Receiver. Subject: Insolvency Judgment: May 9, 2000 Docket: Bankruptcy 4120, Estate No Related Abridgment Classifications For all relevant Canadian Abridgment Classifications refer to highest level of case via History. Bankruptcy and insolvency II Assignments in bankruptcy 11.6 Miscellaneous Headnote Bankruptcy --- Assignments in bankruptcy Miscellaneous issues Bankrupt made assignment in bankruptcy in 1998 while still undischarged from previous bankruptcy Bankrupt had been granted conditional order of discharge in 1992 and trustee was discharged in 1994 Order of absolute discharge on first bankruptcy was ultimately granted in March, 2000 after arrangements were made to comply with requirements of outstanding conditional order Trustee brought application for equitable order that trustee not proceed to annul second bankruptcy assignment Bankrupt had legitimate belief that he had been discharged from his first bankruptcy at time of his second assignment Section 181(1) of Bankruptcy and Insolvency Act provides discretion to annul bankruptcy if assignment "ought not to have been filed" Bankrupt cannot be insolvent person and does not have capacity to file assignment Section 183(1) of Act confers equitable jurisdiction in bankruptcy court Unique and unusual factors in situation warranted equitable relief Bankrupt was only person who would be prejudiced if second bankruptcy were annulled Solution proposed by trustee offered practical resolution to matter Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, ss. 181(1), 183(1). Table of Authorities Cases considered by Registrar Heraufi Bateman, Re (1998), 99 G.T.C. 7056, [1999] G.S.T.C. 26, 10 C.B.R. (4th) 197 (N.S. S.C.) applied Cameron, Re (1972), 18 C.B.R. (N.S.) 99 (C.S. Que.) referred to WeStlaWNext,cAeiteoA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

32 Poisson, Re, 2000 CarswellSask CarswellSask 316, 17 C.B.R. (4th) 292, 192 Sask. R. 308 Haley, Re, 25 C.B.R. 170, [1944] O.W.N. 271, [1944] 2 D.L.R. 765 (Ont. H.C.) referred to Hazel, Re (1998), 10 C.B.R. (4th) 204 (N.S. S.C.) referred to Lararnee, Re (1966), 10 C.B.R. (N.S.) 182, 1966 CarswellQue 68, [1967] C.S. 34 (C.S. Que.) referred to Newman, Re, 35 C.B.R. 235, [1956] O.W.N. 465, 5 D.L.R. (2d) 160 (Ont. S.C.) referred to Schendal, Re (1969), 13 C.B.R. (N.S.) 327 (Ont. S.C.) referred to Statutes considered: Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 s. 2(1) "insolvent person" [renumbered 1997, c. 12, s. 1] considered s. 34(1) pursuant to s. 49 considered s. 49(5) considered s. 178(2) referred to s, 181 considered s. 181(1) considered s. 183 considered s. 183(1) considered APPLICATION by trustee for equitable order that trustee not proceed to annul second bankruptcy assignment. Registrar Herauf The Issue 1 The trustee applied under s. 34(1) of the Bankruptcy and Insolvency Act for directions. The issue relates to the validity of a second assignment into bankruptcy by Mr. Poisson while he was still an undischarged bankrupt from a previous bankruptcy. The Facts 2 The facts are as follows. Lane Michael Poisson assigned into bankruptcy on June 10, On November 30, 1992 Registrar Newis granted a conditional order of discharge requiring the bankrupt to provide "the trustee with payment of $1, or receipt by the trustee of the 1992 pre and post bankruptcy income tax refunds, whichever is greater..." 3 On February 4, 1998 a second assignment was filed by Lane Poisson. Mr. Poisson was granted a suspended order of discharge for a period of six months on December 14, The bankrupt would be discharged effective May 16, An absolute order of discharge on the first bankruptcy was granted on March 29, WeStlaWNeXt,cANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

33 Poisson, Re, 2000 CarswellSask CarswellSask 316, 17 C.B.R. (4th) 292, 192 Sask. R There is uncontroverted evidence that Lane Poisson advised the trustee of the previous bankruptcy and his uncertainty as to whether he had been absolutely discharged. The trustee conducted an insolvency search and the information disclosed the first assignment of June 10, 1992 but also reported that the bankrupt received a suspended discharge with an effective discharge date of September 1, Based upon this information the second assignment was filed on February 4, On March 3, 2000 the trustee was advised by the Official Receiver's office in Regina that Lane Poisson had not been discharged and the information contained on the insolvency search advising otherwise was in error. 6 The material filed in support of the application indicates that Lane Poisson, through his accountant, provided KPMG Inc., his first trustee with his 1992 post-bankruptcy return. There was a small refund of $ which was intercepted by the Saskatchewan Maintenance Enforcement Program. It should also be mentioned that KPMG Inc. was discharged as trustee on December 23, As soon as the current trustee and the bankrupt became aware that he was undischarged from the first bankruptcy arrangements were immediately made to comply with the requirements of the outstanding conditional order granted in the first bankruptcy. As already indicated the absolute order of discharge was granted on March 29, 2000 upon the court being notified that the conditional order had been satisfied. This factor combined with the details of the insolvency search, the fact that the bankrupt advised the trustee of the prior bankruptcy and the bankrupt had reason to believe his tax refund may have been provided to the trustee (even though it was less than the amount of the conditional order) leads me to conclude that Lane Poisson had a legitimate belief that he had been discharged from his first bankruptcy at the time of his second assignment. 8 The trustee succinctly sets out his position in material filed with the court. It is worthwhile to repeat the two paragraphs which are germane to his application: The annulment of the second assignment will provide no benefit to the creditors under the first assignment in bankruptcy insofar as the terms of Lane Poisson's discharge had been set and are concurrently being satisfied and the former trustee, KPMG Inc. had been discharged. The interests of the creditors in the second bankruptcy may conceivably be prejudiced insofar as the annulment of the second assignment will re-vest in Mr. Poisson the assets realized in the second assignment. Mr. Poisson would some time thereafter re-file the second assignment. Therefore, from a practical perspective, the annulment of the second assignment in bankruptcy would provide no apparent benefit to either the creditors of the first or second assignments. Lane Poisson will be significantly prejudiced by the annulment of the second assignment insofar as he has already been bankrupt for over two years, having filed the second assignment on February 4, Based upon these factors the trustee and counsel for Lane Poisson assert that the court can invoke its equitable jurisdiction as set out in s. 183(1) of the Act and maintain the second assignment. The Relief Sought 10 The specific relief requested by the trustee is for "an equitable order that the trustee not proceed to annul the bankruptcy assignment filed by Lane Michael Poisson effective February 4, 1998, and further, that this Court's order dated December 14, 1999, suspending the bankrupt's discharge be binding as it relates to those creditors under the February 4, 1998 assignment and section 178(2) of the Bankruptcy and Insolvency Act." The Law 1 1 There is substantial authority that an undischarged bankrupt does not come within the definition of "insolvent person" in section 2(1) and therefore an assignment by an undischarged bankrupt is null and void. (See Laramee, Re WestiawNext CANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

