Trends in Canadian-US Cross-Border Restructurings  

publication 

2008 - ( PLC Cross-border Restructuring and Insolvency Handbook 2007/08)

PLC Cross-border Restructuring and Insolvency Handbook 2007/08

Cross-border proceedings between the US and Canada continue to evolve and be influenced by legislative and judicial developments in both countries and around the world. Understanding the legislative, judicial and procedural differences between the US and Canada is essential to achieving success in cross-border restructurings. This chapter provides an overview of this area examining key issues, trends and cases. In particular, it looks at federal restructuring legislation, the legal framework for the recognition of foreign proceedings and recent trends and cases in US-Canada cross-border proceedings.

Canada and the US share a border covering 5061 kilometres or 3145 miles. The bilateral trade relationship between the two counties may be the largest and most extensive in the world, reflecting over US$1.5 billion (about EUR1.1 billion) per day in goods, services and investments moving across the border.

Many corporations conduct business and own assets in both countries, directly or through subsidiaries and affiliates. Economic trends that affect one country often affect the other. This has become apparent in recent times in the steel, airline automotive, airline, energy and natural resources sectors.

Insolvency and bankruptcy legislation in the US and Canada share a similar debtor in possession focus and provide considerable leeway for financially challenged debtors who are seeking to restructure. That will become even more apparent once the proposed amendments to Canada's insolvency legislation take effect. There are still meaningful differences in both law and practice that can have an impact on the outcomes and expectations of stakeholders who are participants in cross-border insolvencies. These have given rise to certain challenges in administering cross-border cases. To the credit of each jurisdiction, the courts have proven to be mindful of the need to have a harmonised approach in cross-border insolvencies and have an established history of working together to provide comity in cross-border cases.

This chapter provides an overview of this area examining key issues, trends and cases. In particular, it focuses on the following aspects of US-Canada cross border restructurings:

  • Federal restructuring legislation.
  • The legal framework for the recognition of foreign proceedings.
  • Recent trends and cases in US-Canada cross-border proceedings, including:
  • Canada-US concurrent plenary cases;
  • an examination of a recent co-ordination between a Canadian foreign main proceeding and a Chapter 15 case; and
  • The importance of being knowledgeable about differences between jurisdictions.

Federal restructuring legislation

In Canada, the restructuring of insolvent corporations is primarily accomplished through proposals under the Bankruptcy and Insolvency Act (R.S. 1985, c.B-3) (BIA) and plans of compromise and arrangement under the Companies' Creditors Arrangement Act (R.S. 1985, c.C-36) (CCAA). Canadian restructuring legislation, particularly the CCAA which is currently only 22 sections long, is governed by far fewer statutory provisions than apply to restructurings under Chapter 11 (Chapter 11) of Title 11 of the United States Code (Bankruptcy Code). While sometimes referred to as "Chapter 11 without rules", over the last 20 years a body of jurisprudence has developed which has given shape and predictability to reorganisations under the CCAA.

The CCAA is the legislation of preference for dealing with larger and more complex debtor reorganisations due to the:

  • Flexibility inherent in the CCAA.
  • Broad discretion given to and exercised by the courts.
  • Expansive stays of proceedings typically ordered and the length of the stay of proceedings, which after the initial stay of up to 30 days, is completely discretionary.

As under Chapter 11, during reorganisations under the BIA and the CCAA the debtor retains ownership and usually possession and control of its property. In CCAA proceedings a monitor appointed by the court works with the debtor on the formulation of its restructuring plan and facilitates the debtor's dealings with creditors and other stakeholders during the restructuring process. The monitor is also an officer of the court charged with specific duties under the statute and by orders made by the court. These duties include monitoring the business and affairs of the debtor during the stay period, reporting to the court and often extend to supervising claims processes and asset sales.

