COURT FILE NO.: 31-OR-208426-T
BK-20-00208426
DATE: 20210330
ONTARIO SUPERIOR COURT OF JUSTICE
BETWEEN:
MGF SOURCING US, LLC and MGF SOURCING CANADA, ULC
Plaintiffs
– and –
LA SENZA CANADA, INC.
Defendant
Maria Konyukhova and Nicholas Avis, for the Plaintiffs
Alex MacFarlane, Douglas Smith and Julia Webster, for the Defendant
HEARD: February 16, 17, 18 and 19, 2021
dietrich j.
reasons for decision
Overview
[1] The plaintiffs, MGF Sourcing US, LLC (“MGF US”) and MGF Sourcing Canada, ULC (“MGF Canada”), are in the business of sourcing and selling wholesale apparel and accessories. They supplied such goods to the defendant, La Senza Canada, Inc. (“La Senza Canada”), which owns and operates a lingerie and intimate apparel business in Canada.
[2] MGF US and MGF Canada (the “MGF Entities”) assert that La Senza Canada is justly and truly indebted to them in the approximate amount of US$32,469,490.42 (the “Indebtedness”) for such goods supplied by them, for which La Senza Canada did not pay. The alleged Indebtedness is comprised of approximately US$10,647,059.88 owing to MGF US and approximately US$22,047,180.05 owing to MGF Canada.
[3] The MGF Entities assert that La Senza Canada has not and cannot pay the Indebtedness. Accordingly, they ask this court to have La Senza Canada adjudged bankrupt, and to issue a Bankruptcy Order in respect of the property, assets and undertaking of La Senza Canada.
[4] La Senza Canada asserts that it is not, in fact, indebted to the MGF Entities; rather, the MGF Entities are indebted to it for their breaches of a Master Sourcing Agreement (as amended, the “MSA”) and other wrongs. The MSA was entered into between MGF US and La Senza International, LLC, an affiliate of La Senza Canada.
[5] Pursuant to the MSA, La Senza Canada placed orders for, and the MGF Entities supplied, wholesale apparel to it. However, La Senza Canada asserts that, under the MSA, the MGF Entities also agreed to assist La Senza Canada in a financial turnaround by developing alternative sourcing opportunities and cost reduction strategies, among other things, which they failed to do.
[6] The MSA includes an exclusive forum clause that gives the courts in the City of New York, New York, USA, exclusive jurisdiction for all purposes related to the MSA or any contracts entered into under that Agreement.
[7] When La Senza International, LLC exercised its right to terminate the MSA, MGF US filed a Verified Complaint in the Supreme Court of New York (the “SCNY Proceeding”) against La Senza Canada, La Senza International, LLC and La Senza International Canada (the “La Senza Entities”) with respect to the Indebtedness. The La Senza Entities responded to the Verified Complaint and filed a counterclaim for damages for the MGF Entities’ alleged breaches of the MSA and other wrongs. The SCNY Proceeding has not yet been resolved.
[8] La Senza Canada asserts that the bankruptcy application brought against it by the MGF Entities (the “Bankruptcy Application”) cannot proceed because there is a bona fide dispute between the parties, which must be resolved in the SCNY Proceeding.
[9] For the reasons that follow, the Bankruptcy Application shall be stayed, on terms, pending the resolution of the SCNY Proceeding.
Background Facts
[10] MGF US and La Senza International, LLC entered into the MSA on January 5, 2019. Under the MSA, among other things, MGF US, as Seller, agreed to supply La Senza International, LLC, as Buyer, with wholesale apparel goods. The MSA provided that La Senza International, LLC and MGF US could create binding contracts for the purchase and sale of goods, as described in the MSA. In addition to supplying wholesale apparel to La Senza International, LLC, MGF US agreed to provide services such as redesigning current sourcing and costing structures with a view to improving La Senza International, LLC’s profitability.
[11] La Senza Canada and the other La Senza Entities created contracts pursuant to the MSA notwithstanding that only La Senza International, LLC was a signatory to the MSA. La Senza Canada created thousands of contracts with the MGF Entities pursuant to the MSA, and MGF US invoiced La Senza Canada in respect of those contracts. Each such contract stated on its face: “This purchase order is subject to the terms of Buyers Sourcing Agreement with Seller, or if none, then Buyers purchase terms, which are incorporated into this purchase order.” The contracts included payment terms of net 60 days. Therefore, the MGF Entities assert that La Senza Canada had a direct contractual relationship with them.
