Court Information and Parties

COURT OF APPEAL FOR ONTARIO DATE: 2022-08-22 DOCKET: M53436

Thorburn J.A. (Motion Judge)

In the Matter of Section 101 of the Courts of Justice Act, R.S.O. 1990, c. C.43, as amended, and in the matter of Section 243(1) of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended

BETWEEN

Royal Bank of Canada Applicant

and

Mundo Media Ltd., Mundo Inc., 2538853 Ontario Ltd., 2518769 Ontario Ltd., 2307521 Ontario Inc., 36 Labs, LLC., Active Signal Marketing, LLC, Find Click Engage, LLC, FLI Digital, Inc., Mundo Media (US), LLC, M Zone Marketing Inc., Appthis Holdings, Inc., Movil Wave S.A.R.L., Mundo Media (Luxembourg) S.A.R.L., and Mogenio S.A. Respondents

Matthew P. Gottlieb, Bradley Vermeersch and Xin Lu (Crystal) Li, for the moving party SPay Inc. Scott McGrath, Rachel Nicholson and Stuart Clinton, for the responding party Ernst & Young Inc., solely in its capacity as the court-appointed receiver of Mundo Media Ltd. and its subsidiaries

Heard: July 25, 2022 by video conference

Endorsement

Overview

[1] The issue to be decided on this motion is whether the moving party, SPay Inc. (“SPay”), should be granted leave to appeal the motion judge’s decision not to stay the receiver’s motion for judgment.

[2] On April 9, 2019, Mundo Media Ltd. (“Mundo”) was placed in receivership by the Ontario Superior Court of Justice pursuant to s. 243 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, as amended (the “BIA”). The responding party, Ernst & Young Inc., is the court-appointed receiver and manager of all assets belonging to Mundo and its subsidiaries (the “receiver”).

[3] The receiver brought a motion for an order directing SPay to pay US$4,124,000 to Mundo for a number of unpaid invoices, pursuant to contractual agreements between Mundo and SPay or its predecessor. These agreements were signed in 2017, prior to the receivership.

[4] SPay sought to stay the receiver’s motion on the basis that the agreements contain an international commercial arbitration clause which requires all disputes to be resolved by arbitration in New York pursuant to New York law.

[5] The motion judge refused SPay’s request. He held that the arbitration provisions in the agreements were rendered inoperative by the “single proceeding model” in Ontario.

[6] The single proceeding model applies to insolvency proceedings. This model favours litigation concerning an insolvent company to be dealt with in a single jurisdiction rather than fragmented across separate proceedings. A creditor “who cannot claim to be a ‘stranger to the bankruptcy’, has the burden of demonstrating ‘sufficient cause’” to have the proceedings fragmented across multiple jurisdictions: Sam Lévy & Associés Inc. v. Azco Mining Inc., 2001 SCC 92, [2001] 3 S.C.R. 978, at para. 76.

[7] The motion judge held that SPay is not a “stranger” to the insolvency proceeding as it will seek to set off some or all of the monies owing to Mundo. As such, it is part of the single proceeding model.

[8] SPay claims that the proposed appeal should be allowed to proceed as it meets the three-prong test for granting leave to appeal: (i) there is a real prospect of success as SPay is a stranger to the bankruptcy and its set-off does not render it an interested party to the proceeding; (ii) the proposed appeal involves an issue of public importance that will provide guidance to receivers, third parties and insolvency courts in addressing the enforceability of international arbitration agreements with third parties where a defence of set-off is raised by the third party; and (iii) the short time required to hear the appeal will not prejudice the receiver.

[9] The receiver claims the chances of success are unlikely as SPay’s intended set-off of Mundo’s single largest account receivable is in substance a claim such that it should be part of one proceeding along with all other creditors of Mundo, as contemplated by the single proceeding model. The receiver further claims that this appeal does not involve a matter of general importance; rather, the decision below is rooted in the motion judge’s specific findings of fact, to which deference is owed. Moreover, the receiver claims that allowing the motion for leave to appeal would result in undue delay and additional costs.