Among the meaningful differences that currently exist between insolvency legislation in Canada and the US, is that in Canada there is no:

  • Concept of adequate protection.
  • Restriction on the use and disposition by a debtor of cash collateral or other property.
  • Provision precluding pre-filing security from encumbering after-acquired property.
  • Authority to grant priming liens for loans advanced to the debtor during the restructuring.
  • Authority for the creation of an unsecured creditors' committee.
  • Subordination of damage claims of equity holders.
  • Provision (with some restricted exceptions) for the acceptance, rejection and assignment of executory contracts, including collective bargaining agreements.

A body of judicial precedent has evolved over the past decade and a half that fills in many of the gaps in Canada's existing legislation and demonstrates a movement toward restructuring practices more closely resembling the Chapter 11 experience. The laws of the two jurisdictions remain sufficiently distinct, however, to require that those involved in cross-border proceedings be aware and respectful of the differences.

Legal Framework for the recognition of foreign proceedings

Canada

The BIA (Part XIII) and CCAA (section 18.6) contain provisions permitting a Canadian court to recognise and give effect to foreign insolvency proceedings. Most of the cases involving cross-border restructurings in Canada are conducted under the CCAA. Canadian courts have exercised broad discretion in applying section 18.6 to co-ordinate an ancillary CCAA proceeding with another foreign proceeding, even doing so in the case of a Canadian subsidiary that was not insolvent. Section 18.6 has frequently been used to give effect to a stay of proceedings in respect of actions commenced in Canada against US Chapter 11 debtors and their property and in some instances to provide a stay of proceedings in respect of Canadian corporations affiliated with US Chapter 11 debtors. Orders have been made under section 18.6 that recognise and enforce orders made in Chapter 11 cases, including those in support of debtor-in-possession (DIP) financing and related security, claims processes, rejection of executory contracts and approving plans of reorganisation and associated orders. 

US pre-BAPCPA

Before the enactment of the Bankruptcy Abuse Prevention and Consumer Protection Act 2005 (BAPCPA), Canadian debtors employed section 304 of the Bankruptcy Code to obtain ancillary relief, supplemented by a temporary restraining order (TRO) and preliminary and permanent injunctions. As has been done under section 18.6, section 304 proceedings have been used to recognise and enforce orders made in Canadian insolvency proceedings, including to approve and implement a plan. Since BAPCPA, this trend continues through the use of Chapter 15 of the Bankruptcy Code.

Chapter 15 of the Bankruptcy Code

In 2005, a new statutory scheme governing cross-border proceedings in the US was introduced. Chapter 15 of the Bankruptcy Code replaces section 304 of the Bankruptcy Code and is the US adaptation of the UNCITRAL Model Law on Cross-

Border Insolvency 1997 (Model Law). It permits foreign representatives to obtain relief from US bankruptcy and other courts, provided that the US court first recognises the foreign insolvency proceeding as either a "foreign main" or "foreign non-main" proceeding. Interim relief pending determination of the petition is available in appropriate cases (likely being those cases that could meet the test for a TRO in a section 304 case).

A finding that the foreign proceeding is a foreign main proceeding will afford the foreign representative with certain automatic relief, including a stay of proceeding against the debtor and its property in the US. It is not clear what orders a US Bankruptcy Court will be willing to make in the case of a foreign non-main proceeding. The Bankruptcy Court in In re SPhinX, Ltd (351 B.R. 103 (Bankr SDNY))clearly was concerned about granting a TRO in circumstances where such order represented an attempt to frustrate the appellate process in another bankruptcy proceeding relating to a settlement agreement entered into by SPhinX that certain of its investors were trying to derail. US case law relating to Chapter 15, including determination of the centre of main interest (COMI), continues to develop and may be influenced by jurisprudence from the EU and other jurisdictions. There is still little jurisprudence regarding what impact Chapter 15 will have on the Bankruptcy Courts' willingness to recognise and enforce orders of a foreign court. In this regard, Section 1506 provides that nothing in Chapter 15 prevents a court from refusing to take an action, if it would be manifestly contrary to the public policy of the US.

