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Background and parties
Moroccanoil Inc. (MO) is a well-known manufacturer and distributor of professional hair care products, sold under a salon-only distribution model. Conforti Holdings Limited (CHL), previously known as Salon Distribution Inc., operated a chain of hair salons in the Greater Toronto Area and was a significant purchaser and distributor of Moroccanoil products through its salons. CHL commenced a proposal under the Bankruptcy and Insolvency Act, leading to the appointment of Crowe Soberman Inc. as proposal trustee. In that insolvency process, MO filed a Proof of Claim asserting a substantial contractual claim against CHL’s estate based on an earlier Settlement Agreement and alleged product diversion. The Proposal Trustee disallowed MO’s claim, prompting MO to appeal to the Ontario Superior Court of Justice (Commercial List).
The earlier litigation and the 2013 Settlement Agreement
Before the insolvency, MO and CHL (together with CHL’s principal, Anthony Conforti) had been involved in litigation concerning the distribution and diversion of Moroccanoil products. To resolve that litigation, they entered into a Settlement Agreement effective July 15, 2013. The Settlement Agreement had several key components. First, it imposed a purchase requirement on CHL, obliging it to buy a specified dollar value of MO products over a limited period and at a premium over then-current salon prices. Second, it strictly regulated how CHL and its “Qualifying Salons” could use and sell Moroccanoil products, preserving MO’s “salon only” channel. Third, it contained strong anti-diversion and anti-counterfeiting protections, including both behavioural warranties and financial consequences for breach.
Under section 2 of the Settlement Agreement, CHL was authorized to purchase MO products only for “professional use” in Qualifying Salons. “Professional use” was defined to mean use in salon services or sale to individual salon customers, in quantities consistent with personal or family use, and in face-to-face, taxed retail transactions on the salon floor. This language anchored CHL’s rights firmly within the legitimate salon channel and excluded large-scale or wholesale resale outside the authorized network.
Section 5 provided the core anti-diversion warranty. It defined “divert,” “diverted,” or “diversion” as Moroccanoil products sold or transferred outside MO’s “salon only” distribution channel, typically for sale in unauthorized “brick and mortar” retail locations or online. CHL and related defendants represented and warranted that they would never, directly or indirectly, knowingly or unknowingly, “manufacture, purchase, acquire, store, transport, sell, deliver, market, advertise, hypothecate, broker or otherwise deal in” any diverted or counterfeit Moroccanoil products anywhere in the world. This wording is notably broad in both the conduct covered (“Deal In” is widely defined) and the mental element (covering even “unknowingly”), reflecting MO’s strong interest in containing grey-market leakage.
The Settlement Agreement also incorporated a standard form Salon Agreement that each Qualifying Salon was required to sign. The Salon Agreement contained an important evidentiary and remedial presumption: if Moroccanoil detected diversion of any product from any shipment to a salon, “it shall be conclusively presumed that all Products in that shipment were also diverted.” This clause significantly reduced MO’s evidentiary burden once any instance of diversion in a shipment was proven. Finally, the Settlement Agreement included a liquidated damages clause providing that, for any breach involving diversion by CHL or Qualifying Salons, liquidated damages would be three times the suggested retail price of each diverted product, and a fee-shifting clause entitling the prevailing party in any dispute “arising from or related to” the agreement to its reasonable attorneys’ fees.
The insolvency proceeding and the Proposal Trustee’s decision
After CHL commenced restructuring proceedings by way of a proposal to its creditors, MO filed a Proof of Claim asserting various categories of contractual damages under the Settlement Agreement. MO claimed (1) purchase requirement damages, (2) liquidated damages for diversion, (3) legal fees pursuant to the contractual fee-shifting clause, and (4) interest. The Proposal Trustee reviewed the claim in detail. It accepted in principle the method and quantum of MO’s calculation of purchase requirement damages and legal fees, and it did not quarrel with the arithmetic of the liquidated damages claim. However, it disallowed the claim primarily on the basis that MO had failed to sufficiently prove underlying liability for product diversion by CHL, and, relatedly, had not adequately proven the quantity of product actually diverted for the purposes of triggering and quantifying liquidated damages.
