ONTARIO

SUPERIOR COURT OF JUSTICE

COMMERCIAL LIST

COURT FILE NO.: CV-1410791-00CL

DATE: 20150723

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c.C-36 AS AMENDED

AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF 4519922 CANADA INC.

BEFORE: Newbould J.

COUNSEL:
Robert I. Thornton and Lee M. Nicholson, for the Applicants

Avram Fishman and Mark E. Meland, for the Creditors’ Committee

Evan Cobb, Rahool Agarwal and Stephen Taylor, for the Insurers

Sylvain Vauclair and Neil Peden, for Chrysler Inc. and CIBC Mellon Trust Company

Jay A. Swartz, Dina Milivojevic, James Doris, Peter Osborne, for the Monitor

James H. Grout, for twenty-two CLCA partners

Harry M. Fogul, for nineteen CLCA partners

Lou Brzezinski and Alexandra Teodorescu, for the Gambazzi Group

HEARD: July 15, 2015

ENDORSEMENT

[1] The applicant, 4519922 Canada Inc., a partner of Coopers & Lybrand Chartered Accountants (“CLCA”), sought an order sanctioning a plan of arrangement and compromise dated July 2, 2015 concerning the applicant and CLCA pursuant to section 6 of the CCAA, and ancillary relief. At the conclusion of the hearing the order sought was made for written reasons to follow. These are the reasons.

[2] The circumstances surrounding the 22 year litigation in Quebec involving the audit of Castor Holdings Ltd. by CLCA are set out in my endorsement of January 12, 2015 and need not be repeated. Suffice it to say, without some resolution of the outstanding claims of some $1.5 billion yet to be litigated, the litigation would no doubt continue for many years to come at incredible expense to all involved.

[3] Fortunately, all of the claimants save for one group, the Gambazzi Group, have agreed to a term sheet that forms the basis of a plan of arrangement and compromise. The Gambazzi Group raise a number of issues in opposition to a sanction of the Plan. The Gambazzi Group is comprised of Dr. Marco Gambazzi, a Swiss lawyer and former director of Castor Holdings, two of his personal companies and eight other companies for which he served as a director and investment advisor.

Procedural CCAA history

[4] The Initial Order was made on December 8, 2014 granting protection to the applicant under the CCAA to permit it to develop a plan to resolve the outstanding litigation in Quebec as set out in a term sheet that had been agreed to by most but not all of the claimants in the Quebec litigation. A stay of that litigation was included in the Initial Order.

[5] The term sheet provided for a large amount, some $220 million, to be contributed by the CLCA partners sued in Quebec, by some non-CLCA partners exposed under an indemnity given to PwC, by the insurers of CLCA sued in Quebec and by the applicant and related corporations. In exchange, releases of the contributors were to be provided. The proceeds were to be paid first to pay the costs of the Widdrington test case, second to pay approximately $105 million to creditors who funded that amount to pursue the litigation and third to pay all creditors on account of approved claims on a pari passu basis. The term sheet provided that CLCA would acknowledge as approved claims for voting and distribution purposes the claims of the German Bank Group, the Canadian Bank Group and the Castor Trustee in Bankruptcy.

[6] Chrysler, holding approximately 28% of the claims in the Quebec litigation, was not a party to the term sheet. Nor was the Gambazzi Group. It was disclosed in the application from the outset that the Gambazzi Group’s claims against CLCA suffered from numerous alleged deficiencies and would need to be determined in a claims process.

[7] Under the Initial Order, the German Bank Group, the Canadian Bank Group and the Castor Trustee in Bankruptcy formed a committee of the creditors to assist the applicant and CLCA towards presenting a plan to all creditors. A motion on a comeback hearing by Chrysler to dismiss the CCAA proceedings was later dismissed, and Chrysler eventually came to terms with the creditors’ committee on an amended term sheet. Chrysler was added as a member of the creditors’ committee and now supports the sanctioning of the Plan.

[8] On March 10, 2015, a claims procedure order was issued establishing a claims process to determine the validity, quantum and priority of claims against the applicant and CLCA. The claims procedure order was prepared by the applicant in consultation with the Monitor, the creditors’ committee, the Insurers who are defendants in an action in Quebec, and other stakeholders. The Gambazzi Group did not appear in Court to oppose the claims procedure order and took no steps to appeal it.