Pending amendments to Canadian insolvency legislation

In 2005, legislation was given Royal Assent which introduced reforms to the BIA and CCCA (Amendments). The Amendments have yet to become effective. Further review of the legislation has resulted in amendments being proposed to the Amendments, resulting in the reforms still being the subject of review at the time of writing. The Amendments include:

  • Wage and pension protection for workers by providing statutory charges that can prime existing secured lenders.
  • Provisions relating to the termination and assignment of executory contracts (but not collective bargaining agreements).
  • Statutory authority for DIP lending and priming liens (albeit without the insertion of an adequate protection safeguard).
  • The treatment of claims of equity holders as equity.
  • Provisions authorising asset sales and orders vesting title in assets free and clear of liens, claims and encumbrances (vesting orders).
  • Provisions authorising liens in favour of directors, estate professionals, and possibly others, that may rank ahead of existing secured creditors.
  • Provisions permitting a court to remove directors.
  • Provisions dealing with international insolvencies.

The Amendments introduce into the BIA and CCAA foreign insolvency provisions modelled on, but not identical to, the Model Law or the provisions of Chapter 15. As under Chapter 15, the Canadian legislation would adopt the concepts of a foreign main and foreign non-main proceeding, providing that foreign main proceeding is one that is commenced in the COMI. A foreign non-main proceeding is defined as a proceeding that is not a foreign main proceeding (as contrasted to Chapter 15 which adds the additional requirement that the foreign proceeding be pending in a country where the debtor has an establishment).

Under both Chapter 15 and the foreign insolvency provisions existing and proposed under the CCAA, the goals are to:

  • Respect the insolvency and restructuring laws of the foreign jurisdiction.
  • Facilitate an enterprise's ability to reorganise as a global unit with one jurisdiction taking primary charge of the principal administration of the enterprise's reorganisation.
  • Promote the harmonisation of cross-border proceedings so as to maximise the opportunity for a successful reorganisation.

The Amendments provide that a Canadian court is not required to make any order that is not in compliance with the laws of Canada or to enforce any order made by a foreign court. Revisions recently proposed to the Amendments would make the wording more similar to the Model Law. The court would not be prevented from refusing to do something that would be "contrary to public policy". In contrast, the Model Law and Chapter 15 each refer to actions "manifestly" contrary to public policy. Under the Model Law, in determining the relief to be granted on the recognition of a foreign main or a foreign non-main proceeding, courts are to have regard for protection of the interests of creditors and other stakeholders, a concept adopted in section 1522 of Chapter 15. The Amendments do not have such a provision, although Canadian courts have demonstrated that this factor will be taken into account.

The Amendments do not adopt all of the elements of the Model Law that have been incorporated into Chapter 15. They do, however, provide that nothing prevents a court, on application of a foreign representative or any other interested person, from applying any legal or equitable rules governing the recognition of foreign insolvency orders and assistance to foreign representatives that are not inconsistent with the provisions of the BIA or the CCAA.

Canadian courts likely will draw on this provision, and their willingness to broadly exercise the discretion given to them under the CCAA, to co-ordinate and administer cross-border

proceedings in the flexible and practical manner already evident in the existing section 18.6 cases.

Recent cases and trends in US-Canada cross-border proceedings

Canada-US concurrent plenary cases

Canada and the US have a history of operating concurrent Chapter 11 and CCAA restructuring cases, sometimes with the same debtor filing a plenary case in each jurisdiction, and in other cases with affiliates filing plenary cases in their respective jurisdictions. Business enterprises often have cross-border operations and assets, cross-collateralised lending relationships and inter-company relationships and dealings that may require creditor claims processes, asset sales transactions, plan approvals and other matters to be co-ordinated.

Concurrent Canadian-US plenary proceedings have made use of cross-border protocols to deal with procedural, and in some instances substantive, issues and have also incorporated the American Law Institute Transnational Insolvency Project's Guidelines Applicable to Court-to-Court Communications in Cross-Border Insolvency Cases.

