Court Information

COURT OF APPEAL FOR ONTARIO DATE: 20220915 DOCKET: M53612 & COA-22-CV-0006

Pardu J.A. (Motion Judge)

In the Matter of the Proposal to Creditors of Conforti Holdings Limited, A Corporation Incorporated Under the Ontario Business Corporations Act, R.S.O. 1990, C. B.16

Counsel: R. Brendan Bissell and Joël Turgeon, for the moving party Crowe Soberman Inc., in its capacity as trustee to the proposal to creditors of Conforti Holdings Ltd. Bobby Sachdeva, for the moving party Conforti Holdings Ltd. Clifton P. Prophet, for the respondent Moroccanoil Inc. (Thomas Gertner also appeared but made no oral submissions)

Heard: September 8, 2022

Endorsement

[1] Conforti Holdings Limited (“CHL”) and Crowe Soberman Inc. (“Proposal Trustee”) seek leave to appeal from the dismissal of the Proposal Trustee’s motion for an order “advising and directing the Proposal Trustee to not undertake the adjudication” (emphasis added) of the Moroccanoil, Inc. (“Moroccanoil”) proof of claim and the cross-claim by CHL against Moroccanoil, which would otherwise be required by s. 135 of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (“BIA”) and lifting the stay of proceedings to allow the parties to continue litigating in New Jersey.

Background

[2] CHL or its corporate predecessor operated a chain of 52 hair salons. It had been litigating in New Jersey for more than seven years with Moroccanoil over differences related to the supply of hair products. Moroccanoil also sought relief in those proceedings against the principal of CHL, Tony Conforti, personally. In those proceedings CHL has filed a counterclaim against Moroccanoil. When advised that CHL had filed a notice of intention to make a proposal pursuant to the BIA on September 28, 2020, the New Jersey court stayed proceedings there, upon Moroccanoil’s request, and over the objections of CHL. The New Jersey proceedings have been case managed and the presiding judge indicated that the matter could proceed to trial if the stay were lifted.

[3] Moroccanoil filed a proof of claim for $2,807,478.12 in the proceedings under the BIA. The Proposal Trustee declined to determine whether this was a provable claim or to valuate it but brought a motion asking to be relieved of its obligations to do so.

The motion judge’s decision

[4] The motion judge refused the motion on two grounds. He held that s. 135(1.1) of the BIA required the trustee to determine the claim, and that there was no jurisdiction to exempt the trustee from carrying out this function.

[5] Section 135(1.1) provides:

The trustee shall determine whether any contingent claim or unliquidated claim is a provable claim, and, if a provable claim, the trustee shall valuate it, and the claim is thereafter, subject to this section, deemed a proved claim to the amount of its valuation.

[6] Secondly, he held that even if there was jurisdiction to make the order requested, the order sought was not appropriate as it was not “one of the clear cases that justifies the exercise of discretion to depart from the usual process for valuation of claims under the BIA”. He was not persuaded that allowing the New Jersey proceedings to continue would be materially more efficient that adjudication of the Moroccanoil claim in the proceedings under the BIA:

[47] The Proposal Trustee submits that adjudication of the Moroccanoil Claim through the BIA proceedings would be impractical, unreasonable and unworkable. The Proposal Trustee contends that the valuation exercise would be one of disproportionate difficulty, scale, time, and cost, which would be borne by the estate of the Company rather than the litigants to the private disputes. The Proposal Trustee cites the complexity of the issues, the voluminous evidentiary record, the existence of issues of credibility, the choice of law and jurisdiction provisions in the settlement agreement, the likelihood of an appeal, the need to determine the Company’s cross-motion, and the stage of the New Jersey litigation as factors that support the requested direction.

[49] I accept that valuation of the Moroccanoil Proof of Claim may be an exercise of some complexity. It is expected that there will be an appeal of the Proposal Trustee’s valuation. Nevertheless, on the materials before me, I am not satisfied that the adjudication of Moroccanoil’s Proof of Claim cannot be completed in this Court through process that, with the benefit of case management, will not be materially longer, less efficient, or more costly than continuing the civil proceedings in the New Jersey Court.

The test for leave to appeal

[7] The moving parties seek leave under s. 193 (e) of the BIA.

[8] There is no disagreement as to the applicable test requiring consideration of the following factors:

a) Does the appeal raise issues of general importance to the practice in bankruptcy/insolvency matters or to the administration of justice as a whole;

b) Is the appeal prima facie meritorious; and

c) Would the appeal unduly hinder the progress of the bankruptcy/insolvency proceedings?

[9] A proposed appeal is prima facie meritorious where the decision appears to be contrary to law, amounts to an abuse of judicial power or involves an obvious error causing prejudice for which there is no remedy.

[10] Discretionary decisions by judges in insolvency proceedings, attuned to the particular dynamics of the proceeding, are entitled to considerable deference.

Arguments on the motion for leave to appeal

[11] Here the moving parties submit that the issue of whether a trustee may decline to value a claim by a creditor is of general importance to the insolvency practice. They argue that it is well accepted that a creditor may seek to lift a stay of proceedings and pursue its claims outside the bankruptcy in appropriate circumstances. Equally, they reason that there may be practical circumstances where it makes good sense to permit a trustee to decline to value a claim, and simply accept the outcome of external proceedings. For example, if a bankruptcy filing is made just as a lengthy external proceeding is about to culminate in a decision, it might be reasonable to allow that proceeding to come to a conclusion, rather than attempt to adjudicate it. They submit that the general rule that there should be a single process for determining claims against a debtor should permit exceptions, and that the motion judge’s interpretation of s. 135(1.1) is not mandated by the section. They submit it is inconsistent with a flexible rather than technical and stringent interpretation that could defeat the purpose of the legislation.

[12] Even if these arguments are correct, which I do not decide, I cannot conclude that there is prima facie merit to the proposed appeal because the alternate discretionary conclusion by the motion judge that it was not appropriate to have proceedings involving CHL and Conforti and Moroccanoil proceed in two different fora is unassailable. The proposed appeal is from the order made, not the reasons.

[13] The parties agree that the claims of CHL and Moroccanoil are two sides of the same coin. If one succeeds, the other will necessarily fail. CHL’s counterclaim in part of its estate.

[14] The motion judge was aware of the multiple claims in issue in New Jersey. There is no demonstrable error that would justify this court granting leave to appeal from his assessment of the advantages and disadvantages of dealing with the claims within the proceedings under the BIA. The general rule is that all claims should be adjudicated in the bankruptcy proceedings.

[15] His conclusion that there was no material advantage to allowing the litigation to continue in New Jersey is entitled to deference. An appeal from the order refusing to excuse the trustee from his obligations under s. 135(1.1) of the BIA would likely be dismissed because of the deference owed to his factual determinations. Under these circumstances I cannot conclude that there is prima facie merit to the proposed appeal.

[16] On this basis, the motions by the Proposal Trustee and by CHL are dismissed. The parties may make brief written submissions as to the costs of these motions, due from Moroccanoil within 14 days of the release of these reasons, and from the moving parties within 21 days of that same date.

“G. Pardu J.A.”