Wednesday, 16 December 2015

A decision from bankruptcy court

Ah, I was asleep at the switch.

And so I missed the decision issued earlier this month by Justice Frank Newbould of the Ontario Superior Court of Justice regarding a proposed settlement between two of the tobacco companies found liable in the Blais-Létourneau class actions and the remnants of an insurance company which had once issued them with policies for $100 million in "excess liability".

During the hearing in Toronto last month, there were some pretty big guns lined up against the proposal that the estate of Reliance Insurance provide the companies with $19 million to close the books on any claims the companies might make as a result of the Quebec class actions or other pending lawsuits. Virtually all of the provinces were on hand to ask Justice Newbould to ensure that their right to make claims would not be snuffed out.

Justice Newbould agreed with the lawyers representing the provincial lawsuits that governments were not restricted by the terms of the federal Winding Up and Restructuring Act,  and that this reason alone was enough to block the proposed settlement between Reliance and Imperial Tobacco and Rothmans, Benson and Hedges.  The deal did not go through.

And would it otherwise have done? Would the companies have been able to take a windfall profit of $19 million without making any payment to those whose injuries triggered the claim?

Justice Newbould made clear that this is a messy area that was not clarified enough for him to have made a decision. Perhaps next time..

Wednesday, 9 December 2015

Justice Schrager firmly declines the invitation to reconsider.

There is a much-valued colleague with whom I occasionally enter into a friendly bet on the outcome of various tobacco-related events. The stakes are never higher than the pleasure of being right, which is a good thing given how rarely I win.

This fall we began to negotiate a wager on whether New Year's would be celebrated with either Rothmans, Benson and Hedges or Imperial Tobacco making the security deposit required of them in the Quebec Class Actions.

On October 27th, Justice Mark Schrager had required that the two companies make the first of a series of quarterly payments towards a safekeeping of $758 million by years end.

This is an important milestone. However provisional, these would be the first payments made by a tobacco company in Canada in connection with the harms they caused to smokers.

But we never finalized a wager on whether it would come to pass before Imperial Tobacco took steps that seemed to change the odds.

Imperial Tobacco asks to defer its payments

On November 25th, Imperial Tobacco filed a motion with Justice Schrager, asking that the first payment towards its security deposit be partially deferred.

In their "motion for directions on the schedule to furnish security", they reported that they will not have enough money to make the $108 million payment required of them as they have a previous obligation to pay $100 million as a final payment related to a different (non-tobacco) lawsuit. They money is owed to another subsidiary of British American Tobacco.

They ask permission to reduce their initial payment to $8 million, and to extend the payment period by three months until September 2017.

Otherwise, they say, they will be in a pickle. "If the present motion is not granted, ITL will be placed in the untenable situation of having to choose between defaulting on the Flintkote Loan and/or other financial obligations, or not being able to comply with the Security Order as presently constituted." Defaulting on their security would make them at risk of having their appeal tossed out, they point out.

In a politely worded way, they point the finger at Justice Schrager for this potential embarrassment. "[Justice Schrager] omitted to take into account the mandatory $100,000,000 Flintkote Loan payment due days earlier [than the end of December 2015] and the taxes payable on earnings." 

Would you have wagered that Justice Schrager would amend the payment schedule as they requested? That he would have considered the deferral an acceptable compromise to the companies' acceptance of an only modestly-altered schedule?

If so, like me, you would have been wrong.

Motion dismissed.

In his response, issued this afternoon, Justice Schrager gives Imperial Tobacco a flat and unhappy sounding "no". To these eyes, he seemed a little pissed at having even been asked to enter into what he calls a "disguised appeal".

He scoffs at the company's argument that it has no money, and that it can't make arrangements with the head-office to whom the Flintkote debt is due. He repeats his criticism about British American Tobacco reaping the benefits of cigarette sales in Canada while refusing responsibility for the consequences.

"Petitioner's motion is artfully drafted to suggest that sufficient funds are not available to pay both the Flintkote loan instalment and the security. However, there is no assertion of inability to pay per se. No current financial statements or an affidavit of a financial officer are produced. Moreover, there is no mention of the position of Petitioner's parent and related companies on the subject of helping to fund the security." ...

"In all of the circumstances of this matter, it is impossible to conveniently ignore the benefit of earnings received over the years and the position asserted by Petitioner's parent that it would not commit to fund a final judgment." 

Even if he wanted to re-consider the schedule, he did not have the right to do so. "The doctrine of functus officio applies and I would be without power to correct it."

Even if he had the right to reconsider, he would not want to: "There is no error in my previous judgement requiring correction."

Nothing up their sleeve?

One of the wrinkles in this development is that the request by ITL for a deferral is very different than the approach they signalled immediately after after the Security Order was issued.

On October 28th, BAT told investors that 

"ITCAN believes the Order for Security is unprecedented and unjustified and intends to review its options to apply for leave to appeal this decision to the Supreme Court of Canada and to seek, in the interim, a Stay of the Order."

Trouble is, an appeal to the Supreme Court is not a quick process, Certainly not quick enough to prevent millions - maybe hundreds of millions - from being put into security.

If steps have been taken to seek a Stay of the Order, as presented to investors, I have not heard of them.

So, tell me, please. Is it a safe bet that the money will be posted by Imperial Tobacco by the end of December?