MuscleTech: co-ordination of a Canadian foreign main proceeding and a Chapter 15 case

In Re MuscleTech Research and Development Inc (Ont SCJ, Court File No 06-CL-6241), a Canadian corporation and its affiliates (MuscleTech) were facing numerous product liability and consumer lawsuits relating to the diet supplement, ephedra, as well as certain prohormone products alleged to build muscles. MuscleTech has produced a number of interesting decisions that are pertinent to other cross-border restructuring cases.

Recognition by the US Court of foreign orders. In January 2006, MuscleTech commenced a main proceeding under the CCAA. MuscleTech also filed petitions for recognition of a foreign main proceeding under Chapter 15 of the Bankruptcy Code in the Bankruptcy Court for the Southern District of New York (Bankruptcy Court). A TRO was granted and extended, effecting a stay of proceedings in favour of not only MuscleTech, but also certain related and unrelated non-debtor defendants, including retailers who had sold the impugned products (Third Parties), pending the granting of an order recognising the MuscleTech CCAA proceeding as a foreign main proceeding (Bankr SDNY, January 18, 2006, Case No 06-10092). Because the District Court for Southern District of New York (District Court) had already taken control of several other ephedra-related lawsuits involving non-MuscleTech entities, it withdrew the reference of the Chapter 15 cases to the Bankruptcy Court, in order that it could manage the Chapter 15 cases, directly.

MuscleTech subsequently requested the District Court, applying sections 105(a) and 1521 (a) of the Bankruptcy Code, to recognise and enforce a claims resolution order that had been made by the Canadian court. Some of the creditors with product liability claims objected. They asserted that Canadian order was manifestly contrary to public policy, as provided in section 1506 of the Bankruptcy Code, because the Canadian claims process denied them their constitutional right to a jury trial. In the first Chapter 15 case to consider section 1506, the District Court held that the exception should be narrowly interpreted. It found the proposed Canadian claims process to be fair and impartial and accorded comity to the claims resolution order on the basis that it provided the same substantive and procedural due process protections as would be available in the US, despite the absence of a jury trial (Re Ephedra Products Liability Litigation 39 B.R. 333 (SDNY)).

The importance of seeking relief early in the case. In two separate motions heard by different judges, the Canadian Court subsequently was called on to grant representative status to US creditors, each purporting to represent a body of representative consumer claimants who alleged claims in the nature of false advertising and misrepresentation because the products they purchased did not work. The claims asserted by such representative plaintiffs were for the nominal cost of the purchase. While representative actions had been commenced in several states before the commencement of CCAA and Chapter 15 cases, none had been certified as a class action.

The motions by the representative plaintiffs to the Canadian Court were not successful and the claims were held to be invalid as representative claims. The claims processes had been well publicised, the proofs of claim were in plain language and the creditors could easily have availed themselves of the process. One judge referenced the decision of Judge Rakoff in In re Ephedra Products Liability Litigation (329 B.R. 1 (US Dist Ct SDNY 2005)), noting that claims of a de minimis nature should be discouraged as the time and expense of their adjudication outweigh the potential recoveries for such claimants (2006 CarswellOnt 7877). There was no willingness in either case to open up the claims process to the detriment of the progress that had otherwise been made in moving the case forward to the plan stage, particularly because these parties had not appealed the motions relating to the claims process, nor moved earlier on to lift the CCAA stay of proceedings.

Canadian court approves of plan containing non-debtor third party releases. By the time of the meeting to vote on the plan, all representative plaintiffs had withdrawn their individual claims, paving the way for unanimous approval. The plan contained releases and injunctions in favour of the Third Parties. Certain of the objecting creditors appeared through counsel at the hearing of the motion to sanction (approve) of the plan. It was argued that the Court ought not to approve of a plan that provided for third party non-debtor releases in favour of retailers and others. The Canadian Court sanctioned the plan and made a broad order giving effect to the releases and related injunctive relief provided for in the plan, including in favour of the Third Parties. This is the first Canadian decision in which a court determined the appropriateness of a plan and sanction order that granted releases and injunctions in favour of unrelated non-debtor third parties (who were not officers or directors of the debtor) (2007 CarswellOnt 1029; Notice of Motion for Leave to Appeal served 7 March 2007).

