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