I N S I D E T H E M I N D S

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1 I N S I D E T H E M I N D S Chapter 15 Bankruptcy Strategies Leading Bankruptcy Experts on Understanding the Filing Process and Achieving Successful Outcomes in Cross-Border Insolvency Cases

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3 Chapter 15: A Canadian Perspective David F. W. Cohen Partner Gowling Lafleur Henderson LLP

4 By David F. W. Cohen Introduction The economies of the United States and Canada are intertwined more closely than any other two major trading partners in the world. The inevitable consequence of this is that as operations expand through borders, so too do the complexities associated with carrying on business. Nowhere is this more apparent than upon the financial failure of a business spanning that border. Not only are there pieces to pick up locally, but operations, assets, and creditors are scattered in foreign jurisdictions. In practice, this often gives rise to the added burden of coordinating multiple court restructuring proceedings and complying with distinct and differing legal regimes. Over the years, the US and Canadian courts have mitigated these difficulties somewhat by making concerted efforts to accommodate the proceedings in the neighbouring country. Notions of cooperation and comity have guided much of the Canada-US insolvency experience in recent years. In 1997, the United Nations Commission of International Trade Law (UNCITRAL) developed the Model Law on Cross-Border Insolvency (the Model Law) with the objective of harmonizing insolvency proceedings on a global scale. 1 The premise was for the Model Law to be adopted by individual countries to streamline efforts to regulate, coordinate, and facilitate inter-jurisdictional insolvencies. The Model Law was implemented in the United States through Chapter 15 of Title 11 of the United States Code (the Bankruptcy Code), which replaced Section 304 of the Bankruptcy Code, effective as of October 17, Chapter 15 functions to mitigate the difficulties posed by the dissolution of cross-border business operations, and has been applied frequently in respect of Canadian insolvency matters. It was a few years later before the Model Law was adopted in Canada. It was implemented through amendments to the Bankruptcy and Insolvency Act (BIA) and the Companies Creditors Arrangement Act (CCAA), which came into force on September 18, These corresponding amendments allow US or other foreign creditors to seek recognition of foreign insolvency proceedings in Canada. 1 Model Law on Cross-Border Insolvency of the United Nations Commission on International Trade Law, G.A. Res. 52/158, U.N. Doc. A/RES/52/158 (Jan. 30, 1998), available at 2 See 11 U.S.C.A (West 2012).

5 Chapter 15: A Canadian Perspective To understand the interrelationship between the Canadian and US insolvency regimes, we will focus on: (i) providing a basic overview of Chapter 15 in the Canadian context; (ii) examining the purpose and utility of Chapter 15 with respect to Canadian proceedings; (iii) outlining a variety of specific typical applications of Chapter 15 in Canadian insolvency cases; (iv) outlining examples of Chapter 15 decisions that illustrate these various uses; and finally, (v) examining briefly the future spectrum of Canadian-US insolvency regime interactions. Canadian Context Chapter 15 was given a warm, albeit cautious, welcome by Canadian practitioners. In 2005, it was unknown how the legislation would fare in the Canadian context, and how it would compare to Section 304 of the Bankruptcy Code. Over the past few years, it has become increasingly evident that Chapter 15 is not only applicable, but also useful for Canadian insolvencies, essentially bridging the gap between the countries. Recognition under Chapter 15, discussed in greater detail below, opens the door to a number of benefits. Once a US bankruptcy court approves the Chapter 15 application, certain provisions of the Bankruptcy Code automatically apply, including the automatic stay under Section 362 and the sale provisions under Section The foreign representative gains the ability to operate the debtor s business and may exercise the rights and powers of a trustee. These benefits can be invaluable to a Canadian monitor in a CCAA proceeding or Canadian Court appointed receiver (individually, a Canadian Court Officer and collectively, Canadian Court Officers ) involved in a difficult insolvency with aggressive parties. 4 It allows the Canadian Court Officer to gain greater control over the proceedings, and achieve a resolution cost-effectively and quickly. Criteria for Application of Chapter 15 To gain access to the provisions of Chapter 15, certain criteria are required to be met by the foreign body seeking recognition and recourse. Section 1517 of 3 11 U.S.C.A. 362, 363 (West 2012). 4 See Companies Creditors Arrangement Act, R.S.C. 1985, c. C-36.

