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Courts grappling with third-party releases

|Written By Julius Melnitzer

How far should a court go in granting third-party releases to facilitate complex, multiparty litigation brought in the context of Companies’ Creditors Arrangement Act restructurings?

There’s a fundamental difference between the ABCP and Hollinger matters when it comes to the question of third-party releases, says Jason Squire. Photo: Robin Kuniski

It’s a question that has remained open ever since the Ontario Court of Appeal accepted the settlement reached in the asset-backed commercial paper crisis and one that Superior Court Justice Colin Campbell, the judge who initially approved the deal in that matter, will have to answer in deciding whether to do so in relation to three agreements between Hollinger Inc. and each of Torys LLP, KPMG, and various outside directors of the company.

But the broad third-party releases built into the ABCP plan proved to be the sticking point. The releases operated in favour of most market participants, including ABCP sellers and liquidity support and asset providers, all of whom were third parties in relation to the debtor trusts.

Without these releases, the plan was a no go as they were the sine qua non without which the note holders behind the plan weren’t prepared to extend the market-funding facilities at the heart of the restructuring.

Less than a month after Campbell’s sanction order in the ABCP matter, aggrieved bondholders asked the Ontario Court of Appeal to overturn it. The Court of Appeal took a surprisingly long time to release its decision, which it finally did in late August 2008.

Although seemingly holding its nose as it did so, the court concluded that the CCAA did give Campbell the power to approve the releases and that he had acted within his discretion in doing so on the facts of this case.

Undaunted, the dissidents sought leave to appeal to the Supreme Court of Canada. To the general surprise of almost everyone, the court refused to grant leave. In accordance with its usual practice, the top court gave no reasons for the refusal.

Campbell, who heard the motion for approval of the Hollinger settlement in mid-April, will now have to make his decision on the issue in the face of objections from Conrad Black, his wife Barbara Amiel-Black, and John Boultbee, Peter Atkinson, and David Radler, all former officers and inside directors of the company.

As was the case with the ABCP settlement, the Hollinger deals include third-party releases and bar orders in favour of the settling parties. The third-party releases prevent the non-settling defendants from claiming contribution and indemnity against the settling parties.

Hollinger, Torys, KPMG, and the outside directors maintain that the settlements “will sever the daisy-chain of overlapping claims-over between the various parties to Hollinger-initiated proceedings” in a way that will simplify the complex litigation.

They also maintain that granting the third-party release and bar orders will be economically neutral inasmuch as Hollinger has agreed to waive its right to pursue joint and several liability against the non-settling defendants.

As a result, Hollinger would limit the company’s recovery to each non-settling defendant’s proportionate share of liability.

Finally, they assert that Campbell’s jurisdiction to grant the third-party releases stems from the fact that he’s overseeing Hollinger’s CCAA restructuring and must approve the disposition of sizable assets.

But Jason Squire of Lerners LLP, who with senior counsel and colleague Earl Cherniak represents Black, notes there’s a fundamental difference between the ABCP and Hollinger matters.

“ABCP engaged the public interest because it involved saving a certain portion of Canada’s capital markets,” he says. “Hollinger is private litigation albeit in the context of a restructuring.”

According to Squire, the third-party releases will fundamentally change the dynamics of the litigation and discovery process involving the non-settling defendants.

“Black has been sued in his own right and needs to make full answer and defence, much of which is in the hearts and minds of KPMG and Torys, who in turn need to be substantively involved in the litigation process so that an appropriate apportionment of liability can be made at trial,” says Squire.

“The terms of the settlement that achieve so-called economic neutrality do not address this issue.”

Fasken Martineau DuMoulin LLP’s Aubrey Kauffman, an insolvency and restructuring lawyer who’s not involved in the Hollinger matter, says third-party releases weren’t controversial until after the ABCP settlement.

“In the insolvency world, some level of third-party release is almost always standard fare these days,” he says. “It started some years ago with the practice of including directors and officers and then insurers in the releases. And that made sense to almost everyone.

“But many people think things got out of control in ABCP where the releases went so far as to cover solvent third parties.”

Since ABCP, third-party releases have been granted in the Nortel Networks and Canwest restructuring proceedings. More recently, in Re Kitchener Frame Ltd., Justice Geoff Morawetz of the Ontario Superior Court ruled that the Bankruptcy and Insolvency Act permitted the same third-party releases that were possible under the CCAA.

“What’s happened is that ABCP started a creeping trend that is getting bigger and bigger,” says Kauffman. “Whether that will hold up at the Court of Appeal level remains to be seen."

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