COURT FILE NO.: 31-2675583

DATE: 2022-05-31

SUPERIOR COURT OF JUSTICE - ONTARIO

RE: 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

BEFORE: Justice Cavanagh

COUNSEL: R. Brendan Bissel and Joël Turgeon, for Crowe Soberman Inc. in its capacity as trustee to the proposal to creditors of Conforti Holdings Ltd. Clifton P. Prophet and Thomas Gertner, for the Moroccanoil, Inc. Bobby Sachdeva and Erin Craddock for Conforti Holdings Limited

HEARD: March 15, 2022

ENDORSEMENT

Introduction

[1] Crowe Soberman Inc. in its capacity as proposal trustee to the proposal to creditors of Conforti Holdings Ltd. (the “Company”) under the Bankruptcy and Insolvency Act (Canada) (the “BIA”) (the “Proposal Trustee”) brings a motion for advice and directions.

[2] Moroccanoil, Inc. (Moroccanoil”) has filed a proof of claim with the Proposal Trustee for a claim against the Company based on alleged breaches of a settlement agreement made in U.S. litigation. Litigation in the U.S. in respect of this claim was brought and is pending. The Company has brought a cross-motion in the U.S. litigation claiming damages from Moroccanoil.

[3] The Proposal Trustee seeks an order:

a. advising and directing the Proposal Trustee to not undertake the adjudication of the Moroccanoil proof of claim and the Company’s cross-motion under the BIA and, specifically, s. 135.

b. As a corollary, lifting the stay of proceedings such that Moroccanoil may seek and obtain a determination of the Moroccanoil Claim before the United States District Court for the District of New Jersey (the “New Jersey Court”), provided that any enforcement remain stayed and subject to the BIA.

c. Approving the Proposal Trustee’s Sixth Report dated February 24, and the activities of the Proposal Trustee set out therein.

[4] Moroccanoil opposes the Proposal Trustee’s motion. It submits that the Proposal Trustee is required to value the proof of claim under s. 135(1.1) of the BIA.

[5] For the following reasons, I dismiss the Proposal Trustee’s motion.

Facts

Background

[6] The Company’s business was the operation of 52 hair salons. The Company became insolvent due to reduced business caused by the pandemic and imposed restrictions. It filed a notice of intention to make a proposal on September 28, 2020 and a proposal on March 13, 2021. The proposal is a holding proposal because the Company cannot formulate a final proposal in the uncertain and ongoing pandemic circumstances.

Moroccanoil’s claim in New Jersey

[7] The Moroccanoil proof of claim arises from a claim against the corporate predecessor of the Company, Salon Distribution, Inc. (“SDI”), in relation to allege counterfeiting of Moroccanoil’s trademark and exclusive beauty products by the Company. This claim was the subject of litigation in the New Jersey Court that commenced in 2011. The litigation was settled on July 15, 2015 after the parties entered into a settlement agreement on that date (the “Settlement Agreement”).

[8] At the time the Settlement Agreement was executed, SDI had been amalgamated with Conforti Holdings Limited to form the Company.

[9] Moroccanoil asserts that the Company breached the Settlement Agreement by reselling large quantities of Moroccanoil products to an unauthorized retail store and by failing to maintain required records. As a result of the alleged breaches of the Settlement Agreement, Moroccanoil moved before the New Jersey Court to enforce the Settlement Agreement in April 2015.

[10] The Company and its principal, Tony Conforti, deny that they breached the Settlement Agreement. The Company is defending the New Jersey proceeding and has made a cross-motion claiming $4,430,000 against Moroccanoil (the “Cross-Motion”) for economic loss including lost profits during and after the term of the Settlement Agreement due to alleged faults and breaches by Moroccanoil.

[11] Discovery and multiple motions by both parties in the New Jersey litigation have been ongoing since 2015.

Moroccanoil Proof of Claim

[12] Moroccanoil was not provided with notice of the NOI proceedings commenced by the Company in September 2020 for a number of months while the New Jersey litigation was ongoing. Moroccanoil discovered the existence of the NOI proceedings in or about June 2021 while its U.S. counsel was preparing for depositions in the New Jersey litigation.

[13] Upon discovering that the Company that commenced the NOI proceedings, Moroccanoil filed a proof of claim on August 19, 2021 in the amount of $2,807,478.12 (the Moroccanoil “Proof of Claim”). Moroccanoil alleges the following breaches of the Settlement Agreement:

a. Unfulfilled purchase obligations provided in the Settlement Agreement ($374,279.10).

b. The Company’s diversion, that is, unauthorized sale, of Moroccanoil products, contrary to the Settlement Agreement ($860,000).

c. Legal fees under and related to the enforcement of the Settlement Agreement ($1,237,465).

d. Interest in accordance with New Jersey law ($336,013.12).

