A recent Quebec case saw the court approve a funding arrangement between a litigation financing company and an insolvent company in order to fund a lawsuit against the insolvent company’s largest creditor, with the financing company getting a share of the proceeds if successful.
A recent Quebec case saw the court approve a funding arrangement between a litigation financing company and an insolvent company in order to fund a lawsuit against the insolvent company’s largest creditor, with the financing company getting a share of the proceeds if successful. Lawyers say that the use of third-party financing in insolvency litigation is ripe for these kinds of litigation financing arrangements.
In 9354-9186 Québec inc. (Bluberi Gaming Technologies Inc.) v. Ernst & Young Inc., 2018 QCCS 1040, a bankrupt former casino gaming software company whose only real asset was a potential lawsuit worth as much as $200 million against its largest secured creditor was unable to pursue the claim on its own.
The numbered companies formerly known as Bluberi planned to sue Callidus Capital Corporation for their “numerous and faulty actions and omissions” when they entered into a financing arrangement with the companies when they were still in operation.
The Quebec Superior Court, considering primarily Ontario case law, approved a funding arrangement whereby Bentham IMF would take on the risk and cost of the litigation in exchange for a percentage of the recovered funds if successful. If unsuccessful, Bentham IMF would receive nothing.
Alex Ilchenko, senior counsel with Pallett Valo LLP in Toronto and head of the firm’s insolvency and corporate restructuring practice, says the case is an indication of a greater trend for debtors to use litigation funding in Canadian legal practice.
In the ruling, Justice Jean-François Michaud said that litigation funding is starting to appear in various forms of litigation, notes Ilchenko.
“[This matter] is the equivalent of oppression litigation with the unsecured creditors caught in the middle,” wrote Michaud. “This Court has always managed the file with the interests of the creditors in mind and this is precisely why it accepted that Callidus and the Debtors submit plans of arrangement to the creditors.”
Ilchenko says Bentham IMF has been an innovator in the field of litigation funding and that, in this case, it created the only opportunity for the unsecured creditors to get a recovery.
Usually, debtor-in-possession financing is used to have working capital to keep a company’s lights on while they restructure, says Ilchenko.
“In this case, [DIP financing is] to have working capital available to fund a litigation to create a recovery for the unsecured creditors,” says Ilchenko.
“It created a recovery where there was none before.”
Frank Bennett, founder of Bennett & Company Bankruptcy Legal Counsel in Toronto, points out that litigation funding in insolvency disputes is not new.
“It has been going on for years under s. 38 of the [Bankruptcy and Insolvency Act],” says Bennett, who was not involved in the case.
“If a debtor has a prima facie case against a third party, the debtor can make cause of action part of its proposal or plan of arrangement using its own resources and/or those of a litigation funder.”
Ilchenko says the existence of another form of funding allows litigation to occur that otherwise wouldn’t happen.
“That’s helpful to the creation of the jurisprudence,” says Ilchenko.
“If various issues are not being dealt with in the insolvency context because there is no practical reason to do it on the resources that are available without funding, that jurisprudence never comes into existence.”
Ilchenko says there are interesting issues raised in this case that were only raised because Bentham was funding the argument.
Brett Harrison, partner and co-chairman of the insolvency litigation group at McMillan LLP in Toronto, says Bluberi provides an expansion to the context of third-party litigation financing.
“DIP financers, like traditional lenders, aren’t as able to assess the merits and value of litigation, which these third-party financers are able to do,” says Harrison, who was also not involved in the case.
“There are numerous times where insolvent companies, once they’ve liquidated the business, may only have as an asset residual litigation, which would often not be acted upon.”
Harrison says the move toward the use of third-party financing in insolvency litigation is part of a trend moving away from the doctrine of champerty and toward the principle of access to justice.
“The courts don’t want the inability to fund meritorious litigation to be a barrier to justice and to recoveries for creditors,” says Harrison.
“Third-party financing provides access to the litigation process for companies in the case of insolvency [which] otherwise wouldn’t be able to fund those meritorious claims.”
Harrison says Bluberi is a recognition by the courts that access to justice is more important than it used to be and that they will allow things to occur that they wouldn’t have historically. Quebec didn’t have the concept of champerty, but all other common law provinces do.
“This case does a good job of reviewing the history of the law in some of the common law jurisdictions and setting out the principles under which these agreements should be accepted by the court,” says Harrison. “It’s showing that it’s the direction that the courts are going.”
Harrison says Bluberi provides parties with a very helpful set of parameters for the negotiation for financing agreements.
He notes that the fact that it’s a Quebec decision doesn’t make it binding in Ontario, but the reasoning of the court in the decision is in line and relies on decisions from common law jurisdictions, so there is no reason to think that a court in a common law jurisdiction wouldn’t follow the same reasoning and come to the same conclusion.
“It sets out the principles that the court is going to look for in these arrangements, so that parties can feel more comfortable that these arrangements will otherwise be enforceable and approved by the court,” says Harrison. “That is a very helpful guide.”
“It makes it clear that in the Quebec courts, effectively, DIP lending to fund litigation is recognized in the Quebec context,” says Ilchenko. “It reaffirms the utility of litigation funding in an insolvency context to create assets to fund a plan.”