Authors: Mark E. Meland, Tina Silverstein and Nicolas Brochu
Publication ǀ May 18, 2021
In the matter of the plan of compromise or arrangement of Servites de Marie, Les Servites de Marie de Quebec and Collège Servite (the “Applicants”), on May 13, 2021, the Honourable Justice Daniel Dumais of the Quebec Superior Court refused the request by the Applicants for the issuance of an initial order pursuant to the Companies’ Creditors Arrangement Act (the “CCAA”).
The case reminds us that despite the flexible nature of the CCAA, it is not an appropriate remedy in all circumstances. The Court plays an important gatekeeper role in critically assessing the requests for initial orders presented to it.
SUMMARY OF THE DECISION
The Applicants are three related religious organizations, which, inter alia, operated a high school, Collège Servite (formerly, Collège Notre-Dame des Servites), (the “High School”), from 1948 to June 2020. The Applicants are also defendants in a class action lawsuit filed by a representative plaintiff, under the pseudonym Y, (the “Representative Plaintiff”) on behalf of all persons who are alleged to have been sexually abused by members of the religious congregation, Servites de Marie, while they were guests or candidates for admission at the High School, between 1948 and 2007 (the “Class Action”).
The Class Action was authorized in September 2018, and was scheduled to proceed to trial in May and June 2021, when on the eve of trial, on April 26, 2021, the Applicants filed an acquiescence (confession of judgment) without reserve in the Class Action (the “Acquiescence”).
Following the filing of the Acquiescence, case management conferences were held on April 27 and May 3, 2021 before Justice Christian Immer, the supervising judge of the Class Action in the Quebec Superior Court, at which the disclosure of various documents of a financial nature and the terms of the upcoming truncated trial were discussed. Notwithstanding the Acquiescence, there were still many issues to resolve; for example, the Representative Plaintiff's claim still needed to be quantified (the claim being for approximately $3 million in pecuniary and moral damages including interest, in addition to a collective claim of $15 million in punitive damages), and the parameters for individual recovery of the class members needed to be determined. In addition, the Representative Plaintiff was seeking transparency in the financial affairs of the Applicants and documentation regarding potentially suspect transactions affecting their assets. Justice Immer therefore did not release the dates scheduled for the trial and, given the absence of consensus between the parties with respect to the remaining issues, indicated that the Acquiescence would likely not be approved by the Court.
In this context, on May 5, 2021, the Applicants filed an ex parte Application for an initial order under the CCAA (the “Application”), in which a stay of all proceedings, including a stay of the Class Action, was initially sought. The Application also sought the creation of a first-priority administration charge of $250,000 in favour of the proposed monitor and its legal counsel.
Justice Dumais did not allow the Application to proceed on an ex parte basis. After reviewing the proceedings, he required that the Application be served upon the Representative Plaintiff’s attorneys in the Class Action, citing the Supreme Court of Canada in the case of Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6, wherein the Supreme Court recognized that it was not appropriate, in every case, for an initial order to be granted on an ex parte basis. In this case, Justice Dumais held that there was no urgency to the Applicants’ situation nor any stampede of creditors justifying an ex parte order. Except for a secured claim in favour of a catholic school management organization with which the Applicants had established a partnership for the High School and which had signed a promise to purchase certain assets of the Applicants, the only significant debts appeared to be related to the Class Action.
Accordingly, the Representative Plaintiff’s counsel was notified, and a hearing took place in respect of the Application, which the Representative Plaintiff’s counsel contested.
The Applicants quickly amended the Application (the “Amended Application”) in order to remove the request for a stay of the Class Action, although this did not suffice to fix the many problems that Justice Dumais noted therewith, and which resulted in his refusal to issue the requested initial order.
At the outset, Justice Dumais took issue with the venue of the filing in the judicial district of Quebec, where the religious community has its head office and where their attorneys are located, rather than in the district of Saint-François, where the High School formerly operated and where the Class Action was being heard. Had an initial order been issued, Justice Dumais suggested that it might have been appropriate to transfer the file to Saint-François.
Justice Dumais also did not consider it to be sufficiently clear that the Applicants’ debt exceeded $5 million. Indeed, the Applicants’ only significant debt related to the Class Action, and although much more than $5 million was being claimed, Justice Dumais did not consider such claims to be liquid or quantifiable, given that Justice Immer indicated that the Acquiescence would likely not be accepted, as it was unclear how many potential class members would make claims and how their claims would be valued. Moreover, the Applicants had assets valued at several million dollars.