[12] On October 31, 2019, MGF US sent a formal letter to La Senza International, LLC, alleging that it was in material default of the MSA because it had breached the payment terms.
[13] On November 22, 2019, through its legal counsel, MGF US sent a formal demand letter to each of the La Senza Entities with a notice of default, cessation of shipments, and a demand for reclamation of goods worth US$2.9 million. In the letter, MGF US alleged that all of the La Senza Entities were in default. The La Senza Entities paid US$2.5 million of the demand for reclamation.
[14] On December 2, 2019, La Senza International, LLC exercised its right to terminate the MSA. In its termination letter, it cited repeated failures by MGF US to meet its obligations under the MSA.
[15] Within six weeks of MGF US’s letter alleging default, MGF US filed two civil suits against the La Senza Entities alleging the Indebtedness owed by them to MGF US.
[16] On December 4, 2019, MGF US filed the Verified Complaint to launch the SCNY Proceeding, alleging that the La Senza Entities breached the terms of the MSA and were insolvent.
[17] On January 6, 2020, the La Senza Entities responded to MGF US’s claim and filed a counterclaim, denying any indebtedness or breach of the MSA, and denying their insolvency.
[18] Within two weeks of filing the Verified Complaint, MGF US also brought an action against La Senza International, LLC and La Senza International Canada in the Court of Chancery of the State of Delaware seeking the appointment of a receiver and the liquidation of those two La Senza Entities. On January 9, 2020, these La Senza Entities brought a motion to dismiss the action based on the exclusive forum clause of the MSA, and they were successful.
[19] On January 28, 2020, MGF US filed the Bankruptcy Application against La Senza Canada and added MGF Canada as an applicant on January 14, 2021.
Procedure
[20] This court ordered a trial of issues in the Bankruptcy Application, including whether the alleged Indebtedness is owing by La Senza Canada.
[21] At a case conference prior to this trial, La Senza Canada proposed that the trial be bifurcated such that the issue of whether the alleged Indebtedness was owing would be determined first and, subsequently, there would be a determination of whether a bankruptcy order should be made. I directed that the trial would not be bifurcated, and that counsel would be expected to present evidence and legal submissions on all of the issues at the trial. However, I granted leave to La Senza Canada to bring a motion at the conclusion of the MGF Entities’ case for a stay of the MGF Entities’ application for a bankruptcy order against La Senza.
[22] When the MGF Entities closed their case, La Senza Canada moved for a dismissal or stay of the Bankruptcy Application. La Senza seeks this relief on the basis that the MGF Entities have failed to prove that La Senza Canada is indebted to the MGF Entities and that La Senza Canada is insolvent. La Senza Canada also seeks the stay on the basis that this court does not have jurisdiction to determine whether the alleged Indebtedness, in whole or in part, is owing by the La Senza Canada to the MGF Entities. If a stay is ordered, La Senza Canada seeks an order that the stay remain in place until all its appeals with respect to the determination made in the SCNY Proceeding have been exhausted.
Issue
[23] The issue to be decided at this point in the proceeding is whether the Bankruptcy Application should be stayed or dismissed.
Positions of the Parties
[24] La Senza Canada submits that a stay is appropriate because there is a bona fide dispute about the alleged Indebtedness, and the MGF Entities have not met their onus to prove the debt with sound and convincing evidence; and they have not obtained a judgment in respect of that debt. La Senza Canada asserts that it was improper for the MGF Entities to proceed directly to the Canadian bankruptcy court in an effort to petition La Senza Canada into bankruptcy in respect of the alleged Indebtedness that is being vigorously disputed in the SCNY Proceeding.
[25] La Senza Canada also asserts that the MGF Entities have not proven that there is an act of bankruptcy because they have not shown that La Senza Canada is insolvent or unable to pay the alleged Indebtedness.
[26] La Senza Canada further asserts that this court has no jurisdiction to determine whether the alleged Indebtedness is, in fact, owing by the La Senza Entities to the MGF Entities. The alleged Indebtedness arose in connection with the MSA over which a New York court has jurisdiction regarding dispute resolution, and the issue of the alleged Indebtedness and related breaches of the MSA are currently before a New York court. La Senza Canada further asserts that a stay is appropriate to avoid a multiplicity of proceedings.
[27] The MGF Entities assert that there can be no doubt that La Senza Canada is indebted to them for tens of millions of dollars.