34 Poisson, Re, 2000 CarswellSask CarswellSask 316, 17 C.B.R. (4th) 292, 192 Sask. R. 308 (1966), 10 C,B,R. (N.S.) 182 (C.S. Que.), Re Newman (1956), 35 C.B.R. 235 (Ont. S.C.), Re Haley (1944), 25 C.B.R. 170 (Ont. H.C.), Re Cameron (1972), 18 C.B.R. (N.S.) 99 (C.S. Que.), Re Hazel (1998), 10 C.B.R. (4th) 204 (N.S. S.C.) 12 These decisions also provide that after-acquired property belongs to the creditors in the first bankruptcy, and, if a second trustee is appointed, the second trustee should turn the property in his hands over to the first trustee, subject to a reasonable allowance for realizing the assets. (For example, see Re Schendal (1969), 13 C.B.R. (N.S.) 327 (Ont. S.C.). 13 Although this line of reasoning is compelling, in my view it tends to diminish or even curtail the court's discretionary power under s. 181 or its equitable jurisdiction under s From my reading of s. 49, when a properly executed assignment is presented to the Official Receiver it must be accepted and filed. The only exception is in s. 49(5) which provides the Official Receiver with a mechanism to "cancel the assignment" if a licensed trustee cannot be found to administer the bankruptcy. Once a valid assignment is filed with the Official Receiver a legal process has been initiated which can only be terminated by an application to the court for directions or an application to annul the bankruptcy. 14 I note that in Re Hazel, supra, Registrar Hill stated at p. 206: The assignment certainly out not to have been filed because the individual filing the assignment, Mr. Hazel, lacked the capacity to do so. In my view it is not necessary to issue an order annulling the assignment as I see no necessity to do so where the assignment was, on its face, absolutely void when filed, 15 In my opinion this type of application requires a determination as to whether an order should be granted to either annul or maintain the second assignment. To do so requires the court to exercise its discretion in s. 181 and if the circumstances warrant make an order annulling the assignment. I do not believe that it is sufficient for a court to determine that the assignment was void as in Re Hazel, supra without making an order annulling the assignment. 16 As stated previously to do so prevents the court from considering the mechanism provided for in s. 181(1) to annul the bankruptcy if an assignment "ought not to have been filed." The key word in the provision is "may". It is apparent that the remedy under s. 181(1) is discretionary (see Re Bateman (1998), 10 C.B.R. (4th) 197 (N.S. S.C.). 17 It is also apparent that a bankrupt cannot be an insolvent person and therefore does not have the capacity to file an assignment. Generally, this would lead a court to determine that the second assignment ought not to have been made. The exercise of the court's discretion then comes into play as the power to annul is permissive and not mandatory, even in these circumstances, I agree that absent extraordinary circumstances it would be difficult for a court to maintain a second assignment made by an undischarged bankrupt. However, the matter does not end here. S. 183(1) confers equitable jurisdiction in the Bankruptcy Court and equitable relief is available to Lane Poisson if the situation warrants it. Due to the unique and unusual factors at play in this situation I would prefer to utilize this provision to provide relief to Lane Poisson. 18 I agree with the submission of the trustee that Lane Poisson is the only one who would be prejudiced if the second bankruptcy was annulled. The creditors from the first would not be in any better position as there is basically no after acquired property available that could potentially provide them with a benefit. The creditors from the second bankruptcy, none of whom appeared on the return date of this motion nor objected to the bankrupt's discharge, would likely be subjected to notification of another bankruptcy as Lane Poisson would probably re-file which would mean little other than their requirement to complete additional forms for the trustee. Lane Poisson, on the other hand, has been in bankruptcy since February, 1998 and as already mentioned would probably have to re-file if the bankruptcy was annulled. 19 The solution proposed by the trustee offers a practical resolution to this matter. It provides flexibility to the court to fashion an order which does justice to the parties while at the same time preserves the integrity of the bankruptcy process. 20 I have concluded that I will grant the relief sought and there will be an order that the trustee not proceed to annul the bankruptcy assignment filed by Lane Poisson effective February 4, 1998 and further, that the Court's order dated WestlawNext, CANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

35 Poisson, Re, 2000 CarswellSask CarswellSask 316, 17 C.B.R. (4th) 292, 192 Sask. R. 308 December 14, 1999 suspending the bankrupt's discharge be binding as it relates to those creditors under the February 4, 1998 assignment and s. 178(2) of the Bankruptcy and Insolvency Act. 21 My compliments to the trustee for his excellent written and oral submissions. Application granted. End of Document Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. WestlawNext,cANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

36 Tab 2

37 Cattell, Re, 1991 CarswellBC CarswellBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d) CarswellBC 479 British Columbia Court of Appeal Cattell, Re 1991 CarswellBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d) 165, 56 B.C.L.R. (2d) 233, 6 C.B.R. (3d) 178, 8o D.L.R. (4th) 481 Re TERENCE M.B. CATTELL and FRANK W. MUSSON Macfarlane, Toy and Hollinrake JJ.A. Heard: March 20, 1991 Judgment: May 31, 1991 Docket: Doc. Vancouver CA Counsel: Stephen R Ross, for appellant Hanil Bank Canada. Gordon C. Plottel, for respondent Dunwoody Limited, trustee under the proposals of Terence M.B. Cattell and Frank W. Musson. Subject: Corporate and Commercial; Insolvency Related Abridgment Classifications For all relevant Canadian Abridgment Classifications refer to highest level of case via History. Bankruptcy and insolvency IX Proving claim IX.3 Right to interest Bankruptcy and insolvency X Priorities of claims X.1 Secured claims X.1.b Forms of secured interests X.l.b.ii Mortgages and hypothecs Headnote Bankruptcy --- Proving claim Right to interest Bankruptcy --- Priorities of claims Secured claims Forms of secured interests Mortgages and hypothecs Dividends and distributions Bank filing claim under proposals filed by mortgage guarantors Bank subsequently recovering greater amount upon realization of its security and applying excess to post-proposal interest Bank required to apply sale proceeds first to principal and then to interest in determining amount recoverable against guarantors. The debts of a company to the bank were guaranteed by two individuals. On the same day that the guarantees were executed, the company granted a mortgage to the bank. The company subsequently filed a proposal to its creditors under Pt. III of the Bankruptcy Act. The bank commenced foreclosure proceedings. The company's proposal was defeated and it was deemed to be in bankruptcy as of the date it filed its proposal. The guarantors filed proposals WestlawNext,cANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