[10] For the reasons that follow, the motion for leave to appeal is dismissed.

Background Facts

[11] The moving party, SPay, is a sports management technology company incorporated in Delaware and headquartered in Texas. It provides an integrated technology platform for sports league management, payment administration, sports recruiting, event support and sponsorship.

[12] Mundo is an advertising technology company that provided online marketing services to clients. It carried on business in Canada, the United States and Luxembourg.

[13] In or around March 2017, Mundo began to provide SPay’s predecessor, Stack Media, Inc. with services, the terms of which were set out in a Publisher Agreement and a Maintenance and Support Agreement, both executed in July 2017. Each agreement contains an identical arbitration clause which requires all disputes, including the arbitrability of the dispute, to be determined by arbitration in New York. The substantive law of the contracts is New York law.

[14] On April 9, 2019, as a result of Mundo’s substantial decline in revenue, the Superior Court of Justice appointed the receiver. The receiver was authorized to take all necessary steps to collect Mundo’s accounts receivable.

[15] The receiver claims that SPay owed Mundo US$4,124,000 as of the date of the appointment order. According to the receiver, this is Mundo’s biggest account receivable.

[16] SPay claims that certain amounts were incurred by Stack Media Inc. before SPay bought that corporation’s assets, and that the remaining amount owing, if any, would be set off against the amount that Mundo owes to SPay. SPay has not commenced any set-off proceedings against Mundo.

[17] On May 10, 2021, after making efforts to collect the account receivable for two years, the receiver brought a motion directing SPay to pay Mundo US$4,124,000. The receiver filed no evidence on the motion.

[18] On June 30, 2021, SPay moved to stay the receiver’s motion in favour of arbitration in New York pursuant to the arbitration clauses in the agreements and the UNCITRAL Model Law on International Commercial Arbitration, adopted by the United Nations Commission on International Trade Law on June 21, 1985, as amended on July 7, 2006 (the “UNCITRAL Model Law”). The UNCITRAL Model Law is incorporated by reference in the International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sch. 5 (the “ICAA”), giving it the force of law in Ontario: s. 5.

[19] The ICAA requires the court to refer a matter to arbitration upon a party’s request, unless there are grounds on which the court should refuse the stay. A stay must be granted unless there is some cogent reason to ignore the express terms of the arbitration clause, such as “the agreement is null and void, inoperative or incapable of being performed”: ICAA, at Schedule 2, art. 8.

[20] The motion judge framed the substantive issue to be determined on the motion as follows:

[D]oes the fact that claims by and against Mundo are being administered by the court-appointed Receiver in insolvency proceedings in Ontario under the BIA mean that the arbitration agreements between SPay and [Mundo] are rendered null and void, inoperative or incapable of being performed? The answer to this question, in my view, turns on the applicability of the single proceeding model to the circumstances of this case.

[21] SPay argued that the single proceeding model is only meant to centralize claims by creditors against a debtor, not claims by a debtor against third parties. SPay filed expert evidence that under New York law the arbitration clauses in the agreements would be enforced even if the plaintiff was bankrupt, and that a receiver is generally bound by arbitration agreements executed prior to an appointment order. SPay claimed that it was not a creditor, as a set-off is a defence rather than a claim against the debtor. As such, SPay asserted that the single proceeding model should not apply to it.

The Motion Judge’s Reasons

[22] There was no dispute that the receivership proceedings were properly commenced in Ontario, or that the receiver’s claim related to monies owed to Mundo and the prosecution of proceedings to recover same.

[23] The motion judge held that it would be impracticable to have an arbitrator in New York decide the question of whether a receiver appointed by an Ontario court is bound by an arbitration clause in the context of insolvency proceedings. The motion judge explained that the receiver is an officer of the Ontario court and answers only to that court.

