ISSI Inc. v. SASSY Inc., 2016 ONSC 557

COURT FILE NO.: CV-15-522544

DATE: 20160121

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: ISSI Inc. (formerly ISIS Inc.), plaintiff

AND:

SASSY Inc., SASSY 14 LLC and Angelcare Monitors Inc.

BEFORE: Sean F. Dunphy, J.

COUNSEL: Melvyn Solmon and Nancy Tourgis, for the Plaintiff

Robert Cohen, for the Defendants

HEARD: January 21, 2016

ENDORSEMENT

[1] This motion was originally framed as an anti-suit injunction. By the time it came on for a hearing, the plaintiff/moving party had morphed it into a request to enforce an undertaking to the United States Bankruptcy Court in a motion brought despite (or because of) an existing anti-suit injunction issued by that court. Whether framed as an anti-anti-suit injunction or a motion to enforce an undertaking, it would in my view be counterproductive to entertain such a motion at this stage and I decline to grant the relief requested however phrased.

[2] The plaintiff in this proceeding, once known as “ISIS Inc.” has changed its name to the less-charged acronym of “ISSI Inc.”. It is a Canadian corporation. It is a party to a 2010 distribution agreement with a United States company headquartered in New Jersey known as Sassy Inc. (or “Old Sassy”) providing ISSI with the exclusive right to import and sell certain products for an indefinite term. I do not have a copy of the Distribution Agreement in evidence before me.

[3] While operating under that Agreement, ISSI purchased goods from time to time under purchase orders that it issued. Those purchase orders contained fine print on the back that required several rounds of enlargement before being legible. Included in the fine print, however, was a submission by the seller to the exclusive jurisdiction of Ontario courts and Ontario law.

[4] The distribution system established under the Agreement appears to have required at least some purchase orders to be sent by ISSI directly to various factories in China as the request of Sassy Inc. and payment for the goods so ordered was made directly to the factories in at least some cases. In other cases, purchase orders were routed directly through Sassy Inc.

[5] On the strength of these purchase orders, the plaintiff would have me assume that the relationship between the ISSI and Old Sassy is necessarily one governed by Ontario law. I remain agnostic on the question pending (a) demonstration of relevance; and (b) further evidence. As noted, I do not have a copy of the Distribution Agreement nor more than a sparse description of its context.

[6] A unilateral declaration contained on the back of a purchase order itself issued in the context of a relationship governed by other agreements may or may not reflect the terms of the agreement between the parties. It may be a factor, but a more fulsome exploration of the evidence than has been possible at this point would be required to reach a reliable conclusion. Sassy Inc. being essentially out of the picture at this point for the reasons described below, the relevance of the question is not however readily apparent.

[7] Old Sassy did not enjoy unbridled success in its commercial endeavours. It filed a petition under Chapter 11 of the United States Bankruptcy Code on June 18, 2014. In the course of those bankruptcy proceedings, supervised by Kaplan J. of the United States Bankruptcy Court for the District of New Jersey, a process to sell the assets of Sassy Inc. was undertaken. On August 19, 2014, the US Bankruptcy Court issued an order authorizing the sale of certain assets of Old Sassy and made a number of ancillary orders in favour of the purchasers Sassy 14, LLC and Angelcare Monitors Inc. (hereafter “New Sassy” and “Angelcare” respectively). The purchasers, as asset purchasers, were assured in the approval orders that they would not inherit any successor liability for the obligations of Old Sassy and that the assets purchased would be free and clear of encumbrances. While the transaction was completed on the same day (August 19, 2014), the purchasers were given a period of time to review the executory contracts of Old Sassy and to assume only those executory contracts they chose to acquire. I am only paraphrasing the terms of orders that I do not have fully before me, relying on the quotations from them contained in the motion materials filed in the US Bankruptcy Court proceedings described more fully below.

[8] The approval orders contain terms made – at least as far as they appear in the limited evidence before me – are not in the slightest way unusual or unknown to our own courts operating in similar circumstances.

[9] The Distribution Agreement between Old Sassy and the plaintiff was not one of the executory contracts that the purchasers determined to acquire. In such circumstances, the plaintiff has two obvious issues to deal with: a) the amount of its claim against Old Sassy for the loss of the benefit of the Distribution Agreement; and b) the disposition of the inventory it had acquired on the strength of the Distribution Agreement before Old Sassy effectively repudiated it in the course of the bankruptcy process. In the course of argument before me, the plaintiff assured me that the only practical business interest that it was seeking to protect was its right to realize upon the inventory that it had acquired under the Distribution Agreement before its repudiation by Old Sassy. If that is so, the plaintiff appears to have chosen the rockiest path available to resolve what appears to me to be a fairly simple and straightforward issue.

[10] On February 23, 2015, the plaintiffs started a first action (CV-15-522544) against Old Sassy, the purchasers New Sassy and Angelcare as well as two other companies. The remedies sought included damages for breach of the Distribution Agreement and conspiracy and intentional interference with contractual relationships as against both Old Sassy and the purchasers and an accounting of sales made by the purchasers since January 1, 2015.

