Buth-na-bodhiaga, Inc., O/A the Body Shop v. Lambert et al. [Indexed as: Buth-na-bodhiaga, Inc. v. Lambert]

60 O.R. (3d) 787

[2002] O.J. No. 3163

Docket No. C36677

Court of Appeal for Ontario,

Weiler, Abella and Goudge JJ.A.

August 19, 2002

Bankruptcy and insolvency -- Petition -- Grounds -- Non- payment of foreign judgment -- Whether petitioner's conduct sufficient cause for denial of petition for receiving order -- Dishonest and unconscionable [page788] conduct by petitioning creditor -- Petitioner seeking double recovery and failing to account for assets seized -- Petitioner's conduct providing sufficient cause for court to exercise discretion to dismiss petition -- Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 43(7).

The appellant, Buth-na-bodiaga, Inc. ("the Body Shop"), was a retailer of hair and skin products that operated as the Body Shop. The respondents, the Lamberts, were the shareholders of corporations that operated six franchise stores in the State of Michigan. The corporations granted security to the Michigan National Bank, Citicorp Leasing and the Body Shop, and the Lamberts guaranteed the indebtedness of the corporations. The Citibank guarantees were eventually assigned to the Body Shop.

In 1997, the Lamberts' corporations encountered financial difficulties and went into default under the franchise agreements with the Body Shop. In September 1997, the Body Shop obtained consent judgments against the corporations and took possession of the six stores. Under the franchise agreements, upon a termination of a franchise, the Body Shop had the option of purchasing inventory, and amounts owing from the franchises could be set off against payment. After obtaining the consent judgments, the Body Shop obtained the following: (a) a default judgment from a North Carolina court against the Lamberts in the sum of U.S. $513,730.35 plus post-judgment interest; (b) a default judgment from a New Jersey court in the sum of U.S. $936,836.49 plus interest and costs against Toni J. Lambert; and (c) a default judgment from a New Jersey court in the sum of U.S. $318,334.41 plus interest and costs against John D. Lambert. The Body Shop, despite repeated requests, did not account for the value of the inventory and equipment it obtained when it took possession of the six stores operated by the corporations.

The Lamberts moved back to Toronto. In February 2001, the Body Shop filed petitions in bankruptcy alleging that the Lamberts, within six months preceding, had committed acts of bankruptcy. The Body Shop relied on the foreign judgments. The Lamberts defended the petition on a variety of grounds, which were not successful, and they also contended that the petition should be dismissed pursuant to s. 43(7) of the Bankruptcy and Insolvency Act ("BIA"), which provides that the court may dismiss a petition "for other sufficient cause". After a trial, Cameron J. dismissed the petitions, his key finding being that the Body Shop's conduct toward the Lamberts was dishonest and unconscionable. In particular, the Body Shop was wrong in seeking to obtain double recovery for the value of the assets for which it had never accounted.

The Body Shop appealed. Its primary submission was that Cameron J. did not have the benefit of the Court of Appeal's decision in Beals v. Saldanha, which restricted any public policy defences against the enforcement of a foreign judgment in Ontario.

Held, the appeal should be dismissed with costs.

The court's decision in Beals v. Saldanha was not relevant. The Body Shop was not seeking to enforce a foreign judgment; rather, it was using foreign judgments as evidence of a debt for the purposes of petition in bankruptcy proceedings. While Cameron J. found the foreign judgments were unenforceable on grounds of public policy, he independently found that the conduct of the Body Shop was "sufficient cause" under s. 43(7) of the BIA to deny the petitions. Even if a default judgment were accepted as proper evidence of a debt, a court retains a discretion under s. 43(7) to refuse to make the order for "sufficient cause". The Body Shop's [page789] repossession of the six stores without providing any accounting for the value of the retained assets justified Cameron J.'s conclusion that there was "sufficient cause" to dismiss the petitions. The conduct of the Body Shop contravened a fundamental principle of the law of debtor and creditor -- the prohibition against double recovery. There was a proper basis for the exercise of discretion to dismiss a petition and no manifest error in principle or law that warranted appellate intervention.

