Re Metcalfe and Mansfield Alternative Investments II Corp.: Can a CCAA plan contain a release of claims against third-party financial institutions?
On September 2, 2008, various holders of Asset Back Commercial Paper notes, sought leave to appeal to the Supreme Court of Canada in Metcalfe & Mansfield Alternative Investments II Corp, (Re), 2008 ONCA 587 [Metcalfe]. following the Ontario Court of Appeal’s approval of a Plan of Compromise and Agreement, which takes away the ABCP holders’ rights to sue third party financial institutions in relation to the liquidity crisis.
Asset Back Commercial Paper (“ABCP”) is a sophisticated financial instrument, which is generally a short-term investment with a low interest yield. Generally marketed as “safe” investments, they are considered “asset backed” because the case used to purchase these notes is used to create a portfolio of financial assets or other asset interests, which are security for the repayment of the notes. When the market was strong, maturing ABCP notes were paid off using the cash from the purchase of new ABCP notes or maturing notes were rolled over into new ones. Further, liquidity providers provided funds to investors who wished to redeem their maturing ABCP notes in certain circumstances.
The assets used to back these ABCP notes were varied, ranging from auto loans to residential mortgages, however, their nature was generally long-term, which posed a problem because of the “inherent timing mismatch” between the cash needed to repay maturing ABCP notes and the cash that these assets generated. In the summer of 2007, uncertainty spread throughout the ABCP marketplace, causing investors to stop purchasing the ABCP product and existing noteholders to case the rollover of their maturing notes. Soon, there was no cash to redeem the notes and liquidity providers generally refused to fund the redemption of the notes, which lead to a “liquidity crisis” in the ABCP market. One of the main issues behind this crisis was the lack of transparency in the ABCP scheme, as investors were unable to determine which assets backed their notes. Investors became worried that crumbling assets related to the U.S. sub-prime mortgage crisis backed their ABCP notes and they were unable to redeem their maturing notes.
On August 13, 2007, approximately $32 billion of non-bank sponsored third-party ABCP in the Canadian market was frozen after an agreement between the major Canadian participants. This “freeze” was pending an attempt to resolve the crisis through a restructuring of the market. The Pan-Canadian Investors Committee was created, introducing a creditor-initiated Plan of Compromise and Agreement, which was sanctioned June 5, 2008. Essentially, this Plan converts the noteholders’ frozen paper into new, long-term notes with a discounted face value that could be traded freely, in the hope that a strong secondary market for the notes would emerge in the long run. Part of the Plan requires that market participants, including Canadian banks, Dealers, Noteholders, Asset Providers, Issuer Trustees, and Liquidity Providers, be released from any liability related to ABCP, with the exception of certain narrow fraud claims.
At the Ontario Court of Appeal, the appellants, holders of ABCP notes including a wireless provider, mining company, tour operator, airline, pharmaceuticals retailer and several energy and holding companies, opposed the Plan on the basis that it requires them to grant releases to third party financial institutions against whom they allege they have claims for relief arising out of their purchase of ABCP notes. They claimed that the Companies’ Creditors Arrangement Act, RSC 1985, c C-36 [CCAA] would not permit such a restructuring that required creditors to provide releases to third parties who were themselves insolvent and not creditors of the debtor company. Further, they argued that the application judge erred in sanctioning the Plan under the CCAA and holding that the Plan, with its releases, was fair and reasonable.
While the Ontario Court of Appeal allowed the appellant’s application for leave to appeal, the appeal itself was dismissed. In coming to its conclusion, the court explained that the CCAA allowed for the court to sanction third party releases in an arrangement or plan of compromise where such releases were “reasonably connected” to the proposed restructuring. The wording, objects, purpose and scheme of the CCAA supported the court’s authority to sanction the proposed Plan, including the third-party releases and the Court of Appeal held that the Plan was fair and reasonable in the circumstances.
On September 2, 2008, the appellants sought leave to appeal to the Supreme Court of Canada, claiming that the Ontario Court of Appeal decision was based on an “erroneous reading” of the CCAA. In a submission to the Supreme Court of Canada, James Woods, a lawyer for the appellants, explained that the case raises “issues of public and national importance, which will impact upon may Canadian companies, individuals, debtors, creditors and investors as well as numerous other participants in the Canadian investment and business community.” Further, the application states that the case involves “fundamental issues relating to the proper interpretation and application of insolvency legislation,” as the appellants allege that Canadian bankruptcy law does not allow the sanctioning of such releases. They claim that the Court of Appeal decision creates “a dichotomy in bankruptcy and insolvency law and practice between, at a minimum, the provinces of Quebec and Ontario,” which will lead to “acute uncertainty on a national scale as to the security of commercial transaction and relationships and open the door to abuse of the CCAA mechanism designed solely for insolvent companies.” The investors committee, on the other hand, requested that the Supreme Court of Canada refuse to hear the appeal, as the majority of noteholders agreed with the plan and the Plan’s costs, including the requirement that investors give up their right to sue unless in limited circumstances of fraud, are outweighed by the its benefits.
The effect of the Supreme Court of Canada’s forthcoming decision on whether or not to hear Metcalfe extends beyond ABCP investors. As a case which deals with important issues regarding the interpretation and application of insolvency legislation, Metcalfe has implications for all future Canadian restructurings.