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Showing posts with label Jeffrey Carhart Jay Hoffman Miller Thomson ABCP Asset Based Commercial Paper. Show all posts
Showing posts with label Jeffrey Carhart Jay Hoffman Miller Thomson ABCP Asset Based Commercial Paper. Show all posts

October 6, 2009

Miller Thomson's historic case for Asset Backed Commercial Paper investors

You know you need to pay attention when the American Lawyer Magazine describes a Canadian law suit as "the largest and by far the most complex restructuring in Canada's history" and "the only privately negotiated workout of an entire market anywhere in the world."
This goes back to the 1980’s, when Canadian banks began sponsoring asset backed commercial paper which was much more complex in nature and purchasers began to not really know what it was they were buying. Up until then, Canadian companies had sold bundles of their receivables into the market in packages known as commercial paper which the purchaser knew what he or she was buying.

Jeffrey Carhart and Jay Hoffman, Miller Thomson LLP, took on a case regarding Asset Based Commercial Paper restructuring. One of the key results is that party releases can only be justified in rare cases and even then, the releases may not be able to go so far as to absolve parties from liability for at least some degree of fraud.

Here is the law suit described in full:


By Jeffrey Carhart and Jay Hoffman*


Canada’s market for non-bank sponsored asset backed commercial paper (“ABCP”) froze on August 13, 2007. We became involved immediately after that date when we were contacted by a number of large ABCP investors.

We made the decision at that time that we would act for ABCP holders. We did so for a group of ABCP holders which eventually grew to represent approximately $2 billion worth of ABCP and which was formally recognized by the Ontario Superior Court of Justice in its administration of the reorganization of the ABCP market proposed by the Pan Canadian Committee – which came to be known as the Crawford Committee - pursuant to the Companies’ Creditors Arrangement Act[1](the “CCAA”). We participated actively in the entire process, including the CCAA proceedings. The essential position which we, alone, advocated with respect to the controversial release provisions of the CCAA Plan was the position ultimately endorsed by the Ontario Superior Court of Justice, the Ontario Court of Appeal and, by virtue of its decision to deny leave, the Supreme Court of Canada. While space limits alone mean that this article cannot do justice to all of the issues that we encountered, it contains a relatively brief discussion of some of the main issues that we addressed.

For many years, in Canada, the term “commercial paper” referred to a fairly straightforward type of product. Originally, major Canadian companies started selling bundles of their receivables into the market in packages known as commercial paper. In such a transaction – involving what has been described as “plain vanilla commercial paper sold (directly) by creditworthy companies” - it could be said that the purchaser knew exactly what he or she was buying.

In the 1980’s Canadian banks began sponsoring asset backed commercial paper which was much more complex in nature. Eventually non-bank sponsored ABCP also appeared in the Canadian market and by August of 2007 Canada’s non-bank sponsored ABCP market was worth about $32 billion and was made up of mostly short term debt obligations issued by limited purpose Trusts – also referred to as “Conduits” – which were established by various private sector companies, known as Sponsors. Metcalfe & Mansfield Capital Corp., Newshore Financial Inc., Coventree Inc. and Nereus Financial Inc. were among those Sponsor companies.

Some of the Trusts issued different “series” of ABCP (or “notes”) with different priority ranking and other differentiating features. In turn, the Trusts purchased assets that backed up the ABCP and generated cash flow. Historically those underlying assets were principally made up of mortgages and various types of consumer loans and receivables; however, as discussed below, by 2007 many of the Trusts had come to hold a significant portion of their assets in the form of more exotic assets such as credit default swaps, collateralized debt obligations (“CDO’s”) and other leveraged derivatives instruments. In the circumstances, among other things, there was a distinct gap between the relatively short term maturity of any particular ABCP (which was typically measured in days) and the much longer term maturity of the assets held by the Trust in question to back that same ABCP.

The market functioned by the repayment of maturing ABCP (which was not “rolled over” into new ABCP) from cash generated by an issuer Trust’s underlying asset portfolio and the issuance of new ABCP. As discussed below, the Trusts also paid for liquidity support agreements, which were supposed to provide a source of funding if the Trust was not able to issue a sufficient amount of new ABCP – that is, among other things, the liquidity support agreements were supposed to be designed to address the gap between the maturity of the ABCP and the maturity of the relevant Trust’s underlying assets.

(b) Distribution of ABCP

Generally speaking, the sale of ABCP was not regulated by the Ontario Securities Commission – or any other Provincial Securities Commission. In the early 2000’s Ontario securities law had restricted the sale of ABCP to investors purchasing a minimum of $50,000.00 worth of paper.[8] In turn, however, such securities were exempt from the prospectus requirement.[9] Much of the ABCP was also rated by credit rating agencies, such as DBRS, although that rating was not required, at that time, by securities law. Historically, most Canadian ABCP was rated R-1 (high), the highest rating offered by DBRS.