APPEAL from a judgment of Cameron J. (2001), 2001 28474 (ON SC), 26 C.B.R. (4th) 235 (Ont. S.C.J.) dismissing a petition for a receiving order.

Cases referred to Beals v. Saldanha (2001), 2001 27942 (ON CA), 54 O.R. (3d) 641, 202 D.L.R. (4th) 630, 10 C.P.C. (5th) 191 (C.A.), revg in part (1998), 1998 14709 (ON SC), 42 O.R. (3d) 127, 27 C.P.C. (4th) 144 (Gen. Div.); Four Embarcadero Center Venture v. Kalen (1988), 1988 4828 (ON SC), 65 O.R. (2d) 551, 27 C.P.C. (2d) 260 (H.C.J.); General Broadcasting Ltd. (Re) (1985), 1985 2754 (SK QB), 45 Sask. R. 72, 59 C.B.R. (N.S.) 99 (Q.B.); Kadri Food Corp. (Re) (1996), 1996 5367 (NS SC), 153 N.S.R. (2d) 381, 450 A.P.R. 381, 41 C.B.R. (3d) 272 (S.C.); McNichol Estate v. Woldnik (2001), 2001 5679 (ON CA), 13 C.P.C. (5th) 61, 150 O.A.C. 68 (C.A.), affg (2000), 2000 26983 (ON SC), 52 O.R. (3d) 49, 5 C.P.C. (5th) 333, [2000] O.J. No. 5027 (S.C.J.); Old North State Brewing Co. v. Newlands Services Inc. (1998), 1998 6512 (BC CA), 58 B.C.L.R. (3d) 144, [1999] 4 W.W.R. 573, 41 B.L.R. (2d) 191, 23 C.P.C. (4th) 217 (C.A.), affg (1997), 1997 3540 (BC SC), 47 B.C.L.R. (3d) 254 (S.C.); Paulin v. National Bank of Canada (1985), 1985 4088 (NB CA), 61 N.B.R. (2d) 179, 158 A.P.R. 179, 56 C.B.R. (N.S.) 3 (C.A.) Statutes referred to Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s. 43 Creditors' Relief Act, R.S.O. 1990, c. C.45, ss. 6, 7, 10 U.S. Bankruptcy Code, 11 USC, Title 11 Uniform Commercial Code of Michigan, MCL 440.1101 Authorities referred to Walker, J., "Beals v. Saldanha: Striking the Comity Balance Anew" (2002), 5 Cdn. Int. Lawyer, No. 1 Houlden and Morawetz, Bankruptcy and Insolvency in Canada (Toronto: Carswell, 1993)

John E. Callaghan and Derek A. Vanstone, for appellant. Frank Bennett, for respondents.

The judgment of the court was delivered by

[1] ABELLA J.A.: -- This appeal by the Body Shop raises questions about when a petitioner's conduct constitutes "sufficient cause" to deny a petition for a receiving order under s. 43(7) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 ("BIA").

Background

[2] The appellant, Buth-na-bodhiaga, Inc., o/a the Body Shop ("the Body Shop") is an international retailer of hair and skin care products. The respondents, John D. Lambert and Toni J. Lambert, were shareholders in corporations (the "Franchisees") [page790] that operated six Body Shop franchises in the State of Michigan. The franchises were operated under Franchise Agreements (the "Agreements") signed between 1992 and 1996. Either or both of the Lamberts personally guaranteed the obligations of the Franchisees under each of the six Agreements.

[3] The Agreements provided that they were to be interpreted under the laws of a specific state (some specified New Jersey and some North Carolina), and that any action by one party against the other should be brought in the courts of that state.

