Episode 11 - Legal Counsel Annie Lespérance interviews Associate Investment Manager Nickolas Tzoulas
Read the transcript below:
Hello and thank you for tuning into the Beyond Hourly podcast, hosted by Omni Bridgeway, one of the world's most experienced dispute funders and enforcement specialists. Our podcast focuses on commercial disputes around the globe and innovative ways to maximize value for clients and law firms. Episodes of this podcast can be found on our website at www.omnibridgeway.com,iTunes, Spotify, and other podcast networks. We welcome you to subscribe to the podcast and leave us reviews. My name is Annie Lesperance, and I'm your host for today's podcast, What the Supreme Court of Canada's Decision in Bluberi Means for Litigation Funding and Creditor Recoveries.
I'm a Legal Counsel based in Omni Bridgeway's Montreal office. I'm absolutely delighted to be joined today by my colleague, Nickolas Tzoulas, Associate Investment Manager and Legal Counsel based in our Toronto office, where he assesses the merits of commercial disputes submitted for funding, and once a dispute is funded, provides strategic input to litigants and lawyers with the view to successfully resolving their litigation. His guidance is founded on experience gained as a long time litigator in the Toronto office of Blake, Cassels & Graydon LLP. In that role, he appeared as counsel before various arbitration tribunals, administrative bodies and courts, including three appearances before the Supreme Court of Canada.
In this podcast, Nick will discuss the background and importance of the Bluberi case, as well as the key takeaways of the Supreme Court of Canada's decision. Nick, welcome to the Beyond Hourly podcast.
Annie, thanks so much for the introduction. As you mentioned, I have been with the company in the Toronto office for now going on three years, and I'm excited to be here today to discuss one of the very first matters that I looked at when joining Omni Bridgeway. A piece of litigation on behalf of two companies, formerly called Bluberi, who are under the protection of a Canadian insolvency court.
Bluberi asked for Omni Bridgeway's litigation funding in order to sue its main lender, who allegedly caused Bluberi's difficulties by using unlawful lending practices. The question of litigation funding in this case has been before the courts since late 2017. It finally culminated in the decision we're here to discuss from January 2020, a win before the Supreme Court of Canada.
We'll get into the details in a minute, but first in a nutshell, Nick, could you explain what is the Bluberi decision about?
Of course. The decision that went to the Supreme Court was preliminary in nature. It really had to do with two important questions about the rights and obligations of debtors and creditors in an insolvency proceeding, but touched on issues beyond the insolvency context. The first major issue, as it pertained to the debtor in this case, Bluberi, was could the court, the insolvency court, approve the debtor's litigation funding arrangement whereby it sought financial help of a third party, Omni Bridgeway, to bring its lawsuit?
Another question before the court was, as it pertains to creditors, does the insolvency court have the right to bar a creditor from voting on a plan of arrangement whereby the creditor seeks to use the insolvency process for something that the court deems to be an improper purpose? In a very short nutshell, I will say that the Supreme Court unanimously answered both questions in the affirmative, that is, the insolvency court does have broad discretion on the one hand to approve a debtor's litigation funding arrangement as a form of interim financing, and on the other hand, the broad discretion to deny a credit or the right to vote for an improper purpose.
As to how the decision will impact insolvency practitioners and litigation funding more generally, please stay tuned. This will be discussed later on in the podcast, but for now I think we should go into the background of the decisions. Nick, could you please provide us with a bit more background to the case?
This case is quite factually complicated, but for present purposes, I think what's important is in 2015, Bluberi sought the protection of the insolvency court against, more or less, its main lender—w ho according to Bluberi, was engaged in predatory lending practices and trying to precipitate breaches of the lending agreement in order to scoop up the assets underlying the company for itself.
The court granted the initial order and a number of extensions to that order over time in 2015. In 2017, the court concluded a sale process whereby the lender actually ended up acquiring the assets of Bluberi through the insolvency proceedings, all assets, but for the cause of action against the lender itself, which Bluberi was able to retain. Bluberi valued that at over $200 million, the value of that piece of potential litigation.
When Bluberi brought a motion to approve litigation funding in late 2017, in order to actually bring the lawsuit to realize on that asset—on the underlying litigation against the lender—the lender brought a competing motion to put a plan of arrangement to the remaining creditors. Under that plan of arrangement, the other creditors would get to vote on whether to accept a sum of money from the main lender in exchange for those other creditors, giving the main lender a release of liability for any liability to Bluberi in that $200 million lawsuit.
The court at that time allowed the lender to put its plan to the creditors. The creditors voted in late 2017 to reject that plan, but by a narrow margin. In the face of that, Bluberi brought a second motion to approve litigation funding. That second motion was precipitated by a second plan of arrangement from the lender, which was substantially the same as the first, but for the fact that the lender now stated its intention to vote on its own plan of arrangement, obviously in favor of its own plan of arrangement. That would have been more than enough to get them over the line. If the first plan of arrangement was just shy of that line of what was necessary under the law in order for a plan to be approved by creditors, the second plan of arrangement with the lender's own vote would bring them over the line.
