In Callidus Capital, SCC looks at litigation funding | Julius Melnitzer
Tuesday, September 10, 2019 @ 11:50 AM | By Julius Melnitzer
And because it arises in the context of a Companies’ Creditors Arrangement Act proceeding, the decision will be particularly significant for insolvency and restructuring practitioners.
“We expect that the court will provide some really helpful guidance about how litigation funding works within the CCAA,” said Paul Rand, the Toronto-based chief investment officer for Bentham IMF Canada, the litigation funder involved in the appeal.
More particularly, the parties are calling on the SCC to decide whether CCAA debtors, whose only assets are litigious claims, need to obtain creditor approval for litigation financing by way of a plan of arrangement.
The trial judge ruled that such approval was not necessary, but in early February, a unanimous Quebec Court of Appeal disagreed.
The case centres around Bluberi Gaming Technologies Inc., a gaming equipment manufacturer that obtained CCAA protection in 2015. In its petition, Bluberi alleged that its secured lender, Callidus Capital Corporation, had wrongfully triggered the liquidity crisis underlying the petition.
When Bluberi’s assets were tendered in a court-approved sale, Callidus, whose secured claim was $135.7 million, came up with the best offer. When the sale closed, Callidus retained a $3 million secured claim against Bluberi. Bluberi’s only remaining asset was a damages claim against Callidus for $200 million.
Bluberi then filed for approval of $2 million of interim financing to be used as litigation funding for a proposed lawsuit against Callidus. Bluberi also sought a $20 million charge to secure repayment of the loan and a success fee for Callidus and Bluberi’s lawyers. One of the principals in the joint venture providing the financing was Gerald Duhamel, effectively Bluberi’s sole shareholder.
Callidus opposed the application and proposed a plan of arrangement that would have it contribute $2.5 million for the benefit of Bluberi’s unsecured creditors in exchange for a full release of Bluberi’s claim.
The CCAA judge ordered that both plans be put to the creditors, but Bluberi withdrew its proposal after the court ordered that the fees and expenses related to the creditors’ meeting be shared equally between Callidus and the litigation funder. Ultimately, however, Callidus’ plan, which was approved by 92 per cent of the creditors, failed because it did not reach the threshold majority of two-thirds of the value of all unsecured claims.
Several months later, Bluberi asked the court to approve a new litigation funding plan, including a priority charge of $20 million in favour of Bentham, the litigation funder, and Bluberi’s lawyers. Callidus responded with an amended plan that raised its offer to creditors to $2.88 million and sought a declaration that the litigation funding agreement amounted to a plan of arrangement that was subject to creditors’ approval.
But the CCAA judge ruled that “the whole scheme of suing Callidus, financed by Bentham under the Litigation Funding Agreement (LFA) with considerable contingency fees payable to it as well as to the debtors' attorneys, did not constitute a plan of arrangement to be submitted to a meeting for approval by the statutory majority of creditors”.
Callidus appealed to the Quebec Court of Appeal, which reversed the trial judge and rejected Bluberi’s submission that litigation funding was not a plan of arrangement but the realization of an asset.
The court concluded that because the proposed LFA could significantly affect creditors rights — indeed, they could “very well receive nothing” because the success fee would rank ahead of the unsecured claims — it had to be put to the creditors. Indeed, the court went so far as to adopt the CCAA judge’s initial approach that both plans had to be submitted to a creditors vote, with the related costs to be borne between Callidus and the litigation funder. Accordingly, the creditors were entitled to full disclosure of the LFA, subject to a confidentiality agreement.
What’s unique about the case is that Callidus is both the anticipated defendant in Bluberi’s lawsuit and the company’s largest creditor.
“As Bluberi sees it, Callidus it trying to insulate itself against its alleged wrongdoing,” Rand says. “But there will also be many instances where creditors are quite happy to see debtors pursuing litigation because it increases the chance of recovery.”
Julius Melnitzer is a freelance legal affairs journalist based in Mississauga, Ont. He can be reached at email@example.com.
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