[4] Among other provisions, the Agreements stated that [the] Body Shop had an option to purchase inventory upon termination, with the right to set off amounts owing from the Franchisees from the purchase price of the inventory:

14.9 [The] Franchisor [the Body Shop] shall have the option, to be exercised within thirty (30) days after termination, to purchase from the Franchisee any or all of the inventory, furnishings, equipment, signs, fixtures, or supplies of the Franchisee related to the Franchised Business. Purchase of such inventory [etc.] . . . shall be at Franchisee's cost or fair market value whichever is less. If the parties cannot agree within a reasonable period of time on the fair market value of the inventory [etc.] an independent . . . appraiser's determination shall be binding. If the Franchisor elects to exercise any option to purchase herein provided, it shall have the right to set off all amounts due from the Franchisee . . . and the costs of appraisal . . . against any payment therefor.

[5] By the Spring of 1997, the Lamberts had encountered financial difficulties, defaulted under the Agreements, and sought to reorganize under Chapter 11 of the U.S. Bankruptcy Code. At the time of those proceedings, the Franchisees had three secured American creditors: the Michigan National Bank (Michigan National), Citicorp Leasing Inc. (Citibank), and the Body Shop. The Lamberts had personally guaranteed the indebtedness to Michigan National and Citibank. The Body Shop had a security interest registered under the Uniform Commercial Code of Michigan, MCL 440.1101 et seq.

[6] The Body Shop purchased the Citibank claim and security in July 1997.

[7] In September 1997, the Body Shop obtained consent judgments against the Franchisees under the U.S. Bankruptcy Code, 11 USC Title 11, which allowed it to take possession of the six stores, including the inventory, receivables and fixtures, and to terminate the Agreements and subleases between it and the Franchisees. Significantly, the Franchisees retained the right to assert their rights under the Agreement.

[8] There is no evidence in the record of the value of the six store operations obtained by the Body Shop under these judgments. [page791]

[9] After obtaining the consent judgments, the Body Shop obtained the following default judgments against the Lamberts to enforce their guarantees in the courts of New Jersey and North Carolina, including the Citibank guarantee:

(a) Default judgment of the United States District Court for the Eastern District of North Carolina-Western Division dated September 22, 1998 against each of the Lamberts in the sum of U.S. $513,730.35, plus post-judgment interest at a rate of 4.73 per cent and costs (the "North Carolina Judgment"); and

(b) Default judgment of the Superior Court of New Jersey Law Division: Morris County dated May 19, 2000 in the sum of U.S. $936,836.49 plus interest and costs as against Toni J. Lambert, and in the sum of U.S. $318,334.41 plus interest and costs as against John D. Lambert (the "New Jersey Judgment").

[10] After the default judgments were obtained, the Body Shop continued to operate each of the six stores. At the time of these proceedings, one of the stores had been closed, but the Body Shop continues to operate the remaining five.

[11] On October 25, 1997, December 9, 1997 and January 26, 1998, the Lamberts asked the Body Shop to account for the value of the inventory and equipment it took over under the Chapter 11 consent judgments and as provided in the option to the Body Shop contained in the Agreements. The Body Shop refused to respond, and, to date, has not told the Lamberts whether it intends to sell, retain, or even value those assets.

[12] The Lamberts moved back to Toronto in the summer of 1997. Mr. Lambert resumed his work as a registered securities dealer, but is currently unemployed.

[13] During 2000, Mr. Lambert attempted, without success, to settle the claims with the Body Shop.

[14] In September 2000, the Body Shop filed and served a Notice of Claim under ss. 6 and 7 of the Creditors' Relief Act, R.S.O. 1990, c. C.45 ("CRA") claiming payment of the default judgments.

[15] Mr. Lambert filed a responding affidavit under s. 10 of the CRA, contesting the claim on the following grounds:

-- denying recollection of service of the legal proceedings in either North Carolina or New Jersey;

-- denying either residence or the carrying on of business in either of those states; [page792]

-- stating that the Lamberts had resided and carried on business in Michigan;

-- asserting that the amounts set out in the default judgments cannot be confirmed since a proper accounting was never received from the Body Shop; and

-- contesting the jurisdiction under which the actions were commenced.

