3113736 Canada Ltd. v. Cozy Corner Bedding Inc.

Ontario Reports Court of Appeal for Ontario K.N. Feldman, D.M. Brown and Zarnett JJ.A. March 23, 2020 150 O.R. (3d) 83 | 2020 ONCA 235

Case Summary

Bankruptcy and insolvency-- Practice and procedure — Settlements — Appeal by defendant from summary judgment allowed — Insolvent plaintiff sued defendant for payment on unpaid invoices — Defendant alleged overcharging and price-fixing gave rise to set-off of claim — Motion judge ruled counterclaim raising equitable set-off was barred by release in settlement of price-fixing class action and granted plaintiff judgment — Judgment set aside — Defendant's claim was provided for in exception to release that preserved class members' ability to pursue claims in insolvency — Judge erred in finding insufficient evidence to support overcharging claim — Matter directed to trial — Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36, s. 21.

Appeal by the defendant, Cozy Corner Bedding, from summary judgment dismissing its counterclaim and granting judgment in favour of the plaintiff, Valle Foam. The plaintiff manufactured and supplied foam products. The defendant was a longstanding customer of the plaintiff. In 2010, the plaintiff was charged with price-fixing contrary to the Competition Act, R.S.C. 1985, c. C-34. The plaintiff was consequently a defendant in a class proceeding comprised of customers, such as the plaintiff. In 2012, the plaintiff pled guilty and settled the class action without further payment. The class action release preserved the right of class members to advance claims in insolvency proceedings. Immediately thereafter, the plaintiff filed for insolvency protection. In 2013, the plaintiff sued the defendant to recover unpaid invoices. The defendant counterclaimed that it had overpaid amounts exceeding the plaintiff's claim due to the price-fixing scheme. The plaintiff obtained summary judgment for the amount of the invoices. The motion judge found that the defendant's counterclaim raised equitable set-off that was barred by the class action release, and was not supported by sufficient evidence of overcharging. The defendant appealed.

Held, the appeal should be allowed.

The motion judge did not err in finding that the defendant had sufficient notice of the class action, the settlement containing the release and the right to opt-out. However, the motion judge erred in determining that the class action release applied to the defendant's assertion of equitable set-off. The exception within the release allowed class members, like the defendant, to make claims arising from price-fixing activities in the course of an insolvency proceeding. The right to claim equitable set-off fell within that exception, and was consistent with s. 21 of the Companies' Creditors Arrangement Act. The settlement channeled claims such as that raised by the defendant into the plaintiff's insolvency protection process and left them unimpaired. In addition, the judge erred in failing to find a genuine issue for trial in relation to the issue of overcharging and its impact upon the plaintiff's claim. The summary judgment was set aside with a direction for the matter to proceed to trial.

Cited Authorities

Cases referred to

Statutes referred to

Rules and regulations referred to

Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 20.02(1)

APPEAL from the order of Sanfilippo J., 2019 ONSC 2249, 69 C.B.R. (6th) 102 (S.C.J.).

Counsel: Douglas LaFramboise, for appellant. Varoujan Arman, for respondent.

The judgment of the court was delivered by Zarnett J.A. :

Overview

[1] Insolvency legislation preserves the right of a person, who has been sued by the insolvent, to raise set-off as a defence. The main issue in this appeal is whether that right was given up by a release that the insolvent obtained in a class action.

[2] The respondent, 3113736 Canada Ltd. ("Valle Foam"), was a manufacturer and supplier of foam products. The appellant, Cozy Corner Bedding Inc. ("Cozy Corner") was one of Valle Foam's long-standing customers. In 2010, Valle Foam was charged under s. 45(1)(c) of the Competition Act, R.S.C. 1985, c. C-34 with conspiring to unduly lessen competition in the sale or supply of foam products, and under s. 45(1)(a) of the Competition Act with conspiring to fix, maintain or increase the price for those products. The time period alleged in the charges was from January 1, 1999 to March 11, 2010 for the s. 45(1)(c) offences and March 12, 2010 to July 27, 2010 for the s. 45(1)(a) offences.

[3] Various class actions were commenced against Valle Foam and others alleged to have been involved in the price-fixing scheme. An Ontario class action was commenced in 2010. The class actions included claims for damages for price-fixing on behalf of purchasers of foam products.

