The Developing Use of Protocols in Major Cross-border Filings
The increased use of cross-border insolvency protocols and their acceptance by the courts can only be good news for stakeholders involved in multinational and international businesses that are experiencing financial difficulties. In the past, similar multinational financial reorganizations might have simply disintegrated as a result of creditors and courts in different countries attempting to seize the high ground and take jurisdiction over an entire case (or at least over all the assets) regardless of the creditors and the courts in another jurisdiction. However, cross-border insolvency filings these days, particularly between Canada and the United States, have been characterized by a high degree of respect by the courts of each country for the other. There has probably been more progress and higher levels of cooperation between courts in international insolvency cases than in any other major area of international commercial law. This article focuses on the developments in the three most recent major cross-border filings between Canada and the United States.
Reorganizations by Satellite
Legal history was made in a recent cross-border reorganization involving bankruptcy courts in New York (Hon. Arthur J. Gonzalez, 98 B.R. 48312 (Bankr. S.D.N.Y. 1999)) and Toronto (Mr. Justice J.D. Ground of the Ontario Superior Court of Justice, 98-CL-3162). The company involved, Livent Inc., was an award-winning Toronto-based live theater business that operated extensively in the United States and Canada. When it encountered financial difficulties, it launched reorganizational proceedings under the Canadian Companies' Creditors Arrangement Act2 (CCAA) in Toronto and under chapter 11 in New York.
Livent had operated theaters in Toronto, New York and Chicago and, in its dual reorganizational proceedings, it had reached the stage of seeking court approval for the sale of its theater-related assets in both countries to a single purchaser. The sale procedures were coordinated in the Canada and the United States so that they reached the two courts at the same time. The courts determined that the optimum procedure for this kind of approval would involve a joint two-country hearing via a closed-circuit satellite TV facility.
For the joint hearing, the courts in Toronto and New York were connected by a satellite TV feed. Each court featured a multi-camera set-up that allowed everyone in each courtroom to see both the judge and the counsel making submissions in the other country. During the proceedings, the judges each put questions to counsel in the other country, and on occasion, counsel in one country cross-examined, by television, a witness in the other. With the concurrence of counsel, the two judges were able to discuss procedural and technical issues relating to the joint hearing, which helped streamline the hearing processes in this entirely new system. The hearing concluded successfully after two days of evidence and argument, and the courts made complementary orders that allowed the sale of assets in both countries to the single successful purchaser.
Although Livent was not the first case in which a simultaneous cross-border court hearing had taken place in a reorganization, it is the first in which satellite TV has been utilized. Simultaneous cross-border hearings were held last year during the Solv-Ex Corp. reorganization between Alberta and New Mexico3 through the use of telephone conference facilities, but having experienced both varieties of hearing, the satellite TV system is preferred. The technology that was so successfully demonstrated in the Livent case is certain to be replicated in future cross-border cases.
Resurrecting a Funeral Company
Loewen Group Inc., a multinational business with operations across Canada and the United States, also recently filed under chapter 11 in Delaware (Chief Judge Peter J. Walsh, Case No. 99-01244) and under the CCAA in Toronto (Mr. Justice J.M. Farley of the Ontario Superior Court, Case No. 99-CL-3384). Loewen is the second-largest funeral services business in North America. A stock market high-flyer, its financial troubles began when a dispute with a Mississippi company over a $6 million transaction escalated into a $500 million jury verdict against it. (This proved that Canadian companies should be careful where they litigate.) Although the judgment was settled for a smaller amount and was made payable over time, Loewen never regained its pre-judgment vitality.
Its financial difficulties ultimately forced it to commence reorganizational proceedings in both Canada and the United States. Loewen's corporate structure was reasonably complex, and the filing established some Guinness-type insolvency records when Loewen filed for 870 of its affiliates in Delaware and 116 of its affiliates in Toronto. Industry observers do not recall any provision for a volume discount for bankruptcy court filing fees, but after Loewen, this might be something that should be considered.
In terms of sheer volume, the Loewen filing created some new benchmarks for chapter 11 proceedings. Counsel for the company reported that the Loewen filing was the largest chapter 11 filing of 1999 (even without regard to the parallel Canadian filing) and the 15th-largest chapter 11 case ever filed (after adjusting for inflation). The Delaware bankruptcy court clerk's office estimated that it would have taken three days to time-stamp the papers that were filed with the court, and the case was also notable for featuring one of the largest filing fees (if not the largest) ever paid.
