By Mary Paterson, Emily Paplawski, and Mary Angela Rowe, Osler, Hoskin & Harcourt LLP

In the insolvency context, claims disputes are typically resolved through a summary process rather than through a full trial with all the usual procedural bells and whistles. Recently, insolvency courts have shown great creativity in importing specific trial-like procedural protections – selected bells and whistles – as needed to ensure fairness. Insolvency courts are increasingly comfortable deciding on a case-by-case basis how "summary" or how "trial-like" a claims determination process should be.

This article will examine recent examples where courts made three different procedural choices: (1) a "hybrid" summary trial within the CCAA importing features of a formal trial; (2) a summary determination in a receivership proceeding where an appeal court endorsed more streamlined procedures; and (3) a mandatory mediation where a court concluded that litigation itself would not fulfill the goals of efficient and effective determinations of claims. These examples may provide guidance to practitioners in deciding how best to resolve disputed claims in the insolvency context.

More formal: "Hybrid" summary procedures

Summary determinations in insolvencies use different and tailored procedures on an implicit sliding scale: concerns about efficiency and limiting costs point toward more attenuated summary procedures, while concerns about complexity and fairness point toward more formal (trial-like) procedures. Insolvent debtors generally want disputes to be resolved efficiently to facilitate their restructuring, while creditors may want to fight for certain procedural protections depending on the context of the claim.

One procedurally-creative summary proceeding was Re Walter Canada Holdings, Inc (2017 BCSC 709) wherein Fitzpatrick J. ordered a "hybrid" summary trial of a complex disputed claim. The issue was a novel conflict of laws question to determine whether U.S. law granted a putative creditor a significant claim against the debtors. The putative creditor sought elements of a full trial, including extensive discovery, and argued that the conflict of laws question could not be bifurcated from determining the quantum of the claim. However, the proposed timeline threatened the debtors' restructuring efforts. The debtors argued the proceeding could be bifurcated to save time, and that full discovery was premature as the evidence relevant to the conflicts of laws question mostly existed in the CCAA record.

Justice Fitzpatrick bifurcated the claim and implemented a hybrid summary trial procedure, involving a compressed timetable, exchange of pleadings, written expert reports on U.S. law, and cross-examination of experts (but no discovery). Justice Fitzpatrick applied a “pick and mix” approach and invited insolvency courts to ask which procedures would help resolve each dispute:

1. “whether pre-trial oral or document discovery is truly necessary and if so, whether limits can be put on such discovery;
2. whether affidavits should be filed as opposed to viva voce evidence at a full trial;
3. whether cross-examinations on affidavits or expert reports are necessary and whether that can be done ahead of the hearing or at the hearing itself;
4. whether timelines for delivery of materials, such as affidavits, or any pre-hearing procedures, can be fixed so to expedite the determination of the issues;
5. whether other means of establishing the evidentiary record can be ordered, such as through notices to admit, agreed statement of facts and common documents so as to minimize or eliminate any conflict as to the facts; and
6. whether written arguments can be exchanged in advance of the hearing.”

Practitioners may be mindful of Fitzpatrick J.’s list and ask whether any of those procedural elements should be incorporated into the summary determination of a particular claim.

Less formal: summary determinations in receiverships

While Walter involved incorporating formal procedural elements into a summary determination process, other claims may demand more streamlined procedures. For example, in the receivership proceedings of Ontario Securities Commission v Money Gate Mortgage Investment (2020 ONCA 812), the Ontario Court of Appeal rejected a party's request for more trial-like procedures and affirmed the importance of summary dispute resolution in all insolvency proceedings.

In Money Gate Mortgage, a receiver moved for advice and directions from the court, seeking a declaration that a mortgage was valid (entitling the receiver to the sale proceeds from the underlying property). A third party, who argued the mortgage was invalid, objected on two grounds: (a) the claim could not be fully determined on a motion for advice and directions; and (b) the claim involved conflicting evidence and credibility disputes, which could only be resolved through a trial. Justice Zarnett upheld the motions judge's decision to grant summary judgment in favour of the receiver.

Justice Zarnett took a practical approach: resolving disputes in a timely way may be key to the objectives of a receivership, and there was no principled reason a court could not resolve disputed claims on a motion for advice and directions. Although the third party made allegations of fraud which it said required a full trial, the allegations were not supported by evidence. Parties must put their best foot forward, and the failure to do so was fatal. In any case, the alleged fraud would not impugn the validity of the mortgage, which could be determined on the existing record.

In contrast to Walter, the facts in Money Gate Mortgage did not require formal procedures to resolve the dispute. If a Monitor or receiver seeks a summary declaration regarding a claim, litigants should recall there is no entitlement to more formal procedures: the summary process may be the only shot they get to argue their case.

Outside litigation: mandatory mediation

Summary determination of claims in insolvency proceedings is a means to an end: the efficient and cost-effective resolution of disputes. But a court may conclude that this end won't be achieved through litigation at all -- and may instead pack the parties off to mediation. Justice Fitzpatrick came to this conclusion in Re 1057863 B.C. Ltd (2022 BCSC 759) when she ordered mandatory mediation of the CCAA debtors' $450 million claim against the Province of Nova Scotia, over Nova Scotia's vehement objections. Despite repeated overtures by both the debtors and the Monitor, Nova Scotia had steadfastly refused to engage with the debtors and denied all liability.

Justice Fitzpatrick granted the debtors' order compelling Nova Scotia to attend mediation. Resolving the claim was key to the debtors' restructuring, but in a catch-22, the costly and lengthy litigation required to resolve the claim could imperil their ability to restructure. Since Nova Scotia refused even to contemplate compromise, it was necessary for the court to mandate an alternative dispute resolution process. Reading between the lines, Fitzpatrick J. seemed concerned that one stakeholder's intransigence could hamstring any potential restructuring, to the detriment of all stakeholders.

Takeaways

Walter, Money Gate Mortgage, and 1057863 illustrate that even in a summary context, the actual process for resolving disputed claims in an insolvency is highly fact-specific, with opportunities for creative solutions.

Where a claim is large, requires expert evidence, or requires information not yet available to either the court or a party, an insolvency court may pull in bells and whistles from the trial context, such as the procedures listed by Fitzpatrick J. in her judgment in Walter.

Where a claim can be determined on the existing record, will not significantly impact the overall insolvency, or where a party does not provide evidence supporting a need for more bells and whistles, a claim can typically be resolved summarily without the more robust procedures in traditional litigation. Parties should be prepared to argue their best case on motions for advice and directions rather than counting on more formal procedures down the road.

Finally, debtors and stakeholders alike should demonstrate willingness to engage with one another. If parties come to the bargaining table, even if no settlement is reached, courts may have comfort that no further dispute resolution process will be fruitful and the dispute should proceed through a summary process for determination.