[16] The Body Shop did not proceed further with its claim under the CRA.

[17] On February 7, 2001, the Body Shop filed the petitions in bankruptcy that are the subject of this appeal. The petitions state that the Lamberts, within six months preceding the filing of the petitions, committed acts of bankruptcy, namely: (a) ceasing to meet their liabilities generally as they become due; and (b) permitting an execution or other process issued against them to remain unsatisfied. The petitions state that each of the Lamberts is indebted to the Body Shop in amounts set out in the default judgments.

[18] In February 2001, when the petitions were filed, the Lamberts had four other creditors: Michigan National; Morris/ Rose/Ledgett; Toronto-Dominion Bank; and Commercial Union Trust. Shortly after the filing of the petitions, the Lamberts made arrangements with these creditors, none of whom supported the petitions.

The Trial

[19] At the trial of the petitions, the Body Shop argued that the default judgments it obtained against the Lamberts constituted debts exceeding $1,000 and that as of February 7, 2002, the Lamberts had ceased to meet their obligations to the Body Shop in accordance with s. 43(1)(a) and (b) of the BIA, which state:

(1) Subject to this section, one or more creditors may file in court a petition for a receiving order against a debtor if, and if it is alleged in the petition that,

(a) the debt or debts owing to the petitioning creditor or creditors amount to one thousand dollars; and

(b) the debtor has committed an act of bankruptcy within six months next preceding the filing of the petition.

[20] It also argued that the Lamberts could not challenge the merits of the foreign judgments, which were obtained in courts of competent jurisdiction after service on the Lamberts, and which [page793] the Lamberts did not appeal, try to vary, set aside or stay. Therefore, it argued, the Body Shop was entitled to an order under s. 43(6) of the BIA, which states:

43(6) At the hearing of the petition, the court shall require proof of the facts alleged in the petition and of the service of that petition, and, if satisfied with proof, may make a receiving order.

[21] The Lamberts acknowledged at trial that a final judgment of a foreign court will generally be recognized if the foreign court had jurisdiction to deal with the matter. They argued, however, that the conduct of the Body Shop in obtaining the default judgments raised issues of fraud, natural justice, and public policy, rendering them unenforceable.

[22] The Lamberts further argued that the Body Shop's conduct represented "sufficient cause" for the trial judge to exercise his discretion to dismiss the petitions under s. 43(7) of the BIA, which states:

43(7) Where the court is not satisfied with the proof of the facts alleged in the petition or of the service of the petition, or is satisfied by the debtor that he is able to pay his debts, or that for other sufficient cause no order ought to be made, it shall dismiss the petition.

(Emphasis added)

[23] Cameron J. acknowledged that, subject to limited grounds of impeachment, our courts are obliged to honour foreign judgments and enforce them according to their terms, provided that the foreign court is one of competent jurisdiction. (See Four Embarcadero Center Venture v. Kalen (1988), 1988 4828 (ON SC), 65 O.R. (2d) 551, 27 C.P.C. (2d) 260 (H.C.J.) and Old North State Brewing Co. v. Newlands Services Inc. (1998), 1998 6512 (BC CA), 41 B.L.R. (2d) 191, 58 B.C.L.R. (3d) 144 (C.A.).)

[24] Cameron J. rejected the Lamberts' allegations of fraud on the part of the Body Shop in invoking the jurisdiction of the New Jersey and North Carolina courts to enforce the guarantees given by the Lamberts to the Body Shop. As he noted (at paras. 69 and 70), there was no evidence:

. . . of the laws of those jurisdictions respecting the obligation on a plaintiff to advise the court of partial recovery of the amounts claimed, rights to double recovery and rights on foreclosure of security.

In these circumstances, I am not satisfied on a clear balance of probabilities that Body Shop acted fraudulently in seeking the jurisdiction of the New Jersey and North Carolina courts. If the court had the power and authority to hear and decide the claim, and to deny the claim based on a valid defence, it cannot be said the court lacked jurisdiction in the circumstances and that their jurisdiction was invoked by fraud.