[14] Moroccanoil provided a documentary record in support of the Moroccanoil Proof of Claim.

[15] The Company provided the Proposal Trustee with a written response to the Moroccanoil Proof of Claim.

[16] In connection with the filing of the Moroccanoil Proof of Claim, Moroccanoil sought an order from the New Jersey Court staying the New Jersey litigation pending adjudication of the Moroccanoil Proof of Claim in the Canadian NOI proceedings. Moroccanoil’s request for a stay was granted by the New Jersey Court on August 11, 2021, over the objection of the Company.

[17] Following receipt of the Moroccanoil Proof of Claim, the Proposal Trustee notified Moroccanoil that the Moroccanoil Proof of Claim will be valued at one dollar for the purposes of voting on the Company’s request to extend the proposal proceedings.

[18] The Settlement Agreement provides that it is a New Jersey contract subject to and enforceable under New Jersey law and subject to the exclusive jurisdiction of the New Jersey Court. The matter is under case management by one magistrate judge and a trial judge.

[19] The New Jersey Court dismissed a Moroccanoil motion for summary determination in 2015 as premature. A judge was then assigned to oversee discovery and the parties have conducted documentary discovery and depositions over six years. A second Moroccanoil motion for adjudication is pending before the New Jersey Court since November 2020. Discovery and the New Jersey proceeding is now complete and the matter is ready to proceed to trial. Viva voce evidence from some witnesses (including expert witnesses) is likely to be necessary at trial.

[20] In a transcript of proceedings in the New Jersey court, the Magistrate advised the parties that the court intends to wait for adjudication of the proof of claim and, if it is referred back to the New Jersey Court for adjudication, a briefing schedule would be set on the motion to enforce settlement and the cross-motion, and that discovery would not be re-opened.

Documents submitted in relation to the Moroccanoil claim

[21] Moroccanoil relies upon documents that were provided with the Moroccanoil Proof of Claim consisting of a compilation of “certain evidence, briefs and other documents filed and/or obtained as part of the [New Jersey proceeding]”, excluding some “marked for ‘attorneys eyes only’” and some of which were sealed. Those documents include 17 Moroccanoil and Company briefs and memoranda, 10 declarations, 3 orders, 28 deposition transcripts, 63 “key documents”, and one expert report.

[22] In connection with its response, the Company relies upon and has provided documents including for declarations, 3 orders, 2 transcripts of depositions, 59 “key documents”, 4 expert reports, and 7 transcripts of court hearings in the New Jersey proceeding.

[23] The Moroccanoil documents amount to approximately 2,500 pages and the Company’s documents represent another 2,500 pages, approximately.

[24] The Proposal Trustee served the Office of the Superintendent of Bankruptcy (“OSB”) with its motion materials. The OSB has not appeared on this motion.

Analysis

[25] The issues on this motion are whether the Court has the jurisdiction to direct the Proposal Trustee to not undertake the determination and valuation of the Moroccanoil Claim under s. 135 of the BIA and, if so, whether such a direction should be given so that the Moroccanoil Claim and the Company’s cross-motion would proceed to adjudication in the New Jersey proceeding.

[26] The Proposal Trustee submits that the circumstances at hand are such that the usual process in insolvency proceedings that claims be determined and valued in a single process should be displaced, and that a direction should be given that Moroccanoil’s claim be determined by the New Jersey Court in the New Jersey litigation.

[27] The Moroccanoil proof of claim is a contingent or unliquidated claim in the Company’s NOI proceedings.

[28] Subsection 121(2) of the BIA provides that such claim be determined as follows:

Contingent and unliquidated claims

(2) The determination whether a contingent or unliquidated claim is a provable claim and the valuation of such a claim shall be made in accordance with section 135.

[29] The procedure for determining contingent or unliquidated claims applies not only in bankruptcies but in proposal proceedings under the BIA. See Re FEA Griffiths Corp, 1971 CarswellOnt 65, 15 C.B.R. (N.S.) 231 (Ont. S.C.).

[30] Section 135(1.1) of the BIA provides:

Determination of provable claims

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

[31] The Proposal Trustee submits that notwithstanding the apparently mandatory language in s. 121(2) and s. 135(1.1) of the BIA through the inclusion of the word “shall”, the Court has discretion to direct the Proposal Trustee not to adjudicate the Moroccanoil Proof of Claim, in appropriate circumstances.