[4] On January 5, 2012, Valle Foam pled guilty to the Competition Act offences and was fined a total of $6.5 million. The motion judge noted that this included an admission of price-fixing in relation to the period covered by the charges, namely, January 1, 1999 to July 2010.

[5] On January 11, 2012, Valle Foam agreed to a settlement of the class actions conditional upon court approval. The next day, January 12, 2012, Valle Foam filed for insolvency protection under the Companies' Creditors Arrangement Act, R.S.C., 1985, c. C-36 (the "CCAA"). As described in the affidavit of Tony Vallecoccia, the Chief Executive Officer of Valle Foam at the time of the CCAA filing (the "Vallecoccia Affidavit"), the two events were closely related. As he deposed, the settlement of the class action

did not involve any payment by Valle Foam to the plaintiff class;
was made expressly on the contemplation that Valle Foam would immediately be filing for insolvency protection; and
provided that the settlement and the termination of the class proceedings were "without prejudice to the Class Plaintiffs and putative class members . . . asserting their claims as creditors within the proposed CCAA proceedings".

[6] When Valle Foam filed for CCAA protection, it obtained a broad stay of proceedings against it. Paragraph 13 of the Initial Order provided that until the termination of the stay period, "no proceeding or enforcement process in any court . . . shall be commenced or continued against . . . [Valle Foam]". Paragraph 14 provided that during the stay period, "all rights and remedies of any . . . corporation . . . against [Valle Foam] were stayed and suspended". The stay period was initially until February 10, 2012, but was extended from time to time through to at least April 30, 2019, that is, beyond the time this matter was heard by the motion judge.

This Action

[7] In addition to its purchases from Valle Foam during the period covered by the price-fixing charges, Cozy Corner purchased additional foam product from Valle Foam between August 5, 2011 and January 27, 2012. Valle Foam issued invoices totaling approximately $200,000 for this product, the bulk of which remained unpaid as of April 8, 2013 when Valle Foam demanded payment (the "Disputed Invoices").

[8] On May 1, 2013, Valle Foam, while under CCAA protection, instituted this action claiming $184,319.34 on the Disputed Invoices, which Cozy Corner had refused to pay when it learned of Valle Foam's price-fixing guilty plea.

[9] Cozy Corner defended the action and counterclaimed, alleging that it was not required to pay the invoices because of the price-fixing and overcharging in which Valle Foam had engaged. Cozy Corner referred to the guilty plea and relied on its payments to Valle Foam from 2001 to 2012 "for product that was the subject of price fixing". Cozy Corner counterclaimed for what it estimated was the amount it had been overcharged -- $410,000 representing 10 per cent of the $4.1 million it had paid to Valle Foam since 2001. This amount exceeded Valle Foam's claim by roughly $225,000.

[10] In its reply, Valle Foam relied on the stay in the CCAA order and asked that the counterclaim be dismissed. It claimed that Cozy Corner had not suffered any loss on the Disputed Invoices because they were in respect of product sold after the price-fixing period in the guilty plea. Valle Foam also alleged that, if any amounts were found to be owing to Cozy Corner, they should be set-off against its claim. Paragraph 20 of the reply states: ". . . in the event any amounts are owing by [Valle Foam] to [Cozy Corner], which is expressly denied for reasons pleaded herein and in the Statement of Claim, [Valle Foam] is entitled to set-off those amounts against the amount claimed in the Statement of Claim".

The Class Action Settlement Approval

[11] The Ontario class action was certified for settlement purposes against Valle Foam and others in July 2013. In August 2013, notice of the certification and of a request that the settlement be approved was mailed to, among others, Valle Foam's customer list, on which Cozy Corner's name appeared. Notice was also provided in certain media. The notice provided for an opportunity to opt out of participation in the class action and a deadline (October 18, 2013) for doing so, and stated that if a class member did not opt out "you will be bound by the settlement". Cozy Corner did not opt out.

[12] On February 11, 2014, the settlement of the class actions was approved in Ontario (the "Class Action Settlement Order"). Ontario settlement class members were defined as including all persons who purchased foam products from January 1, 1999 to January 10, 2012, and who did not validly opt out. The Class Action Settlement Order gave effect to the Class Action Release, described more fully below, and deemed the Released Claims (also described below) to be discontinued.