6 By David F. W. Cohen the Bankruptcy Code governs the recognition of a foreign insolvency proceeding. 5 Foreign proceeding is defined in Section 101(23), which states: A foreign proceeding [is] a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court. 6 Canadian applications frequently relate to proceedings commenced under the CCAA 7 (the Canadian equivalent of Chapter 11), but have also been made with respect to proceedings commenced pursuant to the BIA 8 (similar in nature to Chapter 7 and includes a simplified restructuring process to the CCAA generally favored by small cases). Under Section 1517, a foreign proceeding can be a foreign main proceeding or a foreign nonmain proceeding. 9 Foreign Main Proceeding Generally, Canadian petitions under Chapter 15 seek recognition of the Canadian proceeding as a foreign main proceeding. Section 1502(4) defines a foreign main proceeding as a foreign proceeding pending in the country where the debtor has the center of its main interests (COMI). 10 Much has been made of the term COMI. COMI is, seemingly intentionally, not defined in Chapter 15 or in the Model Law. Not surprisingly, it is also not defined under the CCAA or the BIA. Examining in detail the judicial consideration of the term is outside the scope of our review, but it is now generally accepted that the debtor s COMI turns on a number of factors. In the case of In re Sphinx 11, the court enumerated the following factors to be considered in making a COMI determination: 5 11 U.S.C.A (West 2012). 6 Id. at 101(23). 7 Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36,. 8 Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, s U.S.C.A (West 2012). 10 Id. at 1502(4) (emphasis added). 11 In re Sphinx, Ltd. 351 B.R. 103, 117 (Bankr. S.D.N.Y. 2006).

7 Chapter 15: A Canadian Perspective [T]he location of the debtor s headquarters; the location of those who actually manage the debtor (which, conceivably could be the headquarters of a holding company); the location of the debtor s primary assets; the location of the majority of the debtor s creditors or of a majority of the creditors who would be affected by the case; and/or the jurisdiction whose law would apply to most disputes. This determination can be very straightforward, and in those cases, Section 1516(c) of the Bankruptcy Code provides that [i]n the absence of evidence to the contrary, the debtor s registered office, or habitual residence in the case of an individual, is presumed to be the center of the debtor s main interests. 12 Section 1516(c) does not, however, prevent the court or another interested party from questioning the presumption. 13 The recognition process is not intended to become a rubber stamp exercise when no objection is filed. 14 Foreign Nonmain Proceeding Section 1502(5) of the Bankruptcy Code provides that foreign nonmain proceeding means a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment. 15 If there is no foreign proceeding pending, Chapter 15 is not available to the applicant. It is interesting to note that in Canada, under the CCAA, a foreign nonmain proceeding is simply defined as a foreign proceeding, other than a foreign main proceeding U.S.C.A. 1516(c) (West 2012) (This presumption derives from Article 16(3) of the Model Law which provides that, in the absence of proof to the contrary, the debtor's registered office, or habitual residence in the case of an individual, is presumed to be the center of the debtor's main interests. The same presumption appears in Section 45(2) of the CCAA and Section 268(2) of the BIA. Where the debtor is an individual, the BIA provides that in the absence of proof to the contrary, the debtor s COMI is deemed to be his/her ordinary place of residence.). 13 See id. 14 See In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd.., 389 B.R. 325 (S.D.N.Y. 2008) U.S.C.A. 1502(5) (West 2012). 16 See Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36.

