This article has been contributed to the blog by Ziyi Shi.  Ziyi Shi is an associate cross-appointed to the Corporate Group and Insolvency and Restructuring Group of Osler, Hoskin & Harcourt LLP.

Under Québec law, the sale of litigious rights gives rise to a right of redemption in favour of the debtor of the claim that is being sold. The application of this right of redemption, idiosyncratic to civilist legal systems, can lead to unexpected results when insolvency rules are also in play. Such was the case in Investissements Novacap inc. v. Vidéotron, s.e.n.c., 2015 QCCS 138, a long-awaited Québec judgment involving some of the province’s biggest telecommunications companies. 

Background Litigation

Investissements Novacap Inc. (“Novacap”), Telus Québec Inc. (“Telus) and Paul Girard (“Girard”, and together with Novacap and Telus, the “Shareholders”) were the shareholders of Consortium Câble-Axion Digitel inc. and its subsidiaires, Câble-Axion Digitel inc. and Câble-Axion Québec inc. (collectively, “Axion”), a group of cable companies. In February 2000, the Shareholders decided to put up their Axion shares for sale and a share purchase agreement was signed on August 22, 2000 between the Shareholders and Vidéotron G.P. (“Vidéotron”). Closing was expected to occur shortly following the receipt of regulatory approval from the Canadian Radio-television and Telecommunications Commission (CRTC), which approval was granted on November 21, 2000.

Meanwhile, Vidéotron was acquired by Québécor Média Inc. on October 27, 2000. Thereafter, closing of the Axion acquisition was repeatedly pushed back. Notices of termination were sent by Vidéotron, first in July 2001 and then in September 2001, and finally, on October 1, 2001, Vidéotron confirmed termination of the share purchase agreement it had signed with the Shareholders more than a year prior. The Shareholders proceeded to sell their Axion shares to a third party at a significantly lower price and sued Vidéotron for the difference, alleging that termination of the share purchase agreement had been unfounded and abusive.

Girard’s Bankruptcies

Girard filed a first assignment into bankruptcy on November 3, 2006. At the time, he was already a plaintiff in the above-discussed case against Vidéotron. On January 17, 2007, National Bank of Canada (“NBC”), a creditor of Girard’s in his personal bankruptcy, came to an understanding with Girard’s trustee (the “First Trustee”) whereby the First Trustee would assign Girard’s litigious claim against Vidéotron (the “Claim”) to NBC in accordance with section 38 of the Bankruptcy and Insolvency Act (Canada) ( “BIA”). Girard was discharged from bankruptcy on August 4, 2007. He later filed for a second bankruptcy on August 23, 2013, for which Raymond Chabot Inc. was named trustee (the “Second Trustee”).

In September 2014, NBC and Girard entered into an assignment agreement such that NBC transferred its rights in the Claim, which it had previously acquired from the First Trustee, back to Girard for the sum of $65,000, subject to a favourable judgment or settlement in the case in question. Following this assignment, Vidéotron notified Girard that it intended to exercise its right of redemption pursuant to article 1784 of the Civil Code of Québec(“CCQ”) and reimburse the sum of $65,000 to Girard in exchange for a full and final release in respect of the Claim.

At trial, in light of the above transfers, Girard’s standing as a plaintiff was brought up before the trial judge, Justice Pierre Journet of the Superior Court of Québec (the “Court”).

The Sale and Redemption of Litigious Rights

The right of redemption is a statutory right founded in article 1784 of the CCQ:

1748. Where litigious rights are sold, the person from whom they are claimed is fully discharged by paying to the buyer the sale price, the costs related to the sale and interest on the price computed from the day on which the paid it.

Rights of redemption are automatically created when there is a sale of litigious rights (Kuczer and Van Thoi v. Mendel, 2001 CanLII 11322 (QC CA)). “Sale” here means that the transaction was “onerous” as defined under the CCQ, i.e. the selling party must have obtained a real advantage in consideration for the claim sold (art. 1381 CCQ). “Litigious rights”, as per article 1782 of the CCQ, are defined as rights that are “uncertain, contested or contestable”.

The Québec legislator’s goal, in providing for this statutory right, was to discourage trade and speculation regarding litigation claims (Deutsche Bank AG, Canada Branch, v. Hariz, 2003 CanLII 553 (QC CS)). In this manner, non-speculative assignments of claims do not give rise to rights of redemption: donations, sales to a creditor in payment of what is due to the latter, sales to a co-heir or co-owner of the rights being sold or sales to the possessor of the property subject to the right (art. 1784 al. 2 CCQ). Similarly, an assignment of claim is no longer speculative if judgment has been rendered, or if the rights being sold have been established in trial and the case is ready for judgment (art. 1784 CCQ al fine).

In other words, where there has been an onerous transaction attempting to profit from a pending litigation claim, the legislator allows the debtor of such litigation claim to extinguish the claim altogether by way of right of redemption. This was Vidéotron’s intent when it sent Girard a notice of redemption in the fall of 2014.

Decision and Analysis

In the case of Girard, Justice Journet held that Vidéotron could not validly exercise its right of redemption under article 1784 of the CCQ, as the assignment agreement between NBC and Girard executed in September 2014 was null and void. J. Journet recalled that notwithstanding the understanding reached between the First Trustee and NBC regarding the transfer of the Claim, no motion or order under section 38 of the BIA was ever filed. Section 38 of the BIA allows a creditor to exercise a right of the bankrupt when the trustee refuses or neglects to do so. However, this exercise is subject to (i) permission from the inspectors, and (ii) an order of the court authorizing same (s. 38(4) BIA). At trial, there was no record of either condition being met in the case of the transfer to NBC. As a result, the rights to the Claim were never validly assigned to NBC, thus invalidating the sale between the latter and Girard.

What happened to these rights then? Under the BIA, the property of a bankrupt is held by the trustee for the benefit of the bankrupt’s creditors (s. 67 BIA). Any property that is unrealized at the end of the bankruptcy process may be returned to the bankrupt, but only if this occurs prior to the trustee’s application for discharge and with the permission of the inspectors (s. 40(1) BIA). In Girard’s case, these formalities had not been fulfilled. Thus, applying the Quebec Court of Appeal decision in Assurance Luc Vaillancourt inc. v. Charland, J.E. 97-484 (C.A.), Justice Journet concluded that the rights to the Claim remain in Girard’s estate under the administration of the First Trustee. The rights to the claim were not reassigned into Girard’s personal property following his first bankruptcy, and therefore could not have been transferred to the Second Trustee as part of Girard’s second bankruptcy. Neither Girard, in his personal capacity, nor the Second Trustee had the required standing to sue Vidéotron.

Conclusion

Justice Journet ruled in favour of the Shareholders (minus Girard) on the commercial litigation question, awarding them some $18 million dollars in damages. Regarding Girard, Justice Journet rejected his claim, as Girard lacked the required standing to sue. Justice Journet however reserved the rights of the First Trustee, who was not party to the litigation, to continue the proceedings up to Girard’s pro rata portion of the damages, as Girard’s initial rights to the Claim have now vested into the hands of the First Trustee.

An appeal has since been registered against the trial judge’s decision, but only in respect of liability issues and the quantum of damages. According to court record, Justice Journet’s insolvency rulings will not be challenged. It appears then that for Girard at least, the fifteen-year journey against Vidéotron and Québécor has finally come to an end.

Ziyi Shi