38 Cattell, Re, 1991 CarswellBC CarswellBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d) under the Bankruptcy Act which were approved by the court. The trustee paid dividends to the bank under the proposals in the sum of $65,508. The bank then received $1,179,346 from the sale of the mortgaged land and $90,337 in rents from the company's receiver. As between itself and the trustee, the bank applied those funds first on account of accrued interest owing pursuant to the figures in the order nisi and secondly to the principal sum, leaving a deficit of $103,555 to which the bank claimed it was entitled out of the guarantors' estates. The trustee asserted that the bank had been paid $121,178 in excess of its claim in the two proposals and that the bank's position violated the rules against post-proposal interest and against a creditor receiving more than 100 cents on the dollar. The trustee obtained an order for recovery of the $65,508 paid out in dividends under the guarantors' proposals. The bank appealed. Held: The appeal was dismissed. Per Macfarlane J.A. (Toy J.A. concurring): The bank had been paid in full by realization of the security, the proceeds of which had to be applied first to principal and then to interest as required by the terms of the mortgage. Section 134 of the Bankruptcy Act provides that a creditor shall in no case receive more than 100 cents on the dollar, plus interest as provided by the Act. The $1,149,278 claimed by the bank against the guarantors' estates was only part of the company's final indebtedness to the bank, the additional amount being for post-proposal interest. The bank's recovery of $1,270,456 more than satisfied its claim in respect of the guarantors' proposals. The amount which the company, the principal debtor, still owed was an amount incurred after the date of the "bankruptcy" of the guarantors, and the bank had to look to the company to recover that debt. Per Hollinrake J.A. (dissenting in part): The terms of the guarantee governed the relationship between the bank and the trustee, and the bank could not rely on the guarantee to change the fact that as between it and the principal debtor, it was contractually bound to apply the proceeds of sale first to principal and then to interest. That being the case, it was obliged to similarly apply the funds as between itself and the trustee. Accordingly, the bank was not entitled to further dividends up to the sum of $103,555. Because the bank's claim against the company was not paid in full, the bank was entitled to keep the dividend. Its doing so would not offend the rule as to post-proposal interest or the rule that a creditor cannot receive more than 100 cents on the dollar. Table of Authorities Cases considered: Per Macfarlane J.A. (Toy J.A. concurring): Crown Royal Clothing Co., Re (1969), 15 C.B.R. (N.S.) 203 (Que. S.C.) distinguished J. LeBar Seafoods Inc., Re (1981), 38 C.B.R. (N.S.) 64 (Ont. S.C.) distinguished Satin, Re (1872), 7 Ch. App. 760 applied Per Hollinrake J.A. (dissenting in part): WestlawNext,cANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

39 Cattell, Re, 1991 CarswellBC CarswelIBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d) Alliance Credit Corp., Re; Gagnon v. Montreal Trust Co. (1971), 17 C.B.R. (N.S.) 136 (C.S. Que.) considered Blakeley, Re; Ex parte Aachener Disconto Gesellschaft (1892), 9 Morr. 173 (Div. Ct.) considered Crown Royal Clothing Co., Re (1969), 15 C.B.R. (N.S.) 203 (Que. S.C.) considered Developpements du Nord-Est Ltee, Re; Banque Nationale du Canada v. Gagnon (1983), 51 C.B.R. (N.S.) 142 (Que. C.A.) considered J. LeBar Seafoods Inc., Re (1981), 38 C.B.R. (N.S.) 64 (Ont. S.C.) considered Sass, Re; Ex parte National Provincial Bank of England Ltd., 65 L.J.Q.B. 481, [1896] 2 Q.B. 12 referred to Savin, Re (1872), 7 Ch. App. 760 considered Statutes considered: Bankruptcy Act, R.S.C. 1985, c. B-3 Pt. 3 s. 34(1) s. 134 Appeal from order of Sheppard L.J.S.C., 79 C.B.R. (N.S.) 237, requiring repayment to trustee of dividends paid out to bank pursuant to bankruptcy proposals. Macfarlane J.A. (Toy J.A. concurring): 1 I have had the advantage of reading the reasons of Mr. Justice Hollinrake [appeal from (1990), 79 C.B.R. (N.S.) 237], and agree that the bank has been paid its provable claim against the estates of Cattell and Musson in full by the realization of the Arcan security, the proceeds of which must be applied firstly to principal and then to interest. That was the application required by the terms of the mortgage granted by Arcan to the bank, and guaranteed by Cattell and Musson. 2 The alternative ground of appeal concerns the payment of a dividend of $65, to the bank before it was known that the credit arising out of the realization of the mortgage granted by Arcan would result in full satisfaction of the bank's provable claim in respect of the proposals by Cattell and Musson. I cannot agree with Mr. Justice Hollinrake that the bank is entitled to keep that dividend. 3 Section 134 of the Bankruptcy Act, R.S.C. 1985, c. B-3, provides: 134. Subject to section 130, a creditor shall in no case receive more than one hundred cents on the dollar and interest as provided by this Act. R.S., c. B-3, s In my opinion the payment of $65, to the bank violates s The amount claimed by the bank against the estate of the guarantors is $1,149, (part only of the final indebtedness of Arcan to the bank at the date of the bankruptcy of Arcan; the additional debt being mainly for post-proposal interest). The bank recovered in the aggregate $1,270, from the realization of the Arcan mortgage, plus rents, dividends, less taxes paid which, properly applied, more than satisfied the bank's claim in respect of the Cattell/Musson proposals. The amount which Arcan, the primary WeStlaWNextr.cANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

