NORTH OF THE BORDER UPDATE
This article has been contributed to the blog by Steven Golick and Sachin Kanabar. Steven Golick is a partner in the Insolvency and Restructuring Group of Osler Hoskin & Harcourt LLP and Sachin Kanabar is an associate in the group.
The Ontario Superior Court of Justice (the “Court”) has issued reasons that confirm that a Canadian Court has jurisdiction to approve the transfer of and vest title to real property located in the United States owned by a U.S. partnership where such assets are incidental to a complicated Court supervised sale transaction conducted in Canada. The decision in Re Grant Forest Products Inc., 2010 ONSC 2445, was rendered in the context of an objection to a motion to approve the sale and vesting (“Vesting Order”) of substantially all of the debtor’s assets pursuant to a Court-supervised sale transaction under the Companies’ Creditors Arrangement Act (“CCAA”).
Grant Forest Products Inc. (“GFP”) was an Ontario company, with certain privately owned subsidiary corporations carrying on manufacturing operations in both Canada and the United States. The company directly or indirectly owned mills in Ontario, Alberta and South Carolina.
GFP, together with its Canadian subsidiaries and its U.S. subsidiary, Grant U.S. Holdings G.P. formed a Delaware partnership (the “U.S. Partnership”). The U.S. Partnership owned the mill in South Carolina.
GFP, its Canadian subsidiaries, Grant U.S. Holdings G.P. and the U.S. Partnership (referred to collectively as the “Applicants”) obtained protection under the CCAA on June 25, 2009. An extensive court supervised sales process was conducted which culminated in a motion to approve the sale and vest title to the Canadian and U.S. assets. As part of the hearing to approve the sale transaction and obtain the Vesting Order, the Applicants moved to add additional U.S. companies of the GFP group (the “Additional Applicants”) as applicants in the CCAA proceeding in order to implement the sale transaction.
The Applicants had two levels of primary secured debt: the First Lien Lenders (the “FLL”), a syndicate of lenders who were owed the principal amount of $399 million plus accrued interest pursuant to a credit agreement and the Second Lien Lenders (the “SLL”), a syndicate of lenders who were owed the principal amount of $150 million plus accrued interest pursuant to a credit agreement. An Inter-Creditor Agreement (the “ICA”) between the FLL and the SLL, provided that if the liens of the FLL against the collateral were released in connection with the sale of substantially all of the assets of the Company or any Grantor (each as defined in the ICA), then the liens of the SLL on such collateral would be “automatically, unconditionally and simultaneously released”. Further, the ICA provided that the FLL could exercise its remedies under the ICA without consultation with or the consent of the SLL. Although the ICA was governed by the laws of New York, the Court held that the FLL were entitled to exercise their rights and remedies under the ICA in the CCAA proceeding.
The Court accepted the findings of the monitor, Ernst & Young Inc. (the “Monitor”), that the sales process was a “structured, fair, wide and effective canvassing of the market” and the SLL “were consulted and their views and questions were taken into account” during the process. The sales process resulted in the selection of a purchaser, Georgia-Pacific (the “Purchaser”), a Canadian company. The Applicants entered into an agreement with the Purchaser for the purchase of substantially all of the Applicants’ assets (the “Transaction”).
The Transaction contemplated a purchase price of $403 million and, among other things, contemplated (i) that the security previously granted by the applicable Additional Applicants in favour of the FLL and the SLL and the related indebtedness be released and discharged upon closing of the transaction; and (ii) that the partnership interests in the U.S. Partnership be surrendered and cancelled and new partnership interests be issued to the Purchaser through its U.S. subsidiary. The effect of the latter was to convey certain real property in the United States to the Purchaser through a CCAA proceeding. On completion of the transaction, there would be a shortfall to the FLL and likely no recovery by the SLL.
The SLL objected to the approval of the Transaction and issuance of the Vesting Order, as well as the Applicants’ motion to add the Additional Applicants, on various grounds, including that the Court could not make such an order. The SLL argued that the Court would in effect be approving the transfer of real property in the United States, without the sale process envisaged by section 363 of the United States Bankruptcy Code, which the Court did not have the jurisdiction to order.
The SLL’s objections were rejected by the Court. The sales process was not objected to by any party when it was initiated. Nor was the Transaction merely a device for the Canadian vesting of U.S. assets. Rather, the Court was being asked to consider and approve a restructuring transaction in a process that had been overseen by the Court and which included a comprehensive marketing process involving the Monitor as an officer of the Court. The Transaction expressly included the Applicants and their subsidiaries in both the U.S. and Canada as an integrated group in a unified transaction, each element of which was necessary and integral to its success.
The Court concluded that the effective transfer of U.S. assets was incidental to a Canadian sales process that had been approved and overseen by the Court under the CCAA. In such circumstances, the Court had jurisdiction to approve the Transaction even though the effect was to convey to the Purchaser real property owned by the Delaware partnership, which property was located in the United States. The Court did however note that any valid objection by the SLL was appropriately made in the U.S. Bankruptcy Court at a hearing under Chapter 15 of the U.S. Bankruptcy Code to recognize the Vesting Order. The approval of the Transaction would not usurp a determinative review by the U.S. court should such a court find it necessary.
Justice Campbell’s reasons for decision can be found here.