Christa Nicholson

September 22, 2020

Introduction

The Supreme Court of Canada’s (“SCC”) recent unanimous decision in the insolvency case of 9354-9186 Quebec Inc. v. Callidus Capital Corp. 220 SCC 10 (“Bluberi”) confirmed that litigation funding may offer a viable path by which to maximize recovery for an insolvent company’s creditors. This decision marks the first time the SCC has considered litigation finance in any context and, for this reason, is likely to have far reaching implications beyond insolvencies for general commercial litigation and arbitration matters, potentially even for class actions. Knowing the highest Canadian Court has favourably commented upon litigation funding may be especially welcome news to insolvent companies in this heavily COVID pandemic-shocked economic environment. For solvent companies, Bluberi might be seen to open up possibilities to use third party litigation funding as a financing tool for off-balance sheet financing, as well as to free up cash flow, obtain working capital, and monetize litigation assets. Additionally, litigation funding could be beneficial to individuals with significant corporate oppression, directors and officers’ liability, and other claims.

Bluberi related to an insolvency which had been proceeding under the Companies Creditors Arrangement Act (“CCAA” or the “Act”).[1] Section 11.2 of the CCAA allows a court to grant interim financing - commonly referred to as “debtor in possession” or “DIP” financing - when the conditions set out in the Act are met. (See more on interim financing in this article).

The supervising Quebec lower court CCAA judge (“CCAA Judge”) approved a third party litigation funding agreement (“LFA”) as interim financing under s. 11.2 of the CCAA and granted the litigation funder a $20 million super-priority, first ranking charge against the proceeds of the litigation (the “Litigation Funding Charge”).

The Court of Appeal for Quebec (“CA”)[2] overturned that ruling, concluding that the LFA transcended the nature of interim financing and was a plan of compromise under the CCAA (“Plan”) and, as such, needed to be put to the insolvent’s creditors for a vote pursuant to the CCAA (at para. 35 citing para. 85).  This is because, in its view, the LFA: (i) affected the creditors’ share in any eventual litigation proceeds; (ii) would cause the creditors to await the outcome of any litigation; and (iii)could potentially leave the creditors  with nothing at all (para. 35 citing para. 89 of the CA Reasons).

The SCC reinstated the CCAA Judges’ decision. In the process, it confirmed the availability of litigation funding as interim financing in appropriate insolvency scenarios while acknowledging litigation funding’s more regular use in class action proceedings. In this way, the Bluberi decision holds open the prospect of litigation funding’s further legitimization, particularly for commercial litigation and arbitration claims.

Background

The CCAA Proceedings

The insolvent debtor companies, now the appellants, 9354-9186 Quebec Inc. and 9354-9178 Quebec Inc. (collectively, “Bluberi”), filed for an initial CCAA order on November 11, 2015. At that time, Bluberi owed approximately $86 million to its first secured creditor, Callidus Capital Corporation (“Callidus”). Bluberi alleged that its liquidity issues were the result of Callidus taking de facto control of the corporation and dictating a number of purposefully detrimental business decisions where the objective was to deplete Bluberi’s equity with a view to owning Bluberi and eventually selling it (para. 7).

As part of the CCAA proceedings, it was determined that a sale of Bluberi’s assets was necessary. Callidus was a successful credit bidder and, under the sale, would obtain Bluberi’s assets in exchange for extinguishing Callidus’ secured claim except for a remaining $3-million portion. The claims for damages arising from Callidus’ alleged involvement in Bluberi’s financial difficulties which Bluberi asserted should amount to $200 million in damages (the “Retained Claims”) were retained by one of the Bluberi companies. The sale was approved by the CCAA Judge and closed in February 2017, leaving the Retained Claims as the sole remaining Bluberi estate asset and the sole security for Callidus’ $3-million secured claim.

