Re Brookstone Company, Inc. 2016 ONSC 6762

COURT FILE NO.: CV-16-11483-00CL

DATE: 2016-11-23

SUPERIOR COURT OF JUSTICE - ONTARIO

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C.1985, C. C-36, AS AMENDED

AND IN THE MATTER OF CERTAIN PROCEEDINGS TAKEN IN THE UNITED STATES BANKRUPTCY COURT FOR THE DISTRICT OF DELAWARE WITH RESPECT TO BROOKSTONE COMPANY, INC., BROOKSTONE, INC., AND OTHER COMPANIES

BEFORE: Mr. Justice H.J. Wilton-Siegel

COUNSEL: Kenneth D. Kraft and Vanja Grie, for the Applicants, Brookstone Company, Inc. and Brookstone, Inc. D. Ward, for the Respondent, Kathy Miller Jim Tomlinson and David Olevson, for the Respondent, Specialized Transportation Inc.

HEARD: October 27, 2016

ENDORSEMENT

[1] The applicants, Brookstone Company, Inc. and Brookstone, Inc., seek orders pursuant to section 61 of the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (the “CCAA”) recognizing and giving effect in Canada to two orders made in the United States Bankruptcy Court for the District of Delaware (the “U.S. Court”). The orders were made in the applicants’ proceedings pursuant to Chapter 11 of title 11 of the U.S. Code (the “Chapter 11 Cases”).

Background

[2] The following is a brief summary of the relevant facts, which are not disputed.

The Miller Action

[3] Brookstone Company, Inc. is a specialty retailer incorporated in the United States which carries on business through over 200 retail stores located in the United States. It has never opened a store in Canada but services Canadian customers by way of online, telephone, and mail orders.

[4] The respondent, Kathy Miller (“Miller”), commenced an action in Ontario against, among others, each of the applicants, Pilot Air Freight Corp. and OSIM International Ltd. seeking damages in tort for injuries allegedly suffered as a result of the defendants’ negligence in respect of an item of furniture sold by the applicants to Miller and shipped to Canada from the United States.

[5] On April 9, 2013, the applicants filed a defence and crossclaim in the action seeking contribution and indemnity from their co-defendants.

[6] On September 26, 2013, Miller served an amended statement of claim that added the respondent Specialized Transport Agent Group-Canada Corp., operating as STI Canada (“STI”), as a defendant. On October 25, 2013, the applicants served an amended statement of defence and cross-claim which included a cross-claim against STI.

[7] On January 6, 2014, STI served its statement of defence and cross-claim in which it cross-claimed against each of its co-defendants, including the applicants, seeking contribution and indemnity from them.

[8] On February 3, 2014, the applicants served a notice of examination on Miller returnable on September 2, 2014.

[9] The defendants in the action, including the applicants, examined Miller on September 2, 2014. This was after the U.S. court confirmed the Plan (as defined below) in the Chapter 11 Cases. Since that time, the action has not proceeded in any substantial respect. Miller has, however, amended her pleadings in respect of certain defendants, not including the applicants, and obtained expert reports.

The Chapter 11 Proceedings

[10] On April 3, 2014, the applicants and a number of related entities commenced the Chapter 11 Cases. Pursuant to those proceedings, the U.S. Court issued an order dated April 23, 2014 (the “Bar Date Order”) establishing a claims process in those proceedings for the determination of pre-filing claims. The Bar Date Order provided for a claims bar date of June 16, 2014 (the “Bar Date”) in respect of certain classes of pre-filing claims, which included Miller’s claim in her action.

[11] Miller received notice of the Bar Date Order and the documentation to enable her to file a proof of claim in the Chapter 11 Cases. Miller did not, however, file a proof of claim by the Bar Date and has not filed one since.

[12] The plan of reorganization (the “Plan”) regarding the applicants pursuant to the Chapter 11 Cases was confirmed by order of the U.S. Court on June 24, 2014 (the “Confirmation Order”) and became effective on July 7, 2014.

[13] STI first learned that the applicants were the subject of insolvency proceedings from a letter dated July 29, 2014 from the applicants’ Canadian counsel to STI. The letter stated as follows:

As you may be aware, our client has filed for Chapter 11 Protection in the United States. Please advise what you intend to do with respect to Brookstone’s involvement in this action.

I would observe that, by this time, the Plan had already been confirmed.

The Orders Sought to be Recognized

[14] On August 9, 2016, more than two years after the date of the Confirmation Order, the applicants commenced this application. They seek recognition and enforcement in Ontario of the Bar Date Order and the Plan as confirmed by the Confirmation Order (collectively, the “U.S. Orders”).

[15] The relevant provision of the Bar Date Order reads as follows:

14. Any person or entity who is required, but fails, to file a proof of claim or Administrative Claim Form in accordance with the terms of this Bar Date Order on or before the applicable Bar Date shall be: (a) forever barred, estopped and enjoined from asserting such claim against the Debtors or the Reorganized Debtors (or filing a proof of claim with respect thereto) and, moreover, the Debtors or the Reorganized Debtors shall be forever discharged from any and all indebtedness or liability with respect to or arising from such claim and (b) prohibited from voting to accept or reject any plan of reorganization filed in the Debtors’ Chapter 11 Cases or participating in any distribution on account of such claim or receive further notices regarding such claim. [Emphasis in original.]