The court at that time sided with Bluberi on both motions. On the first motion, it approved of the litigation funding, which was an arrangement with Bentham IMF, now Omni Bridgeway, whereby Bentham would pay for all the legal fees, all the disbursements, to bring that 200 million-plus-dollar litigation against the lender. Bentham would receive nothing in the event that the litigation failed. In fact, Bentham would pay the defendant's costs, as is typical in Canada when you sue and you lose. You're ordered to pay the defendant's costs.
Only in the event of success would Bentham get a return on its investment and would there be a recovery for the creditor. At that point, there would be a plan of arrangement where the settlement or award at the end of the litigation would be distributed to the creditors and any excess would go to the shareholders of the company.
On the second motion, the court refused to allow the lender to bring its second plan of arrangement. It said it was futile because in any event, it voting on its own plan would constitute an improper purpose under the legislation and could never result in the court okaying that at the end of the day, because under the Canadian process, the court needs to sanction or okay any kind of arrangement that is voted on in favor of by the creditors.
That decision was then appealed before the Quebec Court of Appeal, at which point, the Court of Appeal reversed the decision in first instance, and then Bluberi sought permission to bring an appeal before the Supreme Court of Canada and leave for appeal was actually granted by the Supreme Court of Canada. How hard is it to get leave to appeal before the Supreme Court?
That's a good question. It's quite hard. Statistically speaking, only about 10% of applications for permission to bring a case to the Supreme Court are granted by the Court. The Court doesn't give reasons for why permission is or isn't granted in any given case, but the base level test is whether the Court is convinced that there is a matter of public importance or sometimes called the national importance test. Is there something at issue here that is of national importance?
We believe that questions about the insolvency regime, questions about litigation funding, questions about who can vote on a plan of arrangement, what is or isn't an improper purpose, all of those would have implications beyond just this case. The argument was made by Bluberi's counsel, which is a firm called Davies—a national firm in Canada, but the Montreal office of Davies—and on behalf of the funder—on behalf of us, Woods, which is a Montreal litigation firm—made arguments successfully to convince the Court that this was a case where their attention would be warranted.
For appeal is granted by the Supreme Court. When was the appeal heard and what happened?
Well, let me take you out of any suspense you might be in. The appeal was heard January 23rd of this year—2020. And actually I was able to attend. Two other of our Omni colleagues were in attendance as well. All three of us had at one point clerked for the Supreme Court. It was interesting to go back and sit in the gallery and watch the proceedings, have no role, neither as clerk or as counsel, but it was very interesting to be in the room. You got a sense, I think, from the vibe of the questions that were being asked that the Court really understood what was at issue here, heard the arguments of both sides, were engaging with the arguments of both sides. Much to our surprise, at the end of the oral argument, the Court asked us to stay put and came back sometime later and announced that they were ready to render a decision, which is pretty unusual to render a decision immediately from the bench.
Can you perhaps expand on that?
Sure. Yes, in a typical case, the Court will reserve judgment and you await six, eight, ten months is the typical delay between a hearing and when a decision is rendered. From time to time, a decision is given from the bench, but usually it's given from the bench affirming a court of appeal, not reversing it, as they did in this case. I've never seen this before, but typically they will give one or two paragraphs of reasons orally as to why they're deciding the way they're deciding. They wouldn’t follow up with a written decision, but here, what the Court specifically said is we are granting the appeal, and we will follow with a written decision in due course.
So, the Court released its decision, its written decision, in May of this year. You already gave a high level summary of the decision at the top of the podcast, but is there anything you would like to add?
From an insolvency standpoint, I think that the Supreme Court went to the effort of talking about what underlies the insolvency and bankruptcy regimes in Canada. What is the important remedial nature of the legislation and the balancing between creditors' rights, debtors' rights, and any other stakeholders who have a stake in the process. The Supreme Court really focused on the degree of deference that should be afforded to the court at first instance—the court that has the most face-to-face time with all of the litigants, all of the participants in the process. That deference, according to the Supreme Court, was not afforded properly by the Court of Appeal. And that is really, I think, what drove the Supreme Court to reverse the Court of Appeal and reinstate the conclusions of the judge at first instance.
The other thing I think is important to reiterate is when it comes to the litigation funding agreement. What the Supreme Court held was, this is no different than other interim financing that allows a debtor company to realize on some of its assets while under the protection of the insolvency court.
Historically, one example is borrowing from a company to keep the lights on—to keep the business running because it's for the benefit of all parties, creditors, and the debtor company itself—to be able to have that power. The courts have said that they have the power to grant that without going to a vote of creditors, just on its own, through its own power, for many decades now. With this decision, what the court found is litigation funding in the appropriate circumstances, such as the circumstances of this case, can be approved by a court.
On the question of creditors' rights and the right to vote, the court again focused a lot on the findings of fact of the trial judge, of the judge at first instance, and held that a creditor that seeks to exercise its voting rights in a way that runs counter to the purpose of the legislation—of the insolvency regime, that runs counter to the fairness that really underlies that regime—can be prevented from voting.