The LFA Terms

Seven months later, Bluberi filed an application seeking the approval by the CCAA Judge of the LFA to fund the litigation of the Retained Claims. The terms of the LFA were not uncommon and included the following provisions:[3]

  • the litigation funder would only be paid for its expenditures in legal fees and disbursements from any proceeds realized from the Retained Claims. It would not be entitled to any rate of interest and it would receive a success fee payable based on a percentage of those proceeds. Thus, only if there was success would the litigation funder obtain any recovery;
  • all obligations owed to the litigation funder were to be secured by the $20-million Litigation Financing Charge, subject only to existing the $250,000 administration charge previously approved by the court;
  • the Litigation Financing Charge would also secure financing for the deferred and contingency portions of the litigation fees of Bluberi’s litigation counsel (“Litigation Counsel”). Under the arrangement, those fees would be paid in priority to the creditors but subordinate to the litigation funder’s interest in the Litigation Financing Charge; and
  • the litigation funder had the discretion to terminate the LFA if, acting reasonably, it ceased to be satisfied in relation to the merits of the litigation that it and/or the Retained Claims were no longer commercially viable.

The CCAA Judge had found that the percentage of return for the litigation funder and Bluberi’s Litigation Counsel contemplated by the LFA was reasonable considering their investment in the litigation and the associated risks. The CCAA Judge also found that, as a whole, the terms of the LFA would not allow the litigation funder to exert undue influence in the litigation and were not overly broad or unreasonable.[4]

The Issue

The issue regarding litigation funding that was addressed by the SCC was whether the CCAA Judge erred in approving the LFA as interim financing pursuant to s. 11.2 of the CCAA and in failing to find that the LFA, properly understood, was a Plan which had to be put to a vote by Bluberi’s creditors pursuant to the CCAA. The facts were such that if the LFA was found to be a Plan necessitating a creditor vote and if Callidus was permitted to vote, Callidus would have succeeded in rejecting it, thereby putting an end to Bluberi’s Retained Claims against it.

The SCC’s Decision

The SCC Explains Third Party Litigation Funding

It is instructive to consider the first comments the SCC has made describing third party litigation funding and how the jurisprudence has developed.

The SCC described litigation funding as generally involving “a third party, otherwise unconnected to the litigation agree[ing] to pay some or all of a party’s litigation costs, in exchange for a portion of that party’s recovery in damages or costs.”[5] It further noted that a common model involves the litigation funder agreeing to pay a plaintiff’s disbursements (i.e. legal costs and disbursements such as expert fees) and indemnifying the plaintiff in the event of an adverse cost award, in exchange for a share of proceeds of any successful litigation or settlement.[6]

The SCC observed that the approval of third party litigation funding agreements outside of the CCAA context has been somewhat controversial because of their potential to offend common law doctrines of champerty and maintenance. The tort of maintenance prohibits “officious intermeddling with a lawsuit which in no way belongs to one.”[7] Citing McIntyre Estate v. Ontario (Attorney General) (2002),[8] the SCC explained that “champerty is a species of maintenance that involves an agreement to share in the proceeds or otherwise profit from a successful suit” (para. 94).

With contingency fee arrangements being found by courts not to be champertous where they are not motivated by an improper purpose (e.g. McIntyre Estate), a cousin to them, namely litigation funding agreements, have also increasingly come to be recognized as not  champertous, per se (para. 95). The SCC explained that this development has been focussed within class action proceedings where a litigant’s access to justice was being hindered because of barriers like adverse cost awards. The SCC further noted that the jurisprudence as to the parameters of their legality in the class action context was still evolving and that it was not asked to evaluate that in the Bluberi case, thus highlighting that different considerations can apply to a court’s consideration of litigation funding, depending on the particular context.

Regarding litigation funding in the insolvency context, after recognising that litigation funding agreements are “not per se illegal,” (para. 96) the SCC stated that first principles do not preclude CCAA judges from approving them as interim financing. Interim financing pursuant to s. 11.2 of the Act is a flexible tool. It is not limited to providing debtor companies with immediate operating or “keep the lights on” capital and may take on a range of forms (para. 96). This may include third party litigation funding, depending upon the facts of the case, bearing in mind the remedial objectives of the CCAA, including, importantly, enabling the preservation and realization of the value of a debtor’s assets.