In particular, the Proposal Trustee viewed with scepticism MO’s reliance on an expert report (referred to as the Neches Report) and on assumptions that all Moroccanoil products and boxes found at a grey-market retailer in Macau (the Suki store) were linked to CHL and were full boxes sourced from CHL’s orders. The Proposal Trustee concluded that MO had not adequately demonstrated that products found at the Suki store were parts of specific shipments from Venus Beauty Supplies Inc. (Venus), CHL’s distributor, to CHL, and thus denied the core diversion-based elements of MO’s claim.
The first appeal endorsement: linking the Macau products to CHL
MO appealed the Proposal Trustee’s disallowance decision to the Superior Court (Commercial List). The appeal was argued over three days in February 2025. In a first endorsement released June 9, 2025, the court (Cavanagh J.) focused primarily on the factual and evidentiary issue of whether products and packaging found at the Suki store could be reliably linked to CHL’s orders through Venus. The court concluded that the Proposal Trustee had made a palpable and overriding error in finding that MO had not proven that nine MO products and one box (alleged to contain six products) located at the Suki store were part of four specific Venus orders to CHL.
Those orders, identified in the later reasons as purchase orders 406809, 403209, 418387 and 401577, represented a significant volume of Moroccanoil products shipped from Venus to CHL, with an aggregate suggested retail price of over CAD $286,000. The court accepted the product tracking evidence, including tracking codes and “trackback” reports, tying the codes found in Macau back to particular Venus–CHL shipments. As a result, the court held that MO had in fact proven that products at the Suki store originated from those four CHL orders, thereby undermining the Proposal Trustee’s core factual premise for disallowing MO’s diversion-based claim.
However, in that first endorsement, the court did not receive full argument on what inferences, if any, should follow from that factual finding. The judge identified an “inferential gap” between proof that CHL’s products were found at the Suki store and the legal conclusion that CHL had breached the Settlement Agreement by dealing in diverted products. The court therefore requested further submissions on (i) whether it should infer that the specific box associated with order #406809 was full (i.e., contained six products) when it arrived at the Suki store, (ii) whether it should infer that CHL dealt with the Suki store in diverted products in breach of the Settlement Agreement, and (iii) what, if anything, could be inferred about the broader extent of CHL’s diversion from the proven facts.
The supplementary submissions and rejection of a new interpretive argument
Following the June 2025 endorsement, the court set a timetable for additional written submissions and a later oral hearing. In its supplementary materials, CHL attempted to raise a new point: it argued that, properly interpreted, the Settlement Agreement did not make it responsible for diversion or counterfeiting of Moroccanoil products “generally,” but only barred it from dealing in diverted or counterfeit product that it itself received from third parties. This late-raised interpretive theory effectively sought to narrow CHL’s obligations and to decouple them from the full breadth of the anti-diversion warranty as read by MO and the Proposal Trustee.
MO objected, pointing out that (i) the court’s request was limited to inferential issues, not wholesale re-interpretation of the Settlement Agreement; (ii) CHL had had a full opportunity during the three-day appeal hearing to raise interpretive arguments and had not done so; and (iii) the new position was inconsistent with both the Proposal Trustee’s findings and CHL’s earlier submissions. The court agreed with MO. Cavanagh J. ruled that CHL’s fresh interpretive argument was outside the narrow scope of the supplemental process and declined to consider or adjudicate its merits. The appeal therefore proceeded on the basis of the existing, broad reading of section 5 and related provisions.
Legal framework for drawing inferences from circumstantial evidence
A central issue in the supplementary reasons was how far the court could go in drawing inferences from circumstantial evidence about diversion, and where the line lay between reasonable inference and impermissible speculation. Relying on Borrelli v. Chan and other authorities, the court reiterated that circumstantial evidence is acceptable but requires careful logical reasoning. Permissible inferences must rest on proven facts, and the question is whether the conclusion is logically probable and reasonably flows from those facts, such that it is “substantially the most probable” view of the evidence on a balance of probabilities.
The judge emphasized that there is only one civil standard of proof—the balance of probabilities—even in cases involving serious allegations such as fraud or diversion, and that allegations of seriousness do not raise the required level of proof. The analysis must distinguish robust inferential reasoning from conjecture. This framework provided the lens through which the court assessed what could and could not properly be inferred about the Macau products and CHL’s conduct.
