Prove It or Lose It: Alberta Court Provides Guidance on Evidence Required for Approval of Litigation Trusts and Litigation Financing

Goldenkey Oil Inc. (Re) is a recent decision of the Court of King’s Bench of Alberta (Court) about litigation trusts and litigation financing. In that case, Justice Michael J. Lema concluded that when an insolvent company asks the Court to exercise its inherent jurisdiction under the Bankruptcy and Insolvency Act (BIA) to approve a litigation trust and litigation financing, the company must support this request with sufficient evidence. The evidence must justify that the proposed trust and financing are reasonable, appropriate, and further the objectives of the BIA.

Goldenkey Oil Inc. (Goldenkey), as part of proposal proceedings pursuant to the BIA, sought several orders that would have, among other things:

(a) Created a litigation trust (Litigation Trust) into which the rights of Goldenkey to a lawsuit against its former insiders and current debtors (Litigation Claim) would have been transferred. Goldenkey also proposed to appoint a current insider to oversee the Litigation Trust (Litigation Trustee).

(b) Approved a financing arrangement that would have allowed the Litigation Trustee to borrow up to C$3.2-million from a party closely related to Goldenkey to fund the Litigation Claim. The proposed financing was to be secured by a super-priority charge over any recoveries of the Litigation Claim (Proposed Litigation Financing).

(c) Vacated a previous consent order which consolidated the Litigation Claim with a cross-claim of Goldenkey’s former insiders and current debtors against Goldenkey. The claim against Goldenkey was proposed to be addressed through the claims process in the proposal proceedings.

A defendant to the Litigation Claim opposed the relief sought by Goldenkey. Ultimately, Justice Lema held that the evidence Goldenkey presented to the Court was insufficient to show that the Litigation Trust and the Proposed Litigation Financing were reasonable, appropriate, and would advance the objectives of the BIA.

Among other things, Justice Lema listed 14 ways in which the information provided was insufficient to make a proper assessment of the Litigation Trust and the Proposed Litigation Financing, including that there was no evidence about any of the following:

(i) whether other financing options were explored;

(ii) how the funding cap of C$3.2-million or the interest rate applicable to the Proposed Litigation Financing were determined;

(iii) why it was in the best interests of creditors for the Litigation Trustee to have complete control over the Litigation Claim;

(iv) why the litigation trust model was proposed as opposed to regular litigation financing; and

(v) the strength of the Litigation Claim or the cross-claim against Goldenkey.

As a result, Justice Lema dismissed the application and declined to approve the Litigation Trust and the Proposed Litigation Financing, albeit without prejudice to Goldenkey’s right to apply again with sufficient evidence.

This decision serves as an important reminder that a party cannot expect to be granted discretionary relief under the BIA relying on the bare assertion that the relief sought is reasonable, appropriate, and furthers the objectives of the BIA. Rather, the party must come to the Court equipped with sufficient evidence to support the relief sought.

Blakes was counsel to the defendant of the Litigation Claim that successfully opposed the relief sought.

For further information, please contact:

Kelly J. Bourassa          +1-403-260-9697
Keith Marlowe             +1-403-260-9632
Tom Wagner                +1-403-260-9734
Jessica MacKinnon      +1-403-260-9657

or any other member of our Restructuring & Insolvency and Litigation & Dispute Resolution groups.