Foreign Judgments, Bankruptcy and Res Judicata: Ontario Court of Appeal Hits a Trifecta in Enernorth Industries Inc. (Re)

The recent Ontario Court of Appeal decision in EnerNorth Industries Inc. (Re), 2009 ONCA 536 (CanLII) 2009 WL 1932726, 2009 CarswellOnt 3886, 55 C.B.R. (5th) 1, 2009 CarswellOnt 3886, 55 C.B.R. (5th) 1 (Ont. C.A.) highlights the preclusive effect of a foreign judgment on creditors in subsequent bankruptcy proceedings involving the judgment debtor.

The Ontario Enforcement Proceedings

In Oakwell Engineering Ltd. v. Enernorth Industries Inc., (2005) 76 O.R. (3d) 528, [2005] O.T.C. 534, (2005) 7 B.L.R. (4th) 256, (2005) 140 A.C.W.S. (3d) 70, (2005) 141 A.C.W.S. (3d) 208, 2005 CarswellOnt 2629 (Ont. S.C.J.) per Day, J [hereinafter “Enernorth-SCJ cited to O.R.] Oakwell, a Singapore corporation that supplies engineering works and products to the marine industry and Enernorth, an Ontario corporation engaged in engineering, construction, shipbuilding and power generation worldwide entered into a joint venture in 1997 for a contract to build and operate power generation facilities in India. Under their agreement, they jointly formed the “Project Company” to finance, construct and operate the project. Disputes arose between the parties, culminating in a Settlement Agreement in December 1998 which included an attornment clause providing that any future disputes would be governed by Singapore law and a choice of law clause subjecting the parties to the non-exclusive jurisdiction of the Singapore courts. Under the Settlement Agreement, Oakwell Engineering was entitled to payment of a sum from Enernorth upon successful financing of the project, referred to as Financial Closure. Enernorth failed to achieve such Financial Disclosure, and in August 2000, without notice to Oakwell Engineering, it divested its interest in the joint venture. Oakwell Engineering commenced an action against Enernorth in Singapore, which Enernorth defended at trial without contesting jurisdiction of the Singapore court. Enernorth was ordered to pay Oakwell Engineering all the sums owing under the Settlement Agreement. Enernorth unsuccessfully appealed to the Singapore Court of Appeal, but failed to raise issues of the conduct or fairness of the trial: (Enernorth-SCJ, at 531).

Oakwell Engineering then applied to have the judgment of the Singapore court against Enernorth recognized by an Ontario court: (Enernorth-SCJ, at 532). Justice Day concluded that the Singapore courts had jurisdiction over the dispute: (Enernorth-SCJ, at 534-5). He also held that Singapore courts were characterized by judicial independence and the rule of law: (Enernorth-SCJ, at 545). Given that Singapore’s legal system, including rules of evidence and procedure, had its roots in English common law, he found that the proceedings were conducted fairly in keeping with principles of natural justice: (Enernorth-SCJ, at 546). Day, J. also held that there was neither bias nor a reasonable apprehension of bias towards Enernorth. (Enernorth-SCJ, at 543). In lieu of cogent evidence that alleging bias or corruption in a court case would lead to charges of sedition, it was not established that Singapore’s Sedition Act barred Enernorth from bringing its objections earlier:(Enernorth-SCJ, at 538 citing Cap. 290, 1985 Rev. Ed. Sing.). Enernorth’s affidavit evidence from their Singapore counsel alleging bias of the trial judge was rejected, as was affidavit evidence from Enernorth’s international law experts alleging inherent bias and corruption within the Singapore legal system.:(Enernorth-SCJ, at 537, 539-541). The application judge found Enernorth lost the Singapore case primarily due to the fact that its witnesses had contradicted themselves. (Enernorth-SCJ, at 539-541). Enernorth appealed.