Whether the Macau box was full when received at the Suki store
A specific factual question was whether the box associated with order #406809, found at the Suki store, was full (i.e., contained six packaged products) when it was transferred to the store. CHL argued that MO had not proven this and that the court would be speculating to assume fullness. It relied partly on the evidence of Easy Cheuk, owner of the Suki store, who said he used empty boxes to fill space and make the store look better, obtained some empty boxes from others, and would not keep large inventories. He also said the store resold Canadian Moroccanoil products, that he did not deal with Canadian suppliers, and that he did not know CHL, Venus, or Mr. Conforti.
The Proposal Trustee had previously found Cheuk’s evidence of uncertain reliability and limited weight, describing him as arguably of “questionable commercial morality” and not treating his testimony as material. MO instead relied on direct evidence from its legal analyst, Manami Sakamoto. She had visited the Suki store in January 2015, taken photographs, and identified one photograph (Exhibit G) showing an open box with case code 4344067 and what appeared to be a Moroccanoil Hydrating Mask product inside. She testified that she saw product inside the box at the store, that there was product visible in the photograph, and that she had looked inside the box.
The court accepted Sakamoto’s evidence as direct proof that the box contained Moroccanoil products when she was at the store. It also considered circumstantial evidence that the box, originally shipped full from Venus to CHL as part of order #406809, logically would have contained six products at the time of shipment to CHL and, in the absence of any evidence of an empty-box trade, was more likely still to have been full when it reached Suki. Alternative scenarios—such as shipment of an empty box from Canada to Macau or the box being sourced via other Asian intermediaries unaffiliated with CHL—were found to lack evidentiary support and to be speculative. Based on both the direct testimony and the logical inferences from the shipment history, the court found as a fact that the box associated with order #406809 was full and contained six Moroccanoil products when transferred to and received at the Suki store.
Whether CHL dealt with diverted products in breach of the Settlement Agreement
The more consequential question was whether the presence at the Suki store of a full box and nine additional Moroccanoil products, all traced to Venus–CHL shipments, supported the conclusion that CHL had “dealt in” diverted products in breach of section 5. MO argued that the only reasonable explanation was diversion in breach of the Settlement Agreement. Specifically, since the products originated in CHL’s shipments but ended up in an unauthorized “brick and mortar” retailer outside the salon-only channel, they must have been sold or transferred, directly or indirectly, by CHL or by someone who acquired them from CHL outside the authorized salon distribution system. MO also asserted that the Suki store was plainly not an authorized distributor of Moroccanoil products.
CHL countered that there was no evidence tying it to any sales or transfers to Suki. It noted the absence of business documents (purchase orders, invoices, shipping records, or correspondence) evidencing a CHL–Suki relationship and emphasized testimony by Conforti, CHL staff, and Cheuk that there was no business connection between CHL and the Suki store. CHL suggested multiple alternative pathways by which the products could have reached Macau: legitimate purchases by third parties at retail in CHL’s salons followed by resale overseas; acquisition and resale by “jobbers” who collect products from many salons; theft of product by staff, customers, or third parties; and purchases from other non-CHL sources supplying the Macau grey market. It also pointed out that Suki continued selling Moroccanoil products for years after MO stopped selling to CHL, arguing this suggested a different source.
The court found these alternative theories failed the standard for permissible circumstantial inferences. There was no concrete evidence of any specific retail purchaser, jobber, or thief actually acquiring and shipping CHL-sourced Moroccanoil products to Suki. Witnesses who mentioned jobbers had only industry-level knowledge or speculation and no direct evidence of jobber activity in Toronto sending Moroccanoil products from CHL salons to Asia. Nor was there evidence that CHL sold products below suggested retail, or that it would be economically rational for retail buyers to purchase at normal salon prices and then ship products overseas for resale at a profit. On the theft hypothesis, there was again no proof that any thefts occurred or that stolen product was exported to Suki.
By contrast, it was a proven fact that (1) the identified box and nine products at Suki were parts of four Venus shipments to CHL, and (2) they appeared for sale at an unauthorized grey-market retailer outside the salon-only channel. From this, the court held that the logically and reasonably probable inference, on a balance of probabilities, was that the products were “diverted” within the meaning of section 5 and that CHL had, directly or indirectly, “dealt in” them in breach of its warranty not to deal in diverted products anywhere in the world. The absence of conventional business records did not favour CHL, since illegitimate diversion would not be expected to generate transparent paperwork, and intermediaries could easily have been used.