[11] This first action was apparently not formally served on any party. However, it appears to have been communicated to the parties. I pause to note that it is not hard for me to appreciate why a party to a purchase agreement approved by the United States Bankruptcy Court might find this first statement of claim to have entailed something of a direct challenge to the orders made by the United States Bankruptcy Court in approving the sale to them.

[12] The first action was reformulated by the plaintiff. On October 6, 2015 the present proceeding was commenced by way of a new Statement of Claim. While certain refinements were brought to the claim, the revised claim raises many of the same issues as to the rights of the purchasers to have acted in reliance upon the US bankruptcy process. The plaintiffs, to be fair, softened some of their approach but much of the theory of the initial claim was carried forward. As well, the claim alleged independent torts that are at least arguably separate and distinct from the fact that New Sassy chose not to assume the Distribution Agreement as it was permitted to do under the US Bankruptcy Court orders governing its purchase of the business. Whether those apparently independent claims can survive scrutiny as stand-alone, independent tort claims and not a collateral attack on the approval orders is not before me and I could express no view on as slender an evidentiary foundation as is before me now.

[13] I am advised that the second Statement of Claim was in fact served upon Angelcare but has not been served upon either Old Sassy or New Sassy. Old Sassy being in bankruptcy proceedings and subject to a general stay of proceedings can be safely assumed to remain mute on the subject. What interest was advanced by adding them as a party without moving to lift the stay (even if one has not formally been recognized here as of yet) is not apparent to me.

[14] The purchasers brought a motion for injunctive and other relief before Kaplan J. in a complaint and associated motion both dated December 15, 2015. The complaint alleged that the present action (i.e. the second claim) has been brought by plaintiffs who had been properly served with notice of the proceedings before the US Bankruptcy Court in the matter of Old Sassy and that this action has been brought in violation of various of the court orders in that proceeding. Other claims, including for payment of debts alleged to be owing and an accounting of sales made in Canada are made as well. Indeed, each side appears to want the other to account to it for sales of product in Canada in proceedings launched on their respective sides of the border. I express no views or comments on that aspect of the complaint as it is neither relevant nor before me.

[15] The plaintiff in this proceeding attaches very great significance to one sentence contained in the motion attached to the complaint filed by the purchasers in the New Jersey proceeding. In the motion, returnable on December 22, 2015, the purchasers sought an emergency injunction barring the plaintiffs in this action from proceeding in Ontario on the basis that they might otherwise be required to file responsive pleadings in Canada within short deadlines. At paragraph 8 of the motion, the purchasers (plaintiffs in that proceeding) indicated that they “intend to file a motion to dismiss or stay the Canada Action based upon the exclusive jurisdiction of the Bankruptcy Court and the fact that the Sale Order extinguished any claim that ISSI may have had against Plaintiffs derived from the exclusion of the Distribution Agreement from the Purchased Assets”.

[16] This statement, they allege, amounted to an undertaking to bring such a motion that the Canadian plaintiffs in this proceeding are entitled to ask me to enforce.

[17] It the statement was made in the motion was a true undertaking, it had a short life span. By December 18, 2015 the purchasers’ counsel had unequivocally stated to the plaintiff in this action that they would not be bringing a motion in Ontario as originally indicated.

[18] Before that email exchange, however, the plaintiffs in this action decided that the only proper response to an anti-suit injunction was another anti-suit injunction. This motion was commenced on December 17, 2015 seeking an interim injunction precluding the defendants from seeking the injunction they were seeking in the December 15 motion.

[19] The US motion was heard first. On December 22, 2015 Kaplan J. issued a “temporary restraining order” - essentially an interim injunction – enjoining further proceedings by the plaintiff in this action. The application for an injunction came on for a hearing before Kaplan J. yesterday (January 20, 2016). Among other things brought to the attention of Kaplan J. in the course of the parties briefing that motion was correspondence from New Jersey counsel for the Canadian plaintiff in this action forcefully pleading before him the terms of the original “undertaking” contained in paragraph 8 of the purchaser’s December 15 motion (quoted above).

[20] In other words, Kaplan J. had before him the precise issue – enforcement of the alleged undertaking – that the plaintiff is asking me to deal with today.

[21] I have had the advantage of reading a transcript of the oral reasons given by Kaplan J. at yesterday’s hearing.

[22] Kaplan J. sought – wisely in my view – to pour some oil on these troubled waters. He advised both parties that he had read the extensive back-and-forth in the materials placed before him. All or most of the same extensive correspondence has been laid before me today. He found that he must examine whether he had subject-matter jurisdiction and personal jurisdiction and – if so – whether the defendants in that proceeding (the plaintiff in this one) ought to be restrained.

[23] As far as subject-matter jurisdiction is concerned, Kaplan J. found that as framed the complaint before him raised the question. To the extent that that the allegations of the plaintiff in the Ontario action arise in whole or in substantial part from the application of orders made by him – his court’s subject-matter jurisdiction is surely engaged. I can find no reason to disagree with that fairly straightforward conclusion. If the claim against the purchasers is that they did what the orders authorized them to do, his orders are engaged. If the claim is that they went further and did things beyond the scope of those orders, different considerations may arise.