In 2005, pursuant to Ontario Securities Commission National Instrument 45-106, the minimum $50,000.00 requirement was removed for “commercial paper maturing not more than one year from the date of issue”[10] if the paper was not “convertible or exchangeable” and as long as it had “an approved credit rating from an approved credit rating organization.”[11]

ABCP was sold by many investment dealers. The degree of disclosure provided by the Sponsors with respect to the assets in each Trust was far short of full prospectus level disclosure. In plain terms, the publicly available informational material with respect to the various ABCP Trusts contemplated that the Trustees could use the funds raised from the sale of ABCP to acquire virtually any type of asset. Also, it was very difficult to find any public information about exactly what assets were held by any particular non-bank sponsored ABCP Trust.

(c) The Assets and Liabilities of the Trusts

By 2007, the Trusts had come to hold a variety of assets (of varying degrees of value and complexity) such as the following:

- Some assets were “normal,” traditional assets such as non-subprime residential mortgages, commercial mortgages, car loans, equipment loans, credit card receivables and other receivables.

- Some assets were much more complex and less traditional and were classified as “leveraged” and/or “synthetic” and/or “derivatives.” For example, some of the Trusts earned periodic cash payments from a counterparty in exchange for providing “insurance” payable to the counterparty upon the occurrence of a designated default on an index of third party debt. In order to secure the Trust’s potential obligations under those “credit default swap” arrangements, the Trust in question had pledged some of its assets as collateral in favour of the counterparty. Those pledged collateral assets may have been divided, in turn, as between, for example, cash or “near cash” and various notes. Generally speaking, the Trusts sold “protection” on amounts which were far in excess of the amount of collateral which the Trust had acquired and posted as collateral for its (potential) obligations. However, among other things, the terms of these leveraged, synthetic arrangements typically gave the counterparty the right to make a “margin call” for more collateral in the event of certain specified changes – such as: (i) changes in general credit market conditions; (ii) changes (referred to as “mark-to-market triggers”) in mark-to market accounting conditions (which sometimes required a subjective determination by the counterparty); and (iii) changes (referred to as “spread loss triggers”) which were tied to levels of certain public indices.

- Some assets were directly tied to the U.S. subprime mortgage market.

In turn, as noted, there were various different “rankings” or series of ABCP of different Trusts in relation to the different portfolios of assets held by the various Trusts. The “riskier” or more subordinate tranches of ABCP Notes gave relatively greater returns as long as the ABCP market functioned. These tranches of ABCP bore such names as Super Senior, Leveraged Super Senior, Junior Super Senior, Senior Mezzanine and Junior Mezzanine. In essence, buyers of certain types of ABCP were accessing leveraged exposure to a portion of a pool of assets.

(d) The Freeze of the ABCP Market in August, 2007

As is now well known, the term “subprime” entered general parlance in early 2007. Concern about the extent to which Canadian ABCP trusts held assets linked to the U.S. subprime mortgage market increased. However, as noted above, there was a distinct “lack of transparency” about what assets were held by the various ABCP Trusts and during the summer of 2007 there was considerable angst and uncertainty in the financial community about whether or not any particular ABCP Trust held any subprime assets. In late July, 2007 Coventree circulated a memo to a select list of industry recipients concerning the amount of subprime exposure of any particular ABCP Trust which they had sponsored but, generally speaking, answers to the spreading questions about what assets were held by the ABCP Trusts were in limited supply.

Eventually, the freeze occurred on August 13, 2007 when a number of sponsors of non-bank managed ABCP announced that they were not able to place new ABCP. A crisis of confidence had hit and there were simply no buyers. In turn, again as discussed in more detail below, the liquidity support agreements that these Trusts had paid for proved to be of no assistance in the circumstances. Most of the liquidity providers denied funding on the basis that they had only agreed to provide such funding in the event of a general market disruption – i.e., one which was more broadly based than the disruption which seemed so very real and which had undeniably occurred in August of 2007.

(e) Canadian Style Liquidity Agreements

During the Cuban Missile Crisis, Robert Kennedy remarked that in an emergency Canada will give you all aid short of help. That comment came to mind when we looked at the liquidity agreements which pertained to these ABCP Trusts.

In Canada, the typical liquidity support agreement - known (one must acknowledge, not in a positive way) as a “Canadian Style Liquidity Agreement” - provided that support would only be made available in the event of a “general market disruption.” In essence, this language meant that the support would only be made available when the entire Canadian asset backed commercial paper market – and not only the non-bank sponsored subset of that market - had collapsed. The Canadian Style Liquidity Agreements were in contrast to Global Style Liquidity Agreements, which were structured to provide support if the cash flow to investors were impaired “for virtually any reason.” Global Style liquidity agreements were used for bank sponsored asset backed commercial paper in Canada – i.e. as opposed to the non-bank sponsored paper which is defined as ABCP in this article.

In 2004, the Office of the Superintendent of Financial Institutions (“OSFI”) amended its existing Guideline B-5 to provide that the banks under its supervision did not have to allocate capital towards potential obligations under these Canadian Style Liquidity Agreements.[21] In other words, OSFI clearly seemed to recognize the unlikelihood of a bank ever having to fund anything under these Canadian Style Liquidity agreements – hence no capital needed to be set aside, in OSFI’s view, in connection with the Banks entering into such agreements. OSFI has stated that through this period “it made clear that it was not dictating what type of lines should be used for Conduits – that was a decision for the Conduit creators and investors and rating agencies to make” in OSFI’s view. “OSFI’s role,” OSFI has gone on to say, “was limited to insuring that …whatever types of loan commitment banks entered into, appropriate capital would be charged: … [and] the roles and responsibilities of Canadian banks were clear.”

