Court File and Parties

COURT FILE NO.: CV-19-00617777-00CL DATE: 2022-04-26 SUPERIOR COURT OF JUSTICE – ONTARIO (COMMERCIAL LIST)

RE: 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

BEFORE: Penny J.

COUNSEL: Matthew P. Gottlieb, Bradley Vermeersch and Xin Lu (Crystal) Li for the moving party, SPay Inc. Scott McGrath and Rachel Nicholson for Ernst & Young Inc., the Court Appointed Receiver of Mundo Media Ltd.

HEARD: March 11, 2022

Endorsement

[1] Mundo Media is an advertising technology company which carried on business in Canada and the U.S. Mundo was placed in receivership by order of the court issued under s. 243 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, on April 9, 2019. The appointment order authorizes the Receiver to exercise all remedies available to Mundo, to collect money owed to Mundo and to prosecute proceedings with respect to Mundo and its property. A U.S. recognition order was issued by the Delaware bankruptcy court in July 2019.

[2] 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. SPay had effectively two contracts with Mundo, executed in 2017, under which these parties performed services for, and invoiced, each other. Under the Management and Support Agreement, SPay agreed to pay Mundo for content distribution. Under the Publisher Agreement, Mundo agreed to pay SPay for “performance ad units” provided exclusively to Mundo.

[3] The Receiver claims that SPay owes Mundo $4.1 million under the Management and Support Agreement and proposes to assert this claim on behalf of Mundo’s creditors by way of a motion for judgment in the receivership proceedings in the Ontario Superior Court of Justice. The SPay receivable is Mundo’s largest outstanding account receivable owing in the receivership.

[4] SPay has made no “claim” under the Publisher Agreement against Mundo or otherwise taken part in the receivership proceedings and, subject to what is said below, has no intention of doing so. SPay nevertheless maintains that it is owed substantial amounts by Mundo under the Publisher Agreement and will be asserting these obligations by way of set-off in any collection proceedings brought by the Receiver. The Receiver takes the position that SPay’s claim for payment under the Publisher Agreement does not qualify as a set-off.

[5] Both contracts contain an arbitration clause requiring any disputes “arising out of or relating to” the agreements, including the arbitrability of any disputes, to be arbitrated in New York according to the JAMS Comprehensive Arbitration Rules & Procedures and applying New York law.

[6] This motion, brought by SPay, seeks a stay of the Receiver’s motion for judgment and a direction that the Receiver must pursue any claim against SPay by way of an arbitration in New York. SPay’s motion, therefore, raises the question of whether the Receiver must assert Mundo’s claim against SPay in arbitration proceedings in New York or whether the claims should be dealt with in the context of the Ontario receivership proceedings.

[7] The UNCITRAL Model Law on International Commercial Arbitration, which is incorporated by reference in the International Commercial Arbitration Act, 2017, S.O. 2017, c. 2, Sched. 5, requires the court to refer a matter to arbitration upon a party’s request if the parties and the matter in dispute are subject to an arbitration agreement and the arbitration agreement is not null and void, inoperative or incapable of being performed: Article 8(1) [1]. The test under the ICAA for referring a matter to arbitration and staying a civil proceeding basically involves three considerations:

(a) Is there an arbitration agreement between the parties?

(b) Does the dispute arguably fall within the scope of the arbitration agreement? and

(c) Are there grounds on which the court should refuse to stay the action?

[8] The threshold to meet this test is “a relatively low one”. A stay of proceeding must be granted unless there is some cogent reason to ignore the express terms of the arbitration clause.

[9] Here there is little doubt that Mundo and SPay are parties to an arbitration agreement and that the subject matter of their disputes fall within the terms of the arbitration clause. The sole issue for determination is whether the arbitration clause is rendered null and void, inoperative or incapable of being performed by virtue of Mundo’s receivership and the appointment of the Receiver to exercise all remedies available to Mundo, to collect money owed to Mundo and to prosecute proceedings with respect to Mundo and its property.

[10] Put slightly differently, the substantive issue for determination on this motion is: does 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 Mondo 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.