Enforced Foreign Judgment Upheld on Appeal

In Oakwell Engineering Engineering Ltd. v. Enernorth Industries Inc., [2006] O.J. No. 2289 (Ont. C.A.) per Laskin, MacFarland and LaForme JJ.A.[hereinafter “Enernorth-CA”]; Application for leave to appeal filed September 8, 2006. S.C.C. Bulletin, 2006, p. 1195. [2006] S.C.C.A. No. 343 (S.C.C.) MacFarland, J.A. for the unanimous court, agreed with the application judge that there was a “real and substantial connection” with Singapore. The Court of Appeal then considered Enernorth’s impeachment of the Singapore judgment “not that it resulted from a law that is contrary to the fundamental morality of the Canadian legal system, but rather that it is the product of a corrupt legal system, with biased judges, in a jurisdiction that operates outside the rule of law,” (Enernorth-CA at ¶ 21). and held:

¶ 23 The application judge carefully reviewed the evidence relied on by Enernorth in support of its bias argument. He considered the exchange between a witness and the Singapore trial judge concerning the correct spelling of the Koh Brothers Group’s name, and the fact they now controlled Oakwell. He concluded that this evidence was insufficient to prove bias or corruption. He considered the evidence of the expert witnesses — Ross Worthington, Nihal Jayawickrama and Francis T. Seow — and concluded that their evidence was either unreliable (as in the case of Mr. Worthington) or too general to prove that there was not a fair trial in this case. He concluded there was a lack of evidence of corruption or bias in private commercial cases and no cogent evidence of bias in this specific case: (Enernorth-CA at ¶ 23).

The Court of Appeal held that Day, J. properly concluded that public policy considerations were not relevant as Enernorth’s argument was based on facts about the judicial system of Singapore, not the laws themselves. The record also supported the judge’s findings about the lack of bias and the fact both Enernorth and Oakwell Engineering enjoyed fair process in the Singapore courts. The Court of Appeal further noted the following:

¶ 29 The application judge considered both the substantive and procedural law of Singapore, as well as its constitution and compared those laws to the Canadian rule of law. He concluded that “while Enernorth’s experts, political scientists and lawyers, provide reports that aspects of the government of Singapore do not meet the standards of the rule of law in Canada, this evidence goes against Singapore’s formal legal structure as evidenced by its constitution and laws” and, importantly, “furthermore, Oakwell has provided evidence to the contrary”. He concluded that, on a balance of probabilities, both parties enjoyed fair process in the Singapore courts. (Enernorth-CA at at ¶ 29).

Enernorth’s Bankruptcy and Creditors’ Appeal

On March 20, 2007, EnerNorth filed an assignment in bankruptcy. RSM Richter Inc. (“Richter”) was appointed trustee in bankruptcy the following day. Oakwell’s claim in the bankruptcy was for CDN$6,807,130.43, based entirely upon the Singapore judgment, plus interest and costs. The appellants, Hall and Cassina, were minor creditors and Enernorth’s former President and Chairman, respectively. Hall filed a proof of claim in the amount of $20,142.38, for outstanding salary, vacation pay and directors’ fees; Cassina claimed $73,222.06 for outstanding consulting and directors’ fees. At the first meeting of creditors, Hall raised the issue of whether Oakwell’s claim should be reduced by a further US$1,650,000 allegedly received from VBC under the Licence Agreement subsequent to the Singapore judgment. Other unsecured creditors supported the appeal. For the purposes of the appeal, Oakwell did not dispute that it had received additional proceeds.(at ¶ 28). Richter made enquiries about these allegations, and concluded that it had not been provided with any confirmable information that would warrant reducing Oakwell’s proof of claim. Accordingly, it proposed to admit Oakwell’s proof of claim in full.(at ¶29)

Hall and Cassina then moved before the Bankruptcy Court for an order pursuant to s. 135(5) of the Bankruptcy and Insolvency Act R.S.C. 1985, c.B-3, challenging Oakwell’s proof of claim, supported by a companion motion by the remaining group of creditors. Oakwell brought a cross-motion to dismiss both motions on the ground that the issue of whether the Licence Agreement payments had to be set-off against any payments made to Oakwell under the Settlement Agreement had already been finally determined in the Singapore proceedings.Justice Campbell granted the cross-motion, and dismissed the appellants’ motion. The appeal is from that order: (at ¶30-31).