[28] The MGF Entities further assert that there is also no dispute that La Senza Canada is insolvent. They submit that the La Senza Entities operated at a massive net loss in 2019 and had cash flow issues resulting in late payments to the MGF Entities and to L Brands, the former owner of the La Senza Entities. The MGF Entities proffered evidence to show that, in addition to the massive debt owing to the MGF Entities, at the time the Bankruptcy Applicant was made, the La Senza Entities had at least one overdue invoice owing to an affiliate of L Brands. During the course of the trial, it was discovered that the latter invoice had been paid shortly before the trial. However, the MGF Entities argue that the La Senza Entities have, nonetheless, in failing to make payment on the orders, ceased to meet their liabilities as they became due to each of MGF US and MGF Canada; and at the time the Bankruptcy Application was made, the La Senza Entities had also failed to pay the invoice issued by the L Brands affiliate. Insolvency is determined as of the date of the Bankruptcy Application.
[29] The MGF Entities contend that they have met their onus and there should be no dismissal or stay of the Bankruptcy Application. Further, if a stay is ordered, they contend that it should be on terms.
The Law
[30] In addition to s. 43(10) of the Bankruptcy and Insolvency Act, R.S.C., 1985, c. B-3 (the “BIA”), which permits the court to stay bankruptcy proceedings to allow for the trial of an issue related to disputed facts, s. 43(11) of the BIA permits the court to order a stay of the proceedings “for other sufficient reason”, either altogether or for a limited time, on any terms and subject to any conditions that the court may think just.
[31] The onus is on La Senza Canada to satisfy the court that there is sufficient reason to stay the Bankruptcy Application: Re Mediacoat Inc. (1990), 80 C.B.R. (N.S.) (Ont. S.C.).
[32] Section 106 of the Courts of Justice Act, R.S.O. 1990, c. C.43 (the “CJA”) permits a court, on its own initiative or on motion by any person, whether or not a party, to stay any proceeding in the court on such terms as are considered just. Section 138 of the CJA provides: “As far as possible, multiplicity of legal proceedings should be avoided.”
[33] The relevant questions are a) whether there is a bona fide dispute between the debtor, La Senza Canada, and the creditors, the MGF Entities; and b) whether there are sufficient grounds that warrant an order staying or dismissing the Bankruptcy Application.
Is there a bona fide dispute?
[34] The MGF Entities assert that there is no bona fide dispute about the Indebtedness or any other issue in the Bankruptcy Application. They submit that La Senza Canada does not dispute that the wholesale apparel it ordered pursuant to the MSA was delivered and accepted. Nor does La Senza Canada dispute that it did not pay for many of the orders it made pursuant to the MSA. On October 31, 2019, when MGF US, as Seller under the MSA, sent the notice of default to La Senza International, LLC, the Buyer under the MSA, the La Senza Entities were behind on approximately US$11 million of payments under the MSA.
[35] The MGF Entities further assert that even if La Senza Canada could establish a bona fide dispute, that dispute would only relate to a very small portion of the Indebtedness, and this would not justify a stay of the proceedings. Under s. 43(7) of the BIA, the MGF Entities need only prove that at least $1,000 is owing by La Senza Canada. The MGF Entities further assert that La Senza Canada has not proffered any evidence to support its theory that the alleged breaches of the MSA by MGF Entities, if proven, would exceed the approximately US$32 million now owed by La Senza Canada to the MGF Entities.
[36] La Senza Canada asserts that there is a bona fide dispute regarding the alleged Indebtedness. Notwithstanding La Senza Canada’s failure to pay for many of its orders, it asserts that the MGF Entities are at fault because they breached the MSA by failing to make some deliveries on time and by failing to deliver on their “Pathway to Profitability Plan” regarding alternative sourcing and cost reductions, among other things, for which La Senza International, LLC bargained when it entered in the MSA.
[37] La Senza Canada further asserts that because the MSA specifically provides, at s. 26, that the interpretation of the MSA is governed by the law of the State of New York, USA and that the parties consent to the exclusive jurisdiction of the courts located in the City of New York, New York County, New York USA, for “all purposes related” to the MSA or any contracts entered into under that agreement, all disputes between the parties, including disputes arising from the MSA must be determined by a New York court.
[38] Further, it asserts that the Bankruptcy Application, a summary procedure, does not provide a sufficient evidentiary basis to resolve the dispute, in which La Senza Canada’s claim is more than a straightforward claim for set-off and the MGF Entities’ defence to La Senza Canada’s counterclaim is not obvious. La Senza Canada also submits that the MGF Entities should not be permitted to use the Bankruptcy Application as a means to collect the alleged Indebtedness.