[13] The Class Action Release provides that class members release Valle Foam, among others, from the Released Claims, which include "any and all manner of claims, demands, actions, . . . damages whenever incurred, . . . relating in any way to any conduct [between] January 1, 1999 to the date hereof [January 10, 2012] . . . in respect of the purchase, sale, pricing, discounting, marketing, distributing of or compensation for, Foam Products. . .".

[14] The Class Action Release is subject to the following exception:

. . . Notwithstanding anything in this Settlement Agreement to the contrary, including but not limited to this Settlement Agreement's provisions relating to the release of the Released Claims granted by the Releasors in favour of the Releasees and the discontinuance of proceedings as against the Domfoam Defendants, nothing in this Settlement Agreement shall preclude the Plaintiffs, or any member of the Settlement Class, individually or collectively, from filing against the Domfoam Defendants a claim in any creditor protection, restructuring, insolvency or other bankruptcy proceeding in Canada and/or the U.S. to the extent that such claim is based upon, arising out of or relating to facts, occurrences, transactions or other matters alleged in the Proceedings. To the extent permitted by law, the Domfoam Defendants shall not object to the filing by the Plaintiffs, or any member of the Settlement Class, of any such claim against the Domfoam Defendants in any creditor protection, restructuring, insolvency or other bankruptcy proceeding in Canada or the U.S., and further agree that nothing in this Settlement Agreement shall in any way impair or limit such claim against the Domfoam Defendants or the ability of such claimant(s) to seek recovery in any such creditor protection, restructuring or other bankruptcy proceeding in Canada or the U.S. for any such claim(s) against the Domfoam Defendants.

[15] The term "Domfoam Defendants" in the Class Action Release included Valle Foam.

The Motion Judge's Decision

[16] The motion judge rejected Cozy Corner's argument that it was not bound by the Class Action Release because it did not receive actual notice of the class action, the settlement approval, or the right to opt-out. He found that the procedure that had been undertaken in the class action provided adequate notice to class members.

[17] In addition, the motion judge found that the claims in the defence and counterclaim, which Cozy Corner sought to set-off against the respondent's claim, fell within the definition of "Released Claims" in the settlement. Cozy Corner was bound by the Class Action Release, and its counterclaim was deemed to be discontinued, as it had not opted out of the class action settlement. The motion judge held this to be a sufficient ground to grant judgment on Valle Foam's claim and dismiss the counterclaim: at paras. 49-55.

[18] In the alternative, he also found that Cozy Corner had not put its best foot forward to show, by evidence, that there was price-fixing on the invoices on which it was sued, or the amount of over-charging due to price-fixing on prior invoices. He therefore would have granted judgment and dismissed the counterclaim on this basis if he had not done so on the basis of the Class Action Release: at para. 78.

[19] Finally, he held that if he had not dismissed the counterclaim on the basis of the Class Action Release, he would have rejected Valle Foam's request to stay the counterclaim on the basis of the CCAA stay of proceedings. He reasoned that "a claim for equitable set-off can be continued in response to a claim brought by a party protected by a CCAA proceeding notwithstanding a stay order", and that the counterclaim is "a form of set-off responsive to the claim by the party under CCAA protection": at paras. 80-82.

[20] As a consequence, the motion judge granted judgment in favour of Valle Foam in the sum claimed on the Disputed Invoices ($184,319.34), with pre-judgment and post-judgment interest, and dismissed Cozy Corner's counterclaim.

Analysis

Standard of review

[21] The motion judge's decision that there was no genuine issue requiring a trial is a finding of mixed fact and law. Where there is no extricable error in principle, findings of mixed fact and law should not be overturned absent palpable and over-riding error: Hryniak v. Mauldin, 2014 SCC 7, at para. 81.

Is Cozy Corner bound by the class action release?

[22] Cozy Corner submits that the motion judge erred in finding that it was bound by the Class Action Release because of its contention that it did not actually receive notice of the class action, the settlement which contained the release, or the right to opt-out.

[23] I would not interfere with the motion judge's conclusion on this point.

