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When Class Actions and Insolvency Proceedings Collide

6 minute read

In 3113736 Canada Ltd. v Cozy Corner Bedding Inc.,1 the Court of Appeal for Ontario grappled with an issue arising in an insolvency proceeding subsequent to the settlement of a class action. The respondent, 3113736 Canada Ltd. (“Valle Foam”) was a manufacturer and supplier of foam products. The appellant, Cozy Corner Bedding Inc. (“Cozy Corner”) was one of Valle Foam’s customers.

The Class Action

In 2010, Valle Foam was charged under the Competition Act, RSC, 1985, c. C-34, with price-fixing. A class action was started against Valle Foam seeking damages for price fixing. The class included purchasers of foam products between 1999 and 2010, including Cozy Corner.

In 2012, Valle Foam pled guilty to the price fixing charges and entered into an agreement to settle the class action. Part of the settlement included a release. It released claims by class members against the class action defendants, but also provided that certain claims could potentially be revived if a defendant subsequently became insolvent (the “Class Action Release”). Immediately after it agreed to settle the class action, Valle Foam filed for insolvency protection under the Companies’ Creditors’ Arrangement Act (the “CCAA”).

The Subsequent Proceedings

While under CCAA protection, Valle Foam commenced an action against Cozy Corner for unpaid invoices. It is this action from which this appeal arises. Cozy Corner counterclaimed alleging that due to Valle Foam’s price fixing scheme, it had overpaid Valle Foam in amounts that exceeded Valle Foam’s claim.

Valle Foam moved for summary judgment for the unpaid invoices and a dismissal of Cozy Corner’s counterclaim. At the motion for summary judgment, the motion judge rejected Cozy Corner’s contention that it was not bound by the class action settlement because it had not received actual notice of it. He found Cozy Corner’s defence and counterclaim raised equitable set off, but found that equitable set-off was barred by the Class Action Release. Further, he held that Cozy Corner had not led sufficient evidence of overcharging in the relevant period to meet its burden to show a genuine issue requiring trial. The motion judge granted summary judgment in favour of Valle Foam.

The Court of Appeal Decision

In the appeal from the summary judgment decision, the main issue was whether the right to raise set-off as a defence was given up in the Class Action Release. The court considered three issues:

(1) Is Cozy Corner Bound By the Class Action Release?

Cozy Corner argued that the motion judge erred in finding that it was bound by the Class Action Release because it did not actually receive notice of the class action, the settlement, or the right to opt-out. The court dismissed this ground of appeal, noting, “while the law is clear that adequate notice to class members must be provided, the lack of actual notice to any particular class member does not prevent the class (except for opt outs) from being bound where sufficient steps have been undertaken to provide adequate notice.”2 Cozy Corner’s lack of actual notice did not prevent it from being bound by the Class Action Release.

(2) Does the Class Action Release Cover Equitable Set-Off?

Cozy Corner argued that the motion judge erred in viewing the Class Action Release as applying to its assertion of equitable set-off. The court agreed noting that the motion judge failed to interpret the Class Action Release as a whole and give meaning to all of its terms, which is a fundamental principle of contractual interpretation. His reasons did not advert to or analyze the exception in the Class Action Release.3

In considering equitable set-off the court explained, “Although equitable set-off is a defence, it is one that arises from the defendant having a “cross-claim” that is closely connected to the plaintiff’s claim…It is a way of raising, as a defence, a plaintiff’s liability to take into account a loss it occasioned to the defendant in reduction of the plaintiff’s claim. It is often referred to as a “claim for equitable set-off…”.4

The court then turned to the definition of released claims in the Class Action Release which refers to “any and all manner of claim” and also to “liabilities of any nature whatsoever.” It was held that this language was broad enough to capture a claim for equitable set-off.5 As for the exception contained in the Class Action Release, the court found the exception allowed class members, like Cozy Corner, to make claims arising from issues in the class action (e.g. price fixing activities) in an insolvency proceeding taken by a beneficiary of the Class Action Release (i.e. Valle Foam). The court was of the view that the right to claim equitable set-off in an insolvency fell within this exception.6

Further, the court noted that the CCAA preserves the ability of a creditor to raise set-off when sued by a company that is subject to CCAA protection.7 Specifically, s. 21 of the CCAA provides:

The law of set-off or compensation applies to all claims made against a debtor company and to all actions instituted by it for the recovery of debts due to the company in the same manner and to the same extent as if the company were plaintiff or defendant, as the case may be.

Section 21 of the CCAA extends to claims for equitable set-off.8 The court concluded:

In my view, the exception in the Class Action Release preserves the right of class members like Cozy Corner to raise claims in insolvency proceedings to the same extent as the law applicable to that insolvency proceeding permits. The CCAA governs Valle Foam’s insolvency proceeding and envisages that Valle Foam, as a company subject to its protection, may sue to recover on debts owed to it, but that if it does, a defendant can raise equitable set-off. Accordingly, I do not view Cozy Corner’s assertion of equitable set-off as falling outside of the right of Cozy Corner to seek recovery in a “creditor protection, restructuring, insolvency or bankruptcy proceeding in Canada”, a right which was specifically said not to have been impaired by the Class Action Release.9

(3) Was there Sufficient Evidence of Overcharging to Raise a Genuine Issue for Trial?

The court found that the motion judge made a palpable and overriding error in his assessment of the evidentiary record finding that the record disclosed facts showing a genuine issue requiring a trial on the amount of the overcharges and their effect on Valle Foam’s claim.

Conclusion

This is an important decision as it demonstrates the interplay between a release in a class action and a subsequent CCAA proceeding. It provides clarity on the defence of equitable set-off in the context of a CCAA proceeding.


13113736 Canada Ltd. v Cozy Corner Bedding Inc., 2020 ONCA 235.

2Ibid at para 31.

3Ibid at para 34.

4Ibid at para 37.

5Ibid at para 38.

6Ibid at para 40.

7Ibid at para 41.

8Ibid at para 42.

9Ibid at para 44.

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