40 Cattell, Re, 1991 CarswellBC CarswellBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d) debtor, now owes is an amount incurred subsequent to the date of the "bankruptcy" of Cattell/Musson. The bank must recover that amount from Arcan, and cannot recover any more from the estates of Cattell or Musson. 5 What I have said involves the application of certain general rules extracted from Re Savin (1872), 7 Ch. App. 760 at p. 764: There is a general rule in bankruptcy whether a right and a reasonable rule or not that there is to be no proof in bankruptcy for interest subsequent to the bankruptcy. There was also a rule in bankruptcy, that a creditor holding a mortgage security is to make up his mind whether he will rely upon his security or give it up and come in and prove with the other creditors. This rule was relaxed in favour of the creditor by a rule that his security might be sold, and then he was to apply the realised proceeds in payment of his debt. On this rule a judicial decision was made nearly eighty years ago, that the proceeds of the sale were, in case of deficiency, to be applied in payment of principal and interest up to the date of the bankruptcy, and up to the date of the bankruptcy only; and then the creditor was to prove for the residue of his debt, which, of course did not include any interest subsequent to the date of the bankruptcy. 6 I pause to note that those rules are at the heart of the resolution of the first issue in this case. 7 Re Savin was not a case involving a claim against guarantors but one involving a claim by a creditor in the primary debtor's estate, when the creditor held security. 8 The appellant submits that despite the fact its provable claim against the estates of Cattell and Musson has been fully satisfied, it is entitled to receive dividends from those estates based on its claim as filed so long as the amounts received from any source do not fully satisfy the total indebtedness of Arcan. That submission is based upon dicta from Re J. LeBar Seafoods Inc. (1981), 38 C.B.R. (N.S.) 64 (Ont. S.C.), and Re Crown Royal Clothing Co. (1969), 15 C.B.R. (N.S.) 203 (C. S. Que.). Neither Re J. LeBar nor Re Crown Royal Clothing Co. addresses the question in this case. 10 In Re J. LeBar the creditor did not hold and had not realized any security granted by the principal debtor. There was no evidence of any payment by the debtor to the creditor. It was held that any dividends which might be declared in the debtor's estate should not be applied to reduce the claim against the estate of the guarantor. In short, the creditor could look to both estates for satisfaction of the debt, but could not recover more than 100 per cent of its claim against the debtor. It appears that this dicta had regard to a situation where the guarantor was liable for the whole of the debt claimed by the creditor. In this case the guarantors are liable for only part of the debt. There is no indication in Re J. LeBar that the guarantor could be called upon to pay more than the amount of the debt at the date of the bankruptcy of the guarantor, or that the estate of the guarantor should not be given credit for the amount by which the liability of the guarantor was reduced by realization of security. 1 1 In Re Crown Royal Clothing Co. it was held that security granted by the debtor to the creditor did not have to be valued in a claim by the creditor against the estate of the guarantor, and that the creditor should be treated as an ordinary creditor, rather than as a secured creditor. (There is no suggestion in the case at bar that the bank must prove as a secured creditor, or give up its security.) It was held [p. 205] that the creditor was entitled to receive dividends from the guarantor's estate as an ordinary creditor up to the amount owing "by its primary debtor after credit for the latter's payments or realization of security." Again, there was no indication that the guarantor would be liable for more than the amount of the debt at the date of the bankruptcy of the guarantor or that the debt for which the guarantor could be liable would not be reduced by the amount of the proceeds arising from realization of security granted to the creditor by the primary debtor. Again, that was not a case where realization of security resulted in full satisfaction of the provable claim against the estates of the guarantors. 12 In my opinion there is nothing in those cases which detracts from the proposition that a creditor cannot recover more than 100 per cent of the amount for which the guarantors are liable. Obviously, any overpayment would be to the WestlawNext.,cANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

41 Cattell, Re, 1991 CarswelIBC CarswelIBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d) prejudice of the other creditors of Cattell and Musson. In my view, the bank holds $65, in trust for the trustee in the matter of the proposals of Cattell and Musson and must repay it. 13 I would dismiss the appeal, but would accede to the submissions of both counsel that the costs of both parties will come out of the estates on a party-and-party basis. Hollinrake J.A. (dissenting): 14 This is an appeal from a judgment of a chambers Judge [(1990), 79 C.B.R. (N.S.) 237] pursuant to an application by the trustee under the proposals of T.M.B. Cattell and F.W. Musson for directions under s. 34(1) of the Bankruptcy Act, R.S.C. 1985, c. B-3. The chambers Judge accepted the position of the trustee and the Hanil Bank Canada now appeals that decision. The chambers Judge held that the bank had recovered its provable debt against the estates of the guarantors and ordered it to pay to the trustee the sum of $65, being the dividend paid to the bank after the date of the proposals but before the bank realized on its mortgage security being property owned by Arcan Investments Ltd. 15 The facts are straightforward. 16 On November 30, 1983, Messrs. Cattell and Musson executed unlimited guarantees and postponements of claim in favour of the bank of all debts and liabilities at any time owing by Arcan Investments Ltd. to the bank. 17 On that same date Arcan granted to the bank a mortgage on property it owned in Chilliwack, British Columbia. 18 On December 21, 1983, the bank advanced $1,065,000 to Arcan. 19 On December 3, 1985, Arcan filed a proposal to its creditors under Pt. III of the Bankruptcy Act. 20 On February 18, 1986, the bank commenced foreclosure proceedings against Arcan. 21 On February 21, 1986, Arcan's proposal was defeated by its creditors and Arcan was thereby deemed to be in bankruptcy as of December 3, 1985, the date it filed its proposal. 22 On March 10, 1986, Messrs. Cattell and Musson filed proposals under the Bankruptcy Act which were accepted by the creditors in an amended form and approved by the court. 23 On March 20, 1986, the bank filed proofs of claim under the Cattell and Musson proposals and incorrectly claimed security against the assets of Cattell and Musson valued at $1,000,000. Nothing turns on this. 24 On March 26, 1986, the bank obtained an order nisi of foreclosure with the redemption period expiring September 26, On December 1, 1986, the bank obtained an order for conduct of sale of the mortgaged property. 25 On February 2, 1987, the bank received dividends from the trustee under the proposals of Cattell and Musson of $65, It is this sum which the chambers Judge ordered be paid by the bank to the trustee. 26 On March 24, 1987, the court approved the sale of the mortgaged property and a vesting order was granted to Vanalta Investments Ltd. In early July, 1987, the bank received the sum of $1,179, from the sale proceeds of the mortgaged property to Vanalta. 27 In July 1986 and again in July 1987 the bank received rents from Arcan's receiver totalling $90,337.09, and in October 1986 the bank paid property taxes on the mortgaged property of $64, On receipt of the sale proceeds of $1,179,346.43, the bank as between itself and the trustee under these two proposals sought to apply those funds, as it had the rent proceeds, firstly, to accrued interest owing pursuant to the figures in the order nisi, and then to outstanding principal which on the bank's accounting left a deficit as between it and Arcan of $103, This is how the bank sees the accounting as set out in its factum. WestlawNext.CANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

