Restructuring

NORTH OF THE BORDER UPDATE

This article has been contributed to the blog by Michael De Lellis and Patrick Riesterer. Michael De Lellis is a senior associate in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP, and Patrick Riesterer is an associate in the group.

A recent Motion for Directions in Re White Birch Paper Holding Company required the Superior Court of Quebec (Commercial Division) (the “Canadian Court”) to consider the appropriate scope of its jurisdiction in a cross-border insolvency and to consider whether it ought to intervene in ongoing negotiations over the allocation of sale proceeds between a U.S. estate and a Canadian estate.

Bear Island Paper Company LLC (“Bear Island”) is a U.S. subsidiary of White Birch Paper Holding Company (“White Birch”), the Canadian parent.  Bear Island is subject to Chapter 11 proceedings in the U.S. Bankruptcy Court for the Southern District of Virginia (the “U.S. Court”), but has not sought protection under the Companies Creditors’ Arrangement Act (the “CCAA”) in Canada.  White Birch and various of its Canadian subsidiaries (collectively, “WB Canada”) are under CCAA protection.  There is a cross-border protocol in place to ensure that the Canadian and U.S. Courts can coordinate on relevant aspects of the insolvency.  In addition, the U.S. Court recognized the CCAA proceeding of WB Canada as the “foreign main proceeding” and White Birch as the “foreign representative”.

Bear Island owes White Birch certain amounts under an intercompany loan.  In addition, both Bear Island and certain WB Canada entities are borrowers under a unified DIP facility (the “DIP Loan”).

Bear Island has proposed a liquidating plan that is conditional on the sale of the assets of both WB Canada and Bear Island (the “Asset Sale Transaction”).  The Asset Sale Transaction has not yet closed, but Bear Island is in negotiations with its creditors and other stakeholders as to how the proceeds of such sale transaction should be distributed.  Different allocation formulas with respect to the distribution of the proceeds of the Asset Sale Transaction (the “Allocation Formulas”) have been proposed.  Among other things, the different Allocation Formulas require Bear Island to repay different percentages of the DIP Loan.

The choice of Allocation Formula is important to WB Canada because the different Allocation Formulas result in vastly different distributions to WB Canada.  The Monitor was concerned that the U.S. creditors would select an Allocation Formula that favours the estate of Bear Island without taking into consideration the effects of such decision in the CCAA proceeding of WB Canada.  Accordingly, the Monitor brought an application for directions, requesting the Canadian Court to, among other things, grant an order that: (i) the Allocation Formula must be approved by the Canadian Court; and (ii) WB Canada be permitted to request a joint hearing before the Canadian and U.S. Courts if the stakeholders are unable to choose an Allocation Formula by consensus or if the Allocation Formula chosen is not acceptable to the Monitor.

The Canadian Court found that it was premature to require that the Allocation Formula must be approved by the Canadian Court or that a joint hearing should be held to determine the appropriate Allocation Formula if a consensual decision cannot be reached among all of the applicable stakeholders.  One of the main purposes of the CCAA is to promote a negotiated settlement between all the stakeholders.  Good faith negotiations are ongoing between Bear Island, the Monitor and the stakeholders and there is no indication that a consensual negotiated settlement cannot be reached.  As such, the Canadian Court found that it was better to let these negotiations progress before intervening in the dispute.

The Canadian Court also stressed the importance of protecting its own jurisdiction as well as the jurisdiction of all tribunals involved in an international restructuring, including the jurisdiction of the U.S. Court.  As such, the Canadian Court noted that Bear Island will be filing a Disclosure Statement that contains a description of the Allocation Formula, that the Disclosure Statement is subject to approval by the U.S. Court and that the Canadian Court has no direct jurisdiction over Bear Island as Bear Island is not subject to the CCAA proceedings.  In this context, the U.S. Court may need to approve the definitive Allocation Formula.  Similarly, the U.S. Court has no direct jurisdiction over WB Canada.  Accordingly, the approval of the Allocation Formula should not be the result of a unilateral decision by either the Canadian or the U.S. Court.

In addition, the Canadian Court stressed that although the definitive Allocation Formula will likely have to be approved by the Canadian Court and the U.S. Court acting within the scope of their respective jurisdictions, such action should be taken after a negotiated settlement has been reached.  Any intervention by either Court should leave room for a negotiated settlement and should proceed by way of removing obstacles to negotiations.

In the absence of a consensus on the selection of an Allocation Formula, important issues will have to be debated before both the Canadian and the U.S. Courts.  In such circumstances, a joint hearing may be the appropriate way to reconcile any disputes on the matter, but the need for a joint hearing is not certain.  The Canadian Court noted that it may be more convenient for the Courts to hold separate hearings to deal with the portions of the dispute that properly fall under the jurisdiction of each Court.

Ultimately, the Canadian Court did not order that it must approve any Allocation Formula. Instead, the Canadian Court ordered that any consensual Allocation Formula may be approved by both the Canadian and the U.S. Court acting within the scope of their respective jurisdictions and that, in the absence of a consensus, any interested party can seek to have a dispute over the selection of an Allocation Formula adjudicated by the Court with jurisdiction over the issue.

The Canadian Court’s decision to adopt a wait and see approach illustrates the flexibility of the CCAA and the willingness of Canadian Courts to allow stakeholders to pursue negotiations that may result in a consensus.  The decision also shows that the Canadian Courts will guard their own jurisdiction, but will also be careful to protect the proper jurisdiction of all the tribunals involved in an international restructuring.

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