[39] La Senza Canada further asserts that there is a bona fide dispute as to its insolvency. It asserts that it is not insolvent, and that the MGF Entities have not proven that it is. It argues that it is not unable to pay the alleged Indebtedness; rather, it is unwilling to do so. It contends that because of MGF US’s multiple breaches of the MSA, the MGF Entities are not entitled to any of the alleged Indebtedness.
Are there sufficient grounds to warrant a stay?
[40] La Senza Canada asserts that s. 26 of the MSA makes it clear that this court does not have jurisdiction to determine the dispute relating to the Indebtedness, and that this dispute must be resolved in accordance with the local laws of the State of New York, USA by a court located in the City of New York, USA.
[41] La Senza Canada further asserts that the SCNY Proceeding should be allowed to proceed to its conclusion, which will include a determination of the bona fide dispute as to whether La Senza Canada is, in fact, indebted to the MGF Entities as they allege.
[42] The MGF Entities argue that s. 26 of the MSA has no applicability in the Bankruptcy Application, properly filed, pursuant to the BIA, in Ontario, which is the locality of the debtor. Further, it argues that the Bankruptcy Application does not deal with MSA terms or contracts made thereunder but, rather, La Senza Canada’s insolvency, which affects all La Senza Canada’s creditors and not just the parties to the MSA.
Analysis
[43] Based on the record and the submissions of counsel, I am satisfied that there is a bona fide dispute between the parties. The MGF Entities have shown that La Senza Canada has incurred a significant indebtedness to the MGF Entities by ordering and accepting significant quantities of goods for which they have not paid. La Senza Canada does not dispute that it has not paid for a number of orders. It contends that it is unwilling, not unable, to pay the outstanding invoices and that the MGF Entities have not proven that La Senza Canada is insolvent. It submits that it pays its undisputed liabilities as they come due. It further submits that its unwillingness arises because of a dispute with the MGF Entities over alleged breaches of the MSA respecting MGF Entities’ obligations thereunder, which critically impaired the cash flow of the La Senza Entities and prevented them from making certain payments to the MGF Entities in a timely manner.
[44] In the counterclaim filed in the SCNY Proceeding, in addition to the alleged breaches of the MSA by the MGF Entities, the La Senza Entities allege breach of implied covenant of good faith and fair dealing, and tortious interference with prospective business relationships.
[45] I am satisfied that these allegations by the La Senza Entities are well articulated and not vague. Based on the record, and the testimony of the witnesses, I do not find that the allegations are doomed to fail.
[46] La Senza Canada asserts that there are issues in dispute that require resolution in a civil court. I agree. Based on the record and the submissions of counsel for the MGF Entities, I am satisfied that La Senza Canada incurred indebtedness to the MGF Entities for apparel the MGF Entities sourced and delivered to La Senza Canada, which La Senza Canada accepted, but for which it has made no payment. However, I cannot, on the record before me, determine whether the MGF Entities are indebted to La Senza Canada for a similar or greater amount as a consequence of alleged breaches of the MSA and the other allegations made against them by the La Senza Entities. That claim will need to be fully discovered.
[47] Perhaps more importantly, I find that this court does not have the jurisdiction to resolve the dispute. The dispute is the subject of the SCNY Proceeding. I am satisfied that the New York Supreme Court is the proper forum for resolving the dispute, as agreed to by the parties to the MSA.
[48] I disagree with the MGF Entities’ argument that the Bankruptcy Application is unrelated to the MSA terms and contracts. It is through the MSA that the alleged Indebtedness was created. In particular, the alleged Indebtedness arose through the orders that La Senza Canada made by virtue of the MSA, and the wholesale apparel and accessories that were delivered by the MGF Entities based on those orders, for which La Senza Canada did not pay. Further, it is under the MSA that MGF US agreed to provide additional services to the La Senza Entities relating to sourcing and costing goods, among other services. This court cannot properly assess the dispute between the MGF Entities and the La Senza Entities without reference to the MSA. Yet, s. 26 of the MSA is clear:
… The parties consent to the exclusive jurisdiction and venue of the courts of proper subject matter jurisdiction located in the City of New York, New York County, New York, USA for all purposes related to this Agreement or any contract entered into hereunder. ….
This court lacks the jurisdiction to adjudicate the claims between the parties that arise out of the MSA. In my view, this is a sufficient ground on which to stay the Bankruptcy Application.
