Journal Issue
Column Name
In the past few years, the Canadian courts have considered a number of cases in
which a debtor conducting business on both sides of the border has filed concurrently
for protection under chapter 11 of the Bankruptcy Code in the United States and
under the Companies' Creditors Arrangement Act (CCAA) in Canada. While comity
and cooperation appear to be the bywords of the day, real difficulties can arise in
circumstances in which the substantive laws of the United States, in respect of such
core issues as priority quantification and validity, conflict with those of Canada.
In these instances, comity can bump up against the equally important principles of
sovereignty, due process and public policy.
In The Loewen Group Inc., the Canadian court recently released a decision that
offers insight into how such potential conflicts might be managed if addressed early in
the restructuring process. While the decision in Loewen may appear innovative at first
glance, it is ultimately founded upon sound and longstanding principles of law.
The Loewen Group Inc. (TLGI) is a funeral services company headquartered in
Canada, but earning 90 percent of its revenues and holding 90 percent of its
assets in the United States. On June 1, 1999, TLGI filed for protection from
its creditors simultaneously in the United States under chapter 11 and in Canada
under the CCAA. The U.S. proceedings involved TLGI and approximately 850 of
its direct and indirect U.S. subsidiaries. In Canada, TLGI filed for protection
with approximately 120 of its Canadian subsidiaries. Only TLGI filed in both
jurisdictions.
As is now common practice, the U.S. and Canadian courts adopted a cross-border
protocol in an attempt to coordinate and harmonize the restructuring efforts of TLGI.
The protocol only purported to deal with procedural issues, such as joint hearings,
for example, and did not address substantive matters. In fact, the protocol
specifically recognized that each court had exclusive jurisdiction over its own case.
TLGI, having cross-filed, was subject to the jurisdiction of each of the courts
and subject potentially to conflicting legal obligations from each jurisdiction. The
benefits of the cross-filing were clear:
- protection on both sides of the border;
- speedy access to court during the restructuring process as required; and
- ultimately, the prospect of a restructured business blessed by courts in each
of the jurisdictions in which it operates.
While the decision in Loewen must be restricted
to its facts, it provides a roadmap for
U.S. and Canadian counsel to work together in
future restructurings.
The first step was for a claims bar date to be established for all the U.S.
debtors, including TLGI, in the U.S. proceedings. A vast noticing process was
also approved by the U.S. court in 1999. While similar procedures were initiated
in Canada shortly thereafter that included TLGI's Canadian subsidiaries, no separate
Canadian claims process was undertaken by the Canadian court with respect to TLGI
at that time. The reasons were twofold:
- TLGI did not wish to confuse potential claimants with multiple and concurrent
claim filing obligations. - TLGI wanted to avoid duplication of process as much as possible.
In excess of 187,000 separate claims notices were sent as part of the U.S.
proceedings to potential claimants. Notices were sent to persons regardless of whether
they resided in United States, Canada or elsewhere. As a consequence, both U.S.
and Canadian claimants filed their claims in the U.S. claims process. In fact,
of the approximate 650 claims filed against TLGI in the U.S. claims process,
more than 200 were filed by Canadian residents.
Once the U.S. claims process was substantially complete and the claims bar date
passed, a separate claims process was approved by the Canadian court for TLGI to
determine whether there were any "Canadian claims" that were not already disclosed in
the U.S. process. Given that all known claimants had already received notice pursuant
to the U.S. claims process, the Canadian court only required notification of the
Canadian claims process by way of advertisement in Canada. The Canadian court
accepted that specific notification of known Canadian claimants would be merely
duplicative and unnecessary. While the benefits were obvious, the hazards included
confusion, conflicting rights and a potential quagmire if TLGI failed to navigate
through the process without incident.
As a result, only six claims were filed against TLGI in Canada pursuant to
the Canadian claims process. These six claims were either settled, disallowed or
unaffected by the proposed restructuring of TLGI. Given that there were no
resulting unique "Canadian claims" and many claimants had already participated in the
U.S. process, as counsel for TLGI we applied to the Canadian court seeking an
order that:
- the Canadian court recognize that the U.S. proceeding was the appropriate
forum for the adjudication of all claims against TLGI (including issues of
validity, quantification and priority) and recognize the jurisdiction of the U.S.
court to determine, compromise or otherwise affect the interests of claimants,
including claimants domiciled in Canada; and - TLGI need not file a separate plan of arrangement or restructuring under the
CCAA. Rather, and given that there were no Canadian claims, the U.S. plan
would govern and bind all claimants of TLGI regardless of their residency.
The Canadian court granted the relief we sought and recognized the (1) transnational
nature of TLGI's business, (2) desire to treat all stakeholders with a similar
claim equally, regardless of their residency; and (3) efficiencies of a single plan
of restructuring. It should be noted, however, that the Canadian court was extremely
careful to limit its reasoning to the particular facts of the Loewen case.
While the decision in Loewen must be restricted to its facts, it provides a
roadmap for U.S. and Canadian counsel to work together in future restructurings.
The decision in Loewen demonstrates one way to manage the problems that can arise
when debtor's counsel faces potentially conflicting substantive laws. While the solution
in Loewen will not be applicable in every case, it does offer some guidance to
practitioners of the types of creative solutions available.
Journal Date