[25] Nor did Cameron J. find any breach of natural justice. The Body Shop's Complaints had been clear and outlined the causes [page794] of action and the amounts claimed. The Lamberts initially denied that they had been served with some of the Complaints, but Cameron J. found that they had in fact been served, had a reasonable opportunity to defend the claims, and had not filed defences because they could not afford to do so.

[26] With respect to the guarantees assigned by Citibank to the Body Shop, however, Cameron J. found fraud going to jurisdiction, making this portion of the default judgments unenforceable. This was based on the fact that the Citibank guarantees were not governed by the Agreements between the parties and were signed in Michigan with respect to money borrowed in Michigan while the Lamberts were living there. As Cameron J. stated (at para. 67):

The Lamberts had lived and carried on business in Michigan. The Citibank guarantees were signed in respect of borrowings in Michigan for the Franchised Businesses in Michigan. At the times of the Complaints the Lamberts were resident in Canada. They owned a house and cottage in Ontario and Mr. Lambert worked in Ontario. The attornment clauses in the guarantees were restrictions which were drafted by Body Shop on the Lamberts' rights and should be read contra proferentem against Body Shop so as to limit their application only to matters relating to the business dealings under the Franchise Agreements between the Franchisees, the Lamberts and Body Shop. There is no evidence the New Jersey or the North Carolina courts had any grounds to assume jurisdiction over the Lamberts in respect of the Citibank guarantees. While the Lamberts were aware of these facts on service of the Complaints, these are matters of jurisdiction. I would refuse to recognize the Default Judgments to the extent they rest on the Citibank guarantees.

[27] But the key to Cameron J.'s decision was his finding that the Body Shop's conduct towards the Lamberts was dishonest. The following (in paras. 66 and 68), explains his conclusion:

At the times of the services of the Complaints, Body Shop had not exercised its rights under the Franchise Agreements to purchase the inventory and equipment within 30 days. There is no evidence the Body Shop had made any demands on the guarantees. The Body Shop had refused to account for the inventory it had acquired. However there was no evidence of any duty to the foreign courts to plead potential defences. In my opinion the Lamberts had almost all the facts necessary to defend the claims against them on their merits in the jurisdictions to which they had attorned by agreement to the extent of the guarantees to the Body Shop. The Lamberts did not know at the time of the Complaint that Body Shop had not given credit for the value of the inventory, . . . obtained under the Consent Judgments. The Complaints were silent on this issue. Further the Lamberts did not know that Body Shop had decided to retain the assets and would not give the Lamberts credit for their value.

Body Shop knew or ought to have known it was wrong to obtain double recovery for the value of the retained assets. Body Shop did not account for the value of those assets in the Complaints and refused to reply to Mr. Lambert's requests to account. [page795]

Body Shop never told the New Jersey or North Carolina courts or the Lamberts that they intended to retain those assets and to sell them for its own account. Body Shop did not proceed further with its claims in the CRA proceedings following the objection filed by Mr. Lambert requesting an accounting for the values of the retained assets and contesting the jurisdiction of the courts to grant the Default Judgments. I am satisfied, on a clear balance of probabilities, that on the basis of the law of Ontario, Body Shop acted dishonestly with a view to depriving the Franchisees, and the Lamberts as guarantors of the Franchisees indebtedness, of the value of the retained assets. Under our law it is an issue going to the merits of the proceeding.

[28] This conclusion was based in part on the evidence at trial from the Lamberts' Michigan commercial bankruptcy lawyer, Max Newman, who had acted for the Franchisees and negotiated the consent judgments. Cameron J. expressed his concern (at paras. 72 to 74) that there were no legal bases for the Body Shop's actions:

Mr. Newman testified that as Body Shop gave no notice of the sale of its collateral to either the debtor or the guarantor, the creditor is completely barred from recovering a deficiency judgment.