[49] I note, for the record, that while this court is not bound by it, a similar decision was reached by the Court of Chancery of the State of Delaware on January 9, 2020. There, an application was brought by MGF US, as plaintiff, against La Senza International, LLC and La Senza International Canada, LLC, as defendants, to appoint a receiver over the defendants. In that case, the Court of Chancery granted the defendant’s motion to dismiss the plaintiff’s complaint for lack of subject matter jurisdiction because the forum selection clause of the MSA mandated that the action be heard in New York.
[50] In my view, a dismissal of the Bankruptcy Application would not be appropriate at this juncture. While La Senza Canada asserts that it is not insolvent, it has not provided sworn evidence that it is, in fact, solvent or that it is meeting its liabilities as they fall due. It has neither disclosed its financial situation, including all of its outstanding liabilities, nor has it shown that no creditors would be prejudiced by the dismissal. Typically, each of these conditions will be satisfied before a bankruptcy application is dismissed: see Re Numohamed, 2006 CanLII 12430 (ON SC), 21 C.B.R. (5th) 42 (ONSC) at paras. 2 and 6, and Re Mernick, 9 C.B.R. (3d) 223 (Ont. Gen. Div.) at para. 5. La Senza Canada submits that it is able to pay its undisputed liabilities as they come due, but it has not provided clear and independent evidence in support of that submission.
[51] Accordingly, a stay of the Bankruptcy Application is appropriate until the issues in the SCNY Proceeding are resolved and all avenues of appeal have been exhausted. This approach will also avoid a multiplicity of proceedings based on the same factual matrix, the same relationship between the parties and the same dealings between the parties.
[52] I am nonetheless mindful of the evidence submitted to this court that suggests that the La Senza Entities are, in fact, struggling financially. The La Senza Entities admit to having cash flow issues and that they have not been able to make timely payments to the MGF Entities, though they hold the MGF Entities responsible for these problems. However, the record shows that the La Senza Entities did not obtain a letter of credit that they agreed to obtain, and they did not make a US$15 million deposit into an escrow account as requested by the MGF Entities when it was discovered that the La Senza Entities had not obtained the letter of credit. I accept the MGF Entities’ submission that they have no confidence in La Senza Canada to improve, or even maintain, its current financial status during a stay period. I also acknowledge its concerns about potential erosion to creditor value.
[53] La Senza Canada maintains that it is not unable to pay the alleged Indebtedness; rather, it is unwilling to do so. I note that the La Senza Entities were able to make a reclamation payment to the MGF Entities of US$2.5 million, albeit not the full US$2.9 million requested. The La Senza Entities also claim that they are paying all undisputed liabilities as they come due.
[54] For these reasons, a stay of the Bankruptcy Application shall be ordered on the following terms:
Within 60 days of these reasons, La Senza Canada shall pay US$5 million into this court, to be held by the Accountant of the Superior Court of Justice pending the resolution of the SCNY Proceeding.
Commencing January 1, 2022, La Senza Canada shall pay US$500,000 into this court, on a quarterly basis, to be held by the Accountant of the Superior Court of Justice pending the resolution of the SCNY Proceeding. Such payments shall be made in each quarter, not later than March 31, June 30, September 30 and December 31, until the final resolution of the SCNY Proceeding.
Pending the final resolution of the SCNY Proceeding, La Senza Canada shall not be permitted to dispose of any real or personal property having a value in excess of CA$100,000 without the written consent of the MGF Entities or the approval of this court.
Disposition
[55] For the reasons given, an Order shall issue staying the Bankruptcy Application, on the terms described above until the SCNY Proceeding has been determined and all avenues of appeal have been exhausted.
Costs
[56] The parties are strongly encouraged to agree on the matter of costs. If they cannot agree, La Senza Canada may make written submissions on costs, not exceeding three pages in length (not including a costs outline or bill of costs and offers to settle, if any) within 14 days hereof. MGF Entities may make similar submissions 14 days thereafter. Reply submissions may only be made with leave.
Dietrich J.
Released: March 30, 2021
COURT FILE NO.: 31-OR-208426-T
BK-20-00208426
DATE: 20210330
ONTARIO
SUPERIOR COURT OF JUSTICE
BETWEEN:
MGF SOURCING US, LLC and MGF SOURCING CANADA, ULC
Plaintiffs
– and –
LA SENZA CANADA, INC.
Defendant
REASONS FOR DECISION
Dietrich J.
Released: March 30, 2021