In mid January, 2007, DBRS adjusted its methodology with respect to ABCP to reflect a recognition that the liquidity lines then held by most Canadian ABCP Trusts would not prove to be of assistance in the event of a disruption in the non-bank sponsored ABCP market. DBRS has noted that purchasers of asset backed commercial paper seemingly paid no premium for notes which were supported by Global Style Liquidity Agreements. In other words, as one can imagine, the Canadian Style Liquidity Agreements were cheaper for the Trusts to purchase than Global Style Liquidity Agreements; in theory, this difference should have been reflected in the yields or pricing of non-bank sponsored ABCP which had such “cheaper” liquidity support – however, in practice, by the summer of 2007, that was not the case. In plain terms, in the summer of 2007, ABCP was priced as if it had less risk associated with it than was actually the case.

(f) The Montreal Accord

When the ABCP market froze, among other things, certain of the financial institutions (known as the “Asset Providers”) that had transferred assets to the Trusts – in exchange for further fees – and who also contracted to receive protection, from the Trusts, against defined credit events, notified certain Trusts that the Trusts were required to post additional collateral to support their obligations owed to the Asset Providers under the credit default swap arrangements, failing which those Asset Providers could seize the collateral which had been pledged to them. (Some of those financial institutions were the same institutions who had agreed to provide (Canadian Style) liquidity support agreements to the Trusts also in exchange for fees.) In plain terms, if that process had been allowed to unfold, the value associated with the Trusts could have collapsed entirely; in essence, the “secured parties” would have taken the pledged collateral, potentially leaving little or nothing for the ABCP noteholders.

On August 16, 2007, a group of financial institutions (including investors in, and distributors of, ABCP, institutions that had provided liquidity facilities to the Trusts, Asset Providers and shareholders of certain Sponsors) agreed to what then came to be known as the Montreal Accord. Under that arrangement these institutions – and other holders who later signed on – agreed to a standstill period[26] during which each party agreed that, among other things, it would not roll over its ABCP on or following its maturity date and would not take any action that would precipitate an event of default under the relevant Trust indenture governing the ABCP.[27] This agreement included a pledge by Asset Providers to refrain from making any collateral calls on assets held by the Trust and a pledge by Trust sponsors to refrain from pursuing efforts to recover from any liquidity provider who signed on to the proposal.

In addition, the participants in the Montreal Accord agreed to a proposal that would see ABCP eventually converted to floating rate notes with maturities which would match the maturities of the underlying assets. It was stated at that early stage that this proposal would ultimately be subject to the approval of the requisite number of holders of ABCP in each Trust.

Ernst & Young was retained by the signatories to the Montreal Accord to assist in the collection and dissemination of information of interest to holders of ABCP.

(g) The Crawford Committee

On September 6, 2007, an investors committee chaired by Purdy Crawford was formed to oversee the proposed restructuring process resulting from the Montreal Accord. That committee – officially known as the Pan-Canadian Investors Committee for Third-Party Structured Asset-Backed Commercial Paper and, as noted, more commonly known as the Crawford Committee - included certain investors who were signatories to the Montreal Accord plus certain other parties.

On November 22, 2007 Purdy Crawford wrote an article[28] which outlined certain aspects of what the Crawford Committee intended to try to achieve. In that article, Mr. Crawford indicated that the plan was designed to “preventing the default of most ... ABCP and the accompanying destruction of value that a “fire-sale” liquidation would undoubtedly have caused.” Mr. Crawford also indicated that the Committee was working with JP Morgan to analyze the assets and the underlying structures and relevant legal documentation of the Conduits with a view to creating “transparency as soon as we can” although he also noted the continued importance of confidentiality. Mr. Crawford indicated an intention to present a plan in December, 2007.

(h) Extraordinary Resolutions

Through the fall of 2007, our clients were faced with requests to sign various extraordinary Trust resolutions, including standstill resolutions. Under the terms of the various Trusts, resolutions were circulated, during that period, to provide for such matters as:

- the Trusts becoming party to the Montreal Accord; and

- the Trusts not pursuing litigation or other activity with respect to the liquidity support facilities.

These resolutions went on to provide that the Trustee in question was both absolved of any claims with respect to prior activities and instructed not to undertake investigations with respect to the options available to protect the noteholders. Many ABCP holders refused to sign these extraordinary resolutions.

(i) Accounting Provisions

In the fall of 2007, the ABCP noteholders were also faced with the task of trying to account for their losses on the frozen ABCP for accounting purposes. This challenge was really an art as opposed to a science. Among other things, we did our very best to gather information about what various parties announced, as a matter of public record, with respect to write downs of ABCP.

(j) Maintenance of Standstill Arrangements

The Crawford Committee was generally successful in maintaining the overall standstill arrangements contemplated by the Montreal Accord. In early November 2007 Perimeter Financial Corporation announced plans to begin listing “as many as 30 different issues of ABCP on its …trading system.” However, the Perimeter trading facility did not attract any significant activity.