The rights of a debtor under Michigan law are similar to the rights of a debtor under s. 63, 64 and 65 of the Personal Property Security Act of Ontario ("PPSA") and the common law. A creditor, in the absence of an agreement to the contrary with the debtor or the surety, must preserve and protect the security and be in a position, unless excused by other agreement, to return or reassign the security to the debtor or the surety on repayment of the debt . . . A creditor may not act or neglect to act so as to worsen the position of a surety and, if by neglect of the creditor a security is lost, the surety is entitled to be discharged to the extent of the prejudice which he suffers as a result of that loss.

A creditor must deal with a security in a reasonable manner to ensure the maximum amount is derivable from it. If the surety is deprived of the fair value of the security then he is entitled to be discharged to the extent of the prejudice suffered subject to the contrary agreement: McGuiness, para. 10.88. Our PPSA has modified this common law by requiring the creditor to deal with the security in a commercially reasonable manner and following proper notices. Where a creditor forecloses the secured property it will lose its right to claim against the surety.

[29] He summarized the foundation for his conclusion that the Body Shop's conduct was "unconscionable" (at paras. 75, 76 and 78) as follows:

Neither the Franchise Agreements, nor the guarantees nor the Consent Judgments contained any provision by which the Lamberts contracted out of the equitable principles reflected in the Michigan U.C.C. and our legislation. The Consent Judgments provided for retention of the assets by Body Shop [page796] but left open the right of the Franchisees to assert their rights under the Franchise Agreements. The Franchise Agreements and Consent Judgments left open the obligations on Body Shop to value the collateral and reduce its claim by that amount, to deal with the retained assets in a commercially reasonable manner, to give notice of sale and to bear the consequences of foreclosure. Body Shop failed to give any notice of retention, sale, opportunity to redeem, accounting or valuation. There is no evidence of any waiver of those rights.

Body Shop seeks a double recovery not available to it in law either in Ontario or in Michigan. It seeks to retain assets transferred to it without taking account of their value in the Complaints or complying with its obligation to account to the Franchisees for the value of those assets. It seeks to recover the amounts of the primary indebtedness to it at the time of the Consent Judgments when it knew it was under an obligation to account for the assets it retained. There was no accounting in the Complaints for the value of the retained assets. The assertion of both the claims in the Consent Judgments and failing to account for the value of the retained assets is unconscionable. Enforcement of the Default Judgments would be an egregious breach of widely accepted commercial morality and contrary to the public policy expressed in the creditors' rights legislation of both Michigan and Ontario. It is not consonant with our system of justice and general moral outlook to countenance a double recovery in these circumstances. See Boardwalk Regency Corp. v. Maalouf (1992), 1992 7528 (ON CA), 6 O.R. (3d) 737 (C.A.) per Carthy J. at p. 743 cited in Beals at p. 143. It would, in my view, bring the administration of justice into disrepute.

In these circumstances an Ontario court ought not to recognize the Default Judgments.

[30] He then concluded (at paras. 81, 82 and 84) that the double recovery constituted "sufficient cause" pursuant to s. 43(7) of the BIA to dismiss the petition:

Body Shop's retention of the assets and asserting the full amount of the indebtedness of the Franchisees without accounting for the value of the retained assets . . . constitutes sufficient cause to dismiss the Petition. In retaining the assets Body Shop has waived its rights to claim the balance against the Franchisees, and so against the Lamberts as guarantors. This court should not encourage attempts by creditors to obtain double recovery on all or part of the debt owing no matter what the conduct of the debtor in attempting to avoid the debt. If the debtor's conduct warrants some further claim by the creditor, the creditor must be up front in asserting it. Retention of the assets without accounting for their value is contrary to public policy.

The Body Shop did not base its Petition on the guarantees and the indebtedness of the Franchisees. It relied solely on the Default Judgments. It offered no evidence of the value of the retained assets. Would the value of the retained assets have exceeded the indebtedness of the Franchisees resulting in no liability under the guarantees? We don't know.