[24] Subsection 29(3) of the Class Proceedings Act, 1992, S.O. 1992, c. 6 states that "[a] settlement of a class proceeding that is approved by the court binds all class members". Cozy Corner does not dispute that it falls within the class definition in the Ontario class action, that it did not opt out, and that even after Valle Foam raised the class action settlement against it, it brought no motion in the class action to extend the time for it to opt out.

[25] Cozy Corner's argument that it did not receive actual notice of the class action, the settlement approval hearing, or of the opportunity to opt out, is therefore unavailing. While the law is clear that adequate notice to class members must be provided, the lack of actual notice to any particular class member does not prevent the class (except for opt outs) from being bound where sufficient steps have been undertaken to provide adequate notice: Currie v. McDonald's Restaurants of Canada Ltd., at paras. 28 to 31; Airia Brands Inc. v. Air Canada, 2017 ONCA 792, at para. 86, leave to appeal refused [2017] S.C.C.A. No. 476.

[26] The motion judge's finding that sufficient steps to provide adequate notice had been undertaken was completely justified on the record. It is entitled to deference. Cozy Corner's lack of actual notice did not prevent it from being bound by the Class Action Release.

Does the Class Action Release Cover Equitable Set-Off?

[27] Cozy Corner further argues that the motion judge erred in viewing the Class Action Release as applying to Cozy Corner's assertion of equitable set-off.

[28] The motion judge's interpretation of the Class Action Release is subject to a deferential standard of review, absent extricable error: Sattva Capital Corp. v. Creston Moly Corp., 2014 SCC 53, at paras. 50 and 55. However, here the motion judge failed to interpret the Class Action Release as a whole and give meaning to all of its terms, which is a fundamental principle of contractual interpretation: Ventas Inc. v. Sunrise Senior Living Real Estate Trust, 2007 ONCA 205, at para 24. His reasons do not advert to or analyze the exception in the Class Action Release. This is an extricable legal error within the meaning of Sattva, at para. 53. Accordingly, his interpretation is not subject to deference.

[29] The motion judge relied on the following term of the Class Action Release as indicative of its breadth:

Released Claims mean any and all manner of claims, demands, actions . . . , damages whenever incurred, damages of any kind including compensatory, punitive or other damages, liabilities of any nature whatsoever, . . . relating in any way to any conduct occurring anywhere, from January 1, 1999 to the date hereof [January 10, 2012] in respect of the purchase, sale, pricing, discounting, marketing, distributing of or compensation for, Foam Products, or relating to any conduct alleged (or which could have been alleged) in the Proceedings or the Other Actions[.]

[30] Cozy Corner argues that equitable set-off falls outside of this language because it is a defence, not a claim. Equitable set-off is not, for example, precluded by a limitation period the way a claim is: Grand Financial Management Inc. v. Solemio Transportation Inc., 2016 ONCA 175, at paras. 92 to 94, leave to appeal refused [2016] S.C.C.A. No. 183.

[31] I would not give effect to this argument. Although equitable set-off is a defence, it is one that arises from the defendant having a "cross-claim" that is closely connected to the plaintiff's claim: Holt v. Telford, at p. 212 S.C.R. It is a way of raising, as a defence, a plaintiff's liability to take into account a loss it occasioned to the defendant in reduction of the plaintiff's claim. It is often referred to as a "claim for equitable set-off": Canada Trustco Mortgage Co. v. Pierce (Estate Trustee of), at para. 50, leave to appeal refused: [2005] S.C.C.A. No. 337.

[32] The definition of Released Claims refers to "any and all manner of claim" and also to "liabilities of any nature whatsoever". In my view, this language is broad enough to capture a claim for equitable set-off.

[33] However, the exception (excerpted at para. 14 of these reasons) is an important restriction on what would otherwise be the broad effect flowing from the definition of Released Claims. The exception allows class members (like Cozy Corner) to make claims arising from the matters in issue in the Class Actions (i.e., the price-fixing activities) in the course of an insolvency proceeding taken by a beneficiary of the Class Action Release (like Valle Foam). It leaves the right to make such claims unimpaired.

[34] In my view the right to claim equitable set-off in an insolvency falls within the exception.