Our thinking, from an early date, was that it was desirable to have the Crawford Committee recognize both our Committee and a funded independent financial advisor for our Committee. We felt that it would be difficult for even sophisticated clients to assess and respond to the detailed terms of the proposed restructuring which we knew would be forthcoming without independent professional advice.

(a) Confidentiality Arrangements

In that regard, it was clear from early on that our clients would have very limited access to meaningful information about the assets of each Conduit prior to the release of an information statement with respect to the reorganization, unless they agreed to detailed confidentiality arrangements.

In turn, the Crawford Committee took the position that, among other things, our clients would not be able to use any information that they received through the disclosure process for any purpose other than considering the restructuring proposal that they could expect to be forthcoming. In particular, therefore, our clients could not use such information in the course of litigation.

However, it was also true that the confidentiality agreements did not prohibit litigation if the reorganization ultimately did not proceed; therefore, it seemed possible that any noteholder who did ultimately form the decision to proceed with a law suit at such a stage would be entitled to secure access to the necessary documents through discovery and the balance of the litigation process. In that regard, the provisions of the confidentiality agreements that we ultimately signed made clear that certain lawyers in our firm who were going to be able to gain access to the information could not themselves thereafter participate in certain types of litigation pertaining to ABCP under any conditions (i.e., including if the reorganization was unsuccessful for any reason).

However, on a fundamental level, we also always accepted the basic legitimacy of the idea of confidentiality requirements. In particular, we respected the fact if the information about the assets in the Trusts got into the wrong hands (before the restructuring could be completed – or be given the chance to be completed) it could be misused to the detriment of all ABCP holders. Eventually we negotiated and signed the terms of detailed confidentiality agreements which permitted access to certain confidential information concerning the Trusts, the ABCP relating to the Trusts, the ABCP and the proposed restructuring.

(b) Financial Advisor

As noted, we indicated to Mr. Crawford that we thought that it was vital for the Crawford Committee to recognize the appointment of a single qualified independent financial advisor in order to address the issues that resulted from the lack of meaningful information about the assets in each Trust. We noted that the restructuring proposal that would ultimately be forthcoming would understandably be detailed and complex on a Trust by Trust basis. In our view, such an advisor, with appropriate legal support, could build up a familiarity with the methodologies used by the Crawford Committee – and its advisor JP Morgan – and their approaches with respect to the complex reorganization of the Trust assets. Being able to work with such advisors, we felt, would also allow our clients to reach their decision as to how they were going to vote with respect to the reorganization in a much quicker manner than would otherwise be the case. We put forward PricewaterhouseCoopers Inc. as financial advisor to the Ad Hoc Committee.

(c) The Release Issue

Early on in the process we recognized that one of the cornerstones of the reorganization was going to be that all holders of ABCP would be called upon to release any claims that they had in connection with their original acquisition of the ABCP. In turn, we advised our clients that that type of result could only be achieved through the CCAA.

In 2006 and early 2007, we were involved in a major CCAA case known as Muscletech which involved the international reorganization of an insolvent group of companies which had sold products containing the drug ephedra. In that CCAA case, a number of “third parties” – such as retail stores which sold the drug products, and insurance companies – participated in the reorganization. In turn, at the end of the process, those third parties – as well as the Muscletech group of companies – received the benefit of comprehensive releases. As discussed in more detail in the article referred to in footnote 33, we felt that such releases had been justifiable on the factual basis of that case. This issue is discussed in more detail below, but it may be noted at this point that in the fall of 2007 we alerted our clients to the fact that it was likely that, in due course, the reorganizational proposal being pursued by the Crawford Committee could only be accomplished pursuant to the provisions of the CCAA. As is also discussed in the article referred to in footnote 33, we felt that one of the fundamental “lessons” of the Muscletech case was that anyone objecting to the concept of third party releases in a CCAA plan should make their concerns known at the earliest possible appropriate point in the CCAA proceeding.


On November 26, 2007, the Crawford Committee announced that they had agreed on the basis of a restructuring plan. On December 23, 2007, a formal Framework Agreement was announced.

The new structure involved the creation of three master asset vehicles or “MAVs.” For those old series of ABCP notes that had been comprised exclusively of traditional assets, those assets would be transferred to MAV3 and the holder of the old notes would receive tracking notes issued by MAV3 based on the pool of assets in that particular exclusively traditional series. The new notes would be termed out so that the maturity date would approximate the maturity of the assets in the relevant new Conduit.

Holders of notes in old ABCP series that included ineligible assets, which were underperforming assets comprised primarily of U.S. subprime mortgages, would receive separate tracking notes that would also be segregated and would track the performance of the underlying ineligible asset. There would be a separate tracking note issued for each ineligible asset. Again, the term of the note would match the term of the underlying ineligible asset.

Any series of old ABCP notes that included a mix of synthetic and traditional assets would be pooled in either MAV1 or MAV2. This pooling would result in the assets of 30 different series of old ABCP notes being included in these new MAVs. The pooling of assets would allow the Asset Providers to cross-collateralize trades, improving the position of the Asset Providers in the event of a margin call on a particular synthetic instrument. Pooling would also make it easier to negotiate with the Asset Providers as it would be less time consuming and more economic to negotiate one solution for all the synthetic trades rather than negotiating on a series-by-series basis for 30 series of notes.