[16] The Plan contains two provisions relevant for the present proceedings. Section 9.1 discharged, released, and barred any “Claims” as defined therein, the definition of which included Miller’s claim in her action. Section 9.5 provided for an injunction enjoining, among other things, the continuation of any proceedings in respect of any “Claims”, including Miller’s claim in her action.

Applicable Law

[17] The applicants did not bring an application pursuant to section 46 of the CCAA for recognition of the Chapter 11 Cases as a foreign proceeding when they were underway. Accordingly, they did not seek recognition of the U.S. Orders of the U.S. Court pursuant to sections 48 or 49 of the CCAA at that time.

[18] Instead, the applicants seek an order at this time under section 61 of the CCAA, which reads as follows:

61 (1) Nothing in this Part prevents the court, on the application of a foreign representative or any other interested person, from applying any legal or equitable rules governing the recognition of foreign insolvency orders and assistance to foreign representatives that are not inconsistent with the provisions of this Act.

(2) Nothing in this Part prevents the court from refusing to do something that would be contrary to public policy.

In effect, section 61 provides that nothing in Part IV of the CCAA prevents a party from seeking recognition of a foreign bankruptcy order on the basis of the common law rules of comity.

[19] The leading case on the law of comity is the decision of the Supreme Court in Morguard Investments Ltd. v De Savoye (1990), 1990 29 (SCC), 76 D.L.R. (4th) 256 (S.C.C.). In addition, the applicants have referred the Court to the decision of Farley J. in Babcock & Wilcox Canada Ltd. (2000), 2000 22482 (ON SC), 18 C.B.R. (4th) 157 (Ont. S.C. [Commercial List]), which addressed the principles applicable to the recognition of foreign bankruptcy orders under the predecessor of section 61 of the CCAA, prior to the amendments that introduced Part IV of the CCAA in 2005. In this regard, Farley J. made the following observations, at para. 21:

… I would think that the following may be of assistance in advancing guidelines as to how s. 18.6 should be applied. I do not intend the factors listed below to be exclusive or exhaustive but merely an initial attempt to provide guidance:

(a) The recognition of comity and cooperation between the courts of various jurisdictions are to be encouraged.

(b) Respect should be accorded to the overall thrust of foreign bankruptcy and insolvency legislation in any analysis, unless in substance generally it is so different from the bankruptcy and insolvency law of Canada or perhaps because the legal process that generates the foreign order diverges radically from the process here in Canada.

(c) All stakeholders are to be treated equitably, and to the extent reasonably possible, common or like stakeholders are to be treated equally, regardless of the jurisdiction in which they reside.

(d) The enterprise is to be permitted to implement a plan so as to reorganize as a global unit, especially where there is an established interdependence on a transnational basis of the enterprise and to the extent reasonably practicable, one jurisdiction should take charge of the principal administration of the enterprise’s reorganization, where such principal type approach will facilitate a potential reorganization and which respects the claims of the stakeholders and does not inappropriately detract from the net benefits which may be available from alternative approaches.

(e) The role of the court and the extent of the jurisdiction it exercises will vary on a case by case basis and depend to a significant degree upon the court’s nexus to that enterprise; in considering the appropriate level of its involvement, the court would consider:

(i) the location of the debtor’s principal operations, undertaking and assets;

(ii) the location of the debtor’s stakeholders;

(iii) the development of the law in each jurisdiction to address the specific problems of the debtor and the enterprise;

(iv) the substantive and procedural law which may be applied so that the aspect of undue prejudice may be analyzed;

(v) such other factors as may be appropriate in the instant circumstances.

(f) Where one jurisdiction has an ancillary role,

(i) the court in the ancillary jurisdiction should be provided with information on an ongoing basis and be kept apprised of developments in respect of that debtor’s reorganizational efforts in the foreign jurisdiction;

(ii) stakeholders in the ancillary jurisdiction should be afforded appropriate access to the proceedings in the principal jurisdiction.

(g) As effective notice as is reasonably practicable in the circumstances should be given to all affected stakeholders, with an opportunity for such stakeholders to come back into the court to review the granted order with a view, if thought desirable, to rescind or vary the granted order or to obtain any other appropriate relief in the circumstances.

[20] In Babcock & Wilcox Canada, Farley J. addressed the recognition of orders in an on-going Chapter 11 proceeding in the United States. It will be observed that his comments, upon which the applicants rely, are focused on such circumstances. The legislative purpose of section 61 of the CCAA after the amendments in 2005 is not at all clear.

Preliminary Observations

[21] The following observations are relevant to the determination of the Court herein.

[22] First, the applicants base their position in part on the argument that, even if Miller is successful in her Ontario action, she would be unable to enforce any judgment in her favour in the United States because, among other things, she had full notice of the Bar Date Order and the claims process established thereunder. Miller acknowledges this but says that she seeks a judgment in the Ontario action with a view to enforcing it in Ontario to the extent the applicants may have any assets in the Province — for example, in the form of receivables that may be attached. Miller submits that foreign bankruptcy orders are presumptively unenforceable and should not be enforced by the Court in this instance.