8 By David F. W. Cohen Commencement of a Proceeding To commence a case under Chapter 15, a foreign representative must file a petition for recognition of a foreign proceeding. 17 The term foreign representative is defined under Section 101(24) of the Bankruptcy Code as a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor s assets or affairs or to act as a representative of such foreign proceeding. 18 With respect to Canadian proceedings, the foreign representative is generally a monitor appointed by the Canadian court pursuant to a CCAA proceeding or a court-appointed receiver under the BIA. A Monitor is defined under the CCAA as a person appointed to monitor the business and financial affairs of a debtor company and is appointed when an order is made on the initial application in respect of the debtor company. Under the BIA, a court may appoint a receiver to (i) take possession of all or substantially all of the inventory, accounts receivable, or other property of an insolvent person or bankrupt that was acquired for or used in relation to a business carried on by the insolvent person or bankrupt; (ii) exercise any control that the court considers advisable over that property and over the insolvent person s or bankrupt s business; or (iii) take any other action that the court considers advisable. 19 Both the Monitor and the Receiver must be a trustee licensed to act under the BIA. Together with a petition to the US bankruptcy court, Section 1515 of the Bankruptcy Code provides that a foreign representative must give evidence of the decision commencing the foreign proceeding and appointing the foreign representative. Alternatively, the foreign representative can provide other evidence of the existence of the foreign proceeding and the appointment of the foreign representative. The Chapter 15 court must also be informed of all foreign proceedings with respect to the debtor that are known to the foreign representative U.S.C.A (West 2012). 18 Id. at 101(24). 19 Companies Creditors Arrangement Act, R.S.C. 1985, c. C-36, s. 243(1).

9 Chapter 15: A Canadian Perspective While the responsibility for much of the application process falls on the foreign representative, the objective of these requirements is to facilitate and expedite the process under which foreign proceedings gain recognition in the United States. Ancillary Proceeding Once a recognition order has been made pursuant to Section 1515 of the Bankruptcy Code, an ancillary proceeding can be commenced in the United States. Commonly, Canadian foreign representatives look to the US courts for assistance and cooperation in administering plans of arrangement, orders of many types and nature (including a sales process and sale approval and vesting orders), and in providing access to and control over assets located across the border. Recognition Orders Once it is established that a Canadian insolvency proceeding is a foreign proceeding, and a foreign representative has filed the requisite evidence, it is fairly cut and dried that recognition under Chapter 15 will follow. Recognition is defined as the entry of an order granting recognition of a foreign main proceeding or foreign nonmain proceeding. 20 It is a key component of facilitating Canadian cross-border insolvencies, because it provides the foreign representative with access to Canadian orders in the United States. With respect to Canadian foreign proceedings, the US. bankruptcy courts have made various recognition orders, which generally fall into four categories: 1. Sales Orders Upon recognition of a foreign main proceeding, Section 363 of the Bankruptcy Code automatically applies to a transfer of the debtor s property, allowing the foreign representative to use, sell, or lease property of the debtor. 21 Consistent with this right, a significant U.S.C.A. 1502(7) (West 2012). 21 See id. at 363.

10 By David F. W. Cohen number of Chapter 15 cases have recognized and approved Canadian sale matters. 22 These sales orders include the following: (a) Appointment of a court officer/receiver over assets located in the jurisdiction of the US court; (b) Recognizing and giving effect to a Canadian claims process; (c) Approval of an auction process; (d) Enforcement of sales process orders; (e) Recognizing and giving effect to a sales transaction (both asset and share sales), including transactions not in strict compliance with Section 363 of the Bankruptcy Code; (f) Enforcement of sale approval orders; (g) Approval and enforcement of a vesting order (or the US court grants a separate vesting order which corresponds to the Canadian vesting order) (h) Authorizing a foreign representative to administer, realize, and dispose of assets situated in the territorial jurisdiction of the United States. (i) Authorizing a foreign representative to sell property and assets free and clear of any lien interest in such property; (j) Recognizing orders sanctioning a plan of arrangement; 2. Investigation Orders US courts have granted orders providing the foreign representative rights to investigate matters within the United States. These include providing for the examination of witnesses and authorizing the examination of a debtor Stay Orders Upon recognition, foreign representatives are provided access to Section 362 of the Bankruptcy Code and have been granted a stay 22 See, e.g., In re Nortel Networks Corp., 445 B.R. 370 (Bankr. D. Del. 2011); In re Bear Island Paper Co LLC, No (Bankr. E. D. Va. Sept.1, 2010); In re Cinram International Inc., No (Bankr. Del., 2012), available at ing.com/cinram/docs/52.pdf. 23 See, e.g., In re Thow, 392 B.R. 860 (Bankr. W.D. Wash. 2007).