MuscleTech succeeded because, from the outset, it telegraphed to the Canadian Court that it would be seeking the Third Party releases as part of its plan for the global resolution of all product liability claims. The Court accepted and, in fact, in earlier decisions had already recognised, that for the plan to be successful it would require funding from, and release of claims for indemnity by, the Third Parties. In determining whether to sanction the plan as being fair and reasonable, the Court considered the relative prejudice to various parties, including the representative plaintiffs, that would flow from the plan being approved or not. The Court rejected the proposition that it did not have jurisdiction to authorise the Third Party releases, holding that the granting of such releases was not only fair and reasonable, but absolutely essential as there would be no funding and no plan without them. The Court referred to the decision of Judge Rakoff, the District Court judge seized of the MuscleTech Chapter 15 proceeding, and Judge Drain, in In re TL Administration Corporation (US Dist Ct SDNY, July 21, 2005, Case No 03-1556)), which it viewed as being equally applicable to the MuscleTech case.

On 1 March 2007 the District Court was requested to recognise and enforce the Canadian sanction order, including the Third Party releases and related injunctions, relying on sections 105, 1501, 1507 and 1521 of the Bankruptcy Code, and on the bases that permanent injunctive relief furthers the purpose of Chapter 15, is an appropriate remedy in the circumstances, ensures just treatment of creditors and is consistent with principles of comity that should be accorded to foreign law. The order was made.

Asset sales transactions – what are the rules and are they changing?

Facilitating a co-ordinated sale of assets for an affiliated group of cross-border debtors can have its challenges. The recent case of Amphenol v Shandler (In re Insilco Technologies, Inc, Adv Proc No 05-52403, Bankr D Del, September 18, 2006) serves as a reminder that a US

Bankruptcy Court cannot grant an order that will deliver up title to the assets of a non-party subsidiary of a Chapter 11 debtor "free and clear" of liens. In appropriate cases, Canadian

courts have granted a vesting order to facilitate a cross-border sales transaction, provided that the court is not being asked to simply rubber stamp a US order in the days or hours before a closing. As the courts in cases such as Heller Financial Inc v Recoton Canada Ltd (Court File No 03-CL-5005 (Ont SCJ)) and Delano Technology Corporation (Court File No 03-CL-4962 (Ont SCJ)) have cautioned, the key is to co-ordinate a complimentary Canadian process - one that includes notice to affected creditors, and involves the Canadian court from the beginning.

A typical domestic Canadian insolvency sale process consists of:

  • A call for non-binding offers.
  • Culling the offers received to select the leading prospects.
  • Providing the prospects with a relatively short time period to deliver a binding agreement.
  • Negotiating the purchase agreement with the lead bidder.
  • Court approval of the proposed sale transaction and associated vesting order.
  • Closing.

To the astonishment and chagrin of many US stakeholders, there is very often a cone of confidentiality surrounding the terms of the various bids and the purchase agreement with the winning bidder (other than disclosure to secured creditors and the supervising court). There is rarely a stalking horse bidder and no opportunity for others to review and try to top the preferred bid, at a public auction or otherwise. Neither should it be assumed that late bids, even if they are higher, will be entertained if a process that has integrity and is fair has been followed. The process, in many cases, will move quickly.

The influence of the US is becoming more pronounced in both cross-border proceedings where there is a co-ordinated US Canadian sales process, and in domestic Canadian proceedings where there are US prospective purchasers and/or creditors with expectations that a process resembling a section 363 sale process will be followed. This recently became apparent in the CCAA proceedings involving the Canadian Calpine entities (ABQB, Action No 0501-17864). Space constraints permit only a brief recital of the pertinent facts involving a series of motions heard by the Canadian Court in Calpine in January and February of 2007.