[23] Second, while Miller does not suggest that she has any defence to the operation of the U.S. Orders, STI submits that there are two legal considerations in its favour. First, it did not receive proper or timely notice of the Bar Date Order or of the process established under the Order. STI submits that it therefore has a valid subsisting claim against the applicants for contribution and indemnity in respect of any judgment against it obtained by Miller. Second, STI says that it has a right to claim against the applicants’ insurer in the United States even if it is unable to claim contribution and indemnity from the applicants. These circumstances suggest that fairness in the present context requires an order that distinguishes between Miller and STI — that is, an order that may operate with respect to Miller but not with respect to STI.

[24] Third, although the Plan also contains injunctive language, the essence of the U.S. Orders in the present context is, in effect, a determination that Miller and STI have no claim against the applicants. While the applicants do not argue that the U.S. Orders should be enforced on the grounds of res judicata, the issue before the Court is, in substance, a question of enforcement of the provisions of the U.S. Orders that hold that Miller has no claim against the applicants.

[25] In this regard, however, it should be noted, that there has been no determination in the U.S. Court of Miller’s claim on its merits. The applicants seek enforcement of the U.S. Orders on the grounds of the operation of a general release of all claims against them in the Plan.

[26] Fourth, while the applicants suggest that the Court should order the relief sought on the grounds that the U.S. Court should have carriage of the Miller action in some manner, I do not think this is meaningful. The U.S. Court is functus. There is no on-going Chapter 11 proceeding that requires that the U.S. Court be the sole jurisdiction addressing the substantive issues pertaining to a reorganization of the applicants. What remains is the issue of enforcement of the U.S. Orders in the courts of Ontario.

[27] Fifth, the applicants have chosen to bring this recognition proceeding under section 61 of the CCAA rather than as a proceeding within the Miller action, which is being heard in the Superior Court in Ajax. The orders sought would have general application in Ontario. In these circumstances, however, even if this Court were to grant the recognition orders sought by the applicants, it would be necessary for the applicants to bring a further proceeding in the Miller action if Miller or STI were to take any further steps in that proceeding. In such further proceeding, the court would have to address the extent to which the U.S. Orders, as recognized by this Court, applied specifically to Miller and STI given any equitable or other considerations.

Analysis and Conclusions

[28] While the applicants have presented this application as a question of whether or not the Court should recognize the U.S. Orders as a matter of comity, I think the reality is otherwise. The real issue for the Court is whether it should recognize the U.S. Orders under section 61 of the CCAA or require the applicants to seek enforcement of the U.S. Orders by way of an action or a proceeding in the Miller action. I conclude that the application should be denied for the following reasons.

[29] First, as mentioned, the applicants are, in substance, seeking to have the Court enforce a determination of the U.S. Court that Miller and STI have no claim against the applicants. In the ordinary course, such an application would be made in the particular action sought to be stayed in Ontario. I see no obvious reason why this practice should not be applied in this case, particularly given the fact, as mentioned, that a further proceeding would be required in any event if Miller or STI were to take any further steps in that action.

[30] Second, as mentioned, the orders sought by the applicants would have general application in Ontario under section 61 of the CCAA and would, therefore, apply to all parties in Ontario, including Miller and STI, without regard for any equities or other considerations that might exist in favour of any such party. The Court could not order recognition of the U.S. Orders against Miller but not against STI even if it thought that STI was able to assert equities in its favour that would justify such differential treatment.

[31] On the other hand, if the applicants are required to bring a proceeding in the Miller action, whether by way of an amendment to their pleadings to assert the legal effect of the U.S. Orders or by way of a stay application, the court will be able to assess the equities and any other considerations in favour of any of the parties against whom enforcement of the order is sought on a party-by-party basis. While such an assessment may become unnecessary in the present circumstances if the effect of a recognition order were to terminate the Miller action, the Court must be aware of the possibility of similar circumstances arising in other cases.

[32] Accordingly, the application is dismissed without prejudice to the applicants to bring any further proceedings they may consider to be appropriate to the same or similar effect in the action under court file 8153/12 in the Superior Court of Justice. I would note that, in reaching this determination, the Court is making no finding as to whether or not the U.S. Orders should be enforced against either or both of Miller or STI in accordance with the principle of comity as articulated in Morguard.

[33] Miller and STI were successful on this application and are entitled to their costs. There is no basis, however, for an award of costs on a substantial indemnity basis. In fixing costs, I have had regard to the relative complexity and novelty of the issues involved, the extent to which the issues raised by the parties were relevant to the determination of the application, and the significance of the result for Miller and STI. In their costs outline, the applicants seek costs of $17,085.41, which I take to be evidence of their reasonable expectations in the event they were unsuccessful. Accordingly, costs are awarded in favour of each of Miller and STI in the amount of $15,000 each on an all-inclusive basis.

Wilton-Siegel J.

Date: November 23, 2016