11 Chapter 15: A Canadian Perspective of execution/enjoining proceedings against the debtor, the receiver, and the debtor s assets Distribution Orders A US court may entrust the distribution of all or part of the debtor s assets located in the United States to the foreign representative or another person. 25 In addition to these orders, the US bankruptcy courts have made a number of significant and far-reaching orders with respect to Canadian proceedings, including giving effect to releases against officers and directors, recognizing agreements between the debtor and third parties, appointing a mediator, authorizing a debtor in possession facility, 26 and granting approval for a foreign representative to file US tax returns on behalf of a debtor. US courts have also assisted in the management of a debtor s estate by granting orders in accordance with Section 1525 of the Bankruptcy Code for the cooperation and direct communication between Canadian and US courts. Understanding the Why of Chapter 15 from the Canadian Viewpoint The willingness of the Canadian and US courts to recognize, complement, and where appropriate, accommodate the insolvency proceedings of the other jurisdiction predates the Model Law. In Canada, certain legislative amendments were enacted in 1997 to address the rising number of international insolvencies. Prior to that time, Canadian courts would essentially rely on the evolving common law principle of comity, which permitted Canadian courts to recognize and enforce foreign decisions. Comity, in the legal sense, refers to 27 : 24 See 11 U.S.C.A. 362 (West 2012). 25 Id. at 1521(b). 26 See, e.g., In re Cinram International Inc., No (Bankr. Del., 2012), available at 27 Re Babcock & Wilcox Canada Ltd. (2000) 18 C.B.R. (4th) 157 (Ont. S.C.J.) at para. 5 (citing LaForest J. in Morguard Investments Limited v. De Savoye (1990), 76 D.L.R. (4th) 256 (S.C.C.) at p. 269).

12 By David F. W. Cohen neither a matter of absolute obligation, on the one hand, nor of mere courtesy and goodwill, upon the other. But it is the recognition which one nation allows within its territory to the legislative, executive, or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protections of its laws... This principle was found to be particularly relevant to foreign insolvency proceedings, where there has been a longstanding recognition that concurrent and potentially conflicting or divergent proceedings are not efficient or advantageous for any of the parties involved. While this ideology continues to be shared by Canadian practitioners and courts, the weight of the Model Law and Chapter 15 has strengthened the ability of Canadian courts to effectively and economically administer cross-border insolvency proceedings. The purpose of Chapter 15 is to incorporate major elements of the Model Law to effectively deal with cases of cross-border insolvency with the objectives of: (1) cooperation between United States courts, trustees, examiners, debtors, debtors in possession, monitors, and court-appointed receivers, and the courts and other competent authorities of foreign countries involved in cross-border insolvency cases; (2) greater legal certainty for trade and investment; (3) fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested entities, including the debtor; (4) protection and maximization of the value of the debtor s assets; and (5) facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment. 28 The Model Law generally, and Chapter 15 in particular, enables the administration of international insolvency cases with a greater degree of legal certainty for trade and investment. The harmonization achieved through ancillary proceedings to a main proceeding in a foreign jurisdiction avoids the potential for conflicting decisions between non-coordinated Canadian-US proceedings U.S.C.A. 1501(a) (West 2012).

13 Chapter 15: A Canadian Perspective The alternative to a Chapter 15 proceeding is generally to commence a full Chapter 7 or Chapter 11 case in the United States. From the perspective of a Canadian debtor and Canadian creditor, this is a more onerous, timeconsuming and expensive process, and in cases where there is a clear foreign jurisdiction, offers very little more function than a Chapter 15 case. It is a commonly held belief that CCAA restructuring proceedings are generally easier to administer than Chapter 11 cases as they involve fewer court appearances, are less expensive, and are resolved more quickly. Where the US aspect of a Canadian insolvency proceeding is not dominant in the case, the commencement of Chapter 11 or Chapter 7 proceedings is thought to be over kill and so burdensome as to have the cost and delay far outweigh the benefit to the vast majority of stakeholders. The practice in CCAA proceedings is generally to have fewer motions on issues and to make efforts to resolve issues without motions. This is in contrast to what we understand to be the US experience: a multiplicity of motions, material and protracted disputes and generally a much higher volume of litigation around main issues in the case. The role of the Canadian monitor, as a court officer and as the de facto facilitator and referee, aids in this reduction in litigation. Commencement of a full ancillary proceeding in the US, from that perspective, is perceived as being less efficient than the Chapter 15 process that now favors less litigation. In many cases, a full second proceeding may create complications and uncertainty. The administration of two main concurrent proceedings generally creates a bottleneck to the resolution of claims. Rather than deferring to the determination of another court, concurrent proceedings require that the same decisions be made twice and that accommodation be made when there is any inconsistency or discrepancy between the enforcement of those decisions. Save for large, multi-national corporations that would conceivably have a strong main presence in a number of jurisdictions, the benefits of hearing separate cases is trumped by the costs of such an undertaking. It is therefore no surprise that the Model Law has been adopted by a number of individual countries, in many cases with very few modifications. Allowing for an ancillary proceeding is a cost, time, and economically efficient alternative, and because of the checks and balances in play, does

