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The judge in the ABCP hotseat

Judge Campbell's ruling could unravel $32-billion agreement, which requires all investors to forgo lawsuits


April 23, 2008


Mr. Justice Colin Campbell will issue a ruling in the next few days that calls for him to choose between saving $32-billion of stranded asset-backed commercial paper or preserving the rights of investors to sue players that hawk defective investments.

  His decision could potentially unravel the loosely stitched ABCP bailout proposal, on one hand, or it could vaporize the legal rights of some of Canada's leading companies.

It's a weighty burden for a 10-year veteran of the Superior Court of Ontario who is so cautious with his cases that he has almost no profile outside Toronto litigation circles. He has chosen his words so carefully during even high-profile decisions, including his ruling against Conrad Black for removing of documents from Hollinger Inc., that he is seldom quoted in the media.

Mr. Justice Colin Campbell of the Ontario Superior Court: 'It's a tough one but I've faced worse.' (Jim Ross for The Globe and Mail)

Yesterday in a brief discussion before a Toronto ABCP hearing, Judge Campbell was characteristically circumspect about the significance of his pending decision.

"It's a tough one, but I've faced worse," he said.

The ABCP mess landed in Judge Campbell's lap last month when a committee overseeing a co-operative workout of the stranded notes shifted the restructuring to the protection of the courts under the Companies' Creditors Arrangement Act. The plan is based on an aggressive timetable that calls for investors to vote on the proposed restructuring this Friday.

Yesterday, Judge Campbell heard motions from a series of disgruntled corporate investors calling for a vote delay and changes to the workout plan.

At the heart of yesterday's legal battle, however, was a fundamental legal right that has very little to do with ABCP.

The real issue at stake at the hearing is how far Canada's courts should be allowed to go in the name of winning a successful commercial restructuring arrangement. Companies left holding the frozen notes say the plan goes too far by calling for all investors to give up their constitutional right to sue any party linked to the frozen notes. Backers of the plan argue that the release is the price investors have to pay to win billions of dollars in new funding to support a new generation of long-term investments that will replace the short-term notes.

The dramatic subtext to the hearings is that they mark the first time that a powerful group of blue-chip companies have so publicly and angrily gone to war with their banks.

On one side, prominent companies such as Barrick Gold Corp., Jean Coutu Group (PJC) Inc. and Transat A.T. Inc. have accused their long-time banks in court motions of misrepresenting the troubled condition of ABCP notes they sold weeks ahead of a market implosion last August. Ratcheting up the stakes, Canada's banks warn that if the restructuring fails, the financial fallout will be so severe that they will have to shut off their lending pipes.

In a court motion, Canada's five largest banks said a failed restructuring "will create a chaotic situation into which the Canadian banks, or any other sensible banks, cannot lend."

The argument doesn't appear to have worked.

"This wasn't Barrick's first choice," said Vince Borg, a spokesman for Barrick, which alleges that Canadian Imperial Bank of Commerce, its bank of more than 10 years, misrepresented the fragile state of the ABCP it sold the company. Barrick alleges that CIBC told the company last July that ABCP issued by Ironstone Trust was not linked to shaky subprime mortgages. Since then it has been revealed that Ironstone has lost most of its underlying asset value because of its links to troubled subprime mortgages in the United States.

At the heart of the companies' opposition to the ABCP plan is a clause that requires investors to give up their right to sue any bank, broker, credit union and any other company or professional remotely linked to the notes. There has never been such a sweeping legal release in the history of Canadian insolvency cases and the committee overseeing the restructuring has stacked the deck by giving the bulk of the voting clout to individual investors who only hold about $300-million of the notes.

"The releases are illegal and invalid," said James Woods, a lawyer acting for Jean Coutu and other Montreal companies that hold about $3-billion of ABCP.

Mr. Woods said some of his clients want to reserve the right to sue National Bank of Canada, which they allege misrepresented the assets backing Ironstone Trust ABCP notes. "They failed to disclose the nature of what they were selling," Mr. Woods told the court yesterday. National Bank has offered to repurchase the Ironstone notes at 75 cents on the dollar.

There are an estimated 2,000 individual investors and fewer than 200 companies who own the marooned ABCP notes. A majority of individual investors appear to have thrown their support behind the restructuring plan after Canaccord Capital Inc. and the brokerage arm of various credit unions recently agreed to fully repay retail clients saddled with the notes.

"They have a majority. They don't need us. They are going to cram it down. They are going to cram the release down our throat and we don't want it," said Ken Rosenberg, a lawyer for Redcorp Ventures Ltd., a fledgling Vancouver mining company stuck with $90-million of ABCP.

A number of companies yesterday asked Judge Campbell to classify the corporate holders as a separate class of investors, a move that would give them more clout to demand changes to the workout plan.

Jeffrey Carhart, a lawyer representing an ad hoc committee of 27 companies owning $1.6-billion in ABCP, urged the court to trim the scope of the legal releases sought under the restructuring plan.

Mr. Carhart said a number of his clients are exploring whether "fraud, willful misconduct or gross negligence" was involved in the sale of ABCP. The court should allow these investors to retain their right to sue.

"This was a massive calamity on an international scale. The eyes of the world are on Canada ... Can you imagine if you just rammed this [restructuring] through and then serious smoking guns emerged in the fall. How is Canada going to look then?" Mr. Carhart said.


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