[9] The claims procedure order provides for a claims process as follows:

a. the submission of all claims to the Monitor;

b. the right for any claimant to examine any proof of claim deposited with the Monitor and to provide documents or information to the Monitor and/or the applicant and CLCA for their consideration with respect to any claim;

c. an initial review of all claims by the applicant and CLCA;

d. an independent review by the Monitor of any claims accepted by the applicant and CLCA to determine if the acceptance was reasonable and the need for the Monitor to consent to an accepted claim; and

e. in the event that any claim is disputed, a claims adjudication process, either before a claims officer, or the Court.

[10] On June 16, 2015, a meeting order was made to establish the date for the creditors’ meeting and authorizing the applicant and CLCA to file the Plan with the Court. The Honourable James Farley Q.C. was also appointed as the claims officer to adjudicate disputed claims. To date only the claims of the Gambazzi Group have been disallowed by the applicant and CLCA.

[11] Under the meeting order, the claimants were to vote at the creditors’ meeting in two separate classes. Claimants holding claims arising from the Castor audit formed a Castor claimant class. Claimants holding general claims and claims related to post-retirement obligations of the applicant or CLCA formed a general claimant class. At the creditors’ meeting held on July 7, 2015 the plan was approved by 100% of the general claimant class and 73.2% of the Castor claimant class holding 76.94% of the face value of the Castor claims. The only claimants who voted against the plan were claimants in the Gambazzi Group, whose claims were recognized for voting but not distribution purposes.

Request for an adjournment

[12] At the opening of the hearing, counsel for the Gambazzi Group requested an adjournment in order to file further material in response to positions taken by the parties supporting the plan. This was the first occasion in which anyone appeared in these proceedings on behalf of the Gambazzi Group. I declined the adjournment request.

[13] One reason for the request was to file material to answer allegations relating to the strength of the Gambazzi Group claims against CLCA. The applicants and the creditors’ committee had referred to allegations and facts that would undermine the validity of the Gambazzi Group claims. I was in no position to deal with any validity issues regarding these claims and made that clear to the parties. That will be an issue to be dealt with before Mr. Farley in the claims adjudication process.

[14] Another reason for the request was to file evidence that the Gambazzi Group had made a contribution to the Castor litigation in the form of a meeting with other claimants’ counsel in which expert reports were discussed and thus should entitled to participate in the amounts to be paid to the claimants under the term sheet and Plan who contributed funds to pursue the Castor litigation. Counsel for the Gambazzi Group asserted that the value that should be attributed to the meeting should be $1 million. However, the payments proposed in the term sheet to those claimants who funded the Castor litigation, which did not involve the Gambazzi Group who did not provide any funds at all, was identified in the original application some seven months before the sanction hearing, and the Gambazzi Group at no time raised any concern about this. It would be unfair to the other parties to upset the process at this late date for this issue. Even assuming that a meeting of lawyers for the Gambazzi Group with other plaintiff’s counsel added some benefit to the pursuit of the Castor litigation, which counsel for the plaintiffs denies, it would be different from the cash actually put up to pursue the litigation, and in any event would be a matter to be voted on by the creditors in considering the Plan. It would hardly amount to unfairness in the Plan. Other claimants in the Quebec litigation incurred their own legal and expert witness expenses and these are not to be paid under the Plan.

Analysis

[15] The requirements for court approval of a plan are well established. See Sino-Forest Corporation (Re), 2012 ONSC 7050 at para. 50. The applicant must demonstrate:

a. there has been strict compliance with all statutory requirements and adherence to previous orders of the court;

b. nothing has been done or purported to be done that is not authorized by CCAA; and

c. the plan is fair and reasonable.

[16] There is no issue regarding the first test. There has been strict compliance with all statutory requirements and previous orders in this proceeding.

[17] The Gambazzi Group takes the position that the second test has not been met. It asserts that the release of the insurers, who are making a substantial contribution to the Plan under the term sheet, is contrary to the public order provisions of the Quebec Civil Code and that the CCAA cannot authorize a plan that is contrary to existing laws. It relies upon a purported expert report in which Mr. Nicholas Krnjevic, a solicitor qualified to practise in Quebec, opines that the settlement would violate direct public order provisions of Quebec law. For a number of reasons I cannot accept this assertion.

