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Court upholds ABCP plan


August 18, 2008 at 5:42 PM EDT

TORONTO — Investors whose funds have been locked up for more than a year in frozen asset-backed commercial paper may get their money back within as little as two months after an appeal court ruled a $32-billion restructuring plan is fair and legal.

A three-judge panel of the Ontario Court of Appeal unanimously rejected an appeal by a small group of ABCP holders and said the plan to swap seized-up paper for new bonds that should trade freely can go ahead.

Toronto lawyer Purdy Crawford, who heads the committee to restructure the ABCP market

“Absent any further appeals, we expect the restructuring to close by Sept. 30, 2008,” said Purdy Crawford, head of the committee that crafted the restructuring plan.

The majority of individual ABCP investors will recoup their money under the plan because the brokerages and financial institutions that sold it to them have agreed to make them whole, and so they were pleased by Monday's ruling.

“I was extremely relieved to hear that the Ontario Court of Appeal not only dismissed the appeal but did so in a unanimous way,” Murray Candlish, an investor in Daysland, Alta., who has more than $300,000 tied up in the market, said in an e-mail.

“Today is a good day.”

Similarly, Brian Hunter, a Calgary oil and gas engineer who has become an informal leader of the small investors, said, “I think we're done here, and should be moving forward.”

“Let's just drive on and don't hold us hostage any more,” he said, acknowledging that some corporate investors may appeal to the Supreme Court of Canada.

While “I don't hear of anybody eating cat food, certainly there's still stress” among the individual investors who have been without their funds since last August, he said.

“Some folks may have had to get jobs, and may not be living the lifestyle they would have if they had access to their full resources.”

It's the second straight legal loss for the opponents, who hold only about 3 per cent of the affected paper but have fought hard.

The decision means that the angry investors, which include companies such as Jean Coutu Group (PJC) Inc., will lose the right to sue except in narrowly defined cases of potential fraud. The opponents said that was not allowed under bankruptcy law but the judges disagreed, saying the rules allow such a compromise.

“In insolvency restructuring proceedings almost everyone loses something,” the appeal court said in a 55-page opinion that upheld a June decision by a lower court that the plan was fair and legal.

The legal battle may now shift to the Supreme Court of Canada, as some opponents of the plan have signalled they may seek leave to appeal the decision to the highest court in the country.

The investor committee, however, is unlikely to wait for that to play out before moving to start the restructuring transaction. Given a strongly worded unanimous victory, the plan will now be to move quickly to get investors the new bonds that will replace the frozen paper, sources said before the ruling.

“It is a fair expectation that somebody is going to apply for leave to appeal,” said Howard Shapray, a lawyer who represented Ivanhoe Mines Ltd., one of the corporate challengers. “It's an issue of national importance, which is the primary ground the Supreme Court of Canada looks to.”

There is also a conflict between the Quebec Court of Appeal, which has in past ruled that such releases are out of bounds, and the Ontario Court of Appeal, he said. That may also be reason enough for the Supreme Court to hear an appeal.

On Monday, the appeal court ruled that because the restructuring is so large and affects “financial markets as a whole,” it was necessary to consider the “importance of the restructuring to the resolution of the ABCP liquidity crisis and to the need to restore confidence in the financial system in Canada.”

The ABCP market has been frozen, leaving investors no access to their money since last summer when the market for the supposedly short-term securities seized up in one of the first big spasms of the credit crunch. Buyers for the paper disappeared amid concern about links to the U.S. subprime mortgage market, and without new purchasers those holding the paper had no way to get their money back.

A group of big holders led by Mr. Crawford and including National Bank of Canada and Caisse de dépôt et placement du Québec has been working since to craft a plan that would thaw the market.

A lower court approved the plan to swap seized paper for new notes in June.

Soon after, however, the challengers renewed their attack. They argued that the so-called releases were illegal and unfair.

The investor committee that crafted the plan again argued that without the releases some players such as banks would not participate and the restructuring would fall apart with massive losses for all investors.

The appeal court ruled that though approving such legal releases wasn't easy, it was permitted.

“While the notion of releases in favour of third parties – including leading Canadian financial institutions – that extend to claims of fraud is distasteful, there is no legal impediment,” the court ruled.

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