Approval could occur where doing so would be “fair and appropriate having regard to all of the circumstances and the objectives of the Act” , including consideration of the factors set out in s. 11.2(4) which are not exhaustive and ought not to be mechanically applied.[9]

The SCC gave the insolvency case of Re Crystallex [10] as an example of third party litigation funding being approved in what it said were circumstances substantially similar to those in Bluberi, calling the CA’s effort to distinguish those two cases on the facts “wrong” (para. 10). In that case, a mining debtor with a right to develop a large gold deposit in Venezuela became insolvent and was left only with one significant asset: a US$3.4-billion arbitration claim against the state of Venezuela. The litigation funder was to advance substantial funds to finance the arbitration in exchange for, inter alia, a percentage of the net proceeds of any award or settlement. Both the lower Ontario CCAA court and a unanimous Ontario Court of Appeal agreed that approval of both the litigation funding agreement and the granting of a charge over the litigation proceeds to secure the financing prior to a Plan being approved were proper.

On the “Pot of Gold”- The LFA and Litigation Financing Charge Are Not a Plan

The CCAA does not contain a definition of a Plan. It was determined that a Plan must “require at least some compromise of the creditors’ rights” and “it follows that a third party litigation funding agreement aimed at extending financing to a debtor company to realize on the value of a litigation asset does not necessarily constitute a plan of arrangement” (para. 102). The SCC rejected the CA’s view that the LFA and the associated Litigation Financing Charge transcended the nature of interim funding (para. 109) and that they formed a Plan because the rights of Callidus were “subordinated” to those of the litigation funder (para. 110). While the Litigation Financing Charge would have the effect of placing secured creditors like Callidus subsequent in priority to the litigation funder, that result is expressly contemplated by s. 11.2(2) of the CCAA and that reality did not convert into a Plan such statutorily authorized interim funding (para. 113).

Citing Crystallex, the SCC drew a distinction between, on the one hand, pursuing through the LFA the “pot of gold” - in this case, the Retained Claims - which the CCAA Judge called the “only potential recovery” for Bluberi’s creditors[11] and, on the other, the manner in which the pot, if filled with gold, would be distributed: “Plans of arrangement determine how to distribute that pot… not what a debtor company should do to fill it” (para. 111). Bluberi had agreed to advance a Plan in the future to address the distribution of any available funds.

After determining that the LFA in question was not a Plan that needed to be presented to Bluberi’s creditors for a vote because it did not require at least some compromise of the creditors’ rights, it left open the possibility that a particular litigation funding agreement could contain terms that effectively convert it into a Plan, stating that each case needed to be considered on its particular facts (paras. 102, 113).

No Error by the CCAA Judge in Approving the LFA

The SCC decided that the CCAA Judge properly exercised his discretion to approve the LFA as interim financing. The SCC found that the CCAA Judges’ approach was not in error or unreasonable in finding the LFA terms to be fair and reasonable after canvassing them and drawing from the principles relevant to approving similar agreements in the class action context.  The CCAA Judge had properly relied upon Crystallex and considered (at para. 105):

  • the unique objectives of CCAA proceedings in distinguishing the LFA from ostensibly similar agreements that had not received court approval in the class action context;
  • the terms under which the litigation funder and the Bluberi’s Litigation Counsel would be paid if the litigation was successful and the risks they were taking by investing in the litigation; and
  • the extent of the litigation funder’s control of the litigation going forward.

Section 11.2(4) of the CCAA provides:

In deciding whether to make an order, the court is to consider, among other things,

(a) the period during which the company is expected to be subject to proceedings under this Act;

(b) how the company’s business and financial affairs are to be managed during the proceedings;

(c) whether the company’s management has the confidence of its major creditors;

(d) whether the loan would enhance the prospects of a viable compromise or arrangement being made in respect of the company;

(e) the nature and value of the company’s property;

(f) whether any creditor would be materially prejudiced as a result of the security or charge; and

(g) the monitor’s report referred to in paragraph 23(1)(b), if any.