The Asset Providers agreed to change the old mark-to-market triggers to more objectively determinable spread loss triggers and, most importantly, to restructure the trigger levels so that they would be more remote than the triggers currently in place. In addition, to the extent that the new, more remote triggers would be breached, there would be a commitment for margin funding to meet future margin calls if necessary. This new credit facility would be in the amount of $14 billion. This credit facility would be made available by a combination of investors, Asset Providers, dealer Banks and other financial institutions.

Under the proposed restructuring, the difference between MAV1 and MAV2 was that in MAV2 the margin funding would be provided by Canadian Chartered Banks and foreign bank Asset Providers, whereas in MAV1 the noteholders would be self-insuring. The total amount of margin funding facilities would be about $13.5 billion. The leveraged synthetic instruments in these pools would also be supported by $8.5 billion of new collateral.

Each of MAV1 and MAV2 would issue four classes of notes. The Class A-1 and A-2 Notes would be senior notes that were expected to be rated AA by DBRS. The Class B and Class C Notes would be subordinated notes that were not expected to be rated. Each holder would receive notes in each Class aggregating the face amount of the relevant series of their existing ABCP. The amount of the Class A-1 Notes would represent the entire “indicative value” of the old notes to be exchanged for the new notes of MAV1 or MAV2.

Again, of course, the proposed restructuring was tremendously complex and massive in scope. It involved not one, but 20 separate debtors and numerous market participants, and, perhaps most noteworthy, it was to take place against the backdrop of an unprecedented widening and contracting of credit spreads before and after the framework of the restructuring had been agreed to by the parties involved.

Clearly the deteriorating credit markets had an adverse impact on the value of the notes issued by the Trusts and created a tremendous amount of uncertainty, all of which made the case for acceptance of the restructuring proposal more compelling to many ABCP noteholders. At the same time, the credit market conditions appeared to strengthen the position of the Asset Providers as, by March 2008, most of the credit default swaps triggers were either breached or were within 10% of being breached, which would have allowed the Asset Providers to demand more collateral and ultimately to unwind the trades (which could have had a domino effect given the unprecedented number of trades that would be affected).

Of course, the widening spreads also made it much more challenging to find lenders willing to provide the margin funding facility at an acceptable cost. In addition, the market conditions made it difficult to obtain the desired ratings on the new notes and it prevented those notes from being rated by a second rating agency. We also understood that the market conditions contributed to the inability of the Crawford Committee to find a liquidity solution for holders of new notes that could not hold to maturity for economic or regulatory reasons.

In the circumstances, the proposed restructuring presented a difficult set of challenges for ABCP holders, including the following:

- There was the basic fact that short-term notes had been frozen since August 2007. As noted, some noteholders purchased ABCP for a period of just a few days, commencing on August 10, 2007. Others invested a substantial portion of the proceeds of public offerings earmarked for large projects. Clearly the lack of liquidity had put a severe strain on many holders of ABCP.

- The total lack of transparency of the old Trusts and the inability to access meaningful information on the assets of the underlying notes, until the middle of March 2008 - and even then some critical information concerning the new notes remained unavailable - made it very difficult for noteholders to assess their situation.

- Many corporate noteholders experienced uncertainty and difficulty around valuing their existing notes for financial reporting purposes.

- Many noteholders had struggled with the complexity around the new structure and the change from a short-term investment to a long-term note with no assurances of a liquid secondary market.

- Questions were raised around the fairness of the treatment of different series of existing notes under the restructuring. For example, there were questions about what, if any, benefits were received by the MAV3 noteholders who hold traditional or ineligible assets. There are also questions around the fairness of certain series of notes comprised of exclusively unleveraged synthetic asset pools being exposed to risk by being pooled with leveraged synthetic assets in MAV1 and MAV2.

- Noteholders struggled to value the proposed new notes.

- The process to approve the restructuring and the related comprehensive releases required difficult decisions to be made by holders of ABCP who believed they had good claims against certain market participants. With respect to this last point, however, in the final analysis, as the calendar moved from 2007 to 2008 our position was that the time had come for our clients to focus their efforts on working with Crawford Committee process as long and as far as possible. There would not be a second chance to do that.[36]


The initial CCAA filing was made with the Ontario Superior Court on March 17, 2008 on the application of the members of the Crawford Committee (sometimes thereafter referred to as the “Applicants” in the CCAA proceeding).

One of the interesting aspects of the CCAA filing was that, as its full name implies, the CCAA is designed to apply to companies – not trusts. In that regard, however, companies had been installed as trustees of one or more of the ABCP Trusts (or Conduits) with effect immediately prior to the CCAA application. Those companies - known as the “Respondents” in the CCAA proceeding - assumed legal ownership of the assets of each ABCP Trust and assumed the obligations of the Trustees who they had just replaced (each of whom would not have qualified as a “debtor company” within the requirements of the CCAA).[37]