[18] The Castor insurers have settled numerous claims, paid out the Widdrington judgment and reimbursed in excess of $70 million in costs. The insurers take the position that the insurance proceeds have been exhausted. They have been sued by plaintiffs in the Castor litigation for a declaration that the policies are governed by Quebec law and that defence costs under Quebec law are to be on top of policy limits. The insurers deny liability. The trial against the insurers was to commence in January of this year and was scheduled to take six months. That trial was stayed by the Initial Order. Needless to say, the issues are somewhat complex. Under the term sheet that is the basis for the Plan, the insurers are paying a substantial amount towards the funds to be collected under the term sheet, and in return are to be released from any further liability they may have. The Gambazzi Group asserts that what the insurers are paying is less than what they would be required to pay under Quebec law.

[19] Mr. Krnjevic, the expert relied on by the Gambazzi Group, is not independent of the Gambazzi Group. He is a lawyer with the firm that has acted for the Gambazzi Group in the Quebec litigation involving Castor Holdings for two decades. Mr. Brzezinski admits that Mr. Krnjevic is not independent.

[20] An expert's lack of independence and impartiality goes to the admissibility of the evidence in addition to being considered in relation to the weight to be given to the evidence if admitted. The expert must be fair, objective and non-partisan and the appropriate threshold for admissibility flows from this duty. See White Burgess Langille Inman v. Abbott and Haliburton Co., 2015 SCC 23 at paras. 45 and 46 per Cromwell J. Mr. Krnjevic cannot be said to be non-partisan. His firm and he are advocates for the Gambazzi Group.

[21] In this case, Mr. Krnjevic did not sign an acknowledgement of an expert’s duty to the court required by rule 53.03(2.1). Mr. Brzezinski said this was not needed as Mr. Krnjevic’s opinion evidence could be considered as opinion evidence of a non-party expert where the non-party expert had formed a relevant opinion based on personal observations or examinations relating to the subject matter of the litigation. It was said that Mr. Krnjevic had acted in the Quebec litigation and therefore had formed a relevant opinion as a non-party, much like a treating physician in a personal injury action. Reliance was placed on Westerhof v. Gee Estate, 2015 ONCA 206. This reliance on Westerhof is misplaced. That case permitted opinion evidence of a non-party expert where the non-party expert had formed a relevant opinion based on personal observations or examinations relating to the subject matter of the litigation for a purpose other than the litigation. Mr. Krnjevic’s opinion was based entirely on his and his firm’s acting in the Castor litigation. He could not be considered to be like a treating physician of an injured person who makes observations and examinations of an injured client for a purpose other than litigation.

[22] There are other problems with Mr. Krnjevic’s opinion. It was based on what “he understood” to be the facts. Mr. Brzezinski acknowledged that what Mr. Krnjevic was relying on as his understood facts were allegations in pleadings. No evidence was led by the Gambazzi Group to establish facts to support the pleadings.

[23] In the circumstances I cannot accept the evidence of Mr. Krnjevic.

[24] Moreover, the argument is based on the Quebec Civil Code that provides that proceeds of insurance are to be applied exclusively to the payment of third party victims and that an insurer may not contract out of these provisions. That says nothing, however, about an insurer compromising a contested claim against it. In this case, a six month trial was to be held. Mr. Brzezinski acknowledged that it would be open in that case for the plaintiffs and insurers to settle the claims by payment of less than the amounts claimed by the plaintiffs and give the insurer a release. I fail to see why such a settlement cannot be made in this CCAA proceeding involving the same parties.

[25] Finally, it has been decided by authority binding on me that Quebec provincial law cannot affect the ability under the CCAA to provide third party releases. In ATB Financial v. Metcalf and Mansfield Alternative Investments II Corp., 2008 ONCA 587 the same argument was made as made by the Gambazzi Group in this case. Blair J.A. dismissed the argument on paramountcy grounds as follows:

102 Mr. Woods and Mr. Sternberg submit that extending the reach of the CCAA process to the compromise of claims as between solvent creditors of the debtor company and solvent third parties to the proceeding is constitutionally impermissible. They say that under the guise of the federal insolvency power pursuant to s. 91(21) of the Constitution Act, 1867, this approach would improperly affect the rights of civil claimants to assert their causes of action, a provincial matter falling within s. 92(13), and contravene the rules of public order pursuant to the Civil Code of Quebec.