Writing for the unanimous Court of Appeal, Blair, J.A. (Simmons and Juriansz, JJ.A. concurring) held that the other creditors did not have an unqualified right under s. 135(5) of Bankruptcy and Insolvency Act to challenge Oakwell’s proof of claim. After reviewing a number of older English authorities, Justice Blair held that:

[49] I agree that the trustee’s power to allow or disallow a proof of claim, and the court’s power to expunge or reduce it on an application under s. 135(5) of the BIA is wide. However, to say that the attacking creditor or debtor has an “unqualified” right to challenge the proof of claim where the claim is based upon a valid and enforceable judgment that is no longer subject to appeal is going too far. The appellant’s submission goes beyond the proposition that a judgment creditor is precluded from making a “double recovery”, that is, that the Bankruptcy Court may examine whether the amount claimed in the proof of claim is the true amount remaining to be paid under the judgment. The Bankruptcy Court may make such an enquiry. But, in the absence of fraud, collusion or some legitimate concern that there has been a genuine miscarriage of justice, a judgment of a court of competent jurisdiction should almost invariably satisfy a trustee or a court regarding the legitimacy of a claim under s. 135 if, in awarding the judgment, the court has considered the merits of the claim: see Re Canada Asian Centre Developments Inc., as cited in Lloyd W. Houlden, Geoffrey B. Morawetz and Janis P. Sarra, The 2009 Annotated Bankruptcy and Insolvency Act (Toronto: Thomson Carswell, 2008), at G§67.1.

The Court of Appeal then considered the appellants’ primary submission that Oakwell’s proof of claim, based on the Singapore judgment, represented an attempt by Oakwell to “double collect” to the extent of sums it has received under the Licence Agreement. With respect to res judicata, Blair, J.A. held:

[58] Here, the question is whether res judicata applies to preclude the appellants from asserting in the bankruptcy proceedings that monies received by Oakwell under the Licence Agreement, post-Singapore judgment, are to be set-off against monies owing by EnerNorth to Oakwell on the judgment awarding damages for breach of the Settlement Agreement, thus reducing or eliminating the Oakwell proof of claim in the bankruptcy. For that to be the case, the same issue must have been decided by a court of competent jurisdiction in a prior proceeding involving the same parties or their privies. The decision must have been final, fundamental in the sense that it was not collateral to the first proceeding, and made on the merits

[60] For res judicata or issue estoppel to apply, the previous proceedings must have involved the same parties or their privies. Although Ms. Hall and Mr. Cassina were the President and Chairman of EnerNorth, respectively, at the time of the Singapore proceedings – indeed, Mr. Cassina was a witness for EnerNorth in the proceedings – the appellant group of creditors argues that its members were in no way involved, nor could they have been. One of the criteria for the application of res judicata has accordingly not been met, they say.

[61] I do not accept this argument. While there is little authority directly on point, I am satisfied that Ms. Hall, Mr. Cassina, and the appellant group of creditors are all “privies” of EnerNorth for the purposes of the s. 135 hearing analysis. As officers of EnerNorth, Ms. Hall and Mr. Cassina were clearly aligned with its interests in the Singapore proceedings, and in the present context continue to be so. It is clear that directors and officers may be considered the privies of their companies…

[63] The appellant creditors as a class fall within this description. For purposes of the bankruptcy proceedings, the Trustee stands in the shoes of EnerNorth, and for purposes of the proposed s. 135(5) hearing, the creditors in effect stand in the shoes of the Trustee, because they seek to have the court do what the Trustee has declined to do. They are “identified” with EnerNorth for purposes of the comparison between the Singapore proceedings and the proposed s. 135(5) hearing, and there is a “community or privity of interest” between them in this regard…The appellants are only entitled to argue that Oakwell’s proof of claim should be expunged or reduced if EnerNorth is entitled to make the mitigation/set-off claim. As creditors, therefore, they have “a sufficient degree of identification” with EnerNorth’s claim in the Singapore proceedings “to make it just to hold that the decision to which one was a party should be binding in proceedings to which the other is a party”: Bank of Montreal v. Maple City Ford Sales (1986) Ltd.