[24] The motion judge then addressed whether the arbitration clauses in the agreements were rendered null and void, inoperative or incapable of being performed by virtue of the single proceeding model. He noted that “the single proceeding model … is not strictly limited to claims against a debtor; it also applies to claims advanced by the debtor against a third party.” He further noted that, in cases where the third party is not a stranger to the bankruptcy, courts have invoked the single proceeding model to allow a claim by a debtor against a third party to be commenced in the jurisdiction where the bankruptcy occurred, referring to Re: Essar Steel Algoma Inc. Et al, 2016 ONSC 595, 33 C.B.R. (6th) 313, at para. 31, and Montréal, Maine & Atlantic Canada Co., 2013 QCCS 5194, at para. 29.

[25] The motion judge held that the “determining factor” in deciding whether a party is a stranger to the proceeding “is the degree of connection of the claim to the insolvency proceedings.”

[26] The motion judge held that SPay was not a stranger to the proceeding because: (i) the receiver was seeking to realize on a significant Mundo asset for the benefit of all creditors; (ii) SPay “intends to assert … its own claim against Mundo by way of the defence of set-off”; and (iii) “nothing turns on whether the money SPay claims to be owed under the Publisher Agreement is a counterclaim or set-off. It is in substance a claim against Mundo.”

[27] For these reasons, on April 26, 2022, the motion judge dismissed the motion to stay the receiver’s claim to collect against SPay, holding as follows:

Requiring the Receiver to commence arbitration proceedings in New York would be unfair to Mundo’s creditors and inconsistent with the object of the BIA to, among other things, enhance efficiency and consistency and avoid the chaos and inefficiency of multiple proceedings and of potentially sending the Receiver “scurrying to multiple jurisdictions”.

The Test to be Met on Leave to Appeal

[28] SPay requires leave of this court to pursue an appeal pursuant to s. 193(e) of the BIA. Sections 193(a)-(d) of the BIA provide that an appeal lies to the Court of Appeal from an order of the court in specified scenarios, barring which there is no automatic right to appeal. Instead, leave to appeal may be granted by a judge of the Court of Appeal “in any other case”, pursuant to s. 193(e) of the BIA. Thus, leave is required in this case and a single judge of this court can determine whether leave should be granted.

[29] On a motion for leave to appeal under s. 193(e) of the BIA, the moving party must satisfy three criteria, as set out by Blair J.A. in Business Development Bank of Canada v. Pine Tree Resorts Inc., 2013 ONCA 282, 115 O.R. (3d) 617, at para. 29.

[30] First, the proposed appeal must be prima facie meritorious; that is, the proposed appeal must raise “legitimately arguable points … so as to create a realistic possibility of success on the appeal”: see Ravelston Corp. (Re) (2005), 2005 ONCA 63802, 24 C.B.R. (5th) 256 (Ont. C.A.), at para. 29. This can include a finding that the decision “(a) appears to be contrary to law, (b) amounts to an abuse of judicial power or (c) involves an obvious error causing prejudice for which there is no remedy”: Pine Tree Resorts, at para. 31. Of course, this assessment needs to be conducted against the backdrop of s. 243 of the BIA, which has been interpreted to give supervising judges a broad mandate to resolve issues in bankruptcy: see Third Eye Capital Corporation v. Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508, 435 D.L.R. (4th) 416, at paras. 57-58. Commercial list judges with experience in insolvency proceedings are alive to the legal and business realities faced by debtors, creditors and the receiver, and substantial deference is therefore owed to their decisions: see Romspen Investment Corporation v. Courtice Auto Wreckers Limited, 2017 ONCA 301, 138 O.R. (3d) 373, at para. 84, leave to appeal refused, [2017] S.C.C.A. No. 238, referring to Royal Crest Lifecare Group Inc. (Re) (2004), 2004 ONCA 19809, 181 O.A.C. 115 (C.A.), at para. 23, leave to appeal refused, [2004] S.C.C.A. No. 104, and Grant Forest Products Inc. v. The Toronto-Dominion Bank, 2015 ONCA 570, 387 D.L.R. (4th) 426, at paras. 97-99.

