The Bluberi CCAA Proceedings: Litigation Funding In Insolvency

On February 4, 2019, the Court of Appeal of Quebec released its decision in the matter of Callidus Capital Corporation and al. v. 9354-9186 Québec Inc. (formerly Bluberi Gaming Technologies Inc.). With the increase in third party litigation funding, we are now seeing it being used in the insolvency context and the Court of Appeal is considering how litigation funding arrangements are to be utilized in Companies' Creditors Arrangement Act1 ("CCAA") proceedings. The Court answers the following question:

When a debtor company, subject to protection under the CCAA has no assets except a litigation claim, who should decide whether to pursue the claim or accept a settlement - the debtor or the creditors?

Spoiler alert - it's the creditors.

In a unanimous decision, the Court of Appeal opined that the March 18, 2018 lower Court decision in the Québec Superior Court was both tainted with palpable errors in the finding of facts and more importantly errors of law in the application of the CCAA. The Court of Appeal substitutes its understanding of what constitutes a plan of arrangement.

Bluberi Gaming Technologies Inc. ("Bluberi"2) is a company that sold games and casino machines. In 2012, Bluberi obtained financing from Callidus, an asset-based lender. On November 12, 2015, Bluberi sought protection under the CCAA. A sales and solicitation process was eventually authorized by the CCAA court and Callidus purchased substantially all of the assets of Bluberi through a credit bid. As a result, Callidus' claim of $135.7 million against Bluberi was extinguished, except for an undischarged portion of $3 million not used in the credit bid. The sole remaining asset of Bulberi excluded from the credit bid arose from Bluberi's expressed intention to file a lawsuit for damages against Callidus (and others) for a significant amount (in the range of $200 million) ("Bluberi Retained Claim").

Bluberi sought a $20 million priority charge through a convoluted lending mechanism in favour of a joint venture company created to be the litigation funder. Gerald Duhamel, the sole shareholder of Bluberi (through a family trust), was involved in the litigation funder. This litigation funder would make $2 million available to Bluberi to finance the litigation of the Bluberi Retained Claim against Callidus. The charge was required to secure repayment of the loan and a success fee in favour of the litigation funder and Bluberi's lawyers.

Callidus not only contested Bluberi's request but also filed a plan of arrangement under which $2.5 million was offered to Bluberi's creditors in exchange of a full and final release.

The CCAA judge ordered that Callidus' plan be presented to creditors and allowed Bluberi to file a competing plan. Bluberi did file a plan but withdrew it a few weeks later, after the CCAA judge ordered that the fees and expenses related to the convening and holding of the creditors' meeting be shared equally between Callidus and the litigation funder.

Callidus' plan was...