While the CCAA Judge did not expressly advert to each of the factors referenced in s. 11.2(4) of the Act, taking the Judge’s decision as a whole, the SCC concluded that the factors could not have escaped his attention and due consideration. Further, the SCC concluded (at para. 106) that the CCAA Judge:

  • believed based on the submissions of Bluberi that approval of the LFA would enhance the prospect of a viable future Plan “with a view towards achieving maximum realization” of Bluberi’s assets (11.2(4)(d);
  • “was apprised of the ‘nature and value’ of Bluberi’s property which was clearly limited to the Retained Claims (s. 11.2(4)(e))”;
  • “implicitly concluded that the creditors would not be materially prejudiced by the Litigation Financing Charge, as he stated that ‘... given the particular circumstances of this matter, the only potential recovery lies with the lawsuit that the Debtors will launch’ (at para. 91 (emphasis added); s. 11.2(4)(f))”; and 
  • “was well aware of the Monitor’s reports and drew from the most recent report at various points in his reasons (see, e.g., paras. 64 - 65 and fn. 1; s. 11.2(4)(g))”, noting also that the Monitor supported approving the LFA as interim financing. 

The SCC further determined that the CCAA Judge was “focussed on the fairness at stake to all parties, the specific objectives of the CCAA, and the particular circumstances of this case when he approved the LFA as interim financing” (para. 107).

Conclusion - Pursuing the Pot of Gold with Litigation Funding

The SCC’s decision in Bluberi has reinforced opportunities for those with commercial litigation or arbitration claims, including individuals and insolvents, as well as solvent companies that may be seeking to conserve cash and find new ways to access liquidity, to potentially make use of litigation funding to pursue that “pot of gold”.

If you think you have an insolvency situation, commercial litigation or arbitration claim that could benefit by third party litigation funding, talk to us. JSS Barristers has been named by Canadian Lawyer Magazine as one of the top 10 civil litigation boutiques in Canada since 2014. Our team of insolvency and restructuring practitioners and commercial litigators/dispute resolution experts will be happy to assist you.

For more information about Rule 4.31, Rule 4.33 and other Rules of Court, JSS Barristers is pleased to announce the launch of the new JSS Barristers Rules Database: a comprehensive, free database providing summaries of Alberta Court decisions which consider the Rules of Court and related commentary.

 

Christa Nicholson is a partner at JSS Barristers. Click here for her bio.


[1] Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36.

[2] Arrangement relatif à 9354-9186 Québec inc. (Bluberi Gaming Technologies Inc.), 2019 QCCA 171 (“CA Reasons”).

[3] CCAA Judge’s reasons at para. 78.

[4] Ibid.

[5] At para. 93 citing R.K. Agarwal and D. Fenton, “Beyond Access to Justice: Litigation Funding Agreements Outside the Class Actions Context” (2017), 59 Can. Bus. L. J. 65, at p. 65.

[6] At para. 93 citing Dugal v. Manulife Financial Corp., 2011 ONSC 1785, 105 O.R. (3d) 364 and Bayens v. Kinross Gold Corporation, 2013 ONSC 4974, 117 O.R. (3d) 150.

[7] At para. 94 citing L.N. Klar et al., Remedies in Tort (loose leaf), vol. 1, by L. Berry, ed., at 14-11, citing Langray v. Doumoulin (1884), 7 O.R. 644 (Ch. Div.), at p. 661.

[8] McIntyre Estate v. Ontario (Attorney General) (2002), 2002 CanLII 45046 (ON CA), 218 D.L.R. (4th) 193 (Ont. C.A.), at para. 26 (“McIntyre Estate”).

[9] Para. 97.

[10] Re Crystallex, 2012 ONCA 404, 293 O.A.C. 102 (“Crystallex”).

[11] Para. 113 citing the CCAA Judge’s reasons, para 91.


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