[11] There are, however, two threshold issues. First, SPay goes so far as to argue that the question of whether the claims should be dealt with by a New York arbitrator as opposed to the Ontario Superior Court of Justice is itself a question for the New York arbitrator. I do not agree with that submission for both practical and legal reasons. SPay brought this motion for a stay in the receivership proceedings in Ontario. The request for a stay necessarily engages the question of whether the Receiver is bound by the arbitration clause. It is, in the circumstances, entirely impractical for this question to be referred to arbitration. Further, the Receiver is an officer and appointee of the Ontario Superior Court of Justice under the 2019 order of this Court. The Receiver is answerable to this Court. Only this Court can determine the scope of the Receiver’s powers and obligations under the 2019 order. As a matter of law, therefore, the question must be decided by the Ontario Superior Court of Justice in the receivership proceedings.

[12] Second, even though SPay asserts that forum-type arguments are irrelevant in the context of a motion for a stay in favour of international commercial arbitration, it spent a good deal of time in its factum and in oral argument on the merits of its defence to Mundo’s claims and addressing expert evidence which it filed on New York law concerning the enforceability of an arbitration agreement even if the plaintiff were in Chapter 11 or Chapter 15 bankruptcy under U.S. law. In my view, none of this evidence is relevant to the core question posed by this motion.

[13] The issue for determination engages two arguments. First, the Receiver says the issue before me has been determined in a similar case by the British Columbia Court of Appeal in Petrowest Corporation v. Peace River Hydro Partners, 2020 BCCA 339. SPay says it has not, or that, in any event, the BCCA decision in Petrowest should not be followed. Second, the Receiver relies upon the principle of the “single proceeding model” to deny the stay. SPay says this model does not apply in this case and that the stay must be granted.

[14] For the reasons that follow, I decline to follow the BCCA in Petrowest. However, I find that the single proceeding model is applicable in this case and that justice dictates and practicality demands that the mutual claims of Mundo and SPay be resolved in the Ontario receivership proceedings. Accordingly, the motion for a stay is dismissed.

Petrowest Corporation v. Peace River Hydro Partners

[15] The Receiver’s first argument in favour of dismissing the motion for a stay relies upon a somewhat similar case to this one, Petrowest Corporation v. Peace River Hydro Partners, which, the Receiver submits, is dispositive of the SPay motion and ought to be followed. In that case, Iyer J. held in first instance (2019 BCSC 2221) that the court had jurisdiction under s. 183 of the BIA, or inherent jurisdiction, to determine whether to refuse to stay insolvency proceedings in light of an arbitration agreement between the debtor and a third party. She exercised her discretion to refuse the stay on the basis that it was necessary to achieve fairness to the creditors and to fulfill the objectives of the BIA.

[16] The British Columbia Court of Appeal dismissed the appeal, but on a different basis than the motion judge. The Court of Appeal doubted that the general jurisdiction conferred under s. 183 of the BIA permitted the court to override the legislative preference for arbitration contained in s. 15 of B.C.’s Arbitration Act. The Court of Appeal concluded, however, that it did not need to consider that question because a receiver “is not an agent of the debtor … but rather acts in fulfilment of its own court-authorized and fiduciary duties, owed to all stakeholders”. The receiver does not “step into the shoes” of the debtor. The receiver is a different party than the signatory under the agreement and is not bound by the arbitration clause. The Court held that “a receiver is not bound by the executory contracts of the debtor, and may disclaim them”. The Court of Appeal held that it is possible for a receiver to sue under a contract, yet disclaim the arbitration clause, which forms an independent agreement and can be disclaimed by the receiver independently from the remaining terms of the agreement, due to the doctrine of separability.

[17] Leave to appeal the Court of Appeal’s decision was granted and the Supreme Court of Canada heard arguments on the appeal earlier this year. No decision has been released.

