Restructuring and InsolvencyRestructuring and Insolvency Group e-COMMNIQUÉ - August 2010Published: 08/04/2010 In This Issue
Canwest: A Winning Case for Rep CounselBy David Ward The latest in a growing line of interesting Canwest Global Communications CCAA decisions addresses the subject of representative counsel appointments and how far should a Court go to assist vulnerable creditors where there is no obvious source of funding for counsel fees. In Canwest, the question was addressed on a motion brought by a number of retirees and former salaried employees of the company. The moving parties sought appointment of representative counsel on the basis that they otherwise had little means of protecting their rights in what was an extremely complex CCAA proceeding. It was argued that process efficiencies would be accrued from ensuring that the moving parties had effective CCAA representation, and that there was a “social benefit” to be derived from representation of the group. The representation counsel motion and associated funding request was opposed by the Canwest debtors, the major secured creditors, and even the Monitor. The basis for the opposition was that the restructuring efforts under way unfortunately did not contemplate any recoveries for unsecured creditors such as the moving party retirees and former employees. It was suggested that counsel for the proposed representatives should reapply to the Court at a later time, if and when their clients could show a legitimate recovery expectation. Those opposing the relief sought even submitted that employees and retirees best keep an eye on the Monitor’s website, and expect notice from the Monitor in the event that changed circumstances improved recovery prospects. Noting that “this watch and wait suggestion is unhelpful” to individual creditors who “find themselves in uncertain times facing legal proceedings of significant complexity,” Justice Pepall granted the representation order sought. The “check the Monitor’s website” submission was also explicitly rejected. The Court noted that the Monitor already had very extensive responsibilities, and that it was unrealistic to expect the Monitor to be fully responsible to the needs and demands of all of the former salaried employees and retirees in an efficient and timely manner. Justice Pepall noted that it was “false economy” to watch and wait. The appointment of representative counsel should facilitate the administration of the CCAA proceeding, improve information flows, and enhance process efficiencies. Lastly, and perhaps most interestingly, the Court addressed the argument put forward by the senior secured lenders that there was no source of funding for representative counsel because the debtors were contractually forbidden from paying for legal advisors by the term of a Court-approved “support agreement.” Dismissing this argument, Justice Pepall directed the affected parties to meet and identify a source of funding. Her Honour ruled that by executing agreements such as the Support Agreement parties cannot oust the jurisdiction of the Court and that the Court has the power to compel the senior secured lenders to facilitate funding, or to fund. The Canwest decision is important because it is illustrative of the Courts' increasing acceptance of representative counsel orders in Canada. Even in the face of significant debtor, secured creditor, and Monitor opposition, there may still be a winning case to be made for estate funded rep counsel. For a copy of the Canwest decision, please e-mail dward@casselsbrock.com. Case Comment – Re Dura Automotive Systems (Canada) Ltd.Typically under the Companies’ Creditors Arrangement Act (“CCAA”) when a debtor brings an application to extend the stay period, the court will grant the extension, so long as the applicant debtor is acting in good faith and with due diligence. In the vast majority of such extension applications the debtor has the support of the court appointed Monitor. The recent Ontario Superior Court of Justice case Re Dura Automotive Systems (Canada) Ltd. is notable as it is a rare example where a CCAA debtor’s application for an extension of the stay was not supported by the Monitor and was denied by the Court. On February 11, 2010 Dura Automotive Systems (Canada) Ltd. (the “Debtor”) sought an order for an extension of the stay of proceedings under the CCAA. Surprisingly, the Monitor did not support the application to extend the stay as it did not believe the Debtor was acting in “good faith and with due diligence.” The Monitor did not support the application in part because a key stakeholder who had the ability to block a plan had made it clear it was unacceptable to them. Accordingly, the Monitor contended that continuing the CCAA proceedings would result in further dissipation of the remaining cash in the Debtor’s estate, without any reasonable assurance that the continuation would result in a viable