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An ABCP legal conundrum


Jim Middlemiss

Friday, May 16, 2008

A decision on Canada's biggest restructuring could come as early as today, and it could set a nasty precedent for the civil justice system.

Mr. Justice Colin Campbell faces an all-or-nothing proposition. If he rejects the plan in the $32-billion non-bank asset-backed commercial-paper restructuring, it puts investors' money at risk and could lead to financial anarchy as banks scramble to collect on their security.

Back the deal and he blesses broad legal releases that bar investors from suing for breach of fiduciary, breach of contract, negligence, bad faith and fraud.

Barring fraud claims would prevent civil lawsuits for injuries from a criminal act and that's bothersome -- as is barring lawsuits in general. It's a basic right of citizens in a democracy to sue. That's why we have courts.

Granted, there's no proven evidence of fraud. Yet, it's plausible that a police or regulatory investigation could unearth fraud.

So parties involved in the ABCP fiasco could face criminal penalties, but not civil, if the deal is passed and that's not justice.

It's no wonder, then, Judge Campbell was clearly pained during the fairness hearing into the plan. He is painted into a corner. Just like noteholders who held their nose and voted 96% in favour of the restructuring, he will probably do the same for the sake of the financial markets and the money at stake. But that doesn't make it good judicial policy or a good precedent.

Judge Campbell is sitting over a Companies' Creditors Arrangement Act hearing. It's flexible legislation that allows businesses to address insolvency issues short of bankruptcy. Call it a Court of Compromise.

That works in business failures, such as Stelco and Air Canada, where ailing businesses and jobs were saved. Releases are common in such workouts, but the encompassing nature of the ABCP releases -- which even required a clarification so they would not prevent regulators from doing their job--go too far.

Purdy Crawford, the lawyer tapped to oversee the committee of investors that negotiated this settlement, was adamant: "There can be no plan unless these releases are included."

The foreign banks and counter-parties, sponsors, asset providers, liquidity providers and bond rating agencies agree. They are worried about the cascading effect of lawsuits. The ABCP parties are so intricately woven together that a lawsuit against one leads to claims against all. Therefore, they argue, the releases are needed to quell the prospect of endless litigation.

Who wouldn't want a free pass from litigation? However, fraud is very difficult to prove, and claims for negligence and breach of fiduciary duty are no slam dunk either.

That raises the question: What are the financial institutions really worried about? If they've done nothing wrong in creating this market and selling billions of dollars in notes and earning millions of dollars in fees, they have nothing to fear. Lawsuits are the cost of business. There are ways to efficiently manage litigation involving multiple parties and multiple claims.

So are the releases simply a cover-up designed to protect the ABCP players from their own or ineptitude and liability in running this market? Are they necessary risk management to effect a hard-fought workout? Or is the demand for releases simply legal bluster and a bluff? If Judge Campbell calls them on it, will the parties walk away from this restructuring? That's for him to ponder.

There's an old judicial aphorism: "Justice must not only be done; it must also be seen to be done." Letting anyone off the hook for the sake of a settlement doesn't seem to pass that sight test, at least for the 4% of investors who voted against it. There were errors made in this market and someone other than investors who bought this paper should share the pain. For the good of the justice system, Judge Campbell should call their bluff.