42 Cattell, Re, 1991 CarswellBC CarswellBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d) Date Event Indebtedness March 10, 1986 Proposals filed $1,149, July 24, 1986 Rents received from Receiver ( 25,000.00) October 24, 1986 Taxes paid 64, February 2, 1987 Dividends received ( 65,508.84) July 13, 1987 Accrued interest from March 10, 1986 at $ per day 224, Subtotal $1,348, July 13, 1987 Sale proceeds received (1,179,346.43) July 23, 1987 Rents received from Receiver ( 65,337.09) Total $ 103, The bank submitted before the chambers Judge that it was entitled to further dividends from the estates of Cattell and Musson in this sum of $103, The fact is that the bank in its books applied the sale proceeds of the mortgaged property firstly to principal and then to interest. More about that later. The trustee of the Cattell and Musson proposals says the bank has been paid $121, in excess of the amount claimed by it in the two proposals. The trustee sees the accounting in his factum as follows: Rents received from Arcan Property: $25, , Total: $ 90, Net Proceeds from Sale of Arcan Property: 1,179, Less Taxes Paid by Bank (64,735.00) Dividends Paid Musson -- $43, by Trustee Cattell -- 22, Total: 65, Total Funds Recovered by Bank: $1,270, Proof of Claim Filed in Each Proposal (Proofs include principal and interest to March 10, 1986) $1,149, Excess of Amount Recovered Over Amount Claimed in Each Proposal $ 121, The trustee, asserting that the bank had been paid $121, in excess of its claim in the proposals, sought recovery successfully of the dividends paid out of the two estates of $65, WestlawNext CANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

43 Cattell, Re, 1991 CarswellBC CarswellBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d) The position taken before the chambers Judge by the bank was that it had not received more than 100 cents on the dollar of its claims against the estates of Cattell and Musson because it was entitled by the terms of the guarantees to apply the proceeds of the sale of the mortgaged property firstly to interest and then to principal. This would leave $103, still owing and the bank submits it is entitled to further dividends up to that sum out of the two estates. 33 The response of the trustee to this is that the position of the bank violates the rule against post-proposal interest and the rule against a creditor recovering more than 100 cents on the dollar (Bankruptcy Act, s. 134). The trustee also asserts that to permit the bank to receive post-proposal interest on the mortgage debt, albeit that interest is not claimed in the bankruptcy and results from the bank's secured position, is inequitable to the other creditors of the two estates. The point is made that by reason of the rule against post-proposal interest, the bank could not prove for such interest in the Arcan bankruptcy, and therefore the guarantors should not be liable for post-proposal interest on the mortgage debt as between the bank and Arcan. To this the bank responds that the bankruptcy of Arcan is irrelevant and that its debt vis-à-vis Arcan is outside the Bankruptcy Act inasmuch as it was relying on its security. 34 The chambers Judge held that any amount paid to the creditor (the bank) from the debtor's estate (Arcan) should go to reduce the creditor's claims in the two estates, and the bank in this case is not permitted to recover more than 100 per cent of its claim, whether the source of that recovery is the guarantor's estate or the debtor's estate. For these propositions the chambers Judge relied on the judgment of Henry J. in Re J. LeBar Seafoods Ltd. (1981), 38 C.B.R. (N.S.) 64 at p. 68 (Ont. S.C.). Before us the bank submits the chambers Judge erred in how he saw this case and how he applied it on the facts before him. In the court below, the bank relied on what was said in Re Crown Royal Clothing Co. (1969), 15 C.B.R. (N.S.) 203 (Que. S.C.), and Re Developpements du Nord-Est Ltee; Banque Nationale du Canada v. Gagnon (1983), 51 C.B.R. (N.S.) 142 (C.A. Que.). I will deal with these cases later in these reasons. 35 In the alternative to its submission that it is entitled to further dividends out of the two estates up to the sum of $103,555.70, the bank submits there is no authority for the order made by the chambers Judge directing it to return the sum of $65, to the trustee. 36 It is crucial to the argument of the bank that as between it and the guarantors Cattell and Musson, it has the contractual right to apply the proceeds of realization of the Arcan mortgage as it sees fit. The bank asserts for the purpose of its claim against the trustee that it has applied these proceeds, firstly, to the interest on the Arcan mortgage, and secondly, to the debt guaranteed. 37 The Arcan mortgage permits the bank to appoint a receiver as it did and it further permits the receiver to sell the property. In reference to the application of the net proceeds of any sale of the mortgaged property, the mortgage says: And the net proceeds of any sale or lease, or both, hereunder shall be applied, subject to the claims of all secured and unsecured creditors (if any) ranking in priority to this mortgage: FIRSTLY: in payment of any costs, charges, expenses and legal fees (between solicitor and client): (i) incurred in taking, recovering or keeping possession of the Lands or by reason of non-payment of the monies hereby secured; (ii) of and incidental to the appointment of the Receiver or Receiver Manager and the exercise by him of all or any of the powers aforesaid including his reasonable remuneration and all outgoings properly payable by him; SECONDLY: in or toward payment to the Mortgagee of the Principal or so much thereof as remains unpaid; THIRDLY: in payment of interest as aforesaid; FOURTHLY: in payment of other monies owing hereunder; and WestlawNext CANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