. . . . . [page797]

Body Shop chose to retain and foreclose on the assets without valuing them. It must live with that decision. Double recovery for part of a debt is contrary to public policy and the effort to do so without advising either the Franchisees or the Lamberts of the decision to do so was no less than contrary to recognized standards of commercial morality.

[Emphasis added]

[31] Cameron J. also observed that Mr. Lambert's licence to trade in securities likely depended on the outcome of these proceedings, and that if he lost his licence, he would be "less able to meet his apparently substantial obligations to his other creditors".

[32] As a result of his findings, he dismissed the petitions against the Lamberts under s. 43(7) of the BIA.

Analysis

[33] The Body Shop's primary submission in this appeal is that the trial judge did not have the benefit of this court's decision in Beals v. Saldanha (2001), 2001 27942 (ON CA), 54 O.R. (3d) 641, 202 D.L.R. (4th) 630 (C.A.), [See Note 1 at end of document] which, it argued, so narrowed the "public policy" defence against the enforcement of a foreign judgment in Ontario as to render foreign judgments almost unimpeachable on those grounds. (See "Beals v. Saldanha: Striking the Comity Balance Anew", Janet Walker, Cdn. Int. Lawyer, Vol. 5, No. 1, (2002)). Because the default judgments were properly obtained in New Jersey and North Carolina, the Body Shop submitted, the trial judge erred in refusing to accept them as evidence of the debt owed by the Lamberts.

[34] It is important to note that the Body Shop is not seeking to have the foreign default judgments obtained against the Lamberts in the United States enforced in Ontario, but instead is seeking receiving orders against the Lamberts, using those foreign judgments as evidence of their debt. As a result, the applicable law in this case is the law of bankruptcy, not the law relating to the enforcement of foreign judgments.

[35] While the trial judge undoubtedly found that the foreign default judgments would be unenforceable on the grounds of public policy, he also clearly and independently found that the conduct which led him to conclude that the default judgments were unenforceable, constituted "sufficient cause" under s. 43(7) of the BIA. [page798]

[36] That means, among other things, that this court's subsequent decision in Beals is not relevant to whether Cameron J. properly exercised his discretion to dismiss the petitions for "sufficient cause" under s. 43(7) of the BIA. Moreover, an application for a receiving order under bankruptcy law necessarily engages matters of domestic policy that go well beyond the principles of international comity relevant to the enforcement of foreign judgments.

[37] I am not aware, in any event, of any case in bankruptcy suggesting that when a foreign judgment is tendered to prove a debt for the purpose of a receiving order, the court is obliged, automatically, to accept that judgment as proof of the debt. (See Houlden and Morawetz, [infra] p. 2-33). In Re General Broadcasting Ltd. (1985), 1985 2754 (SK QB), 45 Sask. R. 72, 59 C.B.R. (N.S.) 99 (Q.B.), for example, the court held that while a petitioner in bankruptcy may prove his or her claim by establishing the existence of a foreign judgment, the question whether a foreign judgment can be enforced in Canada is an issue distinct from whether there is a debt owing.

[38] We need not decide, therefore, whether Cameron J. erred in his application of the public policy defence relating to the enforcement of foreign judgments. He was entitled to take the same factors that informed his "enforceability" conclusion into consideration when undertaking his analysis to dismiss the petitions under s. 43(7).

[39] Even if the default judgments had been accepted by him as valid and proper evidence of a debt over $1,000, he nonetheless retained the discretion under s. 43(7) to refuse to make the order for "sufficient cause". A court is not even bound by the fact that the petitioning creditor has obtained a judgment in a domestic court for an amount in excess of $1,000 -- it still has the authority, notwithstanding the existence of the judgment, to inquire into the relevant circumstances.

