The Supreme Court of Canada in 9354-9186 Québec inc. v. Callidus Capital Corp., 2020 CanLII 5612 reinstated a decision in first instance which authorized third-party litigation funding in court-monitored insolvency proceedings and granted the funders a super priority charge and security. The decision was announced with reasons to follow.
Until the release of those reasons, paras 74-86 of the decision by Mr. Justice Jean-François Michaud in Arrangement relatif à 9354-9186 Québec inc. (Bluberi Gaming Technologies Inc.) -and- Ernst & Young Inc., 2018 QCCS 1040 disclose the facts and Michaud J.’s reasoning and paras 100-109 set out the dispositive order.
Michaud J. held that, without the proposed litigation funding to pursue the single claim in issue, creditors could expect to recover nothing. The litigation funding agreement (“LFA”) provided that the litigation funders would only receive payment if the debtors prevailed at trial or the matter settled by agreement. In addition to finding that the percentage of return set out in LFA was reasonable given the investment in the litigation and the associated risks, Michaud J. stated that he was satisfied the LFA met the following principles:
a) The third party funding agreement must be necessary to provide to a plaintiff access to justice;
b) Plaintiff’s right to instruct and control the litigation should not be diminished by the third party funding agreement;
c) The third party funding agreement must not compromise or impair the lawyer and client relationship or the lawyer’s duties of loyalty and confidentiality;
d) The compensation of the third party funder must be fair and reasonable; and
e) The third party funder undertakes to keep confidential any confidential or privileged information.
Because he did not consider the LFA to be an arrangement required by legislation to be submitted to creditors, Michaud J. dispensed with those formalitities associated with holding such a creditors meeting.
The terms of Michaud J.’s dispositive order in first instance, upheld by the Supreme Court, are as follows:
[100] AUTHORIZES the Applicants to enter into a litigation funding arrangement with IMF Bentham limited (IMF), as agent, and/or its Canadian subsidiary Bentham IMF Canada Limited (Bentham), in its own capacity or as agent (collectively or individually, the Litigation Funder) on the terms and conditions set forth in the proposed litigation funding agreement between the Company, Mr. Duhamel, Dentons Canada LLP and the Litigation Funder (Litigation Funding Agreement), to fund the ongoing expenditures of Applicants and to pay such other amounts as are permitted by the terms of this Order and the Litigation Funding Agreement;
[101] ORDERS that the Applicants may validly redact the version of Exhibit P-3, as it was served upon the service list with the exception of clauses 2.5 and 2.6 of the Litigation Funding Agreement, the definition of the word “appeal” and clause 7.1.4 in Exhibit A attached to the Litigation Funding Agreement, which should not be redacted, and should be made available to the service list;
[102] ORDERS that the non-redacted version of Exhibit P-3 shall be kept by the court confidentially under seal and not released until a further order of this Court;
[103] AUTHORIZES the Applicants to execute and deliver the Litigation Funding Agreement and associated documents, including, without limitation, the retainer agreement with Dentons Canada LLP (Exhibit F to the Litigation Funding Agreement) and with experts, as may be required or permitted pursuant to the Litigation Funding Agreement. Applicants are hereby further authorized to perform all of their obligations under the Litigation Funding Agreement;
[104] ORDERS that Applicants shall pay to the Litigation Funder, when due, all amounts payable to the Litigation Funder pursuant to the terms of the Litigation Funding Agreement and shall perform all of their obligations to the Litigation Funder pursuant to the Litigation Funding Agreement;
[105] DECLARES that all of the Bluberi Retained Claims of Applicants and Litigation Proceeds (as defined in the Litigation Funding Agreement) are hereby subject to a super priority charge and security in favour of the Litigation Funder and of Dentons Canda LLP, in an aggregate amount of $20,000,000 (such charge and security is referred to herein as the Litigation Financing Charge) in favour of: a) as a first priority, the Litigation Funder, as security for all obligations of the Applicants to the Litigation Funder with respect to all amounts owing under or in connection with the Litigation Funding Agreement; and b) as a second priority, Dentons Canada LLP, as security for all of the obligations of the Applicants to Dentons Canada LLP with respect to all amounts owing under or in connection with the Litigation Funding Agreement and the Retainer Letter. The Litigation Financing Charge shall have the priority established in this Order;
[106] ORDERS that the claims of the Litigation Funder pursuant to the Litigation Funding Agreement shall not be compromised or arranged pursuant to any plan of compromise or arrangement under the CCAA or these proceedings and the Litigation Funder, in that capacity, shall be treated as an unaffected creditor in these proceedings and in any plan of compromise or arrangement;
[107] ORDERS that the Litigation Funder may:
(a) notwithstanding any other provision of this Order, take such steps from time to time as it may deem necessary or appropriate to register, record or perfect the Litigation Financing Charge and the Litigation Funding Agreement in all jurisdictions where it deems it is appropriate; and
(b) notwithstanding the terms of the paragraph to follow, refuse to make any funding advance to Applicants if the Applicants fail to comply with the provisions of the Litigation Funding Agreement;
[108] ORDERS that the Litigation Funder shall not take any enforcement steps under the Litigation Funding Agreement or the Litigation Financing Charge without providing at least five (5) business days’ written notice (Notice Period) of a default thereunder to the Applicants and the Monitor. Upon expiry of such Notice Period, the Litigation Funder shall be entitled to take any and all steps under the Litigation Funding Agreement and the Litigation Financing Charge and otherwise permitted at law, but without having to send any demands under Section 244 of the BIA;
[109] ORDERS that, subject to further order of this Court, no order shall be made varying, rescinding, or otherwise affecting paragraphs 100 to 108 hereof unless either (a) an application for such order is served on the Litigation Funder by the moving party with a notice of at least seven (7) days before the application is presentable before the Court or (b) the Litigation Funder applies for or consents to such order[.]
See paras 77-98 and 99-100 of the Court of Appeal’s reasons in Arrangement relatif à 9354-9186 Québec inc. (Bluberi Gaming Technologies Inc.), 2019 QCCA 171. The Court of Appeal considered that the LFA qualified as a an arrangement which had to be submitted to creditors for approval.
urbitral note – A fuller note will issue once the Supreme Court releases its reasons.
The Supreme Court confirmed only that it agreed with the result in first instance and reserved its reasons for a later date. Those reasons will likely evaluate the respective approaches adopted by the Superior Court and Court of Appeal and incorporate principles stated at each level which will inform future applications to approve LFAs.
Those reasons will provide additional guidance to the use and role of LFAs in arbitration practices.
update – The Supreme Court released its reasons in 9354-9186 Québec inc. v. Callidus Capital Corp., 2020 SCC 10 on May 8, 2020.