[31] Second, the proposed appeal must raise an issue or issues of general importance.

[32] Third, the proposed appeal must not unduly delay the progress of the proceedings: Cosa Nova Fashions Ltd. v. The Midas Investment Corporation, 2021 ONCA 581, 95 C.B.R. (6th) 240, at para. 37, citing Marchant Realty Partners Inc. v. 2407553 Ontario Inc., 2021 ONCA 375, 90 C.B.R. (6th) 39, at para. 12, Pine Tree Resorts, at para. 29, and McEwen (Re), 2020 ONCA 511, 452 D.L.R. (4th) 248, at para. 76.

Analysis and Conclusion

[33] In determining whether SPay’s proposed grounds of appeal are prima facie meritorious, the first question is whether the motion judge erred in holding that, as a matter of law, the issue of arbitrability should be decided by the motion judge rather than an arbitrator.

[34] SPay claims that, as a general rule, mandatory arbitration provisions shall apply absent “very clear language” to the contrary: Automatic Systems Inc. v. Bracknell Corp. (1994), 1994 ONCA 1871, 18 O.R. (3d) 257 (C.A.), at p. 266; see also Dell Computer Corp. v. Union des consommateurs, 2007 SCC 34, [2007] 2 S.C.R. 801, at paras. 84-85, and Uber Technologies Inc. v. Heller, 2020 SCC 16, 447 D.L.R. (4th) 179, at para. 34, citing Rogers Wireless Inc. v. Muroff, 2007 SCC 35, [2007] 2 S.C.R. 921, at para. 11.

[35] However, the receiver is appointed by the court and the receiver’s authority emanates solely from the court order. As a matter of law therefore, only the court can determine the receiver’s powers and obligations, which includes determining whether the receiver has the authority to prosecute the debt through the single proceeding model.

[36] The court must therefore assess the limits on the receiver’s powers pursuant to the court order, including whether the presence of an arbitration clause precludes the receiver from asserting claims by the debtor against third parties not involved in the insolvency proceeding under the agreement in which that clause is found: see Canada (Attorney General) v. Reliance Insurance Co. (2007), 2007 ONSC 41899, 87 O.R. (3d) 42 (S.C.), at pp. 51-54; Luscar Ltd. v. Smoky River Coal Ltd., 1999 ABCA 179, 175 D.L.R (4th) 703, at para. 33, leave to appeal requested but application for leave discontinued, [1999] S.C.C.A. No. 381.

[37] Moreover, although article 8 of Schedule 2 to the ICAA requires a stay in favour of the arbitration agreement, the legislation expressly provides room for courts to “find[] that the agreement is … inoperative”. This express carve-out, read in conjunction with the broad discretion that courts exercise under s. 243 of the BIA in supervising bankruptcy matters, enables bankruptcy courts to preclude the operation of the ICAA by virtue of the operation of the single proceeding model.

[38] As such, I find the first ground of the proposed appeal is not prima facie meritorious.

[39] The second ground of the proposed appeal is whether SPay is a stranger to the insolvency proceeding such that the arbitration between the debtor (Mundo) and the third party (SPay) should be permitted to proceed. As noted by the motion judge, “The answer to this question, in my view, turns on the applicability of the single proceeding model to the circumstances of this case.” [1]

[40] The single proceeding model is a judicial construct used to group all claims against a debtor. The objective of the single proceeding model is to bring efficiency to the insolvency process and maximize returns for the benefit of all creditors: see Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379, at para. 22, citing Roderick J. Wood, Bankruptcy and Insolvency Law (Toronto: Irwin Law, 2009), at pp. 2-3; Rompsen Investment Corporation, at para. 70.

[41] The advantages of the single proceeding model were outlined by Deschamps J. in Century Services, at para. 22:

The single proceeding model avoids the inefficiency and chaos that would attend insolvency if each creditor initiated proceedings to recover its debt. Grouping all possible actions against the debtor into a single proceeding controlled in a single forum facilitates negotiation with creditors because it places them all on an equal footing, rather than exposing them to the risk that a more aggressive creditor will realize its claims against the debtor's limited assets while the other creditors attempt a compromise. With a view to achieving that purpose, … the BIA allow[s] a court to order all actions against a debtor to be stayed while a compromise is sought. [Emphasis added.]