Counsel for the Crawford Committee represented the Applicants. At the time of the CCAA filing, a detailed CCAA Plan of Compromise and Arrangement and an Information Statement, all based on the terms of the Framework Agreement, was submitted to the Court. The bound Plan materials resembled a telephone book for a major city and, among many other things, contemplated unlimited releases for a host of parties associated with the distribution and sale of ABCP and the efforts of the Crawford Committee. The proposed beneficiaries of the unlimited releases (broadly defined as the “Released Parties”) included parties who were making undeniable, significant contributions to the proposed new structure as well as parties whose involvement in the “go forward” structure seemed much more remote if not non-existent. In plain terms, however, the Accompanying Information Statement acknowledged that, “the Released Parties (including those Released Parties without which no restructuring could occur) require that all Released Parties be included so that one person who is not released by the Noteholders is unable to make a claim-over from a Released Party and thereby defeat the effectiveness of the release.”[38]

It may also be noted that while the initiation of the CCAA proceeding resulted in a broad court ordered stay of proceedings against the CCAA debtors, proceedings were not stayed with respect to the numerous synthetic derivative contracts which constituted an enormous portion of the overall assets of the Trusts. The reason for that fact is that the CCAA cannot restrain the exercise of rights under “eligible financial contracts”[39] and most of the synthetic derivative contracts in this case constituted eligible financial contracts. Accordingly, as the CCAA case moved forward there were always two “stays” at work – the one imposed by the Court pursuant to the CCAA and the consensual one agreed to by the Asset Providers. Each regularly had to be renewed, creating a constant level of tension surrounding the process.

(a) The Appointment of Representative Counsel to the Ad Hoc Committee and the Ad Hoc Committee’s Financial Advisor

An order was made on March 17, 2008 recognizing both the Ad Hoc Committee and the appointment of Miller Thomson LLP as counsel to that Committee and PricewaterhouseCoopers Inc. as financial advisor to the Ad Hoc Committee. The Applicants, the Canadian Banks and the Asset Providers consented to that appointment order.

(b) The Position of the Ad Hoc Committee on the Initial CCAA Filing

At the time of the initial CCAA application, we were in a position to confirm to the Court that:

- the Ad Hoc Committee supported the decision of the Crawford Committee to initiate the CCAA proceedings as a process to seek a consensus on the terms of the proposed restructuring;

- the Ad Hoc Committee believed that the CCAA process would best ensure a successful implementation of the restructuring; and

- therefore the Ad Hoc Committee was of the view that the Crawford Committee should be given the opportunity to advance the terms of the proposed restructuring within the context of the proposed CCAA proceeding.

Our March 17th court materials also noted our concern about the release issue at that stage; in that regard the affidavit in support of our Notice of Motion stated, in part, that:

The Proposed Restructuring outlined in the Draft CCAA Application Record identifies a number of complex legal and financial issues on which the holders of ABCP will require advice. The Draft CCAA Application Record requires that such holders provide comprehensive releases as a condition to participation in the Proposed Restructuring and that holders vote to approve the Proposed Restructuring in one class of Noteholders. The Ad Hoc Committee has identified these issues (among others) as ones on which it requires representation to advise it and its constituent members on the terms of the Proposed Restructuring.

(c) The Hearing Before the Vote

Our concerns over the release issue came to a head on April 22, 2008 when a hearing took place in advance of the meeting of creditors to vote on the CCAA plan.[40]

As noted above, we had advised our clients that one of the lessons of the Muscletech case was that it was necessary to alert the CCAA debtors and, as appropriate, the Court, of concerns over the release issues as quickly as possible. The problem is that what constitutes “as quickly as possible” seems to keep getting faster and faster.

For example, as discussed in the article referred to in footnote 33, the Muscletech case (which itself moved at a very brisk pace) was built around a claims process. Generally speaking, in that case, it was clear from the point of the initiation of the claims barring process that third party releases would be a central feature of the Muscletech plan. As such, it was really incumbent on parties who objected to the very idea of third party releases to do so at the claims stage rather than at the stage of the creditors’ meeting or the sanction hearing.

In the ABCP case, things were moving even faster. After an Initial Order in mid-March, 2008 the vote was scheduled for April 25, 2008, and there was not going to be a claims barring process. The Plan simply was what it was.

Accordingly on April 22, 2008 we took the following essential positions before the Ontario Superior Court:

- The releases should not be absolute in nature. In other words, we thought that there should be a carve out from the releases. Initially we advocated that this carve out should include fraud, gross negligence and wilful misconduct. Our position was that these were still relatively early days in the ABCP situation and there was a very real concern, on the part of our clients, that facts which were not in the public domain could become known which would justify some form of action. Our clients were almost all corporations and the officers of those corporations dealing with this difficult matter had to explain it to, and seek the approval of, their boards of directors. The direction we had from our clients was that those boards would have a very difficult time approving the plan without carve outs from the releases.[41]

- As a secondary suggestion, we advocated a change in the creditor classification for voting purposes. In that regard, we made the point that noteholders who were participants in the ABCP market should only be in a position of being able to “vote to give themselves a release” if the release had been scaled back appropriately. As we said, it is one thing for people to vote to give themselves an appropriate release, but it did not seem acceptable for people to vote to give themselves an unlimited release.

We did not seek an adjournment of the vote, although that relief was requested by some other ABCP holders who took the position that the release should be removed entirely.