44 Cattell, Re, 1991 CarswelIBC CarswellBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d) FIFTHLY: any surplus shall be paid to the Mortgagor. And so, when the bank applied the proceeds of the sale of the mortgaged property, firstly, to principal, and then to interest on its books, it did so because as between itself and the mortgagor, Arcan, it was contractually obliged so to do. 38 The words in the guarantee that the bank relies on in taking the position vis-à-vis the guarantors that the sale funds can be applied firstly to interest and then to principal are: (1) The Bank may grant time, renewals, extensions, indulgences, releases and discharges to, take securities (which word as used herein includes other guarantees) from and give the same and any or all existing securities up to, abstain from taking securities from or from perfecting securities of, cease or refrain from giving credit or making loans or advances to, accept compositions from and otherwise deal with, the customer and others and with all securities as the Bank may see fit, and may apply all moneys at any time received from the customer or others or from securities upon such part of the liabilities as the Bank deems best and change any such application in whole or in part from time to time as the Bank may see fit, the whole ivithout in any way limiting or lessening the liability of the undersigned under this guarantee, and no loss of or in respect of any securities received by the Bank from the customer or others, whether occasioned by the fault of the Bank or otherwise, shall in any way limit or lessen the liability of the undersigned under this guarantee. [Emphasis added.] 39 The bank submits that the terms of the guarantee govern the legal position between it and the trustee citing Re Blakeley; Ex parte Aachener Disconto Gesellschaft (1892), 9 Morr. 173 at pp (Div. Ct.). In that case the Court referred to the terms of the guarantee in a contest between the trustee of the guarantor and the lender and said that the fullest effect must be given to the language of the guarantee. In this regard see also Re Sass; Ex parte National Provincial Bank of England Ltd., 65 L.J.Q.B. 481, [1896] 2 Q.B Counsel for the trustee submits that the guarantees themselves do not survive the proposals of the guarantors. 41 It is my opinion that Blakeley is authority for the proposition that the terms of the guarantee govern the relationship between the creditor and the trustee, subject of course to the Bankruptcy Act itself. In Blakeley the Court gave effect to the terms of a guarantee in deciding what amounts were to be deducted from a creditor's claim in bankruptcy, and I see no reason why that should not be the case here. 42 It is my opinion that even with the terms of the guarantee governing the relationship between the bank and the trustee in this case, the bank cannot rely on the guarantee to change the reality of the fact that as between it and the principal debtor it was contractually bound to apply the proceeds of the sale firstly to principal, and then to interest. In my opinion, and I did not understand counsel for the bank to submit differently, if the proceeds of the mortgage have to be applied vis-à-vis the guarantors, firstly to principal and then to interest, the bank cannot succeed on its argument that it is entitled to further dividends out of the estate up to the sum of $103, In my opinion, the words "and may apply all monies at any time received from the customer or others or from securities upon such part of the liabilities as the bank deems best and change any such application in whole or in part from time to time as the Bank may see fit" do not permit the bank to apply sale proceeds differently as against the guarantor than as against the principal debtor where the application made against the principal debtor is made under a contractual obligation with no discretion open to the bank as to the application of the funds. The law of principal and surety has always obliged the creditor to deal with the surety on the basis of the terms of the contract evidencing the principal debt at the time the guarantee is given in the absence of anything to the contrary in the terms of the guarantee itself. In my opinion, if a lender seeks to hold its guarantor liable on a basis different than it is contractually obliged to with its principal debtor, the words in the guarantee must clearly state this. My view is this guarantee does not permit what the bank seeks to do vis-a-vis the guarantors as to the application of the proceeds of the sale of the mortgaged property. I WeStlaWNextocANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

45 Cattell, Re, 1991 CarswellBC CarswellBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d) do not doubt that if for some internal reason, and in the absence of a contractual obligation, the bank chose to apply the sale proceeds vis-à-vis its principal debtor firstly to principal and then to interest, and then sought to apply those same proceeds, vis-à-vis the guarantors, on a different basis, the words in the guarantee would permit this. However, this is not the case here. 44 I conclude that because the bank was contractually obliged to apply the sale proceeds as between itself and Arcan firstly to principal and then to interest, it is obliged to make a similar application of the funds as between itself and the trustee of the proposals of Cattell and Musson. That being so, the bank fails on its principal argument that it is entitled to further dividends out of the estate up to the sum of $103, Having concluded as I have on the issue of the bank's right to apply the sale proceeds as between itself and the trustee, I need not deal with the remainder of the argument advanced by the bank. My conclusion then is that the bank has been paid everything it is entitled to under the two proposals. 45 I turn now to the bank's alternative position that it is not obliged to refund the $65, in dividends it has received from the trustee before it received the proceeds of the sale of the mortgaged property. 46 The first point to be made is that in my opinion it does not necessarily follow that because the proceeds of the realization of the security must be applied such that in this case the bank's claim against the two estates is paid in full, the dividends of $65, must be returned to the trustee on the ground that the bank has been paid 100 cents on the dollar in its claims against the estates. There is no issue that as at the time of this payment the bank was entitled to these dividends. What has been paid to the bank out of the estates is $65, on its claims of $1,149, In my opinion, it cannot be said in this case that the bank has received more than 100 cents on the dollar of its claims against the guarantors unless the bank is obliged to bring into the accounting the funds it has received, not from the guarantors' estates, but from the security it held from the primary debtor Arcan. The law is clear that if the mortgage here was one given by the guarantors, then on its realization the proceeds of sale would have to be applied in payment of principal and interest up to the date of the bankruptcy and up to the date of the bankruptcy only. See Re Savin (1872), 7 Ch. App. 760 at p In this case, had the mortgage been given to the bank by Cattell and Musson in support of their guarantees, then on the realization of that security the bank would have recovered more than 100 cents on the dollar in its claims in the proposals and would clearly have to return the dividends of $65, Here, the funds come not out of the estate but out of the hands of a third party by way of security held by the bank in support of the primary debt. The issue then is does the rule that would apply in this case had the mortgage been given by Cattell and Musson Re Savin apply to the case where the mortgage is given by a third party, in this case the primary debtor Arcan. My conclusion is that it does not. I turn now to the cases that border on this issue. I use the phrase "border on" because none of the cases referred to us is on point in terms of its ratio. What is said on this issue in all of them is at best dicta. 47 The first case I deal with is Re J. LeBar Seafoods Inc., supra. In that case Ocean Garden Products Inc. sold its product in Ontario through a broker, J. LeBar Seafoods Inc., on commission. One of Ocean Garden's customers was S. & C. Foods Limited. Under the brokerage agreement LeBar Seafoods guaranteed the obligations of the customers, including S. & C. Foods. LeBar Seafoods and S. & C. Foods went into bankruptcy and Ocean Garden claimed against both estates as an unsecured creditor. Referring to Re Blakeley, Henry J. said at p. 68: As I apprehend the law, the right of the principal creditor, Ocean Garden, to claim against the estate of the guarantor LeBar is governed by Re Blakeley,. Ex parte Aachener Disconto Gesellschaft (1892), 9 Morr. 173 (D.C.). The principle established in that decision is that upon the bankruptcy of its debtor, the creditor is entitled to claim against the estate of the bankrupt guarantor for the full amount of the debt. The claim is to be reduced only by any amount paid to the creditor by the debtor or by the debtor's estate and by the amount of any dividend declared in favour of the creditor prior to proof of the creditor's claim in the estate of the guarantor. There is no evidence of any payment to the creditor, Ocean Garden, by the debtor, S. & C. Foods. There is a projected dividend to be paid by the trustee of S. & C. Foods to Ocean Garden but no dividend has as yet been declared. Ocean Garden may therefore claim in full against the estate of LeBar. That is not an unliquidated or contingent claim; it is liquidated, immediate and direct. Subsequently declared dividends in the estate of S. & C. Foods and paid to Ocean Garden are not to be applied WestlawNext canada Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved.