[42] In Essar Steel, at paras. 31 and 33, Newbould J. outlined the considerations to be taken into account when applying the single proceeding model to third parties:

[In this case, the] issues are completely interwoven and it would make no sense to require [the applicants] to litigate its claim against [the moving parties] in the United States when [the moving parties’] claim against [the applicants] must be dealt with in this Court in Ontario. The claim of [the applicants] against [the moving parties] is an asset of the applicants to be dealt with in this Court.

For the single control model to apply, the [third party] … must not be a stranger to the insolvency proceedings. [Emphasis added; footnotes omitted.]

See also: Montréal, Maine & Atlantic Canada Co., at para. 29.

[43] SPay claims that it is a stranger to this proceeding because: (i) it has not filed a claim against Mundo; and (ii) it proposes to assert a set-off rather than make a claim. A set-off is a defence, SPay submits, and there is no suggestion that the monies SPay claims it is owed exceed the amount payable by SPay to Mundo. SPay states that it does not intend to issue a claim against Mundo, file a proof of claim or receive a distribution from the estate: see P.I.A. Investments Inc. v. Deerhurst Ltd. Partnership (2000), 2000 ONCA 16819, 20 C.B.R. (4th) 116 (Ont. C.A.), at para. 32; Thorne v. College of the North Atlantic, 2022 NLCA 31, at para. 15.

[44] SPay does not dispute that, had it commenced an action against Mundo, SPay would then be a creditor subject to the single proceeding model.

[45] The question then is, what difference does it make, if any, that the third party seeks to reduce or eliminate the amount payable to the debtor by way of a set-off but does not issue a claim seeking those same monies from the debtor?

[46] Canadian jurisprudence distinguishes between a set-off defence and a claim, and further, between legal and equitable set-off: P.I.A. Investments Inc., at para 32. However, the form of a proceeding may be less significant in the context of bankruptcy as the treatment of the bankrupt estate’s largest account receivable is inextricably interwoven with the bankruptcy proceeding.

[47] As noted by Zarnett J.A. of this court, “Although equitable set-off is a defence, ... [i]t 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’”: 3113736 Canada Ltd. v. Cozy Corner Bedding Inc., 2020 ONCA 235, 150 O.R. (3d) 83, at para. 37.

[48] It would seem therefore that the format of the proceeding is not determinative. The fact that a claim is made by a third party by way of a set-off to recover monies from a debtor may be of great significance to all creditors in the single proceeding model; this is particularly so where the debtor’s largest account receivable is at stake. To approach this matter differently would defeat the purpose of the “single proceeding model”, which is intended to “avoid the inefficiency and chaos” of a decentralized receivership process: Century Services, at para. 22.

[49] In this case, SPay is a third party to the insolvency proceeding, but is also Mundo’s largest debtor. The receiver claims that SPay owes Mundo US$4,124,000 as of the date of the appointment order. SPay’s proposed set-off may, if successful, eliminate all debt owing by SPay to Mundo.

[50] SPay is not a stranger to bankruptcy because the outcome of its proposed set-off will determine both the amount of Mundo’s single biggest account receivable and the size of the bankrupt’s estate, thereby affecting all other creditors. As noted by the Supreme Court, the most significant debtor of a bankrupt estate is “[f]ar from being a ‘stranger’ to the bankruptcy”: Sam Lévy, at para. 49.

[51] Whether SPay initiates a claim or claims a set-off, it will inevitably step into the shoes of Mundo’s creditor, and should therefore be treated in the same way as all other unsecured creditors under a single proceeding. The form of proceeding does not change SPay’s substantive role in this regard as a creditor of Mundo. SPay should not be entitled to use the form of proceeding to obtain priority where none is otherwise warranted as this would violate the basic principle of equal treatment in bankruptcy. As noted by the motion judge, if SPay’s dispute with Mundo is not brought within the single proceeding model, the purpose of this model, to avoid the chaos and inefficiency of a decentralized receivership process, would be defeated.

