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.
- whether sufficient effort has been made to obtain the best price and that the debtor has not acted improvidently;
- the interests of all parties;
- the efficacy and integrity of the process by which offers have been obtained; and
- whether there has been unfairness in the working out of the process.
