Settling a fraud claim in a receivership

Re Productivity Media Inc., Productivity Media Income Fund I LP and Productivity Media Lending Corp.
What is the test for approving a settlement in a receivership proceeding?

Summary: In this case, the receiver sought approval of a settlement agreement with a defendant to a fraud recovery action involving the debtor companies, which were financiers for independent film and television productions. The receiver was appointed following allegations that the companies’ principal (who has since passed away) had engaged in fraudulent activity. On this application, the receiver asked the court to approve a settlement with the principal’s wife, who would be removed as a defendant from the action. The application was opposed by certain investors, who claimed a constructive trust over the settlement proceeds. The court approved the settlement. The principal’s wife—who was the executrix of his estate—had been assisting the receiver with identifying, maintaining and liquidating various assets and, despite extensive investigation, the receiver had not identified any evidence that she took any role in the fraudulent scheme. As a result, the court found that the wife’s ongoing involvement would result in significant efficiencies, cost savings and higher net recoveries to the benefit of affected stakeholders.

KSV Restructuring Inc., in its capacity as court appointed receiver of the Debtors sought an Order approving the Settlement Agreement reached with Sonja Santor (“Ms. Santor”) and other ancillary relief, as well as an order removing Ms. Santor as a defendant in a fraud recovery action commenced against, among others, her and her deceased husband, Mr. Santor. The relief was opposed by Alan Plaunt and 1401713 Alberta Ltd. (collectively, “Plaunt”).

Plaunt commenced an action seeking, among other things, tracing and accounting of certain funds invested by Plaunt. Part of that action sought a constructive trust over the proceeds of an earlier settlement by Mr. Santor, which resulted in settlement proceeds of $2.85 million and a series of secured and unsecured loans and certain royalty payments (the “Media House Settlement Proceeds”). Plaunt took the position that the Settlement Agreement effectively put an end to its claim for a constructive trust over the Media House Settlement Proceeds as it transferred to Ms. Santor several assets to which a constructive trust was claimed by Plaunt.

The Debtors had been in the business of providing senior secured debt financing for independent film and television productions in Canada and around the world. The Receiver had been appointed on the application of a secured lender of the Debtors following allegations that, among other things, Mr. Santor had engaged in fraudulent activity with respect to the business of the Debtors.

The Receiver argued that the Plaunt Action was statute barred for limitation reasons and doomed to fail from a tracing perspective. Despite extensive investigation, the Receiver had not identified any evidence that Ms. Santor took any role in the fraudulent scheme that was the subject of the fraud recovery action. Rather, the Receiver noted that Ms. Santor had provided consistent and ongoing cooperation to the Receiver in identifying, maintaining, and liquidating various Mareva assets and in dealing with issues arising out of the death of Mr. Santor. The Receiver's view was that her ongoing involvement would result in significant efficiencies, cost savings, and higher net recoveries, to the benefit of affected stakeholders.

The Settlement Agreement was contingent upon Ms. Santor's continuing cooperation with the Receiver’s efforts to identify, locate, and liquidate the assets of the Mareva defendants in the fraud recovery action. The Settlement Agreement required the parties to make reasonable commercial efforts to sell and liquidate the assets of the Mareva defendants during the duration of the Settlement Agreement, with the joint goal of maximizing the value of the realizations. The Settlement Agreement also contemplated that, subject to Ms. Santor's continuing cooperation with the Receiver, the Receiver would pay Ms. Santor up to US$1,750,000.

In determining whether to approve a settlement in the context of a receivership, the Court generally considers:

1. whether the settlement is fair and reasonable;

2. whether the settlement provides substantial benefits to other stakeholders; and

3. whether the settlement is consistent with the purpose and spirit of the relevant legislation.

In receiverships, the Court frames the test for settlement approval through the lens of the long-established Soundair principles:

1. whether the party made a sufficient effort to obtain the best price and has not acted improvidently;

2. the interests of all parties;

3. the efficacy and integrity of the process by which the party obtained offers; and

4. whether the working out of the process was unfair.

When the Receiver is considering how to deal with a cause of action, the Receiver can meet its responsibility by settling the matter as long as the proposed compromise is commercially reasonable.

The Court was satisfied that the Soundair principles were met in this case. As Mr. Santor’s spouse and the executrix of his estate, Ms. Santor was uniquely positioned to assist the Receiver with its ongoing efforts to identify and locate the assets of the Mareva defendants. Ms. Santor was also able to assist the Receiver with selling and liquidating personal property held in her own name or in Mr. Santor’s estate with minimal administrative hassle. Further, since Mr. Santor’s death, Ms. Santor was made an officer and director of the various corporate Mareva defendants, which provided the Receiver with significant efficiency in dealing with the records, accounts, and other assets of those corporate entities. Accordingly, her ongoing involvement would result in significant efficiencies, cost savings, and higher net recoveries, to the benefit of affected stakeholders.

The Settlement Agreement would avoid the tracing and litigation costs that the Receiver would otherwise be forced to incur, particularly from defences and claims that could be advanced by Ms. Santor as the current legal owner of the certain Mareva assets, as well as the significant delay that would result from this litigation. The Settlement Agreement reflected a fair and reasonable compromise in exchange for the time and cost savings and the certainty that flow from Ms. Santor’s ongoing cooperation in maximizing recoveries.

The Court approved the Settlement Agreement.

Judge: Justice J. Dietrich

Professionals involved:

• Edmond Lamek, Jordan Deering and Regan Christensen of DLA Piper for KSV as Receiver and the Plaintiffs in the fraud recovery action

• David Levangie of Fogler Rubinoff for the Mareva Defendants

• Andrew Hatnay of Koskie Minsky for Ellement Funds

• Claudio Aiello of Aiello Law for Alan Plaunt and 1401713 Alberta Ltd.

• Demetrios Yiokaris of Koskie Minsky for a Consortium of Union Sponsored Trust Funds