46 Cattell, Re, 1991 CarswellBC CarswellBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d) in reduction of the claim against the LeBar estate, subject only to the overriding principle that Ocean Garden is not entitled to recover more than 100 per cent of its claim: see Re Houlder, [1929] 1 Ch Any excess will be held in trust for the trustee of LeBar. [Emphasis added.] 48 I think what Henry J. is saying here is "100 per cent of its claim" against S. & C. Foods, but what is not clear to me is whether he is saying "100 per cent of its claim" against S. & C. Foods as fixed at the time of the bankruptcy of the guarantor LeBar or "100 per cent of its claim" against S. & C. Foods without reference to what was proved in the LeBar bankruptcy. I can see no reason why it should be the S. & C. Foods claim as fixed at the date of the LeBar bankruptcy because the claim against S. & C. Foods is outside the LeBar bankruptcy. The significance of the date of the LeBar bankruptcy is that the creditor Ocean Garden can recover no more out of the estate of the guarantor, LeBar, than it has proved for, and that figure is the amount owing by S. & C. Foods, the primary debtor, at the time of the guarantor's bankruptcy. 49 In his judgment the chambers Judge referred to Re J. LeBar Seafoods Inc. and then referred to Re Blakeley. He concluded his reference to these two cases by referring to what Henry J. said in Re J. LeBar Seafoods Inc. as follows [p. 241 C.B.R,]: His statements make two points. The first is that any amount paid to the creditor from the debtor's estate should go to reduce the creditor's claim. Secondly, the bank is not permitted to recover more than 100 per cent of its claim, whether the source of that recovery is the guarantor's estate or the debtor's estate, 50 I cannot agree that what Henry J. said is necessarily that "the bank is not permitted to recover more than 100 per cent of its claim, whether the source of that recovery is the guarantor's estate or the debtor's estate" if the chambers Judge meant more than 100 per cent of its claim as at the date of the proposals of Cattell and Musson unless, of course, all the funds came out of those two estates which is not the case. In view of the result reached by the chambers Judge, he must have been referring to the claim as fixed by the date of the proposals, and if that be the case, with respect, I cannot agree. 51 In Re Crown Royal Clothing Co. the creditor was Societe Financiere, the primary debtor was Prima Brand Inc., and the guarantor, Crown Royal. Crown Royal filed a proposal on March 14, 1968, and Societe Financiere filed a proof of claim for contractual interest up to April 30, 1968; The claim for contractual interest after March 14, 1968, the date the proposal was filed, was rejected by the court. At p. 205 [15 C.B.R. (N.S.)], Hannen J. said: Concerning the amount of the creditor's claim, considering it as an ordinary claim for the moment, and notably on the matter of interest, the Act provides in s. 38(1) that all the provisions of the Act, insofar as they are applicable, apply mutatis mutandis to proposals, and it is provided in s. 83(6) that the creditor may prove for interest to the date of the bankruptcy. So unless the proposal provided otherwise, this rule applies to this claim and it must be amended in consequence by deduction of the contractual interest from 14th March to 30th April 1968; and, subject to that condition, it would be entitled to receive dividends under the proposal based upon that figure, but obviously never to exceed the balance at any time including contractual interest owing to it by its primary debtor, Prima, after credit for the latter's payments or realization of security. [Emphasis added.] 52 The chambers Judge referred to this quote as follows [p. 242, 79 C.B.R. (N.S.)]: Counsel for the bank submits that the phrase "the balance at any time including contractual interest owing to it by its primary debtor" means that the contractual interest receivable is that which is owing at any time. It is my understanding that the phrase "at any time" modifies the word "balance," and that it is clear from the context of the paragraph that the amount received must never exceed the balance owing at any time, including contractual interest calculated in accordance with the rules against post-proposal interest as set out earlier in the paragraph. WOStlaWNeXt.cANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 10