Here, where there was an initial plan of arrangement which failed and a second plan of arrangement—which was substantially similar and which the creditor itself wanted to vote in favor, thereby ensuring it succeeds—in this instance, what the creditor was trying to do was to circumvent the creditor democracy at the core of the insolvency legislation and insolvency regime. That was correctly found by the judge at first instance to be an improper purpose.
So looking to the future, we have listeners in Canada, the U.S. and abroad, what are some of the major takeaways you can provide on the impact of this decision, perhaps starting with the impact of the decision for insolvency practitioners and then moving on to litigation funding?
The conduct and the purpose of the parties and their behavior in the insolvency process is something that has always been given importance. But now with the Bluberi decision, I think is doubly so. The importance for litigants to act in good faith is something that really is a thread that ties together this decision, and the Supreme Court decision itself does mention that there have been recent amendments to the insolvency regime in Canada that codify good faith obligations among the participants in the process.
For insolvencies in general, for parties that are engaged in insolvencies or creditors that have powers under the insolvency regime in Canada, their behavior and their purpose for how they're acting is something that needs to be clear. It needs to be in good faith. It needs to be at the forefront of their thoughts when they're considering how to exercise remedies that are afforded to them under the law.
On the question of litigation funding, as I think I mentioned from the outset, this case was rendered in the context of an insolvency, but a lot of the factors that led the debtor company Bluberi to seek litigation funding here apply for litigants in a variety of contexts, not just those who are in an insolvency. What we saw here with the Supreme Court saying that there is nothing inherently unlawful about litigation funding—which this case is the first time the Supreme Court's ever opined on litigation funding at all—so to get the Supreme Court's approval of litigation funding as a concept is huge. Not just that, but that litigation funding can be really used as a tool for access to justice. Because here, you have a litigant who obviously could not afford to bring expensive and challenging litigation against a sophisticated defendant like the creditor without the help of a third-party, a well-financed professional third-party funder like Omni Bridgeway.
So, in the context of an insolvency, they can constitute interim financing, and they're not generally plans of arrangements. They don't require the approval of creditors, but even outside of the litigation context where court approval would not be necessary, a litigation funding agreement would not need to go before the court for approval. I think that the Supreme Court decision does stand for the proposition that litigants who either don't have the funds or don't wish to use their own funds for litigation can now comfortably look at the possibility of getting a third-party to help.
One thing I'd like to mention, the Supreme Court uses an analogy that I think is really apt and that is—litigation as a pot of gold. The Supreme Court kind of paints this picture where getting to that pot of gold is what a litigation funder can help a litigant do. When you get to the pot and you see how much is in the pot, how much gold is in the pot, that's when the creditors will have to vote on a plan of how to distribute that gold. But thinking of litigation as a pot of gold, as an asset to maximize the value of sometimes with the help of the litigation funder, I think is really the picture that the Court paints that I think can apply in many different circumstances.
If you could boil it down to what does this decision mean for insolvency and restructuring professionals, companies needing liquidity, lawyers representing cost-sensitive claim-rich clients, what would you say?
I guess it boils down to think about litigation funding. It should be a tool in the toolkit. It's not appropriate for every case. And there are lots of different litigation funders out there that offer slightly different products, but know it's an option. Learn about the differences between funders and between offerings by funders and understand that third-party financing of litigation can help in an insolvency situation, can help satisfy creditor claims. It can help maximize the value of what creditors are getting. And as is typical, if the value is higher than what the creditors are owed, then that also creates value for the shareholders and others who may not otherwise see any return from their investment when a company is going through a restructuring or bankruptcy event.
I think it's also important to think about the transferring of risk when you have a third-party litigation fund or the transferring of risk, the transferring of cost, how can that affect litigation strategy?
And the last thing is the fee flexibility that is provided by litigation funding. When you have another party paying the legal bills, paying the disbursements, paying expert fees, and paying all of the monthly bills that come in during litigation, you as the litigant only have to wait and participate, obviously, and maximize the potential for a settlement and a positive outcome. But you only have to, from a financial standpoint, wait until the case succeeds and then you get your return. And if the case doesn't succeed, you've transferred all that risk onto a third-party.
I think there's lots to digest. I hope this discussion has let listeners get a sense of what this case is about. And I really do appreciate having had the chance to chat about it with you.
Well, thank you very much Nick for being our guest on Omni Bridgeway's Beyond Hourly podcast and sharing your knowledge with our listeners. As I mentioned at the outset, episodes of the Beyond Hourly podcast can be found on our website at www.omnibridgeway.com, iTunes, Spotify, and other podcast networks. And I invite you to subscribe and leave us reviews.
You can also access a transcript of this podcast on our website blog page. Please feel free to follow up with me, Annie Lesperance at alesperance, that's L-E-S-P-E-R-A-N-C-E at omnibridgeway.com ([email protected]) for any feedback, ideas or insights you have on topics we should cover on the podcast. We'll be back soon with another episode. Until then, thank you for listening and goodbye.