103 I do not accept these submissions. It has long been established that the CCAA is valid federal legislation under the federal insolvency power: Reference re: Companies' Creditors Arrangement Act (Canada), 1934 72 (SCC), [1934] S.C.R. 659. As the Supreme Court confirmed in that case (p. 661), citing Viscount Cave L.C. in Royal Bank of Canada v. Larue 1928 514 (UK JCPC), [1928] A.C. 187, "the exclusive legislative authority to deal with all matters within the domain of bankruptcy and insolvency is vested in Parliament." Chief Justice Duff elaborated:

Matters normally constituting part of a bankruptcy scheme but not in their essence matters of bankruptcy and insolvency may, of course, from another point of view and in another aspect be dealt with by a provincial legislature; but, when treated as matters pertaining to bankruptcy and insolvency, they clearly fall within the legislative authority of the Dominion.

104 That is exactly the case here. The power to sanction a plan of compromise or arrangement that contains third-party releases of the type opposed by the appellants is embedded in the wording of the CCAA. The fact that this may interfere with a claimant's right to pursue a civil action -- normally a matter of provincial concern -- or trump Quebec rules of public order is constitutionally immaterial. The CCAA is a valid exercise of federal power. Provided the matter in question falls within the legislation directly or as necessarily incidental to the exercise of that power, the CCAA governs. To the extent that its provisions are inconsistent with provincial legislation, the federal legislation is paramount. Mr. Woods properly conceded this during argument.

[26] Third party releases are authorized under the CCAA if there is a reasonable connection between the third party claim being compromised in the plan and the restructuring achieved by the plan. See Metcalf and Mansfield at paras. 43 and 70.

[27] In my view, the second test for sanctioning a plan that nothing has been done or purported to be done that is not authorized by CCAA has been met.

[28] The third test is that the Plan must be fair and reasonable. The court's role on a sanction hearing is to consider whether the plan fairly balances the interests of all stakeholders. See Canwest Global Communications (Re) (2010), 2010 ONSC 4209, 70 C.B.R. (5th) 1 per Pepall J. (as she then was) at para. 19. In Muscletech Research and Development Inc. (Re) (2007), 2007 5146 (ON SC), 30 C.B.R. (5th) 59 Ground J. stated that the court must exercise its equitable jurisdiction and consider the prejudice to the various parties that would flow from granting or refusing to grant approval of the plan and must consider alternatives available to the applicants if the plan is not approved.

[29] One important measure of whether a plan is fair and reasonable is the parties' approval of a plan, and the degree to which approval has been given. It is not the function of a court to second guess the business people with respect to the business aspects of the plan, descending into the negotiating arena and substituting its own view of what is a fair and reasonable compromise or arrangement for that of the business judgment of the participants. The parties themselves know best what is in their interests in those areas. There is a very heavy burden on parties seeking to show that a plan is not fair and reasonable, involving matters of substance, when the Plan, as here, has been approved by the requisite majority of creditors. See Olympia & York Developments Ltd. (Re) (1993), 17 C.B.R. (3d) 1 per Blair J. (as he then was) at paras. 36 to 40.

[30] The Gambazzi Group assert that the claims process is not fair to them and that all claims should be treated equally. They assert that while the term sheet and the Plan provide for pre-arranged and pre-approved claims of creditors, their claims have not been approved. In their factum they assert that the actions of the applicant and CLCA in approving the claims is not fair, reasonable or in good faith. They do not in their factum request that the Plan not be sanctioned. They acknowledge “the salutary effect that the Plan hopes to achieve” but say that the process was flawed. They say that the claims of the Gambazzi Group should not have to be considered and approved by CLCA but only be considered and approved by the Monitor.

