Institutions seek $35 million back from Bridging fund

With no end in sight to the receivership of failed fund manager Bridging Finance Inc. (BFI), a couple of institutional investors are sick of waiting to get their money back, and are asking the court to return about $35 million to them.

The investors — Blue Cross Life Insurance Co. of Canada and Canassurance Hospital Service Association — are asking Ontario’s Superior Court of Justice to rule that the assets remaining in their fund will not be pooled with the assets of the various other BFI funds to be shared among harmed investors.

They are seeking the return of most of their fund’s remaining cash — $51.3 million and US$1.7 million — minus a reserve of $16.3 million that has already been agreed.

The fund in question was created by BFI with Blue Cross and Canassurance as the only two unitholders. Last year, the court ruled that the firms could have $46 million of their money returned, but that they couldn’t have more than that because the question of consolidation had yet to be resolved.

Now, with the question of how and when assets will be returned to investors still up in the air, the institutions are seeking an order that their fund, Bridging SMA 2 LP, not be part of any consolidation, and that they be given the bulk of their money back.

“Currently, more than $50 million is sitting in a bank account bearing SMA 2’s name, uninvested,” they said in court filings.

The firms stressed that they “have waited patiently” while other issues in the receivership are being resolved.

Earlier in the proceedings, the receiver had hoped to make an initial distribution to investors by June 30, 2022. However, that deadline passed without funds being returned to investors. It’s now uncertain when the funds’ 26,000 retail investors may see their money.

“With no time estimate provided by the receiver as to when it may seek to distribute funds more broadly, the SMA 2 unitholders have taken their own initiative to bring these matters before the court,” the institutional investors said.

In their submission, the investors said the courts have relied on factors that do not apply to their funds, as they consider the question consolidation. The receiver’s reports, they argue, did not identify any “co-mingling or intertwining of affairs of the type that typically leads to substantive consolidation.”

Including the remaining assets from their fund in a consolidation “will result in an outflow of funds from SMA 2 to the other Bridging funds, causing prejudice to the SMA 2 unitholders,” they said, adding that “it is inappropriate to artificially redistribute Bridging’s assets and interfere with creditors’ rights by ordering substantive consolidation.”

In earlier filings, BFI’s receiver, PricewaterhouseCoopers Inc. (PwC), and the court-appointed lawyers representing the funds’ investors, argued it’s premature to decide on whether the SMA 2 fund should be included in any consolidation until the economic impact of that move can be assessed, and various distribution issues are settled.

The investors concede that the specific economic impact of consolidation is not yet known, but that it’s likely they would lose as much as $32 million to other investors in a consolidation scenario.

Given that the factors that favour consolidation don’t apply to their fund, they argue, “a single dollar flowing from SMA 2 to the other Bridging Funds would represent an injustice.”

The investors maintain that they “should not be required to finance the recoveries to other unitholders. To order as much would be contrary to the principles of equity and a perversion of the doctrine of substantive consolidation.”

They argue that the court should conclude that the benefits of consolidation do not outweigh the “enormous prejudice” that they would suffer, and that it’s “therefore not fair and reasonable” to consolidate their fund with the other BFI funds.

The court is set to hear the case on May 11.