Court rejects another Canadian litigation funding agreement
The Superior Court of Quebec has released a decision rejecting a litigation funding agreement in the insolvency proceedings of Fortress Global Enterprises (TSX:FGE).
Fortress, a Montreal, Quebec-based company engaged in the dissolving pulp business and the renewable energy generation sector, obtained protection under the CCAA on December 16, 2019. Long before the inception of the CCAA proceedings in 2014, the company filed a $17 million claim against Goulds Pumps Canada Inc. and Goulds Pump Inc. (collectively, “Goulds”) for restitution of the purchase price and for damages in relation to the alleged defect of two boiler feedwater pumps manufactured and sold by Goulds. Goulds also claimed against Fortress for $0.5 million for allegedly unpaid invoices.
The litigation was suspended as a result of the CCAA proceedings. Fortress and Goulds continued to attempt to settle the issues out of court, but were ultimately unsuccessful. The parties then found themselves at an impasse, with Fortress not having the funds to pursue the litigation. After numerous discussions, Fortress and the Monitor reached an agreement with Omni Bridgeway (Fund 5) Canada Investments Limited, a litigation funder, to finance the resumption of the litigation.
Deloitte as monitor sought approval of the litigation funding agreement and a related charge, arguing that the terms of the agreement and the charge were commercially reasonable and represented the only alternative available to resume and pursue the proceedings for the benefit of the company’s stakeholders. The DIP lender and the company’s secured creditors were supportive of the monitor’s application.
Goulds opposed the application, and the issues before the Court were whether Goulds had standing to oppose, and whether the litigation funding agreement should be approved. With respect to the first issue, the Court held that Goulds had standing to oppose the application since it was in a position, as a defendant and as a creditor, to provide the Court with useful guidance in the debate as to whether the agreement should be approved. With respect to the second issue, the Court acknowledged that the litigation funding agreement and related charge purported to maximize the value of Fortress’ assets, which was in line with one of the remedial objectives of the CCAA.
Ultimately, however, the Court refused to approve the litigation funding agreement because it placed limits on Omni’s obligation to fund an eventual adverse costs award. Specifically, under the agreement, Omni had no obligation to pay adverse costs awards relating to costs incurred prior to the approval of the agreement or after its termination. At this point, the litigation had been ongoing for seven years and substantial costs had already been incurred by the parties. These costs would not be covered under the agreement.
The Court found that it would be inappropriate to authorize a party who is specifically in the business of financing litigations to litigate a matter, while at the same time pre-emptively excusing such a party from honoring an eventual adverse costs award, stating that “such an imbalance in the obligations of the plaintiff and of the defendant towards the payment of adverse costs award discredits the administration of the justice, given the role and purpose of costs awards.”
This decision is consistent with a recent decision of the Ontario Superior Court of Justice in the CCAA proceedings of JMX Contracting, where the Court refused to approve a litigation funding agreement primarily because it failed to address the financing of any adverse costs award.