[18] I am not prepared to adopt the reasoning of the BCCA in Petrowest. In my view, there is a serious question about whether the doctrine of separability has any application to circumstances such as these where the Receiver is purporting to sue on an agreement made by the debtor with a third party which contains an arbitration clause. I am not persuaded by the logic and reasoning of the BCCA. Since that decision is not binding on me and is subject to a pending decision on appeal to the Supreme Court of Canada, I decline to follow it.

The Single Proceeding Model

[19] The Receiver’s second argument turns on the “single proceeding model” adopted by our courts for the resolution of debtor/creditor claims in an insolvency.

[20] SPay argues that the single proceeding model is only meant to centralize claims by creditors against the debtor, not claims by the debtor against third parties. The single proceeding model serves as a “shield” to debtors from having to defend claims in multiple proceedings or jurisdictions. It is not, and has not been used as, a “sword” to permit a receiver to select the forum in which it will pursue a claim on behalf of a debtor contrary to a valid, binding international commercial arbitration agreement.

[21] SPay, for example, relies on the decision of Deschamps J., writing for the majority of the Supreme Court, in Century Services Inc. v. Canada (Attorney General), 2010 SCC 60, [2010] 3 S.C.R. 379, at para. 22 where she held that the organizing principle of the single proceeding model is to group all claims against a debtor into a single proceeding controlled in a single forum in order to bring efficiency to an insolvency:

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, both the CCAA and the BIA allow a court to order all actions against a debtor to be stayed while a compromise is sought.

[22] SPay points out that the Supreme Court reiterated that the single proceeding model is intended to centralize claims against a debtor in a single forum in Newfoundland and Labrador v. AbitibiBowater Inc., 2012 SCC 67, [2012] 3 S.C.R. 443. At para. 21, Deschamps J. again held that the single proceeding model is a central feature of the CCAA scheme as it “ensures that most claims against a debtor are entertained in a single forum”. The Court held that “under this model, the court can stay the enforcement of most claims against the debtor’s assets in order to maintain the status quo during negotiations with the creditors”.

[23] SPay overstates the point however. While it is true that the majority of applications of the single proceeding model concern creditor claims against the debtor, the single proceeding model it is not strictly limited to claims against a debtor; it also applies to claims advanced by the debtor against a third party. This makes sense because, given the underlying rationale for employing the model at all, there is no overarching, principled basis for treating claims against a debtor any differently from claims by a debtor. Rather, it depends on the circumstances. This is borne out in the authorities.

[24] SPay itself cites in argument the decision of Binnie J. in Sam Lévy & Associés Inc. v. Azco Mining Inc., 2001 SCC 92, [2001] 3 S.C.R. 978 (Eagle River). In Eagle River, the third party argued that the agreement which was the subject of the dispute had to be interpreted according to the laws of British Columbia and that B.C. would be the most convenient and efficient forum. Binnie J. applied the single proceeding model to allow a claim against a third party for the return of shares, warrants and payment of debts to be commenced in bankruptcy court in Quebec rather than the third party’s preferred location in the British Columbia civil court.

[25] Justice Binnie refused to move the proceeding to B.C. because the third party was not a “stranger to the bankruptcy”. While the third party was resisting a claim by the trustee in bankruptcy, it threatened to counterclaim against the bankrupt estate on the same set of commercial agreements. The counterclaim would have been a claim by a creditor against the bankrupt which would be subject to the rulings in Century Services, AbitibiBowater and the like, requiring that all claims by creditors should be organized and administered in a single jurisdiction. He went on to say, at para. 77, that:

[A] creditor (or debtor) who wishes to fragment the proceedings, and who cannot claim to be a “stranger to the bankruptcy”, has the burden of demonstrating “sufficient cause” to send the trustee scurrying to multiple jurisdictions … The Act is concerned with the economy of winding up the bankrupt estate, even at the price of inflicting additional cost on its creditors and debtors.