The judge concluded that the facts did not support any alternative non-breach inference as substantially probable, and therefore found that CHL had contravened the Settlement Agreement. Even if competing inferences were theoretically possible, the presence at Suki of CHL-sourced products, including a full box, was “substantially the most probable” explanation consistent with CHL’s breach.
Extent of diversion and the presumption in the Salon Agreements
MO argued that it did not need to prove the full breadth of CHL’s diversion activity beyond the specific products identified as diverted in order to establish breach. Relying on the Salon Agreements incorporated into the Settlement Agreement, MO emphasized the presumption that, once diversion of “any product from any shipment” to a salon is detected, all products in that shipment are conclusively presumed to have been diverted.
The evidence established that the nine products and the box at the Suki store came from four purchase orders: 406809, 403209, 418387 and 401577. Those orders, taken together, had a total value with taxes and freight of $171,040.38 CAD and a suggested retail price of over $286,000 CAD. Ms. Sakamoto also testified that when she visited the Suki store she observed between 150 and 200 cases of Moroccanoil product and at least 500 individual products on display. While that observation suggested diversion might be occurring on a larger scale, the court found that the evidence did not permit a precise finding as to the total extent of CHL’s diversion activities, especially since Suki appeared to have sources of Moroccanoil other than CHL long after MO had stopped selling to CHL.
Nevertheless, given the conclusive presumption in the Salon Agreements, the court held it was unnecessary to quantify the actual, physical number of diverted units beyond the fact that diversion from the four identified shipments had occurred. Once any product from those shipments was proven to have been diverted, the contractual presumption deemed “all Products in that shipment” to have been diverted for the purpose of calculating damages. This presumption reflected the parties’ recognition of the practical difficulties of tracing and proving diversion in the real world and was central to MO’s liquidated damages claim.
Material breach under the Settlement Agreement
CHL attempted to frame the matter as, at most, a minor infraction unworthy of termination or major damages. Section 7 of the Settlement Agreement allowed termination by either party in the event of a “material” breach that was not cured. CHL argued that, even if there had been proven diversion, it amounted to just nine bottles and a box of six products, an insubstantial quantity. Coupled with its claim that there was no direct evidence of CHL’s involvement in getting those products to Suki, CHL contended there was no “material” breach.
The court rejected this argument. It noted that section 5 contained an absolute warranty that CHL would not deal in any diverted or counterfeit product anywhere in the world, with no de minimis exception. The parties had expressly acknowledged in the Settlement Agreement and Salon Agreements that preventing and detecting diversion was of crucial importance to MO, and they had built in both the conclusive presumption and the tripled liquidated damages as tools to address even small quantities of detected diversion. The proven diversion here related to products from four different orders, not a single stray unit, and, under the presumption, implicated all products in those shipments. In that context, proof of diversion, even if centered on a relatively small set of identified products, could not be dismissed as trivial.
The court concluded that any diversion in breach of these core anti-diversion provisions was inherently serious and, given the structure and purpose of the Settlement Agreement, constituted a material breach. CHL’s characterization of the incident as inconsequential was incompatible with the contractual language and the remedial scheme to which it had agreed.
Enforceability of the liquidated damages clause
A critical remedial issue was whether the tripled-price liquidated damages provision was an impermissible penalty. CHL argued that setting damages at three times the suggested retail price of diverted products was extravagant, unconscionable, and not a genuine pre-estimate of loss, and therefore should not be enforced. It relied on the common law rule against penalty clauses, as summarized in cases such as Peachtree and Dunlop, where a stipulated sum that is “in terrorem” of the promisor and grossly disproportionate to any conceivable loss may be unenforceable.
The court analyzed the clause as of the time the Settlement Agreement was made. It noted that the parties had expressly acknowledged the difficulty of quantifying MO’s damages from diversion—taking into account lost sales, erosion of brand and goodwill, harm to the salon-only distribution model, and the challenge of tracking grey-market flows. They had agreed that the amount and method of calculating liquidated damages were fair and reasonable approximations of MO’s likely losses in the event of breach. The judge accepted that diversion-related harm is inherently hard to measure with precision and that a multiple of retail price could reasonably reflect both direct and indirect business impacts.
On this basis, the court concluded that the three-times multiplier was a genuine attempt to pre-estimate damages, not a punitive penalty. It was not “extravagant and unconscionable” when compared to the greatest conceivable loss arising from diversion, particularly in light of Moroccanoil’s brand positioning and its dependence on a tightly controlled salon distribution channel. The liquidated damages clause was therefore enforceable.
