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Canadian insolvency statute continues to provide fertile ground for third party settlements

Settlements made in conjunction with a restructuring plan ("Plan") under the Companies' Creditors Arrangement Act ("CCAA") enjoy the possible availability of a unique advantage. If the court can be convinced that a particular settlement is fair and reasonable, provides substantial benefits to the relevant stakeholders and is in keeping with the purpose and spirit of the CCAA, the court can order that the settling party will have the benefit of a release and injunction that will protect it, not only from those who are party to the Plan, but also from third parties who are not otherwise bound by the Plan (a "Third Party Release"). A recent example will demonstrate how this works.

On July 6, 2013, a train carrying a cargo of fuel crashed in the Quebec town of Lac-Mégantic. It resulted in the death of 47 persons, destroyed the downtown and created a massive oil spill into the environment, which was estimated to cost several hundred million dollars to clean up.

The train company involved was Montreal, Maine & Atlantic Canada and its U.S. parent Montreal, Maine & Atlantic Railway Ltd. ( collectively "MMA"), which together operated 510 miles of a shortline freight railway service in Quebec, Vermont and Maine. Following the derailment, a class action was commenced in Canada against a large number of defendants and many law suits were brought in the US on behalf of the victims of the accident.

The US company filed for protection under Chapter 11 of the US Bankruptcy Code and the Canadian company under the CCAA. A cross border protocol was quickly worked out and approved by both courts as it was obvious that cross border cooperation and coordination would be crucial in this case.

It was clear from the outset that quantum of the liabilities caused by this accident would completely dwarf the value of the collective assets in MMA. In acting for the Canadian company, my firm took the approach that the only way to get meaningful recoveries for those harmed by this accident was to use the CCAA proceedings as the principal platform to get substantial contributions from third parties who were potentially subject to lawsuits from the numerous victims of this accident ("Contributing Third Parties"). The carrot offered to the Contributing Third Parties was that, if they were able to come to a satisfactory settlement, the Plan would offer them full and final releases in respect of all litigation relating to the derailment. The Third Party Release is of significant value to the Contributing Third Parties because it provides a complete resolution to all their liability in respect of the derailment and protects them from years of litigation from multiple parties. Accordingly, parties are willing to pay more for this global resolution than they otherwise would be prepared to pay to settle litigation on a one off basis.

After many months of complex and protracted negotiation, MMA was able to file a Plan which incorporated settlements with Contributing Third Parties aggregating in excess of $430 million. Compare that to the sale of the railway business itself (which constituted substantially all of MMA's assets) for approximately $15 million. Without the ability to offer the Third Party Release under Canadian law, there would have been no way to provide for this extra compensation to the victims of the accident. Of all the potential Contributing Third Parties negotiated with, only one failed to reach a settlement. The non settling party will obviously not have any protection under the Plan and will remain subject to all litigation, present and future, relating to the derailment. Only time will tell if their decision not to make an acceptable settlement within the context of the CCAA was a wise one as they work their way through potentially years of multiple litigation.

This ability to offer Third Party Releases is quite unique to Canada and can be used quite effectively to increase the size of the pot available for distribution in connection with a Plan under the CCAA. While the availability of such releases are severely limited in the US or perhaps even legally unavailable in certain of its jurisdictions, the US Bankruptcy Court has had no difficulty in giving recognition, under Chapter 15 of the US Bankruptcy Code, to Third Party Releases granted by the Canadian court in relation to Plans under the CCAA. In looking at this issue, US courts have stated that the test is not whether such relief would have been available in a Chapter 11 plenary case; rather the question is whether such relief should be recognized under Chapter 15. As long as the US court is satisfied that the parties in the Canadian litigation have had a full and fair opportunity to litigate the issue, the US court, principally on the basis of comity, will recognize the Canadian's court decision to grant such Third Party Releases. This clearly adds additional value to the Third Party Releases and these settlements are typically conditioned on the Third Party Releases not only being granted by the Canadian court, but also upon them being recognized and given effect to by the US Bankruptcy Court.