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Insolvency and Restructuring Team

In the past few years, the Canadian courts have considered a number of cases in which a debtor conducting a cross-border business has filed concurrently for protection under the Companies' Creditors Arrangement Act ("CCAA") in Canada and under foreign insolvency legislation.  While comity and co-operation appear to be the bywords of the day, real difficulties can arise where the substantive laws of a foreign jurisdiction 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 two decisions which offer insight into how such potential conflicts might be managed if addressed early in the restructuring process.  While the decisions in Loewen may appear innovative at first glance, they are ultimately founded upon sound and long-standing principles of law.

The Loewen Group Inc. ("TLGI") is a funeral services company headquartered in Canada but earning 90% of its revenues and holding 90% 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 of the U.S. Bankruptcy Code 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 co-ordinate and harmonize the restructuring efforts of TLGI.  The protocol only purported to deal with procedural issues, such as joint hearings, 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 potentially subject to conflicting legal obligations in each jurisdiction.  The benefits of cross-filing were clear:

1. protection on both sides of the border;
2. speedy access to court during the restructuring process as required; and
3. ultimately, the prospect of a restructured business blessed by courts in each of the jurisdictions where it operated.

The first step was for a claims bar date to be established against 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 in respect of TLGI's Canadian subsidiaries, no separate Canadian claims process was undertaken by the Canadian court in respect of TLGI at that time.  The reasons were two-fold:

1. TLGI did not wish to confuse potential claimants with multiple and concurrent claim filing obligations; and
2. 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 the United States, Canada or elsewhere.  As a consequence, both U.S. and Canadian claimants filed their claims in, and effectively attorned to, the U.S. claims process.  In fact, of the approximately 650 claims filed against TLGI in the U.S. claims process, over 200 were filed by Canadian residents.

Once the U.S. claims process was substantially complete and the claims bar date had passed, a separate claims process was approved by the Canadian court for TLGI to determine whether there were any "Canadian claims" that were not 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 hazard included confusion, conflicting rights and responsibilities and a potential quagmire if TLGI failed to navigate the process without incident.

In the 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 unique "Canadian claims" and many claimants had attorned to the U.S. process, as counsel for TLGI we first applied to the Canadian court seeking an order:

1. recognizing 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 further recognizing the jurisdiction of the U.S. court to determine, compromise or otherwise affect the interests of claimants, including claimants domiciled in Canada; and
2. to the effect that 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 against TLGI regardless of their residency.

The Canadian court granted the relief we sought and recognized:

1. the transnational nature of TLGI's business;
2. the desire to treat all stakeholders with a similar claim equally, regardless of their residency; and
3. the 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.

Once the U.S. court had approved a U.S. plan of reorganization (the "U.S. Plan") (which affected debtors and creditors domiciled in Canada), TLGI then applied to implement and enforce the U.S. Plan in Canada in accordance with its terms.  The Canadian court did in fact approve the U.S. Plan on December 7, 2001 and enforced it in Canada.

While the decisions in Loewen must be restricted to their facts, they do provide an opportunity for counsel to use these concepts in future restructurings.  The decisions in Loewen demonstrate one way in which to manage the problems which can be created when debtor's counsel face potentially conflicting substantive laws.  While the solution in Loewen will certainly not be applicable in every case, it does offer some guidance to practitioners of the types of creative solutions available.

Derrick Tay
Orestes Pasparakis

The purpose of this document is to provide information as to developments in the law. It does not contain a full analysis of the law nor does it constitute an opinion of Ogilvy Renault or any member of the Firm on the points of law discussed.

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Christine A. Carron


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Louis J. Gouin


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Sylvain Rigaud


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Mario J. Forte


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Ian A. Ness


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Orestes Pasparakis


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Tony Reyes


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Derrick C. Tay


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Peter S. Noble


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Frank L. Picciola


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