In his ruling,[42] Justice Campbell allowed the vote scheduled for April 25, 2008 to proceed on schedule but he stated that “there is a very serious issue of law of the legally permissible extent of third party releases.”[43] Accordingly, Justice Campbell held (in paragraph 12 of his decision) that parties were entitled to vote “while preserving their ability to argue both validity and fairness of specific releases.”[44]

In the circumstances the vote proceeded on the 25th of April, 2008. We read a statement into the record at the meeting to the effect that, among other things, those in our committee who were voting “yes” preserved their right to argue fairness and validity of the release provisions in accordance with paragraph 12 of Justice Campbell’s decision and that, in turn, those who were voting “no” did not mean to signify that they were insisting on no compromise of any of their litigation rights, again in accordance with paragraph 12 of Justice Campbell’s decision.

(d) The Original Sanction Hearing

Relentlessly, the matter then came back before Justice Campbell in a fulsome two day sanction hearing on May 12th and 13th, 2008.

By that time our Ad Hoc Committee’s membership had increased from 14 parties holding approximately $1.2 billion in ABCP to 31 parties holding approximately $1.8 billion in ABCP .

At that time we reiterated some of our core concerns with respect to the release issue, including that:

- there had been no formal claims process so as to enable the Court to know exactly what was being released; and

- the members of our Ad Hoc Committee were simply not in possession of enough information about the marketing, sale, funding and sponsorship of the ABCP marketplace to know what they were and were not releasing.

As we also said at that time, in the words of Justice Blair (then of the Ontario Court General Division), “fraud … unravels all.”[45] It just did not seem open to ask a court to absolve people from responsibility for fraud in these circumstances.

In taking our position we were well aware of the severe pressures our clients were under.[46] Among other things they needed to choose between the possibility of foregoing the undeniable benefits of the Plan[47] while fighting to preserve a right to pursue a claim in fraud – a type of claim which (as it should be, of course) is extremely difficult to make out. As already noted, the decision of the Asset Providers to forego collapsing the derivative contracts held by them and realizing on the assets pledged to them by the Trusts was consensual and could be revoked at any time and their decision in that regard was still playing out against a backdrop of historically volatile credit markets. There was a real risk that the Asset Providers would walk away from the process if we – or anyone else – successfully opposed the formulation of the Plan as it had been presented and voted on.[48] In short, on many memorable days, it was very hot in the kitchen.[49]

However, after careful consideration and discussion, the position of the Ad Hoc Committee was that, in plain terms, it just did not seem – in the words of the CCAA – “fair or reasonable” to allow a CCAA plan to confer an unlimited release with respect to fraud in the circumstances of the ABCP case. Again we acknowledged the exception of the Muscletech case; however, in that case, among other things, the drug had been illegal (and therefore off the market) and litigation had been ongoing for years by the time the CCAA proceeding started. Accordingly, in that case, it was highly unlikely that any further “smoking guns” – or, for that matter, any legitimate new creditors – were going to emerge by the time that parties were called upon to submit to the jurisdiction of the CCAA process, including the claims process and thereby, in our submission, the issue of fraud in Muscletech became effectively moot, as discussed in footnotes 33 and 41.

Accordingly we argued that the release provisions of the Plan should not cover fraud.

As noted at the onset of this article, space limitations prevent doing full justice to all of the arguments made against our position. (Indeed, again, we are not even doing full justice to the presentation of our own position.) Suffice to say that there were several parties to the right and left of our position as to the need for a fraud carve out from the release. To the right of us, counsel for the Crawford Committee, the Canadian Banks and the Asset Providers (many of whom were foreign banks) argued that the unqualified release should stand – on the basis that a Plan under the CCAA is essentially just a contract and thereby could include such a contractual term.[50] To the left of us, counsel for several corporate ABCP holders argued that the releases should be stricken from the Plan entirely on the basis that the purpose of the CCAA is to address compromises between (just) a debtor and its creditors – not the obligations of third parties. The parties to the left of us suggested that the Muscletech case was wrongly decided and put forward the Quebec Court of Appeal decision in Michaud v Steinberg[51] as authority for the proposition that a CCAA plan should not be allowed to confer a release on a third party in addition to the CCAA debtor.

(e) The Decision of Mr. Justice Campbell in Response to the Original Sanction Hearing

In his decision – released May 16, 2008 – Justice Campbell ruled that he was “not satisfied that the release proposed … to encompass release from fraud … is …properly authorized by the CCAA, or is…fair and reasonable.”

Justice Campbell held that the parties should report back to him by May 30, 2008 to report on proposals “if any, for resolving potential claims in fraud.”

(f) The Fraud Carve Out

Ultimately a fraud carve out was put forward by the Applicants in accordance with our core position on May 12th and 13th, 2008. We engaged in some very intense, time limited negotiations over the terms of this carve out and it was amended further before the Plan, including this amended fraud carve out, came back before Justice Campbell on June 3, 2008.

Under the terms of the carve out:

- No member of the Crawford Committee was entitled to assert a claim.

- The fraud to be complained of had to be wilful and direct and needed to have been focused on specific representations which were made to a buyer of ABCP at the time of the purchase. Accordingly, the carve out was effectively limited to claims against ABCP dealers.

- The carve out did not contemplate claims over. (This provision was arguably of benefit to plaintiffs in that it precluded them from being met with multiple defences. See also footnote 50.)