plan. After assessing the circumstances, Justice Morawetz determined that he was not satisfied that the Debtor had met the test required to obtain an extension of the stay period. In making his ruling, Justice Morawetz emphasized that the fundamental issue in the proceedings was the pension plan deficit of approximately $9 million. He felt that in negotiating with the pension plan administrator and unions, the Debtor had changed its tactics at the “11th hour” to present the plan to the retirees, when the Debtor realized that negotiations with the original group were not going to be successful. Justice Morawetz felt that the last-minute change in tactics lead to the inescapable conclusion that the Debtor had not acted in good faith in negotiating with the original group of stakeholders. Justice Morawetz determined that the Debtor gave every appearance that, up to the last minute, it was negotiating with the appropriate representative groups and shifted strategy when it was clear that an agreement was unlikely. He concluded that “by questioning the representative status of the parties at the last possible moment, the Applicant (Debtor) has demonstrated that it cannot be said to be acting in good faith and with due diligence.” This recent decision highlights, that although rare, the court will in the appropriate situation deny an application by a CCAA debtor for an extension of the stay period. The determinative factors considered by the Court in denying the stay extension were that the negotiations were unlikely to result in a viable plan, and that the Debtor was not acting in good faith and with due diligence. Unquestionably, the fact that the Debtor’s application was not supported by the Monitor was a significant contributing factor in the Court’s denial of the extension of the stay. Case Comment - Capital One v. SolehdinIn Capital One v. Solehdin,1 the Ontario Superior Court of Justice recognized judgments of a Louisiana bankruptcy court and held that they were enforceable in Ontario. The judgments were summary judgments against guarantors under their respective guarantees. The decision is significant – it is one of the first cases where guarantors challenged the recognition and enforcement of such judgments of a foreign bankruptcy court on the basis that the foreign bankruptcy court lacked the jurisdiction to grant the judgments. Capital One, National Association loaned monies to Fair Vista, Ltd. for, in part, the purchase of a hotel in Louisiana. The loan was guaranteed by Nizar and Yasmeen Solehdin and limited guarantees were obtained from two other individuals. Fair Vista filed for bankruptcy under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court of the Western District of Louisiana. Capital One commenced actions on the guarantees in the first Judicial District Court for the Parish of Caddo in the State of Louisiana. Mr. Solehdin counterclaimed and the two limited guarantors commenced a crossclaim against the Solehdins for contribution. Capital One transferred its action from the Louisiana state court to the Louisiana bankruptcy court alleging that Mr. Solehdin’s counterclaim challenged orders of the Louisiana bankruptcy court and were actually claims of the bankruptcy estate. Summary judgment was granted against the Solehdins and the limited recourse guarantors by the Louisiana bankruptcy court and Capital One applied to the Ontario Superior Court of Justice for an order recognizing these judgments and their enforceability in Ontario. The Court summarized the law regarding the recognition and enforcement of foreign judgments: (1) the “real and substantial connection” test (e.g. whether there is a real and substantial connection to the foreign jurisdiction) which previously only applied to interprovincial judgments also applies to foreign judgments; (2) the real and substantial connection test is the primary test although other factors such as residence in or written attornment to a foreign jurisdiction can strengthen the real and substantial connection; (3) parties cannot confer jurisdiction on a court where legislation prohibits it; and (4) once this territorial jurisdiction is determined, unless the foreign judgment was arrived at by fraud, violates natural justice (e.g. the foreign procedure) or is contrary to domestic public policy, it is not appropriate for a court to determine if the foreign court had jurisdiction vis-à-vis its own laws. The Solehdins argued that the judgments issued by the Louisiana bankruptcy court did not relate to Fair Vista’s bankruptcy (e.g. the judgments could not have altered the rights or liabilities of Fair Vista or influenced the administration of its estate), were therefore beyond the limited statutory jurisdiction of the Louisiana bankruptcy court and therefore there could be no real and substantial connection. Capital One argued that there was a real and substantial connection to the Louisiana bankruptcy court: (1) Capital One was located and carried on business in Louisiana; (2) the guarantees were executed in Louisiana and the loan was, in part, to fund the purchase of a hotel located in Louisiana; and (3) the cause of action (e.g. the bankruptcy of Fair Vista) occurred in Louisiana. Capital One also argued that the issue of the Louisiana bankruptcy court’s jurisdiction was moot because the Solehdins did not appeal the judgments or the Final Dismissal Judgment of the Louisiana bankruptcy court. The Court recognized the foreign judgments and held that they were enforceable in Ontario. The Court agreed with Capital One that there was a real and substantial connection and disagreed with the Solehdins that the Louisiana bankruptcy court acted beyond its statutory jurisdiction: (1) it was not clear that the Louisiana bankruptcy court acted beyond its statutory jurisdiction – Capital One’s and the Solehdins' experts disagreed with each other; (2) the Louisiana bankruptcy court decided it had jurisdiction; and (3) the Solehdins did not appeal the judgments or the Final Dismissal Judgment of the Louisiana bankruptcy court. 1 Capital One. v. Solehdin, 2010 ONSC 1012 The CCAA Scene: Recent and Notable - August 2010Abitibi On May 4, 2010, AbitibiBowater Inc. announced that it and certain of its Canadian and US subsidiaries filed with the court in Canada a draft Plan of Reorganization and Compromise and with the court in the US a draft Debtors’ Joint Plan of Reorganization. Abitibi announced that non-disputed pre-petition secured, administrative, debtor-in-possession and other priority claims would be paid in full in cash (or satisfied as otherwise agreed), unsecured claims would receive a pro rata share of equity in a reorganized Abitibi and its current common stock would be cancelled (with common shareholders not recovering). Abitibi reported that it must secure exit financing and complete efforts regarding labour costs and pension issues and satisfy other conditions in the reorganization plans before exiting from CCAA and Chapter 11 protection. Subsequently, it was reported that Abitibi requested court permission for the creditor vote on its restructuring plan originally held on August 26, 2010 to be instead held on September 14, 2010, the delay as a result of negotiations with its unsecured creditors (in connection with its $500,000,000 rights offering) and the complexity of its cross-border restructuring. It was also reported that Abitibi repaid $166,000,000 of its DIP facility ($40,000,000 outstanding) and extended it to December 31, 2010. Abitibi produces newsprint, commercial printing papers, market pulp and wood products. AAER Inc. On April 8, 2010, AAER Inc. announced that it, AAER USA Inc. and Wind-Smart LLC successfully filed under the CCAA in Quebec. AAER’s cash in hand did not allow it to meet its current obligations and it was unable to proceed with its previously announced public offering. AAER also announced that it was granted $330,000 in interim financing to provide working capital during the CCAA process. Successive court orders have extended the CCAA stay until August 11, 2010. On July 7, 2010, AAER filed a Plan of Reorganization and Compromise which is to be submitted to creditor vote on August 9, 2010 (and, if accepted, will be approved by the court on August 11, 2010). AAER is based in Bromont, Quebec and manufactures wind turbines. Bear Mountain In March 2010, it was announced that The Bear Mountain Master Partnership successfully successfully filed under the CCAA in British Columbia. It was reported that Bear Mountain was attempting to reach an agreement with lender HSBC Bank Canada who is reportedly owed at least $200,000,000. Unlike other CCAA proceedings, media reports have described the CCAA proceeding as being driven by HSBC and other creditors, as opposed to Bear Mountain. In May 2010, it was announced that the Chief Restructuring Officer of the Bear Mountain CCAA proceeding was granted the right to assign the CCAA protected entities into bankruptcy. The CRO reported that the decision to obtain bankruptcy pre-approval was made as a result of a $3.5 million GST assessment – a GST payable would be an unsecured claim in bankruptcy as opposed to a priority secured claim under a CCAA proceeding. Subsequently, on July 5, 2010, the court extended the CCAA stay to September 30, 2010, approved the appointment of a new CEO and permitted Bear Mountain to file its Consolidated Plan of Arrangement. Bear Mountain owns the 500 hectare Bear Mountain Resort and housing development west of Victoria, British Columbia. It has been reported that Bear Mountain’s investors include former NHL players Mike Vernon and Joe Nieuwendyk as well as current NHL players Ryan Smyth and Rob Blake. Canwest Conventional and Speciality Television Broadcasting Business On May 3, 2010, Canwest Global Communications Corp. announced that Shaw Communications Inc., certain senior