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In ABCP ruling, judges approve legal shield


August 18, 2008 at 5:29 PM EDT

TORONTO — Broad protection from lawsuits can be granted to companies, organizations and individuals involved in bankruptcy protection proceedings, a panel of Ontario Court of Appeal judges have agreed, giving those involved in restructurings significant scope to get the job done.

In a highly anticipated ruling released Monday, the appeal court agreed with a judge's decision to sanction the restructuring plan for the $32-billion third-party asset-backed commercial paper market, even though the plan granted broad legal releases to most of the market's major players, including banks, credit rating agency DBRS and brokerages.

A number of companies that have been stuck holding frozen ABCP for nearly a year now argued that their right to sue was unfairly being taken away.

In its ruling Monday, the appeal court panel said the case raises issues of considerable importance to restructuring proceedings across the country under the Companies' Creditors Arrangement Act, the law that many corporations fall under when they are in precarious financial situations.

“The CCAA is a sketch, an outline, a supporting framework for the resolution of corporate insolvencies in the public interest,” the unanimous decision states. “Parliament wisely avoided attempting to anticipate the myriad of business deals that could evolve from the fertile and creative minds of negotiators restructuring their financial affairs.

“It left the shape and details of those deals to be worked out within the framework of the comprehensive and flexible concepts of a ‘compromise' and ‘arrangement.' I see no reason why a release in favour of a third party, negotiated as part of a package between a debtor and creditor and reasonably relating to the proposed restructuring cannot fall within that framework.”

The committee that hammered out the restructuring plan, led by Toronto lawyer Purdy Crawford, had argued the plan wouldn't work without the legal releases. Some banks, for instance, refused to make necessary sacrifices unless they obtained the legal protection.

The plan calls for the release of virtually all of the ABCP market's participants for nearly everything related to ABCP, with the exception of certain potential narrow claims related to allegations of fraud (which the committee agreed could be taken to court, provided they fit certain criteria).

Some ABCP investors allege they have legitimate claims for negligence, misrepresentation, and conflict of duty. There are a few allegations of potential fraud.

“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 to the inclusion of a release for claims based in fraud in a plan of compromise or arrangement,” Monday's ruling states.

The CCAA was enacted in 1933, as a result of the Great Depression, in order to alleviate the effects of business bankruptcies, the ruling noted.

“An interpretation of the CCAA that recognizes its broader socio-economic purposes and objects is apt in this case,” it said.

The appeal court was looking at Ontario Superior Court Justice Colin Campbell's earlier decision to approve the plan for the ABCP market.

“In insolvency restructuring proceedings almost everyone loses something,” Monday's decision said.

“Here, the debtor corporations being restructured represent the issuers of more than $32-billion in non-bank sponsored ABCP notes. The proposed compromise and arrangement affects that entire segment of the ABCP market and the financial markets as a whole. In that respect, [Justice Campbell] was correct in adverting to 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.

“He was required to consider and balance the interests of all noteholders, not just the interests of [those who launched the appeal], whose notes represent only about 3 per cent of that total. That is what he did.”

The collective ABCP holdings of the group that appealed are slightly more than $1 billion, with many of them being small or mid-sized companies that own millions or hundreds of millions of dollars worth.

The committee that came up with the restructuring plan includes 17 financial and investment institutions - banks, credit unions, pension plans - that together hold about two-thirds of the $32-billion.

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