Loewen determined that cross-border coordination between the proceedings in Delaware and in Toronto was very important to its reorganization effort. In a precedent-setting move, Loewen presented both courts with a full-fledged cross-border insolvency protocol in its initial application for protection under the CCAA and in its initial chapter 11 filing. Under the terms of the protocol, both courts agreed to cooperate and coordinate their administrations wherever appropriate and feasible. The protocol provides that the two courts may communicate with each other and conduct joint hearings, and it sets out rules under which such joint hearings can take place. The protocol also provides that creditors and other interested parties can appear in either court and that the jurisdiction of each court over insolvency administrators from the other jurisdiction is limited to the particular matters in which the insolvency administrator from the other jurisdiction appears before it. The protocol also provides for coordination of the stays of proceedings in each country to assist with the reorganizational proceedings in the other. The Loewen case is still in its early stages, and the developing cross-border issues are intriguing and complex.
Philip Services Corp.
The most recent cross-border insolvency protocol came out of a complicated complex two-country reorganization of Philip Services Corp., which also filed chapter 11 in Delaware (Hon. Mary Walrath, Case No. 99-02385) as well as under the CCAA in the Ontario Superior Court in Toronto (Mr. Justice R.A. Blair, Case No. 99-CL-3442). Philip Services is a major environmental and waste recycling operation headquartered in Hamilton, Ontario, with extensive operations in the United States.
Several years ago, Philip embarked upon a major acquisition program in which it took on a substantial debt level. Philip's financial decline arose out of a combination of circumstances primarily linked to a decline in metal prices and exacerbated by allegations of a lack of disclosure in its handling of losses in metal futures trading. Over several months, Philip's major lenders and shareholders had negotiated the format for a pre-packaged plan that was intended to be carried out contemporaneously in the United States and Canada. In late June, the parent company of the Philip Group filed in both countries and simultaneously filed for a number of subsidiaries in each country. While a smaller number of subsidiaries were involved in Philip Services than in Loewen, there were more than 135 filings in Delaware and 25 companies in Toronto. As in the Loewen case, the initial orders in each of the filings approved a cross-border insolvency protocol to coordinate and harmonize the administration of the cases in the two countries. In the Philip Services protocol, the courts agreed to cooperate, wherever feasible, in the coordination of claims processes, voting procedures and plan confirmation procedures.
One of the early complexities in Philip Services revolved around a particular set of securities-related claims that would be treated differently under U.S. law than under Canadian law. A complicating factor was that some of these claims were against Canadian residents who, in turn, had claimed over against Philip. In the United States, these claims would probably fall into the equity level, but in Canada, they would be debt claims. The company's intention was to have these claims determined in the jurisdiction that would be most favorable to it, i.e., the United States, but an objection to doing so was taken before the Canadian court and, in a recent preliminary ruling, the objection was upheld. The issue is still pending before the courts.
In its ruling, the Canadian court strongly suggested that the issue be resolved as part of the negotiations on the company's plan but the Philip Services experience illustrates one of the most difficult areas of cross-border reorganizations, i.e., determining which law applies to what claims and how to achieve a fair result in a cross-border plan in circumstances in which asset recoveries may vary between one jurisdiction and the other.
These recent cases illustrate a strongly increased willingness on the part of the courts and the insolvency profession to employ cross-border insolvency protocols in international cases to facilitate and enhance cooperation between the jurisdictions involved. As the current cases involving such protocols make their way into the plan and plan confirmation stages, there will be interesting and constructive issues of multinational and cross-border claims to be dealt with. The solutions to these issues, however, have the potential to develop into a set of rules and precedents that, in turn, may evolve into a form of "common law" of cross-border and multinational reorganizations.
Author's Note: ABI members have been prominent in each of these reorganizations. Readers with other experiences involving cross-border cooperation and the application of protocols are encouraged to share them with ABI's International Committee and ABI members through this column. Please direct comments and reports to Bruce Leonard c/o Cassels Brock & Blackwell in Toronto. Copies of the protocols granted in Loewen and Philip Services are available in the International Committee Section of ABI World.