Can litigation funding be used by a company that is subject to insolvency proceedings?
Bluberi Group Inc. (“BGI”), Bluberi Gaming Technologies Inc. (“BGTI”) and Bluberi USA, Inc. (collectively “Bluberi”) were technology companies that manufactured, distributed and serviced electronic gaming machines. Pursuant to an initial order made on November 12, 2015, Bluberi were declared debtor companies subject to the Companies’ Credit Arrangement Act (“CCAA“). Bluberi’s principal secured debtor was Callidus Capital Corporation (the “Secured Creditor”), which had lent Bluberi approximately $86 million.
A sale solicitation process was duly authorized in early February 2017, which led to the sale of Bluberi’s assets to the Secured Creditor pursuant to an asset purchase agreement (“APA”). Bluberi’s rights, security and interests in the purchased assets were transferred to the Secured Creditor.
Certain assets and rights did not vest in the Secured Creditor, including potential claims that BGI and BGTI (the “Debtors”) could pursue against, among others, the Secured Creditor (the “Retained Claims”). The Retained Claims were the Debtors’ only remaining assets. The Debtors sought to initiate an action against the Secured Creditor for $200 million. They intended to use the proceeds recovered from the Retained Claims to fund a plan of arrangement with their creditors.
On February 6, 2018, the Debtors filed an application seeking, among other things, the approval of a litigation funding arrangement (the “LFA”) offered by IMF Bentham Limited (the “Litigation Funder”). The purpose of the LFA was to put in place the funding required by the Debtors to pursue the Retained Claims. The Litigation Funder would only be entitled to a return on its investment to the extent that the litigation proceedings yielded proceeds, either through a settlement or a judgment. The implementation of the LFA and the prosecution of the Retained Claims was the only prospect that could potentially allow any meaningful recovery for the creditors of Bluberi.
The Monitor of Bluberi stated that the LFA was negotiated at arm’s length with the Litigation Funder. The Litigation Funder was a reputable lender with a proven track-record in the field of litigation funding, and the budget articulated for the contemplated litigation appeared realistic.
The Debtors’ claims against the Secured Creditor included negligence, unlawful interference in contracts and fraudulent misrepresentation and concealment. The Debtors alleged that the Secured Creditor consumed the equity value of the Bluberi businesses through debt and fees, with a view to ultimately owning the company.
Although the Court did not opine on the Debtors’ likelihood of success, it held that the allegations against the Secured Creditor were serious and, prima facie, not frivolous. Since the LFA offered the only avenue for meaningful recovery for the creditors, the Court also held that this result was in line with the purpose of the CCAA—that is, the protection of creditors’ interests.
The Court noted that, in general, third party funding agreements are not illegal and should be approved subject to the following principles:
- the agreement must be necessary to provide the plaintiff with access to justice;
- the agreement does not diminish the plaintiff’s right to instruct and control the litigation;
- the agreement does not compromise or impair the lawyer and client relationship or the lawyer’s duties of loyalty and confidentiality;
- the compensation of the third party funder is fair and reasonable; and
- the third party funder undertakes to keep confidential any confidential or privileged information.
The LFA satisfied the general principles articulated above. The percentage of return for the Litigation Funder was reasonable, considering its investment in the litigation and the associated risks. The LFA did not allow the Litigation Funder to exert undue influence in the litigation. The termination clauses contained in the LFA—which permitted the Litigation Funder to exit the LFA in certain circumstances—were also deemed reasonable. The Court was convinced that the Litigation Funder had no intention of terminating the LFA unless it perceived that it would not gain from it.
The Court granted the Debtors’ application for an Order authorizing the LFA. The decision is still subject to appeal with leave.
Counsel: Roger Simard, Ari Sorek and Myriam Simard of Dentons Canada LLP for the debtor companies, Joseph Reynaud and Émilie Lanteigne of Stikeman Elliott LLP for the monitor, Patrice Benoit and Geneviève Cloutier of Gowlings WLG (Canada) LLP for Callidus Capital Corporation, Jocelyn Perreault and Noah Zucker of McCarthy Tétrault LLP for International Game Technology, Deloitte S.E.N.C.R.L., Les Agences T.L.S. inc., Luc Carignan, François Vigneault, Tommy Hamel, Philippe Millette, Francis Proulx and François Pelletier, Neil Peden of Woods LLP for IMF Bentham Limited and Bentham IMF Capital Limited and Denis Bouchard of Deveau Avocats for SMT Hautes Technologies
Full case: http://canlii.ca/t/hr2jl