subordinated noteholders of Canwest Media Inc. and Goldman Sachs Capital Partners and certain of its affiliates agreed that Shaw would purchase all of the shares of the restructured Canwest (upon completion of the proposed recapitalization transaction and for approximately $478 million) and all of Goldman Sachs’ equity and voting interests in Canwest’s subsidiary CW Investments Co. (for $700 million). Approximately $440 million of the aggregate subscription price for the shares of the restructured Canwest would be used to satisfy the claims of Canwest Media’s 8% senior subordinated noteholders, US $38 million would be used to satisfy the claims of Canwest Media’s other unsecured creditors and the shares of Canwest held by its existing shareholders would be cancelled without compensation. Regarding Goldman Sachs, Canwest announced that it, Goldman Sachs and Shaw executed a mutual release with respect to the ongoing litigation between them. The transactions remain subject to the satisfaction of certain conditions as well as regulatory approval and approval from the Ontario Superior Court of Justice and on closing Shaw will own Canwest’s conventional and specialty television broadcasting assets. On July 19, 2010, Canwest announced that affected creditors approved a restated consolidated plan of compromise, arrangement and reorganization. [The plan was approved on July 28, 2010 and Canwest is proceeding with its implementation.] Newspaper and Online Digital Media Business On May 17, 2010, Canwest Global Communications Corp. announced that the Ontario Superior Court of Justice approved an approximate $1.1 billion bid (including $950 million in cash funding) to purchase substantially all of the assets of Canwest Limited Partnership and certain of its subsidiaries (the proceeds of which will provide for the full repayment of approximately $925 million owed by the sellers to its senior secured lenders). Specifically, the bid, made on April 30, 2010, was made by members of an ad hoc committee of holders of 9.25% senior subordinated notes issued by Canwest Limited Partnership and the purchased assets will include all of the sellers’ newspapers, digital and online media operations and the shares of National Post Inc. The bid is reported to provide for the continued operation of the newspapers and continued employment to all full time employees and substantially all part time employees of the sellers. As announced by Canwest, upon the completion of the bid transaction, unsecured trade creditors with proven claims of less than $1,000 would receive a cash payment for the full value of their claim and unsecured trade creditors with proven claims of $1,000 or more would receive a pro rata distribution of shares in the new company formed to purchase the sellers’ assets. Subsequently, amendments were proposed to the bid. The effective purchase price and cash funding are to remain unchanged but it was proposed that bid reflect that the ad hoc committee’s total equity commitment of $250 million will be for shares in the new Canwest company. Previously, the committee’s funding commitment of $250 million was comprised of $150 million in mezzanine notes and $100 million in shares. On June 14, 2010, Canwest announced that affected creditors approved the proposed amended plan of compromise and arrangement. On June 18, 2010, Canwest announced that the Ontario Superior Court of Justice issued a Sanction and Vesting Order approving the amended plan of compromise and arrangement. On July 13, 2010, Canwest announced that it successfully implemented its amended plan of compromise and arrangement and that its newspaper and digital media business emerged from CCAA protection under the ownership of newly incorporated Postmedia Network Inc. The CCAA stay has been extended to December 31, 2010. Smurfit-Stone On April 13, 2010, Smurfit-Stone Container Corporation announced that its Plan of Reorganization, filed in its CCAA and Chapter 11 proceedings, received overwhelming support from its voting creditors in number of claim holders who voted on the plan of reorganization and in dollar amount of claims. Stone Container Finance Company of Canada II (a special purpose financing subsidiary) was excluded by Smurfit-Stone from the plan with Smurfit-Stone reporting the exclusion would not affect the timing of the plan’s confirmation or delay Smurfit-Stone’s exit from its CCAA and Chapter 11 proceedings. On June 30, 2010, Smurfit-Stone announced that it successfully completed its restructuring and emerged from Chapter 11. Its Plan of Reorganization was confirmed by the US Bankruptcy Court on June 21, 2010 and recognized by Canadian court order. Smurfit-Stone announced that, in accordance with the Plan of Reorganization, its previous common and preferred stock was cancelled and that 2.25% of the New Smurfit-Stone Common Stock Pool will be distributed to each of its previous common and preferred