[64] I conclude, therefore, that Ms. Hall, Mr. Cassina, and the appellant group of creditors are all “privies” of EnerNorth for purposes of the res judicata analysis in the s. 135(5) context. [citations omitted]

Similarly, Blair, J.A. concluded that the mitigation/set-off issue was finally and conclusively determined in the Singapore proceedings:

[65] The application judge concluded, at para. 22, that the appellants “seek to litigate precisely the issue that was before the Singapore Court, namely the entitlement of Oakwell to receive funds from VBC and at the same time pursue its entitlement under the Settlement Agreement against EnerNorth.” In his view, “[t]he fact that the precise amount was not dealt with in the Singapore trial, apart from the concession in respect of $350,000, [did] not invalidate Oakwell’s entitlement under the judgment against EnerNorth.” To permit the s. 135 challenge to proceed would therefore violate the principles of res judicata.  

[66] I agree.  
[67] The appellants submit that the mitigation/set-off issue was not determined in the Singapore proceedings and, indeed, that the trial judge specifically indicated that the issue was “not a matter before [him]”. Alternatively, to the extent the issue may have been determined they say it was determined in EnerNorth’s favour because the trial judge in fact deducted the $350,000 that had been received by Oakwell from VBC to that point. A review of the trial judge’s reasons in their entirety does not bear out this analysis, however.  
[68] There is no doubt the mitigation/set-off issue was squarely before the trial judge. It was raised in both the defence and counterclaim. It was the subject of evidence. It was argued in EnerNorth’s written submissions at the opening and the close of trial. But was it decided? That question is somewhat more difficult to answer.  
[69] It is true that the Singapore trial judge gave little direct consideration to the question of whether monies received by Oakwell from VBC under the Licence Agreement had to be deducted from monies received by Oakwell from EnerNorth under the Settlement Agreement, except simply to deduct the amount conceded by Oakwell. He made no specific finding one way or the other on that point. However, the appellants’ submission that he said the mitigation/set-off issue was not before him is not accurate. What he said was that Oakwell’s claim that VBC had breached the Licence Agreement by failing to pay the remaining amount of $1,650,000 under that Agreement was “not a matter before [him].” That issue is quite different than the mitigation/set-off issue as between EnerNorth and Oakwell.  
[70] Read as a whole, the trial judge’s reasons – and, more importantly, the judgment he rendered – reveal that he rejected the mitigation/set-off argument. The judgment rendered does not make sense unless premised on the rejection of EnerNorth’s arguments by way of defence and counterclaim, in their entirety.  
 
[74] As I read the judgment, the trial judge simply reduced the amount of the award by the two conceded amounts because Oakwell had voluntarily agreed to those reductions. The trial judge made no finding that Oakwell was obliged to make the deduction or that any amounts received under the Licence Agreement should be set-off and, as I have explained, his judgment as a whole is incompatible with such a conclusion. His judgment is very full and thorough. In my view, it makes no sense for him to have rejected EnerNorth’s defence and dismissed its counterclaim – both of which he did – without also rejecting the mitigation/set-off argument. I am not convinced that he left open to future proceedings the resolution of whether the bulk of the monies that were the subject of the debate (the US$1,650,000 and US$4 million) were to be set-off against the Settlement Agreement damages and/or disgorged.  
[75] In the end, I am satisfied that the mitigation/set-off issue was both fully argued and determined in the Singapore proceedings. EnerNorth’s creditors are barred from re-litigating that very issue in their efforts under s. 135(5) of the BIA to accomplish what EnerNorth failed to do in the Singapore courts and the Ontario courts.

Implications

Creditors have few options to challenge a foreign judgment’s preclusive effect following the Enernorth Industries Inc. (Re) decision. Once an Ontario court either recognizes or enforces a foreign judgment, it becomes res judicata in any subsequent bankruptcy proceedings. The aphorism: “strike while the iron is hot” is apt; unsecured creditors must not wait until the judgment debtor is either petitioned or voluntarily makes an assignment into bankruptcy to enforce their claims.
Antonin I. Pribetic

One Response to “Foreign Judgments, Bankruptcy and Res Judicata: Ontario Court of Appeal Hits a Trifecta in Enernorth Industries Inc. (Re)”

  1. Thomas P. Valenti Says:

    Antonin:A very helpful post on foreign judgments. As the world shrinks, these issues will need to be addressed by attorneys all over the world.Tom Valenti

Leave a Reply

Please log in using one of these methods to post your comment:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: