Canada Expands Judicial Assistance to the U.S.

U.S. and Canadian Proceedings

In late 2002, the United States of America and the United States Federal Trade Commission brought proceedings in Illinois and in Ontario to prevent Yemec and his employees from continuing to operate.

The U.S. government alleged the scheme was deceptive in violation of the Federal Trade Commission Act because chances of winning the lottery were not good and the consumers who sent money to redeem large prizes never received them.

While the Ontario suit bogged down in a fight over a Mareva injunction and an Anton Pillar order, which were granted and then later set aside, the Illinois case rolled along, resulting in a summary judgment of $19 million against the defendants and a permanent injunction prohibiting them from telemarketing into the U.S.

The U.S. government then asked the Ontario claim to enforce the judgment. But a motion for partial summary judgment was dismissed on the grounds that there was a question as to whether the Canadian defendants had a “meaningful opportunity to be heard” in the U.S. proceedings. The U.S. government was granted leave to appeal the decision.

The Ontario Court of Appeal justices were asked to consider two novel issues as part of Yemec. The first was whether the available Canadian defenses to the enforcement of a U.S. judgment should be expanded.

A Fourth Defense?

The leading case in the area is Beals v. Saldanha (2003 SCC 72, [2003] 3 SCR 416), in which the Supreme Court of Canada lays out three traditionally accepted defenses: Jurisdiction, natural-justice and public policy. But the top court made it clear that the list of available defenses was not closed, and that new ones could be created as appropriate. Defendants in Yemec asked the Ontario Court of Appeal judges to do just that, to adopt a fourth defense based on the denial of a “meaningful opportunity to be heard.”

The defendants argued they were unable to mount an effective defense in the United States because they were simultaneously fighting proceedings started by the U.S. government in both countries. They said they feared arrest if they entered the United States and so lacked access to seized business documents and computers, making it difficult for them to properly instruct counsel. They indicated that this deprived them of a full and fair opportunity to defend the U.S. proceedings. The court overturned the lower court's decision.

“There is nothing to suggest any unfairness to the defendants in the U.S. summary judgment proceeding,” Justice James MacPherson wrote on behalf of the three-member appeals panel. He noted that U.S. District Court Judge Amy St. Eve had given the defendants a chance to review documents, which they didn't do. “The defendants had a meaningful opportunity to be heard,” MacPherson said.

The Ontario Court of Appeal also explicitly rejected the proposed new defense, saying it duplicated the existing natural-justice defense because the right to be heard is one of its cornerstones. The appeals judges ruled against the defendants on the second novel issue, whether the long-standing common law rule that prevents the enforcement of foreign non-monetary judgments ' in this case the permanent injunction ' still holds firm or needs to be updated.

The defendants had argued that the traditional common law position in Canada is that foreign judgments are enforceable only if they are for a specific sum of money. The appeals court pointed to the guidance by the Supreme Court of Canada in Pro Swing Inc. v. ELTA Golf Inc., (2006 SCC 52, [2006] 2 SCR 612), the leading case in area, in which the top court noted the time was “ripe” for a reconsideration of the absolute common-law bar to the enforcement of foreign non-monetary orders.

The Supreme Court justices set out several factors in Pro-Swing that lower courts should use in determining enforceability. They include whether the terms of the order are clear and specific, whether the originating court retains the power to issue further orders and whether the use of judicial resources in Canada would be consistent with what would be allowed for domestic litigants.

The Ontario Court of Appeal held that the non-monetary part of the injunction prohibiting Mr. Yemec and his associates from telemarketing into the United States met all those tests, and should be upheld.

Conclusion

United States v. Yemec is highly relevant to issues of comity between Canada and the United States ' two of the world's largest trading partners that also share the world's longest undefended border. It establishes that an absolute common-law ban on the enforcement of all foreign non-monetary judgments is no longer a given, a decision that will affect both commercial activity and judicial assistance in the very many areas of Canada-U.S. cross-border litigation and commerce.

U.S. attorneys who want to pursue a full range of bankruptcy remedies and realizations north of the border will find United States v. Yemec a useful tool in their arsenal. Whereas in the past they may have run into roadblocks with Canadian courts reticent about recognizing and enforcing non-monetary orders of U.S. courts, the Ontario Court of Appeal decision provides new authority for Canadian judges to do so in line with the wishes of the Supreme Court of Canada. The ruling will assist in the aggressive pursuit of all types of commercial litigation, including bankruptcy-related litigation designed to maximize estate assets and creditor recoveries.

The bottom line is that Canadian defendants dealing with disputed assets ' and seeking to avoid dealing with U.S. judgments and orders in the process ' now have fewer places to hide.

David Ward ([email protected]) is a restructuring and insolvency partner with Cassels Brock & Blackwell LLP. He has a litigation emphasis to his insolvency practice focused on creditors' rights and remedies in reorganizations and liquidations under Canada's major insolvency and corporate statutes.

As commerce between the U.S. and Canada becomes increasingly intertwined, the courts of the land haven't always kept pace. But a recent decision by one of Canada's highest courts is going to make it easier to enforce U.S. decisions that reach north across the border.

While United States v. Yemec (2010 ONCA 414, 2010 CarswellOnt 3839) was not an insolvency case per se, the precedent it set will be highly relevant to U.S. bankruptcy and insolvency lawyers due to myriad civil litigation that typically flows from large cross-border insolvencies for years to come.

The core of Yemec centered on a group of Toronto-area telemarketers who purchased lottery tickets for residents of the United States. For some 20 years, George Michael Yemec and his 250 employees called tens of thousands of people a year offering to sell them packages or groupings of tickets of Canadian and other foreign lotteries. The packages generally sold for between $100 and $500, which represented a mark-up of between five and eight times above the actual cost of the tickets.

U.S. and Canadian Proceedings

In late 2002, the United States of America and the United States Federal Trade Commission brought proceedings in Illinois and in Ontario to prevent Yemec and his employees from continuing to operate.

The U.S. government alleged the scheme was deceptive in violation of the Federal Trade Commission Act because chances of winning the lottery were not good and the consumers who sent money to redeem large prizes never received them.

While the Ontario suit bogged down in a fight over a Mareva injunction and an Anton Pillar order, which were granted and then later set aside, the Illinois case rolled along, resulting in a summary judgment of $19 million against the defendants and a permanent injunction prohibiting them from telemarketing into the U.S.

The U.S. government then asked the Ontario claim to enforce the judgment. But a motion for partial summary judgment was dismissed on the grounds that there was a question as to whether the Canadian defendants had a “meaningful opportunity to be heard” in the U.S. proceedings. The U.S. government was granted leave to appeal the decision.

The Ontario Court of Appeal justices were asked to consider two novel issues as part of Yemec. The first was whether the available Canadian defenses to the enforcement of a U.S. judgment should be expanded.

A Fourth Defense?

The leading case in the area is Beals v. Saldanha (2003 SCC 72, [2003] 3 SCR 416), in which the Supreme Court of Canada lays out three traditionally accepted defenses: Jurisdiction, natural-justice and public policy. But the top court made it clear that the list of available defenses was not closed, and that new ones could be created as appropriate. Defendants in Yemec asked the Ontario Court of Appeal judges to do just that, to adopt a fourth defense based on the denial of a “meaningful opportunity to be heard.”

The defendants argued they were unable to mount an effective defense in the United States because they were simultaneously fighting proceedings started by the U.S. government in both countries. They said they feared arrest if they entered the United States and so lacked access to seized business documents and computers, making it difficult for them to properly instruct counsel. They indicated that this deprived them of a full and fair opportunity to defend the U.S. proceedings. The court overturned the lower court's decision.

“There is nothing to suggest any unfairness to the defendants in the U.S. summary judgment proceeding,” Justice James MacPherson wrote on behalf of the three-member appeals panel. He noted that U.S. District Court Judge Amy St. Eve had given the defendants a chance to review documents, which they didn't do. “The defendants had a meaningful opportunity to be heard,” MacPherson said.

The Ontario Court of Appeal also explicitly rejected the proposed new defense, saying it duplicated the existing natural-justice defense because the right to be heard is one of its cornerstones. The appeals judges ruled against the defendants on the second novel issue, whether the long-standing common law rule that prevents the enforcement of foreign non-monetary judgments ' in this case the permanent injunction ' still holds firm or needs to be updated.

The defendants had argued that the traditional common law position in Canada is that foreign judgments are enforceable only if they are for a specific sum of money. The appeals court pointed to the guidance by the Supreme Court of Canada in Pro Swing Inc. v. ELTA Golf Inc., (2006 SCC 52, [2006] 2 SCR 612), the leading case in area, in which the top court noted the time was “ripe” for a reconsideration of the absolute common-law bar to the enforcement of foreign non-monetary orders.

The Supreme Court justices set out several factors in Pro-Swing that lower courts should use in determining enforceability. They include whether the terms of the order are clear and specific, whether the originating court retains the power to issue further orders and whether the use of judicial resources in Canada would be consistent with what would be allowed for domestic litigants.

The Ontario Court of Appeal held that the non-monetary part of the injunction prohibiting Mr. Yemec and his associates from telemarketing into the United States met all those tests, and should be upheld.

Conclusion

United States v. Yemec is highly relevant to issues of comity between Canada and the United States ' two of the world's largest trading partners that also share the world's longest undefended border. It establishes that an absolute common-law ban on the enforcement of all foreign non-monetary judgments is no longer a given, a decision that will affect both commercial activity and judicial assistance in the very many areas of Canada-U.S. cross-border litigation and commerce.

U.S. attorneys who want to pursue a full range of bankruptcy remedies and realizations north of the border will find United States v. Yemec a useful tool in their arsenal. Whereas in the past they may have run into roadblocks with Canadian courts reticent about recognizing and enforcing non-monetary orders of U.S. courts, the Ontario Court of Appeal decision provides new authority for Canadian judges to do so in line with the wishes of the Supreme Court of Canada. The ruling will assist in the aggressive pursuit of all types of commercial litigation, including bankruptcy-related litigation designed to maximize estate assets and creditor recoveries.

The bottom line is that Canadian defendants dealing with disputed assets ' and seeking to avoid dealing with U.S. judgments and orders in the process ' now have fewer places to hide.

David Ward ([email protected]) is a restructuring and insolvency partner with Cassels Brock & Blackwell LLP. He has a litigation emphasis to his insolvency practice focused on creditors' rights and remedies in reorganizations and liquidations under Canada's major insolvency and corporate statutes.