Can a CCAA monitor exercise the rights of creditors and sue third parties?
The Debtor imported and distributed faucets to the Appellants. The Appellants (also known as the “Retailers”) ultimately resold the faucets to Quebec-based consumers or contractors. Claiming water damage caused by faulty faucets, many consumers sought compensation from their insurers, who, upon payment, were subrogated in the rights of their insureds. The insurers then instituted legal proceedings against the Debtor, the aggregate of which claims exceeded the Debtor’s insurance coverage.
The Debtor obtained stays of proceedings through the filing of a notice of intention to file a proposal under the Bankruptcy and Insolvency Act, which stay was continued under the Companies’ Creditors Arrangement Act (the “CCAA“) pursuant to an initial order.
The Monitor subsequently sought and obtained an order to amend its powers to take proceedings against retailers who resold or installed defective faucets purchased from the Debtor. The Monitor also filed a Plan of Arrangement, providing for the establishment of a litigation pool made up of all the sums collected by the Monitor in exchange for full releases. The Plan of Arrangement also included the power of the Monitor to sue the Retailers on behalf of the creditors. The Monitor was, therefore, authorized to exercise the rights of creditors rather than those of the Debtor. In May 2019, the Monitor instituted actions in damages against the Retailers as contemplated in the Plan.
The Appellants opposed the Plan because it authorized the Monitor to take legal proceedings against them on behalf of creditors of the Debtor. The question on appeal was whether a monitor appointed pursuant to the CCAA could exercise the rights of the creditors of a debtor to sue third parties for damages. The Appellants argued that this power was not “in respect of the company” within the meaning of section 23 of the CCAA. They also argued that the Monitor’s exercise of remedies on behalf of the Debtor’s creditors compromised its duty of neutrality.
The CCAA expressly provides for certain powers and duties of the monitor. These powers and duties may be extended, because s. 23 of the CCAA provides that a monitor is required to “do anything in respect of the company that the court directs the monitor to do”. Thus, while the law does provide the basic framework within which the monitor must act, the courts may use their discretion to grant additional powers considered appropriate.
Mere commercial expediency or good sense is not enough to qualify the exercise of judicial discretion under the CCAA as appropriate nor for a plan to qualify as fair and reasonable. Judicial discretion may be exercised in furtherance of the CCAA’s purposes, which in the case at bar is the maximization of creditor recovery, since the Debtor had ceased carrying on business. The Court held that there was, in this case, legal justification for the exercise of discretion.
Significantly, the creditors voted unanimously that their rights against the Retailers be exercised by the Monitor in their place and stead and for their benefit through the proposed proceedings and the litigation pool within the CCAA framework. Absent a CCAA process, the creditors would have been free to consensually assign their rights or subrogate others, including, by way of example, a trustee of a litigation trust. The Monitor was merely putting into effect the collective will of the creditors, expressed through their unanimous vote approving the Plan of Arrangement. Giving effect to creditor democracy reflected in the CCAA was a sound basis for a court to approve the Plan.
Accordingly, given that the parties being sued were third parties vis-à-vis the CCAA estate and as such, had no claim on the litigation pool, and given that the creditors/beneficiaries of the litigation pool voted unanimously in favour of the Plan, there was sufficient legal rationale to grant the power in question. In addition, the mechanism was a direct and practical way to maximize recovery for creditors.
The appeals were dismissed with costs.
Counsel: Hubert Sibre and Rosemarie Sarrazin of Miller Thomson for Home Depot of Canada Inc., Pierre Goulet for Groupe BMR Inc., Groupe Patrick Morin Inc., Matériaux Laurentiens, Intact Compagnie d’assurance inc., Julie Himo, Dominic Dupoy and Arad Mojtahedi of Norton Rose Fulbright for Rona Inc.and Royal & Sun Alliance Insurance Company of Canada, Jocelyn Perreault and Gabriel Faure of McCarthy Tetrault and Antoine Melançon of Lapointe Rosenstein Marchand Melançon for Raymond Chabot inc., Jocelyn Perreault and Gabriel Faure of McCarthy Tetrault for 9323-7055 Québec inc, Eric Savard of Langlois Avocats for various other insurance companies and Alexandre Bayus of Gowling WLG (Canada) for Home Hardware Stores Limited.
Judges: The Honourable Mark Schrager, J.A., Patrick Healy, J.A. and Lucie Fournier, J.A.