[32] Moroccanoil responds that s. 135(1.1), plainly read and understood, mandates the Proposal Trustee to determine and value Moroccanoil’s Proof of Claim. To do so, the Proposal Trustee must consider and determine the Company’s claim against Moroccanoil as a necessary component.

[33] The Proposal Trustee submits that its motion is not dissimilar in substance to a motion by a creditor under s. 69.4 of the BIA for an order lifting the stay of proceedings under the BIA to allow a claim made in another court to proceed to adjudication in that court where the creditor applying is likely to be materially prejudiced by continuation of the stay of proceedings or it is equitable on other grounds to lift the stay. Where a claim proceeds in another court and is determined, the amount of the claim is then imported into the BIA proceedings.

[34] Where a creditor seeks to lift a stay under the BIA and allow a claim in another court to proceed, the Bankruptcy Court is not asked to relieve a trustee of its statutory obligation to determine a claim made in a bankruptcy. The court is asked to lift the stay, at the request of the creditor or other person affected by the stay of proceedings, to allow a claim to proceed to adjudication in another court so that the claim, as so determined, can be filed with the trustee. The effect of such an order is to suspend the trustee’s obligation under s. 135(1.1) with respect to a contingent or unliquidated claim until the claim has been determined and valued by another court.

[35] In this case, there was no stay of proceedings that affected the New Jersey litigation when the NOI was filed. Moroccanoil, when it learned of the NOI proceeding, elected to file the Proof of Claim with the Proposal Trustee and it moved to stay the New Jersey action which, when granted, gave effect in New Jersey to the stay of proceedings under the BIA in Canada. Moroccanoil does not seek to lift a stay under the BIA. Section 69 of the BIA does not apply here and, in my view, the procedure that is available to a creditor to seek to lift a stay of proceedings does not assist me to decide the question of jurisdiction on this motion.

[36] In support of its submission that this Court has jurisdiction to direct that Moroccanoil’s claim be determined by the New Jersey Court in the New Jersey litigation, the Proposal Trustee cites Graham Mining Ltd., Re, 2001 ONSC 28466.

[37] In Graham, a privately appointed receiver and the trustee in bankruptcy of Graham Mining Ltd., a bankrupt, moved for advice and directions respecting the trustee’s decision to settle, subject to court approval, lawsuits in which Graham was a plaintiff and defendant by counterclaim in one action and a defendant in another action. Four preferred and unsecured creditors moved to reverse the trustee’s decision to settle the litigation, subject to court approval, and expunge or reduce the proofs of claim filed by two other creditors. Justice Cameron authorized the trustee and the receiver to enter into the proposed settlement.

[38] In Graham, Cameron J. addressed the trustee’s obligation under s. 135 of the BIA to value every contingent or unliquidated claim. Cameron J. was satisfied that the cost of analyzing the claim and any set-off alleged by the objecting creditors would be substantial, where the claims were complex and turned on credibility. He held, at para. 69, that in view of various factors including the lack of funds in the estate to pursue the Graham claim, “any breach of the obligation under BIA s. 135(1) to value the claim is moot”. Cameron J. was satisfied that the trustee had acted honestly and in good faith and in a commercially reasonable manner in accepting the settlement proposal and he authorized the trustee to enter into minutes of settlement accepting the proposal.

[39] The facts in Graham are materially different from those on this motion because in Graham, the trustee determined the claims by the general contractor and the performance bond issuer by making the settlement, subject to court approval. The objecting creditors were not seeking to have their own claims determined. They moved under s. 135(5) of the BIA to reverse the trustee’s decision to determine and value claims by settling the litigation involving Graham. The Court found that in so doing, the trustee had acted in good faith and reasonably in the discharge of its obligation under s. 135 of the BIA. Graham is not a case where, as here, the trustee asked the court to relieve it of an obligation to determine and value a creditor’s claim, and direct that this be performed by a civil court in another jurisdiction.

[40] The Proposal Trustee cites s. 183(1) of the BIA in support of its submission that there is jurisdiction for this court to give the requested direction. Section 183(1) provides that the Superior Court of Justice exercising its jurisdiction under the BIA is “invested with such jurisdiction at law and in equity as will enable [it] to exercise original, auxiliary and ancillary jurisdiction in bankruptcy and in other proceedings authorized by this Act ...”.