[35] The CCAA preserves the ability of a creditor to raise set-off when sued by a company that is subject to CCAA protection. Section 21 of the CCAA, which appears within a group of sections appearing under the heading "Claims", provides:

21 The law of set-off or compensation applies to all claims made against a debtor company and to all actions instituted by it for the recovery of debts due to the company in the same manner and to the same extent as if the company were plaintiff or defendant, as the case may be.

[36] Section 21 of the CCAA extends to claims for equitable set-off: Algoma Steel Inc. v. Union Gas Ltd., at paras. 13-16. Because successfully raising set-off against the insolvent permits a dollar-for-dollar reduction in what would otherwise be a liability to the insolvent, claims for set-off are to be viewed with caution: Algoma, at paras. 14-15. However, here the motion judge accepted that what Cozy Corner raised was a claim for equitable set-off.

[37] Valle Foam argues that the exception in the Class Action Release only applies to permit Cozy Corner to file a claim for payment of the overcharges in a CCAA claims process. It argues that the exception does not extend to allowing Cozy Corner to raise set-off as a defence when Valle Foam, while under CCAA protection, sues it.

[38] I would not give the exception so narrow a reading. In my view, the exception in the Class Action Release preserves the right of class members like Cozy Corner to raise claims in insolvency proceedings to the same extent as the law applicable to that insolvency proceeding permits. The CCAA governs Valle Foam's insolvency proceeding and envisages that Valle Foam, as a company subject to its protection, may sue to recover on debts owed to it, but that if it does, a defendant can raise equitable set-off. Accordingly, I do not view Cozy Corner's assertion of equitable set-off as falling outside of the right of Cozy Corner to seek recovery in a "creditor protection, restructuring, insolvency or bankruptcy proceeding in Canada", a right which was specifically said not to have been impaired by the Class Action Release.

[39] There is no unfairness to Valle Foam in this conclusion. Although the motion judge viewed the settlement as reflecting a choice by Cozy Corner "to pursue its remedy against [Valle Foam] in the administration of the class settlement" (para. 68), there was in fact no remedy to be pursued in the class settlement as Valle Foam made no payment to settle. More accurately put, the settlement channeled claims into Valle Foam's CCAA process, and left them unimpaired in that process. Cozy Corner, by raising a claim of equitable set-off in its defence and counterclaim, is raising a right specifically available in the CCAA process, which was not compromised by the Class Action Release.

Was there Sufficient Evidence of Overcharging to Raise a Genuine Issue for Trial?

[40] The motion judge held that, in any event, Cozy Corner failed to lead and establish evidence to support its claim of equitable set-off. He stated, at paras. 76 to 77, that

Cozy Inc. did not produce any evidence of price-fixing by Valle Inc. during the period of the 2011-2012 Invoices, recalling that the Offence Period admitted by Valle Inc. in its guilty plea under the Competition Act charges (January 1, 1999 to July 2010) pre-dated the 2011-2012 purchases in question. Section 9.1 of the Class Settlement Agreement specifically states that any step taken by Valle Inc. in the Class Action settlement "shall not be deemed, construed or interpreted to be an admission of any violation of any statute or law, or of any wrongdoing or liability" by Valle Inc.

In regard to the 2009 invoices, Cozy Inc. did not produce any evidence of the amount of over-charging said to have resulted from price fixing by Valle Inc. so as to establish a quantification of the damage claim that it asserted. The 10% over-pricing value pleaded by Cozy Inc. was not established by any evidence. Cozy Inc. submitted that it could not produce this evidence because the Plaintiff had refused to provide it. I agree with Corbett J. in Sweda Farms Ltd. v. Egg Farmers of Ontario, 2014 ONSC 1200, at para. 28, that "a burden of persuasion rests on [the responding party] to establish that it has taken reasonable steps to obtain the evidence it needs for the motion for summary judgment, and that the missing evidence would be material to the disposition of the motion". Cozy Inc. has not shown that it took reasonable steps to obtain the evidence that it says the Plaintiff has on the over-pricing value.

[41] In my view, the motion judge made a palpable and over-riding error in his assessment of the evidentiary record in coming to this conclusion.

[42] The motion judge noted that the Disputed Invoices fell outside the time period for which Valle Foam had entered a guilty plea, and that Cozy Corner's principal had conceded on cross-examination that the only reason these invoices were not paid was due to the Competition Act charges on which Valle Foam was convicted. The motion judge was entitled to view the amount of the Disputed Invoices as established.