- There was no process whereby a claimant needed to get leave of the Court to pursue his or her claim. However, the time limit for asserting the claims was relatively tight. We negotiated an extension of this deadline from 6 to 9 weeks from the making of the sanction Order.

- The carve out precluded claims for consequential or punitive damages.

- With reference to our long standing core submission that it was inappropriate to ask ABCP holders to forego claims based on facts of which they were unaware, the carve out was not designed to allow for claims based only on broadly applicable facts which might emerge in the future but which were not currently in the public domain.

It is to be noted that the Banks did not seek to amend any of the enhanced margin facility arrangements at the time that the fraud carve out was added to the Plan.

In addition to negotiating for an extension of the time for filing claims, we negotiated changes with respect to the posting of security for costs and so as to allow for the further particularization of a pleading based on facts gathered through the discovery process.

(g) The Second Sanction Hearing and Justice Campbell’s Decision in Support of the Plan

Having negotiated the terms of the fraud carve out to the best of our ability, we supported the sanctioning of the Plan with the carve out.

The matter came back before Justice Campbell and – despite continued strong opposition from a group of ABCP holders to the left of us - he sanctioned the Plan at this stage.

In doing so, Justice Campbell noted the evolution of the position of the Ad Hoc Committee:

…as this matter has progressed, additions to the supporter side have included for the proposed releases the members of the Ad Hoc Investors’ Committee. The Ad Hoc group had initially opposed the release provisions. The Committee members account for some two billion dollars’ worth of Notes.

Justice Campbell also spoke to the issue of parties being asked to release claims based on facts which they were unaware of at the time in question:

I leave to others the questions of all the underlying causes of the liquidity crisis that prompted the [ABCP] Note freeze in August 2007. If by some chance there is an organized fraudulent scheme, I leave it to others to deal with.

(h) The Appeal

A number of dissident ABCP holders appealed Justice Campbell’s sanction Order and the matter came before the Court of Appeal for two full days of argument on June 25 and 26, 2008.

(i) The Decision of the Court of Appeal

The Court of Appeal decision was rendered on August 18, 2008.

The Court of Appeal held that a CCAA Plan may contain a release of claims against someone other than the debtor company or its directors, and that Justice Campbell had not erred in the exercise of his discretion to sanction the Plan in this case given the nature of the releases called for under it (and which, of course, now included a fraud carve out).

Justice Blair rejected the decision of the Quebec Court of Appeal in Michaud v Steinberg and held that a CCAA plan can include releases of third parties “where those releases are reasonably connected to the proposed restructuring.” Justice Blair stressed the connection between what the banks and the asset providers were giving – in the form of their contributions to the plan – and what they were receiving in the form of the releases. Of course, as already noted, the releases benefited a much wider group of parties than those who were making specific contributions to the Plan

With respect to the delicate issue of fraud Justice Blair held:

The law does not condone fraud. It is the most serious kind of civil claim . . . [o]n the other hand… there is no legal impediment to granting the release of an antecedent claim in fraud, provided the claim is in the contemplation of the parties to the release at the time it is given. (Emphasis Added)

(j) Application to the Supreme Court of Canada

Somewhat surprisingly, leave to appeal the decision of the Court of Appeal was denied by the Supreme Court of Canada on September 19, 2008.


As things turned out, there was still quite a bit of road to travel after that decision of the Supreme Court.

The Applicants strove to complete the closing of the restructuring transaction in the early fall of 2008, but multiple extensions were announced as a result of, “current market conditions, the complexity of the restructuring and the large number of participants involved.”

In mid December 2008 it was announced that the Applicants had also sought out, and had obtained, significant additional support to the Plan. These final enhancements to the Plan included:

- the introduction of a moratorium period of 14 months during which collateral calls on certain collateralized debt obligations would be prohibited;

- the further relaxing of certain critical spread loss triggers, so as to make the likelihood of those triggers being reached after the moratorium more unlikely; and

- the provision of an additional $9.5 billion “back stop” margin funding facility to be provided by a combination of Canadian governments (the Federal Government, the Government of Ontario, the Government of Alberta and the Government of Quebec) which is now available to be used for a limited period of time if the other margin facilities are exhausted.

These enhancements were enough to obtain an A rating, from DBRS, for the new paper.

On the 12th day of January, 2009, the Ontario Superior Court made a comprehensive Implementation Order designed to allow for closing of the final form of the transaction, incorporating the enhancements obtained in December 2008. The final closing occurred in January, 2009.


It is now beyond dispute that, as a matter of Canadian law, a CCAA plan may validly contain third party releases. However, it remains to be seen just how far this practice will be applied in any particular case. Third party releases can only be justified in rare cases. Even in those rare cases, as we helped to establish in the historic ABCP case, the releases may not be able to go so far as to absolve parties from liability for at least some degree of fraud – nor may they be able to cover facts of which the creditors (being deemed to have given releases) cannot possibly be aware.

The footnotes to this article have been removed. For full details and to discuss further, please contact:

Jeffrey Carhart
Miller Thomson LLP
Scotia Plaza
40 King Street West, Suite 5800
P.O. Box 1011
Toronto, Ontario, Canada M5H 3S1
Direct Line: 416.595.8615
Fax: 416.595.8695