Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed by Sandra Abitan and Julien Morissette. Sandra Abitan is a partner in the Insolvency and Restructuring Group of Osler, Hoskin & Harcourt LLP, and Julien Morissette is an associate in the group.

In a judgment rendered on September 14^th, the Superior Court of Québec issued a rare order for full indemnity costs in proceedings under the Companies’ Creditors Arrangement Act (CCAA). It ordered an alleged creditor, the Deputy Minister of Revenue of Québec, to compensate another group of creditors for advancing a claim through litigation which it termed “aggressive.”

9007-7876 Québec Inc., formerly Steinberg Inc. (Steinberg), operated a supermarket chain which was a casualty of the recession of the early 1990s. The company obtained court protection under the CCAA. In 1993, its creditors approved a plan of arrangement (the Plan), pursuant to which a group composed of certain unsecured creditors (the Creditors) became the beneficiaries of a litigation portfolio, i.e. the beneficiaries of any recovery  in respect of  certain litigation claims advanced by Steinberg against third parties.

Steinberg was awarded a multi-million dollar judgment in 2004. In execution of the judgment, the Court-appointed Monitor responsible for implementing the Plan collected approximately $14 million in trust for the Creditors (the Judgment Proceeds).  About four years later, tax authorities (the Deputy Minister of Revenue of Québec, acting for both the provincial and federal governments, hereinafter the Government) assessed Steinberg for $1.5 million of sales taxes allegedly due on the Judgment Proceeds. An appeal of this assessment is still pending.

The Government never assessed the Monitor with respect to the Judgment Proceeds and is now time barred from doing so. In June 2010, Justice Tingley of the Superior Court of Québec rendered a very short judgment declaring that the Monitor could distribute litigation portfolio proceeds to the Creditors. The following year, long after the appeal period for this judgment had elapsed, the Government sought to reverse the judgment on the basis that it had suffered a prejudice as it had not received notice of the hearing (the MRQ Motion). Justice Tingley dismissed this application in August 2011 on the basis that the Government lacked the proper interest, since it had never assessed the Monitor, which held amounts in trust which had been relinquished by Steinberg under the Plan. Accordingly, the Government had no direct claim against the Judgment Proceeds, over which the Creditors had priority.

The MRQ Motion resulted in delayed distributions by the Monitor to the Creditors (approximately one year) and in additional litigation costs to the estate. The judgment dismissing the MRQ Motion provided that the Monitor was entitled to ‘costs.’ Following standard rules of civil procedure, this meant an entitlement to $17,178, far less than the actual costs incurred.

The Monitor took the extraordinary step of filing a motion seeking payment by the Government of $64,000, the price tag attached to its successful contestation of the MRQ Motion (known in Québec as extra-judicial fees).

Justice Tingley granted the motion. He held that under section 11 of the CCAA – a broad provision which provides that the Court may “make any order that it considers appropriate” – the Court had no obligation to make such an order concurrently with its order on with the merits of the MRQ Motion. This is contrary to the result under subsection 197(2) of the Bankruptcy and Insolvency Act which has been interpreted to mean that any special order as to costs must be rendered concurrently with the ruling on the merits.

Not only was the Court protective of the Creditors, noting that the Judgment Proceeds “are all that is left for the creditors and the predators continue to circle the wagons,” but it served a strong warning to parties which press untenable claims or otherwise pursue abusive litigation:

Perhaps the time has come to hold sophisticated litigants to account for the damage or suffering they cause by the aggressive or even abusive exercise of their perceived rights. This is not to suggest that Canada has in any way abused its perceived rights, but it has certainly adopted an aggressive and even proprietary interest in the Litigation proceeds belonging to the unsecured creditors of Steinberg Inc.

This commentary by the Court, especially as regards the Government, is virtually unprecedented, even more so given that the bulk of litigation arising under the CCAA is adjudicated without any costs being granted. Citing case law from other Canadian provinces, Justice Tingley went so far as to find that the Government’s behaviour was tantamount to a civil fault giving rise to a damage claim by the Monitor.

In order to make its point, the Court ordered in addition that the Government be liable for the Monitor’s full costs relating to the Motion.

Given that costs are rarely granted in CCAA proceedings, litigation has often been perceived in the Québec insolvency community as a pressure tactic with very limited downside. This judgment serves a warning to those who seek to position tenuous claims through the threat of litigation. The CCAA courts will likely be less hesitant to penalize frivolous or vexatious claimants in the future.

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