Canada: The Quebec Court Of Appeal Qualifies Litigation Funding Agreement As A Plan Of Arrangement

Overview

In Arrangement relatif à 9354-9186 Québec inc. (Bluberi Gaming Technologies Inc.), the Quebec Court of Appeal characterized a litigation funding agreement in the context of CCAA proceedings as a plan of arrangement, ordering a creditor vote for its approval.

Background

Bluberi Gaming Technologies Inc. (together with Bluberi Group inc. as Bluberi) operated a gaming company based in Drummondville, Quebec. In November 2012, Callidus Capital Corporation (Callidus), the publicly traded arm of Catalyst Capital Group Inc., provided Bluberi a $24 million loan. Despite missed projections, Callidus continued to extend credit to Bluberi.

In November 11, 2015, Bluberi filed for CCAA protection. In its filing, Bluberi's management complained that Callidus had deliberately employed predatory lending tactics and consumed the equity value of Bluberi with a view of taking over the business.

In early 2016, Bluberi sought a sale solicitation process and received four offers, with Callidus submitting the winning offer. Following months of negotiations, the parties agreed on an asset purchase agreement by which Callidus purchased all of Bluberi's assets. Except for an undischarged claim of $3 million, Callidus' secured claims were extinguished. However, Bluberi retained a right to pursue Callidus.

On September 11, 2017, Bluberi filed an application seeking approval of a $20 million interim lender priority charge to finance its litigation against Callidus (the Callidus Litigation). The funders were comprised of a venture company involving Bluberi's former President Gerald Duhamel and Bentham IMF (Bentham) (collectively, the Funders). Prior to Bentham's financing, there was no proposed plan of arrangement.

A week later, Callidus filed a CCAA plan of arrangement proposing a $2,630,000 payment to Bluberi creditors. In response, Bluberi filed a plan of arrangement which foresaw half the proceeds of the Callidus Litigation, after payment of expenses, would be distributed to the creditors if the net proceeds exceed $20 million.

Bluberi's largest creditor voted against Callidus' plan (as amended), barring two thirds majority approval. Bluberi withdrew its plan prior to the creditor meeting and vote.

On February 6, 2018, Bluberi sought approval of third-party financing by way of a Litigation Funding Agreement, as between Bluberi and the Funders. The terms of the litigation funding agreement (LFA) included that:

• The proceeds of the Callidus Litigation will be used to reimburse the Funders for sums expended to finance the litigation. The expended amounts are otherwise not reimbursable and carry no interest;
• A success fee based on a percentage of the litigation proceeds payable to the Funders; and
• $20,000,000 super priority charge in favour of the Funders over the Callidus Litigation to secure reimbursement of the Funders' expended amounts and success fee.

In response, Callidus filed a new plan of arrangement, increasing its contribution by $250,000, and requested the CCAA Court to allow it to exercise its voting rights for the unsecured portion of its proof of claim. With permission to vote on its own plan, Callidus would likely achieve the two thirds majority vote required to sanction its plan of arrangement.

QCCS Decision

As discussed in an earlier post, Michaud J. approved Bluberi's funding arrangement and kept certain clauses of the LFA as confidential. He also prohibited Callidus from voting on its own plan.

Michaud J. noted that Callidus' behaviour had been contrary to the "requirements of appropriateness, good faith, and due diligence [that] are baseline considerations that a court should always bear in mind when exercising CCAA authority." He noted that Callidus:

• Initially contested the appropriateness of the CCAA proceedings to prevent Bluberi from pursuing its claim in damages against it,
• allowed the Monitor and Debtors to work on a valuation of the business, then appointing a chief restructuring officer, only to adopt a different position before the Court to exhaust Mr. Duhamel financially, and
• filing a plan of arrangement at 3 p.m., the day before a scheduled hearing for an application to allow debtors to pursue their claim against Callidus, which provided releases from the claims against it. Callidus was "buying releases from creditors who have no interests in the awarding of such release."

QCCA Decision

In a unanimous decision, Schrager J. reversed Michaud's J. ruling, providing that:

• Being a plan sponsor does not preclude the creditor from voting on its plan.
• There was no factual or legal justification to prohibit Callidus from voting on its plan, warranting the QCCA to substitute its discretion for that of the court below.
• Litigation financing cannot be authorized to pursue a litigious claim of the debtor company, in the absence of an approved CCAA plan, where creditor rights are affected and where there are viable alternatives for creditor recovery.
• Litigation funding forming the basis of a plan of arrangement must be disclosed in full to creditors in the context of CCAA proceedings, subject only to litigation privilege.

We understand that Bluberi is working to seek leave to appeal to the Supreme Court of Canada.

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