47 Cattell, Re, 1991 CarswellBC CarswelIBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d) With respect I cannot agree with this view of what Hannen J. said in the Crown Royal case. I think what Hannen J. was saying was that the creditor could never be paid dividends out of the guarantor's estate beyond the claim it proved in that estate but that it could receive such dividends up to the figure proved in the bankruptcy of the guarantor as long as, after realization of its security, including contractual interest on that secured principal sum, it would not receive by way of those dividends out of the guarantor's estate and the realization on the security a sum in excess of what was owed to it by the principal debtor. This is precisely the case before us. The bank has received funds from the two estates as well as realized on its security. Those two figures together still leave the bank with a deficit on the loan to Arcan guaranteed by Cattell and Musson, and the amount received from the two estates is well under the claim of the bank against those estates. What Hannen J. said is dicta, but in my opinion he correctly stated the position of the creditor against that creditor's bankrupt guarantor where the creditor holds security from, and only from, the primary debtor. That being so, in my opinion, the bank is entitled to keep the dividends paid to it of $65, The last case I refer to on this issue is Re Developpements du Nord-Est Ltee, where Beauregard J.A. said at p. 144: Bref je partage l'opinion exprimee dans l'affaire Savin, supra, qui a depuis toujours ete consider& comme representant la regle de droit qui prevaut au Canada. Dans cette affaire Savin, decidee en 1872, le juge notait que la regle etait connue en Angleterre depuis déjà 80 ans: There is a general rule in bankruptcy whether a right and a reasonable rule or not that there is to be no proof in bankruptcy for interest subsequent to bankruptcy. There was also a rule in bankruptcy that a creditor holding a mortgage security is to make up his mind whether he will rely upon his security or give it up and come in and prove with the other creditors. This rule was relaxed in favour of the creditor by a rule that his security might be sold, and then he was to apply the realized proceeds in payment of his debt. On this rule a judicial decision was made nearly eighty years ago, that the proceeds of the sale were, in the case of deficiency, to be applied in payment of principal and interest up to the date of the bankruptcy, and up to the date of the bankruptcy only; and then the creditor was to prove for the residue of his debt, which, of course did not include any interest subsequent to the date of the bankruptcy. Dans sa critique de cette jurisprudence l'avocat de l'appelant fait une analogie avec le cas ou la creance est garantie non pas par les biens du failli mais par une tierce personne. Dans ce cas, affirme l'avocat de l'appelant, le creancier garanti peut se faire payer les interets gagnes apres la faillite par cette tierce personne pour ensuite s'inscrire comme creancier ordinaire dans la faillite. Cela est peut-titre vrai mais la situation est bien differente puisque dans ce cas, comme les biens du failli ne servent pas a payer les interets gagnes apres la faillite, les autres creanciers ordinaires de la faillite ne subissent aucun prejudice du fait que le premier creancier se fasse payer des interets gagnes apres la faillite. The translation of the last paragraph is: In his criticism of this jurisprudence, counsel for the appellant draws an analogy with the situation where a debt is guaranteed not by the property of the bankrupt but by a third party. Counsel for the appellant argues that in such a situation, the creditor with the guarantee can have interest earned after the bankruptcy paid by the third party in order that he can thereafter make a claim as an ordinary creditor in the bankruptcy. This may be true, but this situation is very different because, in such a case, since the property of the bankrupt is not used to pay interest earned after the bankruptcy, the other ordinary creditors in the bankruptcy will suffer no prejudice from the fact that the first creditor has paid to him interest earned after the bankruptcy. 55 This is what the chambers Judge said in dealing with this case [p. 242, 79 C.B.R. (N.S.)]: The bank also relies on the decision of the Quebec Court of Appeal in Re Developpements du Nord-Est Ltee; Banque Nationale du Cana v. Gagnon (1983), 51 C.B.R. (N.S.) 142. The court agreed in obiter dicta that the rule against a creditor receiving interest subsequent to the date of the bankruptcy of the debtor may not apply when the debt is WeStiaWNext,,cANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 11

48 Cattell, Re, 1991 CarswellBC CarswellBC 479, [1991] B.C.W.L.D. 1558, 27 A.C.W.S. (3d) guaranteed not by the property of the bankrupt, but by a third party. In the case at bar, the trustee admits that the bankruptcy of a principal debtor does not limit the liability of a guarantor. However, and this is the distinguishing factor, the bankruptcy of a guarantor does. The rationale for the rule against post-proposal interest is the same for bankrupt guarantors as for bankrupt debtors. 56 It will be seen that the chambers Judge distinguished this case on the basis of the rule against post-proposal interest being the same for bankrupt guarantors as it is for bankrupt debtors. With respect, I do not view this as a distinguishing feature. The fact is that in the guarantors' estates post-proposal interest has not been proved for nor can it be. When I say post-proposal interest I refer to the interest that is contractually payable by the guarantors on the guaranteed debt. In my opinion, the guaranteed debt here includes both principal and interest on the principal debt. What cannot be proved for and what has not been proved for in this case is the contractual interest on the guarantee itself. 57 Counsel for the trustee cited Re Alliance Credit Corp.; Gagnon v. Montreal Trust Co. (1971), 17 C.B.R. (N.S.) 136 at p. 142 (Que. S.C.), for the proposition that a creditor cannot recover more than 100 cents on the dollar (Bankruptcy Act, s. 134). To this the bank responds that as a secured creditor and outside the Bankruptcy Act, it has not realized 100 cents on its security which includes interest, and it seeks from the two estates only that part which it asserts is principal. That is, the guaranteed debt is composed of both principal and interest and it is the total of the principal and interest which is the principal sum of the guaranteed debt. The bank says, and this is the fact, that it has not recovered 100 cents on the debt as between it and Arcan. 58 In Re Alliance Credit Corp., the Montreal Trust Company was the trustee under certain trust deeds and had declared the security constituted by the trust deeds to have become enforceable. The debtor was Alliance Credit, The trustee of Alliance Credit, Gagnon, was seeking an order from the court that certain premiums under the trust deeds be paid to the estate for the benefit of the creditors rather than to the trustee under the trust deeds. Prior to the receiving order being made against Alliance Credit, the trustee under the trust deeds had distributed a substantial sum to the secured noteholders. These distributions included capital, interest and premiums without any breakdown. The issue before the court was whether the trustee, Gagnon, was entitled to an amount of money represented by these premiums and interest accrued thereon, or whether the trustee under the trust deeds was entitled to this sum for distribution to the secured noteholders. On the facts the secured noteholders had received the entire amount represented by the face amount of the notes as well as interest, The trust deeds did not stipulate that a premium was automatically payable in the case of a premature redemption as a result of default as was the case here, 59 The basic argument of the trustee of the bankrupt company was that it would be unjust and inequitable to allow the trustee under the trust deeds to enforce payment of the premium. It was found as a fact that, as a result of this premature redemption, the secured noteholders had obtained substantial and unanticipated benefits. For instance, they received 100 cents on the dollar and all accrued interest, whereas had they sold on the open market they would have realized somewhere between cents on the dollar. 60 The Judge said [p. 145] that in these circumstances to give the secured noteholders "yet additional advantage, a premium which would deprive the unsecured creditors of any meaningful dividend, borders on the immoral." The Judge held [p. 146] "that the payment of the 'premium' by the respondent [trustee under the trust deeds] would be inequitable and unjust." The funds were awarded the trustee of the bankrupt company for the benefit of the creditors. The Judge referred in his reasons to the right of the trustee under the Bankruptcy Act to seek equitable relief. He posed the question [p. 149]: Can they and should they [secured noteholders] obtain more at the expense of the unsecured creditors? Having posed that question, the Judge then referred to what was then s. 93 of the Act (now s. 134), which said, "a creditor shall in no case receive more than one hundred cents in the dollar and interest as provided by this Act." He then went on to discuss the concept of equity in the Bankruptcy Act and, quoting from a Supreme Court of the United States case, said at p. 151: The broad purpose of the Bankruptcy Act is to bring about an equitable distribution of the bankrupt's estate among creditors holding just demands based upon adequate consideration. Any agreement which tends to defeat that beneficent design must be regarded with disfavor. WeStlaWNexticANADA Copyright Thomson Reuters Canada Limited or its licensors (excluding individual court documents). All rights reserved. 12