[43] But, even if the amount of the Disputed Invoices sued upon was established, any overcharging on prior invoices issued and paid during the period of price-fixing could, in the circumstances, qualify as a "cross-claim . . . so clearly connected with the demand of [Valle Foam] that it would be manifestly unjust to allow [Valle Foam] to enforce payment without taking into consideration the cross-claim": Telford, at p. 212. The parties were in a long-term supply arrangement, and overcharging for a period from 2001 to 2010, if it occurred, could form the basis of an equitable set-off against amounts properly charged in following years. The motion judge made no finding to the contrary. His concern was with the evidence in support of the amount of overcharging.

[44] Valle Foam's evidence in support of its motion for summary judgment attached the Vallecoccia Affidavit, which had been used in support of its CCAA filing. The Vallecoccia Affidavit stated that Valle Foam had agreed to a substantial fine in its prosecution by the Competition Bureau "based on a number of factors, including the Bureau's practice of assuming a 20% overcharge". It went on to say that in the absence of a settlement, Valle Foam faced substantial exposure in the class action "even if [Valle Foam was] only exposed to several liability and the Court calculates damages based on a modest 5% overcharge . . ." (emphasis added). The motion judge did not advert to that evidence.

[45] Given that Valle Foam's own evidence included the amount of the Competition Bureau's assumption concerning its overcharging (20 per cent), and described its potential exposure in the class action using a percentage of overcharging that its CEO considered to be "modest" (5 per cent), there was some basis in the evidence that there had been an overcharge which, when applied to the amount of Cozy Corner's prior purchases from Valle Foam (in excess of $3 million), yielded an amount that could substantially negate or reduce Valle Foam's claim. Valle Foam supplied no other evidence of the amount of the overcharges or to explain the Vallecoccia statements.

[46] The motion judge noted that when asked by Cozy Corner to provide the amounts of the overcharges, Valle Foam did not do so. Although the motion judge referred to the request and refusal, he did not explain what further steps were required to be taken by Cozy Corner at this stage to qualify as "reasonable steps to obtain the evidence that it says [Valle Foam] has on the over-pricing value": at para. 77. Nor did he explain why an adverse inference could not be drawn against Valle Foam from its failure to provide such information: Rules of Civil Procedure, R.R.O. 1990, Reg. 194, rule 20.02(1); Indcondo Building Corp. v. Steeles-Jane Properties Inc., [2001] O.J. No. 3316 (S.C.J.).

[47] In my view, taken together, the record disclosed facts showing a genuine issue requiring a trial on the amount of the overcharges and their effect on Valle Foam's claim.

Conclusion

[48] I would allow the appeal, set aside the summary judgment, and direct the matter to proceed to trial. The parties did not address whether, if Cozy Corner establishes equitable set-off in an amount that exceeds Valle Foam's claim, it could, in addition to defeating that claim, obtain judgment for any excess in a manner analogous to what s. 111 of the Courts of Justice Act, R.S.O. 1990, c. C.43, allows in cases of legal set-off. Nothing in these reasons preordains the determination of that issue if it arises.

[49] In accordance with the agreement of the parties, I would award Cozy Corner the costs of the appeal in the amount of $5,000, inclusive of disbursements and applicable taxes.

Appeal allowed.

End of Document

3113736 Canada Ltd. v. Cozy Corner Bedding Inc., 2020 ONCA 235

Case Summary

3113736 Canada Ltd. v. Cozy Corner Bedding Inc.

Case Summary

Cited Authorities

Overview

This Action

The Class Action Settlement Approval

The Motion Judge's Decision

Analysis

Standard of review

Is Cozy Corner bound by the class action release?

Does the Class Action Release Cover Equitable Set-Off?

Was there Sufficient Evidence of Overcharging to Raise a Genuine Issue for Trial?

Conclusion

Cited By (3 cases)

Johnson v. Ontario, 2022 ONCA 725

Mundo Media Ltd. (Re), 2022 ONCA 607

El-Khodr v. Northbridge Commercial Insurance Company, 2021 ONCA 440

Judges

Counsel

Parties

Areas of Law

Legislation 5