[26] There are numerous additional cases where the single proceeding model has been applied to claims by the debtor against third parties. For example, in Essar Steel Algoma Inc., 2016 ONSC 595, 33 C.B.R. (6th) 313, Newbould J. held that the single proceeding model required that the claim of the debtor corporation against a contractual counterparty be determined under the CCAA proceeding so as to keep all the litigation involving the debtor in one jurisdiction. Justice Newbould stated that the debtor’s claim was an asset to be dealt with by the insolvency court and, in that case, where the counterparty was also asserting a claim against the debtor, “it would make no sense for Essar Algoma to litigate its claim against [the counterparty] in the United States”: at para. 31. See also Montreal, Maine & Atlantic Canada Co., 2013 QCCS 5194, at para. 29.

[27] These cases stand for the proposition that claims by a debtor against a third party may be required to be heard in the insolvency proceedings rather than in the jurisdiction or proceedings that would otherwise have applied. The determining factor is the degree of connection of the claim to the insolvency proceedings. That degree of connection has been characterized as involving a consideration of whether the third party is a “stranger to the bankruptcy”.

[28] Thus, the narrow question for determination in this case becomes whether SPay is or is not a “stranger to the bankruptcy” by reason of:

a) the alleged contractual payment obligations SPay owes to Mundo; and

b) the fact, undisputed on the evidence, that if it is sued on that alleged debt (in Ontario or in a New York arbitration), SPay will assert a set-off or counterclaim for monies alleged to be owing by Mundo to SPay.

[29] The Court’s power to appoint this Receiver originated from s. 243 of the BIA, which provides that the court may appoint a receiver to do any or all of the following if it considers it to be just or convenient to do so:

(a) take possession of all or substantially all of the inventory, accounts receivable or other property of an insolvent person or bankrupt that was acquired for or used in relation to a business carried on by the insolvent person or bankrupt;

(b) exercise any control that the court considers advisable over that property and over the insolvent person’s or bankrupt’s business; or

(c) take any other action that the court considers advisable.

[30] This section, when interpreted in light of the legislative history and the statutory object and purpose, provides supervising judges with the broadest possible mandate in insolvency proceedings to enable them to react to the unique circumstances of each case and to do what “justice dictates” and “practicality demands”: Third Eye Capital Corporation v Ressources Dianor Inc./Dianor Resources Inc., 2019 ONCA 508, 70 C.B.R. (6th) 181, at paras. 57-58.

[31] SPay takes the position that it is a stranger to the bankruptcy. It asserts that:

(i) it has not made, and has no intention of making, a claim against the debtor in the receivership proceedings. At most, it will assert a set-off as one of its defences. Nor has SPay participated in the receivership proceedings in any way, other than bringing this motion for a stay under Article 8(1) of the Model Law and s. 9 of the ICAA;

(ii) there are no “interwoven” issues between the Mundo receivership and the purported set-off claim of SPay that require this dispute to be adjudicated in a single jurisdiction;

(iii) the parties independently and with the benefit of legal advice agreed to arbitrate all disputes arising from their contractual relationship;

(iv) the law favours enforcement of arbitration clauses;

(v) Mundo is not in need of protection against a multiplicity of creditor claims around the world; and

(vi) the Receiver is seeking to rely on Mundo’s agreement with SPay as the basis for its claim. The Receiver cannot rely on some provisions of the agreement to support its claim against SPay for monetary damages but, at the same time, purport to disclaim other provisions of the same agreement which would require any dispute to be adjudicated by way of arbitration in New York.

[32] I am unable to agree that these arguments are sufficient to order a stay of the Receiver’s proceeding against SPay.

[33] There is no evidence or argument disputing that the receivership proceedings were properly brought in the Ontario Superior Court of Justice. The Superior Court therefore has jurisdiction over the debtor, including its assets and liabilities. This jurisdiction has been recognized in this very case by a reciprocal enforcement order in the United States issued from the Delaware bankruptcy court. The Receiver’s claim properly relates to a matter which is subject to the 2019 order, i.e., to exercise all remedies available to Mundo, to collect money owed to Mundo and to prosecute proceedings with respect to Mundo and its property.