stockholders. Smurfit-Stone produces containerboard and corrugated packaging. Tagish On April 12, 2010, Tagish Lake Gold Corp. announced that it successfully successfully filed under the CCAA in British Columbia. As at January 31, 2010, Tagish had total current liabilities of over $7,000,000 to its secured and unsecured trade and other creditors. Tagish is currently in default under the credit facilities provided by its largest secured creditor, YS Mining Company Inc. and who has security in all of Tagish’s property including mineral rights and mineral projects. Tagish reported that it has made investments in and expenditures on its mineral properties of over $30,000,000. It was further reported by Tagish that YS Mining has indicated a preliminary willingness to provide DIP financing as well as post-restructuring financing. Subsequent court orders extended the CCAA stay to September 7, 2010. Tagish explores and develops gold-silver mineral deposits in the Yukon Territory in Canada. Winalta Inc. On April 26, 2010, Winalta Inc. announced that it and certain of its subsidiaries successfully filed under the CCAA in Alberta. Winalta announced that on March 31, 2010 it and its subsidiaries received demands for payment and notices to enforce security from HSBC Bank Canada, its principal secured lender. Winalta and HSBC entered into a forbearance agreement whereby HSBC would be exempted from the CCAA stay but forbear from enforcing against Winalta and Winalta would be permitted to access its existing operating loan from HSBC (subject to certain margin requirements and limits). Winalta also announced that should it be in default under the forbearance agreement, HSBC would be entitled to appoint a receiver under the Bankruptcy and Insolvency Act (Canada). Subsequent court orders extended the CCAA stay to August 6, 2010. Winalta also reported that the court approved the sale of 6.13 acres of highway commercial property (for which Winalta reportedly received $1,440,000), 32 homes and lots (for which Winalta reportedly received $3,825,000) and 118 acres of residential property (for which Winalta will reportedly receive $1,600,000). Winalta is based in Acheson, Alberta and builds manufactured housing for residential and industrial use as well as traditional site-built homes. International Insolvency Institute Rome ConferenceBruce Leonard, as Chair of the International Insolvency Institute, presided over the III’s Tenth Anniversary Conference in Rome on June 7 and 8, 2010. Bruce has been the Chair and a Director of the III since its inception. The III is now represented in over 65 countries around the world by leading insolvency professionals, academics and Judges. The III Conference in Rome was the III’s largest and most successful Conference ever with over 175 registered Delegates and over 225 attendees for the III’s Legendary Rome Dinner which was held at the Musei Capitolini on one of the original Seven Hills of Rome. David Ward and Deborah Grieve also participated in the Conference and Franca Tibando was instrumental in organizing all of the major Conference arrangements. Copies of the materials presented at the Conference will be posted on the III’s website at www.iiiglobal.org. Next year’s conference is planned for Columbia University in New York and anyone interested in the conference details for the Columbia Conference should contact Franca Tibando at ftibando@casseslbrock.com. The III welcomes contributions of significant international and comparative insolvency materials and analysis to its website and contributions should be directed to Michael Casey (mcasey@casselsbrock.com). Professional NotesBruce Leonard Bruce Leonard has been recognized as one of the foremost practitioners in insolvency and restructuring in Canada in the 2010 Edition of Who’s Who Legal Canada 2010 published by Law Business Research, the official research partner of the International Bar Association. Bruce joins 14 other Cassels Brock Lawyers from 10 practice areas who have been recognized as leading practitioners in their areas of business law. Deborah Grieve Deborah Grieve has been elected Chair of the Canadian Network of the International Women’s Insolvency and Restructuring Confederation. Deborah is a partner in the firm's Restructuring and Insolvency Group and has practised exclusively in corporate restructuring and insolvency for 25 years. She is also one of only a few lawyers certified by the Law Society of Upper Canada as a specialist in Bankruptcy and Insolvency Law. The International Women’s Insolvency and Restructuring Confederation (IWIRC) is dedicated to helping restructuring professionals advance their careers and develop leadership skills. With 30 chapters located world-wide, it is a premier networking organization devoted to enhancing the status of professional women in insolvency and restructuring. Members are located in every major market and represent all industry disciplines. |