In any event, even taking for granted that the Applicants’ debt exceeded $5 million, Justice Dumais, referring to the wide discretionary power that the Court enjoys in this regard, still did not consider it appropriate to issue an initial order on the facts of this case.
Indeed, the Court did not consider that the requested initial order furthered any purpose of the CCAA. Justice Dumais noted that the primary purpose of the CCAA is to enable companies to restructure and/or refinance, with a view to helping them survive, save jobs and avoid the social and economic impacts of bankruptcy. He questioned why the Applicants required the protection of the Court to restructure in these circumstances, where the Applicants’ affairs are not complex and when there are no employees to consider. If the Applicants wanted to restructure, there was nothing preventing them from hiring professionals to help them do so. While he acknowledged that in certain cases, the CCAA has been used to facilitate a liquidation, Justice Dumais did not consider that the context of this case justified a CCAA proceeding.
The Applicants argued that the objective of proceeding under the CCAA was to help their creditors, in order to ensure the orderly distribution of their assets under the control of the Court, and after questions had been raised about certain of their assets and transactions. However, this argument was not convincing, given the contestation by the attorneys representing the only significant creditor group, who did not consider that the CCAA provided any advantage for the individuals they represent, especially since they were likely to be the ones to ultimately bear the substantial costs associated with the proposed CCAA proceedings, including the administration charge in favour of the professionals. Moreover, Justice Dumais noted that there exist recourses in the civil courts to which the creditors could resort in the event that they would ever wish to contest any impugned transactions entered into by the Applicants.
In addition, insofar as the stay sought in the Application, Justice Dumais did not consider that it would be beneficial to transfer the claims process of the Class Action into the CCAA file, nor did he consider the carving out of the Class Action from the stay of proceedings in the Amended Application to resolve the problem. Ultimately, he considered that an initial order in the circumstances would achieve little more than incurring major costs.
Justice Dumais was also mindful of the impact that a CCAA proceeding would have on the class members, who after four years of litigation and at the dawn of a final judgment following the Acquiescence, would learn that their debtors were subject to restructuring proceedings and that the final resolution of the matter was being moved to a CCAA court. This could discourage the class members from pursuing their claims and raise concerns about the continued confidentiality and anonymity established in the Class Action file.
Finally, Justice Dumais noted that the CCAA proceedings had little chance to resolve the situation in view of the fact that these same contesting creditors would need to approve any eventual plan of arrangement in order for it to be opposable against them as a result of Section 19(2)(b)(i) CCAA, pursuant to which the claim of creditors relating to an award of damages by a court in civil proceedings in respect of sexual assault, may not be compromised in an arrangement unless they vote in favour thereof.
Accordingly, the request for an initial order was refused. However, Justice Dumais did not fully close the door to the possibility that an initial order could be required in the future. He did note that if the Applicants were to try again and there was a change in circumstances rendering an initial order necessary, they should address such request to Justice Immer, who has carriage of the Class Action, who would be better suited to render a decision in the matter.
TAKEAWAYS FROM THE DECISION
While it has become somewhat routine for applicants to ask for the issuance of a first-day initial order on an ex parte basis, it is often not appropriate to proceed in this manner. Where there is no particular urgency, and no compelling reason justifying an ex parte hearing, courts should insist that major affected creditors be notified and given the opportunity to participate. In this case, the opportunity for the Representative Plaintiff to be heard at the first-day hearing resulted in the Court denying issuance of the requested order.
The case is also a good reminder that despite the flexibility of the CCAA, it is not always an appropriate recourse.
The courts must realistically assess whether there is a chance of success to the process, before allowing a debtor the substantial benefits of CCAA protection. The absence of support of the creditors was particularly important in this case, where the most significant claims that the Applicants’ face are subject to Section 19(2)(b)(i) CCAA. Without the support of the victims, there was virtually no chance that the process could yield any beneficial results and would rather result in wasted resources, which would be better spent satisfying the claims.
Finally, Justice Dumais’ concluding remark that if the Applicants were to make a subsequent request for relief under the CCAA, same should be raised before Justice Immer, is an interesting one. In this case, the Court was sensitive to the impact that granting an initial order would have on the appearance of justice, as the Applicants were seeking protection from a new judge in a new district when their only litigious claim was already being actively managed by a supervising judge seized of the dispute. Essentially, a debtor-litigant should not be perceived to have used CCAA proceedings primarily to gain a litigation advantage and, even in cases where such insolvency proceedings are warranted, courts should nevertheless consider whether the district in which the main civil litigation is being pursued would be better suited as the venue for the CCAA proceedings.