• Post category:Court Cases

Arrangement relatif à 9323-7055 Québec inc. (Aquadis International Inc.), 2018 QCCS 2945 (CanLII)

What does the court consider when approving litigation settlements in CCAA proceedings?

In June 2015, the Debtor—a vendor of bathroom products—issued a notice of intention to file a proposal under the Bankruptcy and Insolvency Act. The Debtor’s financial difficulties arose from liabilities incurred from its sale of defective faucets to retailers in Quebec and Ontario. Between 2006 and 2010, hundreds of faucets failed, causing significant damage to property owners and resulting in many subrogated claims by the property owners’ insurers against the Debtor and its insurers.

In December 2015, the Debtor’s restructuring proposal was continued under the Companies’ Creditors Arrangement Act (the “CCAA“). Over 800 claims amounting to almost $22 million were filed with the Monitor. In December 2016, the Monitor commenced legal proceedings against the Taiwanese Manufacturer of the faucets, the Distributor of the faucets, their insurers and several other parties, claiming $22.4 million in damages and insurance proceeds. The Monitor received four offers of settlement from the insurers of the Manufacturer and Distributor that amounted to $7.2 million. The Monitor sought the Court’s authorization to accept these offers, which were contingent upon the granting by the Monitor of releases in favour of the insurers and their insureds. The Monitor’s request was opposed by the Manufacturer, the retailers and an insurer of the Debtor (together, the “Opposing Parties”). The Opposing Parties were concerned that their rights would be prejudiced by the proposed releases.

The Monitor proposed two protective measures through which to address the Opposing Parties’ concerns. First, in any defective product claim brought against a non-settling party, such party’s liability would be reduced by the proportionate amount of the settlement proceeds allocated to that loss. Second, the liability of the non-settling party would be further reduced by any amount that, but for the release, that party could have obtained against a released party by subrogation.

The Opposing Parties argued that the proposed settlements were not necessary or incidental to a restructuring of the Debtor, and that the CCAA was improperly used to settle claims that involved third parties, such as the retailers. Further, they argued that the Court could not conclude that the settlements were in the interest of all parties because the Court had little information concerning the extent of each party’s liability.

The Court agreed that the proposed settlements were unlikely to lead to a restructuring of the Debtor. Rather, they comprised part of a plan to carry out an orderly collection and distribution of the Debtor’s assets and to wind up its affairs. This objective fell within the scope of the CCAA. The CCAA proceeding also sought to maximize the assets available to the Debtor’s creditors by centralizing all claims and rights of action in the hands of the Monitor, thereby putting an end to multiple proceedings between numerous parties and dealing with the parties’ competing interests in a comprehensive and expeditious fashion.

The proposed releases did not exceed the scope of the CCAA by interfering with the rights of unrelated third parties. In that respect, the retailers did not qualify as unrelated third parties because they were solidarily liable for the product claims asserted by the Debtor’s creditors, and thus directly interest in the settlement of such claims.

To determine whether a proposed settlement agreement should be approved, a court should consider: 
  1. whether sufficient effort has been made to obtain the best price and that the debtor has not acted improvidently;
  2. the interests of all parties;
  3. the efficacy and integrity of the process by which offers have been obtained; and
  4. whether there has been unfairness in the working out of the process.
The Court concluded that the negotiation process leading to the proposed settlements was reasonable and fair. It was satisfied that the Monitor had assessed the reasonableness of the settlement offers in light of the amount of outstanding claims, the limits of the defendants’ insurance coverage, and the risks and expense involved in executing a judgment in Taiwan. The value of the $7.2 million settlement amounts to one-third of the outstanding claims. In accepting the offers, the Debtor’s creditors retained their rights against the Manufacturer and its insurer. From a financial perspective, it was clearly in the best interest of the creditors to accept the offers.
 
The Court also noted that the committee of creditors had resolved to accept the offers, subject to Court approval. Creditors are in a better position to determine whether a plan is in their own best interests. As such, the Court could not ignore the representative character of the committee and its expertise in insurance matters when considering whether the offers were in the interest of the Debtor’s creditors.
Finally, the form of the proposed releases produces a result that is similar to that intended by a proportionate share agreement. It reduced the claim that can be made against the non-settling parties by a proportionate share of the settlement funds obtained by the Monitor. The releases further allowed the non-settling parties to reduce their liabilities by showing that they could have received more from the settling parties by exercising their right of subrogation than what was obtained under the settlement. In other words, the Monitor effectively agreed to indemnify the non-settling party for any portion of the damages that a court may determine he could have effectively recovered from a settling party.
 
If the settlements were not approved, there was an increased risk that no global settlement would be reached, and litigation would remain the only option. As such, the Court concluded that the proposed settlement agreements should be approved.
 
CounselAlain Tardif and Gabriel Faure of McCarthy Tétrault and Francis Meagher of Lapointe Rosenstein Marchand Melançon, LLP for the Monitor, Jean Lozeau and Josée Brière of Groleau Gauthier Plantefor Fubon and Gearex, Éric Savard of Langlois lawyers for the Creditors committee, Valérie Allard of Michaud LeBel for IAPMO, Jean-Paul Morinof Tremblay Bois Mignault Lemay for Sovereign, Louis-Philippe Constantand Noémie Bégin of Clyde & Co for INA, Ian Rose and Alexandra Belley-McKinnon of Lavery, de Billy for AIG, Nicholas Krnjevic and Annie-Claude Beauchemin of Robinson Sheppard Shapiro for Lloyd’s, François Gagnonand Joël Turgeon of Borden Ladner Gervais for JYIC and Cathay, Hubert Sibre and Jeffrey Carhart of Miller Thomson for Home Depot, Julie Himo of Norton Rose Fulbright Canada for Rona and RSA and Pierre Goulet for Intact and BMR and Patrick Morin