[31] What the Gambazzi Group is doing is making a collateral attack on the claims process approved by the Court in March of this year. That process provided for claims to be reviewed by the applicant and CLCA. As the claims of all but Chrysler and the Gambazzi Group were pre-approved by the applicant and CLCA in the negotiations leading up to the term sheet and the initial application under the CCAA, there was built into the claims process a requirement that any claim approved by the applicant and CLCA had to be reviewed and consented to by the Monitor. The Gambazzi Group did not appear to oppose the claims process order or appeal from it. It is now too late after the parties have relied on the claims process and the Monitor has at great expense reviewed the claims for the Gambazzi Group to be attacking the claims procedure order. The application before me is to sanction the Plan of compromise and arrangement and consider whether it is fair and reasonable. It is not to consider whether the past claims process order was fair.

[32] In any event, I see no unfairness in the process. The applicant and CLCA, along with the other parties who supported the Initial Order, have made it clear from the outset that they have difficulties with the claims of the Gambazzi Group. It is not for this Court to get into whether those claims are good or bad, but it would also not be fair to deprive those other parties from considering the claims filed by the Gambazzi Group in the CCAA process. The idea that they could not have any input into the consideration of the validity of the claims of the Gambazzi Group would be unfair to them. It would also mean that the Monitor, who has had no prior dealings with this whole affair, would be required to determine whether or not to consent to the claims without any input from those who have knowledge of the matter.

[33] In this case, the Gambazzi Group has the right to have their claim determined in the claims process by the Honourable James M. Farley. I see no unfairness in that.

[34] The Gambazzi Group also asserts that the claims be treated pari passu on a pro rata basis and that the priority accorded to the Participating Creditors in the Plan be struck. I do not agree. The Participating Creditors were claimants in the Castor litigation who funded the Castor litigation with over $100 million in cash by way of loans. The Participating Creditors are Chrysler, the German Bank Group and the Canadian Bank Group. The Gambazzi Group chose not to fund any of the Castor litigation.

[35] If the Gambazzi Group’s assertion were accepted, it would mean that they would rank equally with those claimants who funded over $100 million to support the claims in the Castor litigation. This would not be treating all claimants fairly or equally. It would mean that the Participating Creditors would receive nothing for their cash disbursements to fund the litigation and the Gambazzi Group and other claimants who did not fund the litigation would be accorded a privileged position. It is fair and reasonable for those claimants who funded the litigation to be reimbursed their funding before claimants are paid on their claims. It recognizes their financial contribution to achieving a settlement for the benefit of all claimants. If the Gambazzi Group and other claimants that are not Participating Creditors recovered pro rata in all of the contributed funds it would be severely inequitable as, net of costs, they would recover a higher percentage on their Castor claims compared to the Participating Creditors.

[36] The third party releases are justified in this case. In order to justify third party releases, there must be a reasonable connection between the third party claim being compromised in the plan and the restructuring achieved by the plan to warrant inclusion of the third party release in the plan. See Metcalf and Mansfield at para. 70. The following factors are to be considered:

(a) the claims to be released must be rationally related to the purpose of the plan;

(b) the releases must be necessary for the plan;

(c) the parties who have claims released must be contributing in a tangible and realistic way; and

(d) the plan will benefit the debtor and its creditors generally.

[37] The release of the defendants or potential defendants in the Castor litigation is the whole purpose of the Plan. The releases are necessary as one could not expect the parties funding the Plan to do so if they remained at risk in the Castor litigation. The contributors who are being released are paying no small amount. The claimants who have voted in favour of the Plan are obviously satisfied with the contributions. Furthermore, the CLCA group is monetizing its assets in order to make a contribution to the Plan.

[38] The Plan will benefit all concerned. Without the third party releases, there could be no Plan. The third party releases are approved.

[39] The circumstances in this case cry out for a resolution of the claims. Madam Justice St. Pierre in the Widdrington test case put it simply that the time has come to put an end to the longest running judicial saga in the legal history of Quebec and Canada. Without a resolution, many more years of costly litigation will result. The assets of CLCA and its former partners currently available for settlement would be further diminished and all parties would face the risks of the continuing litigation having an unfavourable outcome. There is also the prospect of the bankruptcy of CLCA and its former partners, nearly all of whom had nothing to do with the Castor Holdings audit and are as much the victims as any plaintiffs who relied on the audit to their detriment.

[40] For these reasons, the Plan is sanctioned.

Newbould J.

Date: July 23, 2015