[34] Here, far from being a stranger to the bankruptcy, the claim against SPay is potentially Mundo’s most significant account receivable available to the Receiver. The fact of the receivership raises different considerations from those that would be relevant to a purely private, contractual relationship. For example, although the Receiver would be asserting Mundo’s claim against SPay, other Mundo creditors will have a significant interest in the prosecution of that claim and may well wish to participate in the hearing of that claim.

[35] In this case, however, it is not necessary to decide whether sufficient cause to deny the stay would have been demonstrated if the Receiver’s claim against SPay was SPay’s only connection to the receivership proceedings. This is because, in addition to Mundo’s claim against SPay, representing the largest potential receivable in the receivership, SPay has threatened to assert its own claim against Mundo under the Publisher Agreement for money owing to it which would, it maintains, operate as a defence or a set-off to any funds found owing by SPay to Mundo under the Management and Support Agreement. For the purposes of assessing whether SPay is a stranger to the bankruptcy, 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.

[36] There is no material difference between the circumstances of the trustee in Eagle River or the debtor in Essar Steel and the Receiver in this case. The fact that the competing jurisdiction here is a potential commercial arbitration in New York is a distinction without a difference. Choice of forum, including international commercial arbitration, is a significant, but not a controlling, factor in the assessment of the applicability of the single proceeding model.

[37] In my view, the dominating considerations in this case are 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. These factors bring this case squarely within the ambit of the analysis in Century Services, Abitibi Bowater, Eagle River and Essar Steel.

[38] 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”. [2]

[39] Further, I am not satisfied that SPay will suffer any prejudice whatsoever by requiring it to defend and assert its set-off or counterclaim in these proceedings before the Superior Court of Justice. All of the relevant procedural protections available in a New York arbitration are capable of being reproduced, if necessary and appropriate for the just and equitable management of this case, within the context of the Receiver’s claim in the receivership proceedings for $4.1 million under the Management and Support Agreement. SPay’s behaviour in relation to its set-off claim is strategic. SPay knows there are insufficient funds for unsecured creditors to be paid out of the receivership and, therefore, that there would be no value to asserting its claim under the Publication Agreement directly against Mundo now. The value of SPay’s monetary claim, if it has one, is by way of set-off against Mundo’s Management and Support Agreement claim, assuming SPay can establish its right of set-off. Section 97(3) of the BIA preserves SPay’s ability to do so.

[40] Finally, there is no conflict between the provisions of Article 8(1) of the Model Law and s. 243 of the BIA. Article 8(1) contains a limitation on the mandatory language (“shall … refer the parties to arbitration unless…”), i.e., where the arbitration clause is “inoperative”. An otherwise valid order of the Court under s. 243 of the BIA requiring adherence to the single proceeding model in favour of referral to arbitration renders the arbitration agreement inoperative.

[41] For these reasons, the motion for a stay of the Receiver’s claim against SPay under the Management and Support Agreement in these proceedings is dismissed.

Costs

[42] SPay, if successful, would have sought over $95,000 in partial indemnity costs. The Receiver’s cost summary seeks $27,950. The Receiver is awarded costs payable by SPay in the amount of $27,950.

Penny J. Date: April 26, 2022

[1] Article 8. Arbitration agreement and substantive claim before court (1) A court before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.

[2] This is not merely hypothetical. Mundo carried on business in Canada and the U.S. In this very case, the Receiver earlier brought a motion to collect a receivable owing to one of the debtors by a foreign third party, Vdopia Inc. The agreement with Vdopia had a mandatory arbitration clause that required disputes to be resolved by way of arbitration in California; an arbitration had been commence pre-receivership. Vdopia Inc. challenged this Court’s jurisdiction. Justice Hainey determined that he had jurisdiction to hear the Receiver’s motion. In a hand written endorsement he stated: The arbitration proceedings provided for under the invoices in questions, that were commenced in California, have been stayed by the Receiver without objection by Vdopia. I am satisfied that the issues raised on this motion should be determined by this Court, not in the California arbitration on the basis of the well-established Single Proceeding Model. Vdopia Inc. appealed Hainey J.’s order which was dismissed by the Court of Appeal from the bench.