The motions revolved around the disposition by Calpine Canada Power Ltd (CCPL), one of the CCAA debtors, of certain assets (CCPL Assets), being long-term management, administration and operating contracts (Contracts) between CCPL and Calpine Power Investment Fund (CPIF) and related entities (Fund Entities), and partnership units of Calpine Power LP (CLP). The Calpine debtors initially anticipated that the CCPL Assets would be unattractive to a third party purchaser in light of various legal uncertainties relating to valuing such assets, including the quantification of certain claims owned by CLP, the relative entitlement of CCPL and the Fund Entities to the realised assets of CLP and the ability of CCPL to assign the Contracts to a third party. A settlement agreement was entered into between CCPL and the Fund Entities resolving these issues.

Before the first hearing of the motion to approve the settlement agreement, CCPL received an offer from a US-based investor (HCP) willing to purchase, theCCPL Assets for an amount in excess of the value to be realised by CCPL under the settlement agreement. This party also was involved in a hostile bid to purchase the units of CPIF, and likely considered an acquisition of CCPL Assets to be strategic. Delivery of the offer challenged the premise of the

parties to the settlement agreement that no outsider would be willing to buy the CCPL Assets and fuelled complaints by creditors, primarily US noteholders, that the Court had not ordered

a sales or auction process in respect of such assets. These creditors also complained about the non-public disclosure of terms of the settlement agreement, such that the only parties receiving information considered material to the motion were those who had signed confidentiality agreements. The settlement agreement contained a confidentiality provision due to the concern of the Fund Entities that it not be converted into a stalking horse offer. The Court ordered the monitor to prepare a report that summarised the third party offer, compared such offer to the settlement agreement (this portion of the report being disclosed only to persons who had signed confidentiality agreements), and concluded with the monitor's recommendations. Parties were to return to the Court five days later to argue the motion to approve of the settlement agreement.

Before the next hearing, HCP submitted a new and higher offer. This prompted further outcry from the creditors who had vocalised concerns about the lack of a sales or auction process and who continued to complain about the "secret" nature of the settlement agreement. The Court responded by ordering an abbreviated sale process requiring all offers to be received within what was extended to a period of four days (Deadline). On the fifth day the monitor was to deliver a report on all offers received. In an effort to appease the concerns of the noteholders who refused to sign confidentiality agreements that would restrict their trading activities, the Court also ordered the monitor to prepare a report summarising the financial provisions of the settlement agreement. The Fund Entities responded by terminating the settlement agreement.

When the Deadline arrived, there were three offers received. One was from the Fund Entities and was modelled on the Settlement Agreement, one was from HCP, and the third was from a Canadian private equity fund (Catalyst). After the Deadline, a deal was reached between the Fund Entities and HCP whereby the independent trustees of the fund agreed to recommend that unit holders accept a sweetened HCP offer to purchase their units. This paved the way for HCP to purchase the CCPL Assets (as HCP would control the Fund Entities who were parties to the Contracts and who owned the remaining CLP partnership units). As part of this process, HCP submitted a new offer (HCP Final Offer), supported by the Fund Entities, which was lower than its previous offer. The Fund Entities modified the settlement agreement offer. Finally, Catalyst clarified its offer, which was in the end higher than the HCP Final Offer.

The monitor prepared a further report to the Court taking into consideration the post-Deadline events, evaluating the closing risks that impacted on the various offers and, ultimately, recommending the final offer submitted by HCP. The Court approved of the final HCP offer on 30 January, largely on the basis of closing certainty and monitor and creditor support (2007 ABQB 49). The Court was unwilling to approve of the Catalyst offer or re-open the bidding process, notwithstanding Catalyst's efforts during the hearing to demonstrate that it had submitted the highest offer.

