On February 4, 2019, the Quebec Court of Appeal (Court of Appeal) ruled in the restructuring proceedings of Bluberi Gaming Technologies Inc., now 9354‑9186 Québec Inc., et al. (Bluberi) that under the Companies’ Creditors Arrangement Act (Canada) (CCAA), creditors have a right to vote in their own self-interest. In so doing, the Court of Appeal reversed the lower court’s decision.
The unanimous decision of the Court of Appeal casts doubts on whether a CCAA court has discretion to prevent a creditor from voting on a plan for an improper purpose, except in the clearest of cases. Additionally, this decision raises the spectre that CCAA debtors, whose only assets are litigious claims, may need to consider seeking creditor approval of litigation financing schemes by way of a plan of arrangement.
On November 12, 2015, Bluberi obtained protection from its creditors under the CCAA. In its petition for an initial order under the CCAA, Bluberi alleged that its liquidity crisis had been triggered by the behaviour of its secured lender (Lender).
The best offer received for Bluberi’s assets arising from the court-approved sale process was a credit bid from the Lender, who had a secured claim of C$135.7-million. Following the closing of the sale, the Lender retained an undischarged secured claim of C$3-million against Bluberi, while Bluberi’s sole remaining asset was a claim asserted against the Lender, pursuant to which Bluberi intended to file a lawsuit for damages of approximately C$200-million.
In September 2017, Bluberi filed an application for, among other things, approval of an interim lender priority charge and interim financing of C$2-million from a lender, in which Bluberi’s principal controlling mind was involved, to finance the litigation against the Lender. The Lender contested the litigation funding and proposed a plan of arrangement, which, as amended, would see it contribute a total amount of C$2.5-million for the benefit of Bluberi’s unsecured creditors, in exchange for a full release of Bluberi’s prospective claim against it.
In response, Bluberi filed its own plan of arrangement, providing for a scheme of distribution to unsecured creditors of the net proceeds of the litigation claim against the Lender. The court ordered the Lender and Bluberi to share the CCAA Monitor’s fees and expenses of presenting their competing plans of arrangement to creditors for a vote at a creditors’ meeting, to be held for this purpose. Bluberi failed to comply with this order and withdrew its plan.
In December 2017, the Lender’s plan failed to obtain the statutorily-required creditor approval. The Lender did not vote on this plan as its C$3-million claim was secured.
On February 6, 2018, Bluberi sought court approval of a litigation funding agreement (LFA) with a commercial litigation funding firm (Litigation Funder), as well as a C$20-million super-priority charge on the claim against the Lender in favour of the Litigation Funder. Bluberi envisioned submitting a plan of arrangement to creditors after litigating the claim against the Lender.
In addition to contesting Bluberi’s application for court approval of the LFA, the Lender sponsored a new plan. The Lender’s new plan again provided for a full release of claims against the Lender by Bluberi. Additionally, the Lender amended its proof of claim to value its security as nil and sought to vote as an ordinary creditor with an unsecured claim of C$3‑million. If its vote was accepted, this would ensure creditor approval of the Lender’s new plan.
SUPERIOR COURT DECISION
On March 16, 2018, the Superior Court of Quebec (Superior Court), relying mainly on a 1998 decision of the Nova Scotia Court of Appeal, found that the Lender should not be permitted to vote on the new plan it was proposing, as its intention to vote in favour of the plan served an improper purpose, which would give rise to a substantial injustice. In the Superior Court’s view, the Lender’s behaviour appeared to be motivated by its own self-interest, resulting in the Lender sponsoring and funding a plan of arrangement for the sole purpose of obtaining releases from Bluberi or its claims against the Lender.
As the outcome of a vote on the Lender’s new plan, without the Lender having a right to vote, would be the same as the vote on the Lender’s initial plan, the Superior Court found it unnecessary to order a second creditors’ meeting for such purpose.
The Superior Court also found that Bluberi’s proposed action against the Lender did not appear to be frivolous. Relying on previous case law, the Superior Court approved the LFA with the Litigation Funder, noting that the Monitor agreed that the litigation against the Lender was the only option that may result in recovery for the creditors.
The Superior Court further found that Bluberi’s proposed litigation financing did not require the creditors’ approval pursuant to a plan of arrangement or otherwise because Bluberi was simply realizing its sole remaining asset (being the claim against the Lender), following which the distribution of any future recoveries, after payment of super-priority amounts due to the Litigation Funder, would be subject to an eventual plan of arrangement that would be put to creditors at that time.
COURT OF APPEAL DECISION
Can “Improper Purpose” Impair a Creditor’s Right to Vote on a Plan?
The Court of Appeal found that there was no reasonable basis in law for the judge’s exercise of discretion to exclude the vote because it was seeking a release from the debtors’ proposed lawsuit of alleged damages arising from the parties’ commercial dealings. The Court of Appeal was prepared to interfere with what it viewed as an error in principle and an unreasonable exercise of discretion by the CCAA supervising judge in this case. The Court of Appeal held that “Voting rights are basic to the scheme of creditor democracy under the BIA and CCAA… Here the judge relied on allegations of a yet to be instituted lawsuit against the creditor to deny the latter’s voting rights. This is not an appropriate exercise of discretion. Denial of a fundamental right should not depend on unproven allegations.”
Additionally, the Court of Appeal relied on authorities for the proposition that a creditor has a right to vote in its own self-interest and found that the Lender did not act with an improper purpose. The Lender was simply attempting to settle the prospective litigation against it by obtaining a release in exchange for valuable consideration, which would be used to fund a plan that would pay all, or part of, the creditors’ claims. Such releases in favour of third parties who contribute to the funding of a plan of arrangement have long been recognized as valid.
Are Litigious Claims and a Litigation Funding Agreement Equivalent to a Plan of Arrangement?
The Court of Appeal found that the LFA, in this case, was not equivalent to interim or debtor-in-possession financing, the purpose of which is to allow a debtor to continue operations or keep the lights on during CCAA proceedings. Instead, the Court of Appeal found that there was no connection between the LFA and Bluberi’s commercial operations; rather, the litigation financing pursuant to the LFA was part of a plan of arrangement pursuant to which Bluberi would make payments to unsecured creditors upon settling or winning a lawsuit against the Lender. Therefore, the LFA consisted of a plan of arrangement that should be put to creditors for a vote.
In particular, the Court of Appeal was concerned that the LFA did not provide creditors with any say in the outcome or settlement of the litigation or the potential recovery associated therewith, such that they would risk recovering nothing. It was up to the creditors to decide whether to accept this risk, by voting on a plan of arrangement that provided visibility as to the level of recovery in various litigation outcome scenarios.
The Court of Appeal ordered that a creditors’ meeting be held for the purpose of allowing creditors to vote on the Lender’s plan or, if Bluberi files a plan consisting of the LFA or an amended version thereof, to vote on whether to approve the Lender’s plan or Bluberi’s plan. The Lender has the right to vote.
This decision confirms the value ascribed by the courts to creditor democracy in CCAA proceedings. While the door has not been closed on the ability of a CCAA court to prevent a creditor from voting for an improper purpose, it is clear that, if such an improper purpose exists, it would need to be “the clearest of cases” to allow the court to limit the voting rights of a creditor.
Additionally, while the Court of Appeal did not rule that a litigation funding scheme is always equivalent to a plan of arrangement that must be submitted to creditors for a vote, debtors and litigation funders must, at a minimum, critically examine the factual matrix before seeking court approval of a litigation funding scheme without creditor approval.
For further information, please contact:
Sébastien Guy 514-982-4020
or any other member of our Restructuring & Insolvency group.