[41] In Kingsway General Insurance Company v. Residential Warranty Company of Canada Inc. (Trustee of ), 2006 ABCA 293, the Alberta Court of Appeal, at paras. 20 and 21, addressed the Bankruptcy Court’s inherent jurisdiction at law and in equity under s. 183(1) of the BIA:

Inherent jurisdiction is not without limits, however. It cannot be used to negate the unambiguous expression of legislative will and moreover, because it is a special and extraordinary power, should be exercised only sparingly and in a clear case: Baxter Student Housing Ltd. v. College Housing Cooperative Ltd., 1975 SCC 164, [1976] 2 S.C.R. 475 at 480; Wasserman Arsenault Ltd. v. Sone (2002), 2002 ONCA 41494, 33 C.B.R. (4th) 145 (Ont. CA).

Further limitations are based on the nature of the BIA - it is a detailed and specific statute providing a comprehensive scheme aimed at ensuring the certainty of equitable distribution of a bankrupt’s assets among creditors. In this context, there should not be frequent resort to the power. However, inherent jurisdiction has been used where it is necessary to promote the objects of the BIA: [citations omitted]. It has also been used where there is no other alternative available: [citations omitted].

[42] The regime under the BIA provides for a summary procedure for (i) determination by the trustee of whether a contingent or unliquidated claim is a provable claim and, if so, (ii) for the trustee to value it. The BIA provides for an appeal of the trustee’s determination and, although the appeal may be made to the registrar in bankruptcy, a judge of this court may exercise this jurisdiction under. 192(2) of the BIA. Insolvency proceedings under the BIA are subject to court supervision, and the court is able to give directions for the timely and efficient determination of claims.

[43] Although Moroccanoil’s claim was commenced in the New Jersey Court as an ordinary civil claim to enforce a settlement agreement, the claim is now being made in the context of an insolvency proceeding that was triggered by the Company’s NOI filing. Before the commencement of the NOI proceedings, Moroccanoil’s claim, and the cross-motion by the Company, were proceeding in accordance with the civil procedures under New Jersey law for the adjudication of ordinary civil claims. However, in an insolvency context, where an unsecured creditor is unlikely to recover its claim as proven, the full procedural opportunities of normal civil litigation are often inappropriate. For this reason, the statutory regime in Canada under the BIA for summary determination of claims differs materially from the procedural rules for adjudication of civil claims.

[44] I read s. 135(1.1) of the BIA as unambiguously providing that the Proposal Trustee is required to determine whether Moroccanoil’s claim is a provable claim and, if it is, that the Proposal Trustee value it. In Re Nortel Networks Corporation et al., 2015 ONSC 1354, Justice Newbould, at para. 35, held, in the context of an insolvency under the CCAA, that a court should not lightly lose control of the process whereby claims against the debtor are to be determined. The requirement for claims to be determined and valued through a single claims process under the supervision of a single Bankruptcy Court is consistent with the scheme and objects of the insolvency process under the BIA.

[45] I conclude that the inherent jurisdiction of this Court under s. 183(1) of the BIA does not extend to displacing the claims process mandated by s. 135(1.1) of the BIA.

[46] If I am in error in this regard, I address whether this is one of the clear cases where the court’s inherent jurisdiction should be exercised to displace the process for valuation of claims provided for in 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.

[48] Morrocanoil submits that any appeal of the Proposal Trustee’s valuation of its claim should proceed to a judge of the Commercial List under s. 192(2) of the BIA to be heard as a trial of an issue by way of a streamlined process based on largely paper record and supplemented by viva voce evidence, as needed.

[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.

[50] If there is jurisdiction for this Court to give the requested direction, I am not satisfied that the Proposal Trustee has shown that this is one of the clear cases that justifies the exercise of discretion to depart from the usual process for valuation of claims under the BIA.

[51] I conclude that the Proposal Trustee is required to determine and value Moroccanoil’s Proof of Claim pursuant to s. 135(1.1) of the BIA. I decline to give the requested direction.

Disposition

[52] For these reasons, the Proposal Trustee’s motion for an order directing the Proposal Trustee to not undertake the adjudication of the Moroccanoil Claim and the Company’s cross-motion under s. 135(1.1) of the BIA is dismissed.

[53] At the hearing of this motion, I did not receive oral submissions on the portion of the Proposal Trustee’s motion for approval of the Sixth Report. I ask that counsel for the Proposal Trustee arrange an appointment before me to address this portion of the motion, which is adjourned.

[54] If the parties are unable to resolve costs, they may provide written submissions according to a schedule to be agreed upon and approved by me.

Cavanagh J.

Date: May 31, 2022