[52] I appreciate that the single proceeding model is typically used as a ‘shield’ to protect debtors from having to defend claims in multiple proceedings or jurisdictions, rather than as a ‘sword’ to enable receivers to pursue claims against a third party. However, I see nothing in the jurisprudence precluding this result. On the contrary, the motion judge identified two decisions – Essar Steel and Montréal, Maine & Atlantic Canada Co. – which employed the single proceeding model in the very manner contested by the moving party. The motion judge’s decision is also in keeping with the purpose of the single proceeding model as outlined by the Supreme Court in Century Services – to promote efficiency and maximize returns for creditors – and accords with the jurisprudence that parties should not be allowed to contract out of the single proceeding model where one party may make claims that will seriously adversely affect all creditors. I see no principled reason for drawing the distinction urged by the moving party.

[53] I note that the motion judge did not state that set-offs always, or even often, render a third party part of the single proceeding model. Rather, he held that “claims by a debtor against a third party may be required to be heard in the insolvency proceedings”, and that “[t]he determining factor is the degree of connection of the claim to the insolvency proceedings”. The “dominating considerations” for the motion judge in this case were that “the Receiver is seeking to realize on a significant Mundo asset for the benefit of all creditors and that SPay intends to assert, in whatever forum is ordered, its own claim against Mundo by way of the defence of set-off.”

[54] Therefore, the motion judge’s conclusions rest on findings of fact about the specific situation in which these parties find themselves, having regard to the vast amount of this account receivable relative to Mundo’s other debtors. The motion judge’s findings of fact, upon which he based his decision that there is a strong connection between SPay’s dispute with Mundo and the receivership, are findings to which deference is owed.

[55] For these reasons, I do not find that the second proposed ground of appeal is prima facie meritorious.

[56] SPay certainly articulates issues that may be characterized as issues of some importance, namely: (i) when the single proceeding model renders an arbitration clause in an international commercial agreement inoperative; (ii) when a party is a “stranger” to the single model proceeding; and (iii) whether a determination of arbitrability by an arbitrator would be impracticable. Nonetheless, in this case, I see no error in the motion judge’s articulation of the law. More importantly, on this point, the issues of concern raised by SPay are really about the application of the law to the specific facts in this case, and are not necessarily issues of more general importance. This is especially true in light of the infrequency with which these issues arise, as evidenced by the scarcity of available jurisprudence with comparable facts.

[57] Moreover, allowing the appeal to proceed would result in undue delay, additional litigation costs and deterioration of the assets of the receivership. The receiver has been trying to pursue its largest account receivable since May 24, 2019, after dealing with multiple counsel purporting to act for SPay. The receiver served its motion record on May 10, 2021. Since then, there have been other delays as a result of limited court resources, flowing in part from the COVID-19 pandemic.

[58] For these reasons, the motion for leave to appeal is dismissed. Costs of this motion are awarded to the responding party in the amount of $15,000, as agreed upon by the parties.

[59] I would like to thank counsel for their excellent advocacy.

Released: August 22, 2022 Thorburn J.A.

Footnotes

[1] The receiver also argued before the motion judge that the decision in Petrowest Corporation v. Peace River Hydro Partners, 2020 BCCA 339, 43 B.C.L.R. (6th) 8, leave to appeal granted and appeal heard and reserved January 19, 2022, [2021] S.C.C.A. No. 30, was dispositive of SPay’s motion. The motion judge considered that decision and said that he was “not persuaded by the logic and reasoning” in it. After noting that the decision was under appeal at the Supreme Court of Canada, and that he was not bound by it, he declined to follow it. Neither party has resurrected an argument that relies on Petrowest and, as such, I make no comment on its applicability to this case.