Quantification of MO’s claim: purchase requirements, liquidated damages, fees and interest
Having found that CHL breached the Settlement Agreement by dealing in diverted products and that the liquidated damages provision was enforceable, the court turned to the quantum of MO’s claim.
First, as to purchase requirement damages, the Proposal Trustee had already accepted MO’s calculations as correct, and had stated it would have allowed this portion of the claim had liability for diversion been proven. The court held that the figure of $374,279 for purchase requirement damages was properly established and allowed that component.
Second, the court addressed liquidated damages for diversion. It applied the Salon Agreement presumption to the four identified shipments and relied on the evidence of Anthony Wilson, MO’s General Counsel, Americas. Wilson’s spreadsheet, annexed to his declaration, listed the suggested retail price of each product in the four orders (406809, 403209, 418387, and 401577), totalling CAD $286,995.80. Applying the contractual triple multiplier produced liquidated damages of $860,467.40. MO claimed the rounded figure of $860,000, and the court accepted this amount in full, finding MO had adequately proven both the occurrence of diversion and the correct application of the formula.
Third, on legal fees, MO claimed $1,237,465 in reasonable attorneys’ fees under the Settlement Agreement’s fee-shifting clause. The fees were originally billed in U.S. dollars and converted to Canadian dollars at the Bank of Canada rate on the date of CHL’s Notice of Intention to Make a Proposal. Although the Settlement Agreement provided for application of New Jersey law, no evidence of New Jersey law was led, so the court applied Ontario law. Referring to Bossé v. Mastercraft Group Inc., the judge noted that courts generally exercise their costs discretion in a manner consistent with contractual cost provisions, though they retain the power to refuse enforcement in special circumstances.
Here, the Proposal Trustee had accepted the amount of legal fees as a reasonable figure for full indemnification but would have discounted it to reflect typical Ontario partial or substantial indemnity principles. The court, however, held that the contract gave MO, as prevailing party, the right to “reasonable attorneys’ fees” rather than a partial contribution. There was no evidence from CHL challenging the reasonableness of the billed amount, no inequitable conduct by MO, and no special circumstances making full fee recovery unfair or onerous. Accordingly, the court enforced the contractual right and allowed MO’s claim for legal fees in the full amount of $1,237,465.
Fourth, MO sought interest on all amounts owing under the Settlement Agreement. The Proposal Trustee had previously accepted MO’s calculation of $336,013.12 as correct. The court adopted that conclusion and allowed the claimed interest as part of MO’s proven claim.
Summing these components, the court accepted:
This yields a total quantified claim of CAD $2,807,757.12 allowed in MO’s favour against CHL’s estate, based on the figures as of the Proof of Claim (exclusive of any further interest accruing thereafter under the Settlement Agreement).
Final outcome and disposition
In its final disposition, the court allowed Moroccanoil’s appeal from the Proposal Trustee’s Notice of Disallowance. It ordered that MO’s Proof of Claim be allowed in full as a valid claim against the estate of Conforti Holdings Limited. This outcome reversed the Proposal Trustee’s earlier disallowance, validated MO’s interpretation of the anti-diversion and remedial provisions in the Settlement Agreement, and confirmed the enforceability of both the conclusive diversion presumption and the tripled liquidated damages clause in the grey-market context.
The judgment did not fix a separate court costs award for the appeal itself. Instead, it provided that, if the parties could not agree on costs, they might deliver written submissions pursuant to a timetable approved by the court. Thus, while the contractual damages, liquidated damages, interest, and full contractual legal fees were quantified and allowed as part of MO’s claim, any additional party-and-party costs of the appeal remained to be determined, if necessary.
In summary, the successful party is Moroccanoil Inc., which obtained an order that its entire Proof of Claim be accepted against CHL’s insolvent estate. The court upheld MO’s position that CHL’s dealings in diverted products breached the Settlement Agreement in a material way, enforced the agreed liquidated damages and fee-shifting regime, and recognized a total monetary award (in the sense of allowed claim) of approximately CAD $2.8 million in Moroccanoil’s favour, subject only to any further court costs determination in subsequent submissions.
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Applicant
Respondent
Court
Superior Court of Justice - OntarioCase Number
BK-20-02675583-0031Practice Area
Bankruptcy & insolvencyAmount
$ 2,807,757Winner
ApplicantTrial Start Date