On 5 February, the Court was notified that another US party desired to put in an offer for the CCPL Assets (Khanjee). It claimed that it should be entitled to do so in that the Court had not made a final order and that the sales process followed was tainted because as a prospective bidder for CPIF's units it had signed a confidentiality agreement that precluded it from participating in the CCAA sales process. This prompted a "me-too" motion by Catalyst. Implicit in these efforts was the prospect that, if these new offers were considered or the bidding process re-opened, more money would be realised for the CCPL Assets.

On 9 February, the Court, after a short hearing, refused to vary its earlier order. In reaching its decision the Court noted that Khanjee had signed the confidentiality agreement, consensually, and could not complain now about the consequences. Catalyst had previously participated in the sales process and was not to be given another chance. This case highlights that once a Canadian court approves of an offer following a court-supervised sales process, it will be reluctant to vary its order, even in the face of a potentially higher and better offer.

Be prepared for differences between jurisdictions

It is not clear that lenders, investors, suppliers and other creditors are always prepared for the issues that arise when the laws of another jurisdiction are different from their own. This can sometimes translate into unwelcome surprises. Debt holders in the Sons of Gwalia Australian case found out the hard way that damage claims by equity holders are not subordinated to the claims of unsecured creditors, as would be the case under section 510 of the Bankruptcy Code (Sons of Gwalia Ltd v Margaretic [2007] HCA 1(31 January 2007)). In fact, until the Canadian Amendments (or some variation of them) take effect, there is no statutory subordination of such claims in Canada, although there is judicial support for this result.

Creditors on both sides of the border encountered some unwelcome surprises in the CCAA/section 304 cases involving Ivaco Inc and related debtors. In both the US and Canada, mature industries are facing burdensome legacy obligations such as underfunded pension plans. In Ivaco, the actions of pension regulators and administrators on both sides of the border have caused concerns for other creditors.To the considerable surprise of Canadian creditors, the Pension Benefit Guarantee Corporation (PBGC), a US federal government corporation that insures plan members against the loss of pension benefits in defined benefit pension plans, initially asserted claims of over US$100 million (about EUR76 million) against not only Ivaco, as a plan sponsor or guarantor, but also against the other CCAA Applicants in respect of which Ivaco held a controlling interest of over 80%.

The Employee Retirement Income Security Act 1974 (ERISA) is a US statute that deals with the administration of retirement and benefit plans. ERISA creates a statutorily imposed form of group enterprise liability, making the controlled group of a sponsor of a pension plan jointly and severally responsible for liabilities relating to such plan on the date of the plan's termination, or on withdrawal of such plan under certain circumstances, effectively creating a statutory piercing of the corporate veil among related persons. It is an open question whether ERISA provisions can impose joint and several liability on members of a controlled group outside of the US. The claims filed by the PBGC in Canada raised complex questions of international law, including the extraterritorial application of ERISA. Ultimately, a settlement was reached with the PBGC, as a result of which the issue of whether the ERISA claims are enforceable in Canada was not determined.

In Ivaco, US and Canadian creditors alike are extremely discontent not yet to have received a distribution from the assets sales that occurred over two years ago. This distribution has been held up in large part due to motions brought in Canada by certain pension parties asserting claims based on statutory deemed trusts and liens created by provincial legislation and other arguments. These parties are seeking to have the funding deficiencies in the defined benefit pension plans be paid from the sales proceeds in priority to the claims of the secured and unsecured creditors of the estate. Stakeholders dealing with US debtors should also be alert to the liens that can be asserted by PBGC in the US against the property of a debtor that is a plan sponsor, as well as that of members of its controlled group, including new legislation that enhances the risks posed by PBGC.

As highlighted by the above cases, achieving a positive outcome in US-Canada cross-border restructurings requires an awareness of legal and procedural issues and other dynamics material to each jurisdiction.

 © This chapter was first published in PLC Cross-border Restructuring and Insolvency Handbook 2007/08 and is reproduced with the permission of the publisher, Practical Law Company. For further information or to obtain copies please contact iain.plummer@practicallaw.com, or visit www.practicallaw.com/restructurehandbook .