[40] The s. 43(7) jurisprudence offers illustrative circumstances in which courts have exercised their discretion to dismiss a petition. In Re Kadri Food Corp. (1996), 1996 5367 (NS SC), 41 C.B.R. (3d) 272, 450 A.P.R. 381 (N.S.S.C.), for example, the court refused to make the receiving order where the petitioning creditor was a landlord whose illegal distress caused the failure of his tenant debtor's business. The following have also been held to represent improper conduct or purpose disentitling the petitioner to a receiving order:

(a) the filing of a petition to get rid of a business competitor or to gain a business advantage; [page799]

(b) using the bankruptcy court as a collection agency, not with the intent of obtaining the benefit of an equal distribution of the debtor's assets for all creditors, but with the intent of forcing the debtor to make some special arrangement for the payment of the petitioning creditor's debt, regardless of what is done for other creditors;

(c) using the bankruptcy court for extortion, that is, threatening bankruptcy unless the debtor pays something beyond what is legally due;

(d) filing a petition in order to harass a debtor;

(e) filing a petition in order to terminate a contract;

(f) filing a petition in order to settle a dispute between shareholders;

(g) purchasing a debt in order to be able to file a petition; and

(h) filing a petition to prevent the debtor from defending itself against a disputed claim.

(See Houlden and Morawetz, Bankruptcy and Insolvency in Canada (Toronto: Carswell, 1993) at pp. 2-65 to 2-66).

[41] Based on the analogous guidance of this list, it seems to me that the Body Shop's repossession of the six stores formerly operated by the Lamberts without providing any accounting to them for the value of the retained assets, amply justifies Cameron J.'s characterization of this attempted double recovery as "sufficient cause" to dismiss the petitions.

[42] On these facts, Cameron J. is entitled to deference in the exercise of his discretion. The facts he relied on to conclude that the Body Shop's conduct was so violative of public policy as to render the judgments unenforceable, were the same facts supporting his decision that there was "sufficient cause" for dismissing the petitions. He found not only that the Body Shop had intentionally deprived the Franchisees of their assets, but that its attempt to obtain recovery in circumstances it knew -- or ought to have known -- were improper, was dishonest and unconscionable.

[43] The trial judge found that the Body Shop had improperly retained the assets of the Franchisees without the required accounting. This, to him, meant that the amounts of the default judgments could therefore be misleading, even to the possible extent that after an accounting, no money would be owing to the Body Shop. This conduct on the part of the Body Shop, Cameron J. [page800] concluded, contravened a fundamental principle of our law of debtor and creditor: the prohibition against double recovery. In my view, this was a proper basis for the exercise of his discretion to deny the petitions.

[44] To warrant appellate intervention, the Body Shop would have to show a manifest error in principle or law. (See Paulin v. National Bank of Canada (1985), 1985 4088 (NB CA), 56 C.B.R. (N.S.) 3, 158 A.P.R. 179 (N.B.C.A.).) I see none here. The reasons of Cameron J. outlining the factors provoking his concerns were careful, thoughtful, and persuasive.

[45] The Body Shop also argued that Cameron J. erred when he found that there was no jurisdiction in the New Jersey or North Carolina courts for the Citibank debt on which the default judgments were partially based. Relying on McNichol Estate v. Woldnik (2001), 2001 5679 (ON CA), 150 O.A.C. 68, 13 C.P.C. (5th) 61 (C.A.), it submitted that because the trial judge found that the foreign courts had jurisdiction over the Body Shop guarantees in the Agreements, it was an error not to recognize the Citibank debt which involved the failure of the same franchises and same Franchisees. In view of my conclusion that Cameron J. made no error in the exercise of his discretion under s. 43(7) of the BIA, it is unnecessary to address this argument.

[46] Accordingly, the appeal should be dismissed with costs. In order to fix costs of the appeal, the court will entertain brief written submissions dealing with the award of costs. Counsel for the Lamberts should deliver submissions and a bill of costs no later than seven days from the date of this judgment. Counsel for the Body Shop may deliver a response, if any, no later than seven days thereafter.

Appeal dismissed with costs.

Notes

Note 1: Leave to appeal Beals was granted by Supreme Court of Canada, May 16, 2002 (S.C.C. File No. 28829, S.C.C. Bulletin, 2002, p. 781.).