[24] As for personal jurisdiction, Kaplan J. found that the record before him was entirely inadequate. Sensibly, Kaplan J. directed the parties to engage in a discovery process in order to place before him a better evidentiary record on personal jurisdiction.

[25] In the result, he continued the TRO/interim injunction to allow that discovery process time to be conducted. Applying a test not at all dissimilar to our own in terms of weighing the balance of convenience he found that a temporary stay would have appear to have little impact beyond deferring the costs of litigation in the Canadian proceeding and that the public policy in favour of the finality of sale orders outweighed the potential harm to this defendant (i.e. the Canadian plaintiff).

[26] Finally, Kaplan J. concluded by noting that he was not directing his order at the Ontario court out of respect for this court and hoped that this court would afford him a similar level of respect.

[27] The purchasers appeared on a purely conditional basis for the purposes of this motion only. I did not need to hear from them at the hearing in any event.

[28] The alleged undertaking made in paragraph 8 of the motion to Kaplan J. has become the sole remaining foundation of the motion as brought before me. The plaintiffs claim that this was indeed an undertaking and should and must be enforced by me.

[29] I shall refrain from deciding whether paragraph 8 of the motion is an undertaking or simply a revocable statement of intention. If the latter, it was withdrawn within 48 hours and before any substantive order was made by the US Bankruptcy Court. More importantly, the very issue was quite explicitly raised before Kaplan J. who determined in a reasoned judgment to maintain his TRO/interim injunction without requiring the purchasers to bring that motion. While it is true that his reasons for decision do not explicitly deal with the issue of the alleged undertaking, I have no doubt it was before him and was given consideration.

[30] There is simply no basis for me to treat a statement made to the United States Bankruptcy Court in a motion made before it as an undertaking that I ought event to consider enforcing when the exact same question has been raised before that same Court and resulted in an adverse decision.

[31] I have no reason to believe that the plaintiff in this proceeding will receive anything less than due process before the United States court. There is no question in my mind that what Kaplan J. described as matters of “core jurisdiction” before his court are indeed matters that we would regard as core to the jurisdiction of his court. If the plaintiffs in the Ontario action can fairly demonstrate that their independent tort allegations are indeed independent and not merely a thinly disguised collateral attack on the orders made by the Bankruptcy Court, I have no reason to believe that Kaplan J. will fail to discern the difference.

[32] Our bankruptcy courts supervise liquidation proceedings of going-concern businesses and make similar common-sense orders similar to those made in the case of Old Sassy on a regular basis. I recognize in the orders of the United States Bankruptcy Court shown to me just the sort of orders and outcomes that I would expect to see arising in similar circumstances before our own courts exercising bankruptcy jurisdiction. I hasten to add that comity is not premised upon courts in different jurisdictions operating in identical fashion under identical rules.

[33] It goes without saying that our bankruptcy systems are sufficiently similar in approach and methodology that numerous courts on both sides of our very long border have recognized that the appropriate approach to be is to assume that comity will be granted absent unusual circumstances. The volume of trade and common economic and social ties between our two economies is a fundamental pillar of the prosperity enjoyed by both and those ties depend in no small measure upon the ability of our respective legal systems to iron out the minor frictions that arise from time to time in a common-sense manner and with respect and deference. Comity is not just good manners, it is a fundamental feature of our relationship.

[34] While it is true that no order recognizing the various orders made by the United States Bankruptcy Court in the course of the proceedings involving Old Sassy has yet been sought on this side of the border, such orders are contemplated (where needed) by our bankruptcy statutes (c.f. Part XIII of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 and Part IV of the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. 36 ) and have long been granted by our Superior Courts in the exercise of our inherent jurisdiction on an ad hoc basis as well. Absent unusual circumstances, I would expect that a United States Bankruptcy Court requesting the aid and assistance of our Court would be able comfortably to anticipate a favourable response of that request.

[35] This motion is premature. There is no irreparable harm about to be visited upon the plaintiff. The plaintiff has access to an entirely adequate and reasonable forum to air its positions on subject-matter and personal jurisdiction. Kaplan J. is entitled to assume my co-operation and assistance when reasonably requested and his requests appear eminently sensible and reasonable in this context.

[36] As I expressed to the parties in court, it seems that the true dispute between them concerns the inventory acquired by the plaintiff under the Distribution Agreement prior to its termination in the bankruptcy proceedings (which appears to have been on December 31, 2014). The launching of cruise missiles by one side or the other from their litigation bunkers seems a much less efficient means of discussing how that inventory ought to be liquidated than a dispassionate and reasonable discussion among business people.

[37] This case is not the first nor will it be the last time such an issue has presented itself in bankruptcy proceedings and a non-litigious way for the parties to stand down and resolve the issue ought not to challenge sensible business people acting in a reasonable fashion.

[38] The motion is accordingly dismissed. I shall make no order as to costs for today.

Sean F. Dunphy, J.

Date: January 21, 2016