Court File and Parties

COURT FILE NO.: CV-1410791-00CL DATE: 20160606 SUPERIOR COURT OF JUSTICE – ONTARIO COMMERCIAL LIST

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: Avram Fishman and Mark E. Meland, for Fishman Flanz Meland Paquin LLP, Creditors’ Committee counsel Barry H. Bresner, for FCA Canada Inc. Natasha MacParland, for the Monitor

HEARD: May 31, 2016

Endorsement

[1] This motion and cross-motion arises from the demand of Fishman Flanz Meland Paquin LLP (FFMP), who acted for certain plaintiffs in the Castor litigation in Quebec and who are counsel to the Creditors’ Committee in this CCAA proceeding, that FCA Canada Inc., formerly Chrysler Canada Inc. (Chrysler), sign an indemnity and release in favour of FFMP before Chrysler is paid its percentage of the cost award made in Quebec in the Castor litigation. The indemnity agreement is to indemnify FFMP against any tax liability that might accrue as a result of the cost award made in the Castor litigation being paid to FFMP under the terms of the Plan of Arrangement approved in this proceeding (the “Cost Award Funds”). Chrysler says it is not required to sign any such indemnity. Chrysler also says that FFMP should not be paid its expenses regarding the tax issue or any expenses incurred in these motions.

Relevant facts

[2] Chrysler is one of 22 Participating Creditors who entered into an agreement to pay the litigation costs of the Widdrington action, the test case against Coopers & Lybrand (“CLCA”) in the Superior Court of Quebec for the audit and other professional services provided to Castor Holdings Ltd. (“Castor”). The Cost Award Funds were awarded in that action. Mr. Widdrington, and later his Estate, was represented by FFMP.

[3] The quantum of the Cost Award Funds reflects two judgments issued by the Superior Court of Quebec: a judgment on the bill of costs of $15,896,297.26 and a judgment awarding a “special fee” to FFMP of $2.5 million. Article 479 of the Quebec Code of Civil Procedure then in force provides that costs are distracted in favour of the attorneys of the successful litigant. In particular, the award of a special fee is payable to the attorneys of a successful litigant in cases that are exceptional in nature due to their length, complexity, and difficulty.

[4] FFMP considered that it was both appropriate and reasonable to distribute the Cost Award Funds to the Participating Creditors, including Chrysler, who had assumed the funding of common issues in the Widdrington test case, based on their respective contributions to the financing of the litigation expenses.

[5] When this CCAA application was commenced, it included a term sheet which the applicant wished to use as a basis of a Plan and which provided for an injection of approximately $220 million in return for a release from any further litigation. The term sheet contained a term providing for the Cost Award Funds to be paid by CLCA to FFMP in trust. It provided that the Cost Award Funds “shall be distributed as FFMP sees fit”.

[6] Chrysler had not been given notice of the initial CCAA application. After the Initial Order was made, Chrysler moved unsuccessfully to set it aside. Thereafter discussions took place that resulted in Chrysler agreeing to support the Plan of Arrangement. One of the things that Chrysler did not like in the term sheet that formed the basis of the Plan was the provision that the Cost Award Funds were to be distributed by FFMP as it saw fit. During the negotiations, Chrysler sought assurances that it would be paid its percentage of the Cost Award Funds if it supported the term sheet. The Initial Order provided in paragraph 10 that CLCA would be entitled to pay the Cost Award Funds to FFMP in trust. Chrysler’s counsel stated that Chrysler was prepared to agree not to contest or seek to vary paragraph 10 if FFMP would give confirmation that Chrysler would be paid its proportionate share of the Cost Award Funds.

[7] Chrysler obtained an undertaking from FFMP during the negotiations regarding payment of the Cost Award Funds. It says that the undertaking precludes FFMP from requiring an indemnity against any tax liabilities. Chrysler eventually agreed to support the term sheet with no amendment to the “as it sees fit” language and to the Plan.

[8] Shortly after the sanctioning of the Plan on July 15, 2015, in a discussion with the Castor Trustee and its tax counsel from Stikeman Elliot LLP, FFMP was informed of the possibility that it could be exposed to certain tax liabilities arising from the distribution of the Cost Award Funds to the Participating Creditors. Therefore, prior to distributing the Cost Award Funds, FFMP obtained an independent legal opinion on this issue which indicated that it was unlikely, but possible, that there may be certain tax liabilities on FFMP. FFMP was advised to get an indemnity from each Participating Creditor before distributing to it its proportionate share of the Cost Award Funds.

[9] On October 19, 2015, each of the Participating Creditors, including Chrysler, was informed by FFMP in writing that it was unlikely, but possible, that FFMP might face tax liability in connection with the receipt and distribution of the Cost Award Funds, and was asked to sign an Indemnity Agreement in favour of FFMP. As well, each Participating Creditor was advised of the specific amount of the Cost Award Funds it was to receive and was advised that FFMP would be deducting each Participating Creditor’s pro rata share of the cost of the tax advice and a reserve for future tax advice. The total paid for the tax advice was $86,061.78 and the reserve for future tax advice is $28,743.75. In the case of Chrysler, it was informed that it would receive US $3,345,159.97 and CDN $5,122,808.87.

[10] To date, 21 of the 22 the Participating Creditors have signed the Indemnity Agreement and 19 have been paid their pro rata share of the Cost Award Funds. Apart from Chrysler, none of the Participating Creditors has refused to sign the Indemnity Agreement.

Analysis

[11] FFMP relies on terms of the Plan and the term sheet to say that it is entitled to request an indemnity and that an indemnity is consistent with the plan. Paragraph 6.01 of the Plan provides that “Upon Plan Implementation, Creditors’ Committee Counsel may release and distribute the Cost Award Funds in the manner provided for in the Term Sheet.” The Term Sheet specifies that the Cost Award Funds “shall be paid to FFMP” and “shall be distributed as FFMP sees fit.” FFMP says that because it was always acknowledged by it from the outset that it was going to distribute the Cost Award Funds to the Participating Creditors, the language “as it sees fit” language was intended to provide FFMP with considerable latitude in the manner and modalities it employed to distribute the Cost Award Funds.

[12] Paragraph 9.03 of the Plan provides that a number of parties, including counsel for the Creditors' Committee (i.e. FFMP), shall not be liable to any Person for any act or omission in connection with, or arising out of, the implementation of the Plan or the administration of the Plan or the property to be distributed under the Plan, except for their own wilful misconduct or gross negligence. FFMP says that the indemnity, which excludes an obligation to indemnify FFMP if its liability was caused by its wilful misconduct or gross negligence, is in conformity with the intent of the Plan.

[13] Chrysler says that FFMP made an undertaking to pay Chrysler its pro rata share of the Cost Award Funds upon implementation of the Plan and that FFMP has not honoured that undertaking. It says there was nothing in the undertaking permitting FFMP to demand an indemnity and that without the undertaking, Chrysler would not have agreed to waive its objection to section 10 of the Initial Order or agreed to the Plan. It says any discretion to FFMP under the Plan is irrelevant.

[14] During the negotiations, Chrysler’s lawyer told FFMP that Chrysler wanted a clear undertaking that it would be paid the amount corresponding to Chrysler’s pro rata share of the Cost Award Funds, failing which Chrysler would contest or seek to vary paragraph 10 of the Initial Order. FFMP wrote to Chrysler’s lawyers on December 18, 2014 and stated that provided that Chrysler did not oppose any provisions of the Initial Order or the December 5, 2014 term sheet that dealt specifically with the payment by priority of court costs and special fee to FFMP, FFMP agreed that the Cost Award Funds would, at the closing of the Plan or the termination of the CCAA proceeding, be paid to the credit of the participating creditors, including Chrysler, who funded the common litigation expenses through loans to the Castor Trustee.

[15] After further discussions and correspondence dealing with the amount of the Cost Award Funds, FFMP again wrote to Chrysler’s lawyers on December 19, 2014 and stated:

We confirm that if Chrysler agrees not to contest or seek to vary paragraph 10 of the Initial Order, it is our position that Chrysler should be entitled to be paid its pro rata share of the aforesaid amounts (defined as the Cost Award Funds) after we are authorized to release the funds (i.e. at the closing of the Plan or after the termination of the CCAA Proceeding).

We have verified with the Trustee the share of the foregoing sums that Chrysler would be entitled to receive. Although it is correct that the percentage share of Chrysler since January 1, 2014 is 43.7429%, Chrysler's contribution to the funding to date, by way of loans, is a combination of different percentages over time. Chrysler's share of recovery of the Cost Award Funds will be determined by the Trustee based on Chrysler's percentage share of all of the participating loans made to the Trustee.

At the time that we are called upon to distribute the Cost Award Funds, the Trustee will make an exact calculation of the percentage contributions to date of each participating creditor, and that will be used to determine each respective share, including Chrysler, the German Bank Group and the Canadian Bank Group.

[16] It is clear that what Chrysler wanted was to ensure that FFMP would pay to Chrysler its pro rata share of the Cost Award Funds rather than keep that portion for itself. That is what drove the negotiations. When the time came to pay out the Cost Award Funds, FFMP attempted to do that with Chrysler, albeit with the conditions it attached. So far as the demand for an indemnity is concerned, I do not see that as breaching any undertaking given by FFMP. There was no undertaking as to what conditions if any FFMP would impose. The undertaking was as to the amount to be paid and the timing. It went no further. At the time, of course, the potential tax liability of FFMP had not yet arisen.

[17] Chrysler contends in the alternative that FFMP has not established that there is any risk of a tax liability. I do not think it is necessary to get into the details of the tax advice received. However, if Chrysler is right, and I do not think it is wrong to say that it is not so clear as Chrysler says, it should not matter. If there is no risk, Chrysler has nothing to lose by signing the undertaking so long as it is limited to the tax risk.

[18] Chrysler has insisted from the very beginning on equality of treatment among the Participating Creditors. It now seeks different treatment. In my view, however, it is fair that FFMP not bear any tax risk. It chose to distribute the Cost Award Funds to the Participating Creditors. Thus it has held the Cost Award Funds for others and not for itself. This situation of FFMP holding the funds has been of benefit to all Participating Creditors, including Chrysler, because if the funds had not been distributed to FFMP under the Plan they would have gone to the Monitor who would have been obliged to pay them to all creditors. In that circumstance, Chrysler would have received approximately 28% of the Cost Award Funds instead of approximately 41% which it will be paid. While FFMP has not strictly speaking been a trustee under an existing trust, its position is akin to a trustee who would have a right to be indemnified by the beneficiaries of the trust.

[19] FFMP says the “as it sees fit” language in the term sheet is broad enough to permit it to require the indemnity it has obtained from the other 21 Participating Creditors and which it seeks from Chrysler. FFMP may be right in that contention. However, under section 11 of the CCAA a court has the discretion to make any order it considers appropriate in the circumstances. It is appropriate that an order be made that Chrysler be required to sign and deliver to FFMP the indemnity as provided by FFMP to Chrysler before FFMP is required to pay to Chrysler its pro rata share of the Cost Award Funds.

[20] Chrysler says that the form of indemnity is broader than an indemnity for tax exposure. The indemnity was drafted by the independent tax advisor to FFMP. I think a fair reading of section 2.1 is that it refers to issues of tax arising out of FFMP’s role in receiving and distributing the Cost Award Funds. The other 21 Participating Creditors had no difficulty with the language, and neither should Chrysler.

[21] Chrysler contends that FFMP has no right to deduct from Chrysler its proportion of the cost of the tax advice. It says FFMP is the author of its own misfortune in that any tax liability would arise from its receiving the Cost Award Funds and that this situation was the result of an agreement between FFMP and its clients who negotiated the term sheet providing for the Cost Award Funds to be paid to FFMP.

[22] This is a trivial issue, involving less than $50,000 to Chrysler, no doubt less than Chrysler has spent on contesting this tax indemnity issue. The fact that this trivial issue is raised by Chrysler is an indication of the unfortunate relationship between Chrysler or its counsel and FFMP and the other Participating Creditors. It does little to Chrysler’s credit to raise this.

[23] The fact that the Cost Award Funds have been held by FFMP was not something put in place just for the advantage of FFMP or the banks for which it has acted. It was agreed to by the Trustee in Bankruptcy of Castor. It has been of benefit to Chrysler, no doubt one the considerations that Chrysler took into account in deciding to approve the Plan that provides for the Cost Award Funds to be paid to FFMP.

[24] Chrysler says that by deducting the cost of tax advice, FFMP is impermissibly reducing the amount of the Cost Award Funds. This technically is not correct. The definition of Cost Award Funds does not include interest earned on the funds. The interest earned has been much greater than the cost of the tax advice and it is from that interest that the cost of the tax advice is being paid. The undertaking given by FFMP to pay Chrysler its share of the Cost Award Funds made no reference to interest.

[25] More fundamentally, it would not be right for FFMP to have to pay for the tax advice. It should be paid for by the Participating Creditors who will receive the money. Again, while it is not a trustee under a trust deed, it is akin to a trustee and should not have to bear the reasonable costs of the funds it is administering. It is appropriate that an order be made that Chrysler pay its portion of the cost of the tax advice of $86,061.78 paid by FFMP and the reserve of $28,743.75 for future tax advice.

[26] Chrysler contends that FFMP should not be paid its expenses for this motion and cross-motion from the Contributed Funds obtained under the term sheet and to be distributed under the Plan to the creditors. Chrysler says that FFMP is acting only for itself and not for the creditors, the Creditors’ Committee or any other party. This too is a trivial matter for Chrysler.

[27] FFMP is acting for the Creditors’ Committee. It has acted for the Creditors’ Committee in the discussions with Chrysler’s counsel regarding the issues surrounding the Cost Award Funds and counsel for Chrysler has confirmed that in correspondence. The Creditors’ Committee acts by a majority. Three of the four members of the Creditors’ Committee, the fourth being Chrysler, have consented to the payment of all of FFMP’s reasonable fees and disbursements relating to the litigation with Chrysler and directed that such payments should be made from the Contributed Funds as defined in section 6.08 (c) of the Plan which provides for the payment of reasonable fees and disbursements of Creditors’ Committee counsel, being FFMP.

[28] The motion of FFMP is allowed. An order is to go (i) directing that Chrysler is required to sign and deliver to FFMP the indemnity agreement attached as Schedule A to the draft order at tab 4 of the amended motion record, (ii) directing Chrysler to pay its pro rata share of the cost of the tax advice of $86,061.78 paid by FFMP and the reserve of $28,743.75 for future tax advice, and (iii) declaring that the reasonable costs and expenses of FFMP in connection with the motion and cross-motion be paid to FFMP from the Contributed Funds as provided for in section 6.08 (c) of the Plan, all to be done before FFMP is required to pay to Chrysler its pro rata share of the Cost Award Funds.

[29] The cross-motion of Chrysler is dismissed.

[30] FFMP is entitled to its costs from Chrysler on a partial indemnity basis. If these cannot be agreed, brief written submissions along with a cost outline may be made within 10 days and brief written submissions in reply may be made by Chrysler within a further 10 days.

Newbould J. Date: June 6, 2016