14 By David F. W. Cohen not create any material disadvantage to any party involved. Indeed, US courts are reluctant to accept the decision of a foreign court, even a Canadian court, without engaging in a comprehensive analysis of the facts and implications. US courts do not cede their inherent jurisdiction lightly and while Chapter 15 permits such, it does not mandate it. US courts need to see fairness in the Canadian process and cannot be left believing the foreign proceeding is materially deficient. Thankfully, the US and Canadian insolvency regimes are well developed, bear certain similarities, and are equipped with many inherent safeguards. We believe that as US courts gain broader experience with the Canadian system (many already enjoy this), there will grow an increased trust in the Canadian regime despite its procedural and tactical differences and findings from the US regime. Uses of Chapter 15 in the Canadian Context There are very clear advantages to Chapter 15 with respect to Canadian insolvency proceedings. The jurisprudence to date has illustrated a number of instances where a Chapter 15 proceeding is particularly useful for Canadian-based cases with US implications. Where There Is a Clear Main Venue/Forum/Jurisdiction As mentioned above, where a business clearly operates in a particular venue or jurisdiction, it is more efficient and convenient to coordinate insolvency proceedings from the dominant locale. Where Canadian main proceedings are augmented by US ancillary proceedings, a focused and streamlined approach takes precedence. All matters are centralized and related to the primary jurisdiction of the debtor. Furthermore, concerns of prejudice to creditors and stakeholders are reduced, as they are given a forum within their jurisdiction of domicile from which to address any issues or matters. Concurrent Proceedings with Respect to the Same Debtor Are Pending It is recognized by both the Canadian and US courts that efficiency can be achieved by avoiding a multiplicity of main proceedings in different jurisdictions. Therefore, where concurrent proceedings with respect to the same debtor are pending and the parties involved are able to determine the COMI of the debtor, it is in the interests of all parties to integrate the

15 Chapter 15: A Canadian Perspective proceedings, to the extent possible. While straightforward in theory, this approach is not always realistic and in certain instances, it is preferable to have concurrent proceedings. In that event, Chapter 15 prescribes that cooperation between US courts and foreign courts or foreign representatives specifically includes the coordination of concurrent proceedings regarding the same debtor. 29 Where There Are Strong Creditor and Debtor Interests Involved A stated purpose of Chapter 15 is the fair and efficient administration of cross-border insolvencies that protects the interests of all creditors, and other interested entities, including the debtor. 30 In a cross-border insolvency proceeding, there will inevitably be multiple interested parties from a variety of jurisdictions. The organization and prioritization of these interests can be a complicated undertaking, more so in light of the nearly automatic rights granted to a foreign representative upon recognition of the proceeding. Canadian practitioners acknowledge that the inclusion of a forum for local concerns to be voiced and argued in the ancillary proceeding both avoids and mitigates any geographically generated unfairness with respect to access to the main proceedings for US creditors. The fair treatment of US creditors is a paramount consideration in the granting of a Chapter 15 recognition order. If the order being requested is inequitable and unfair to the local creditors, it is highly unlikely that a US court would accede to the decision of the foreign court. The objective of Chapter 15 is not to improve the position of main proceeding creditors at the expense of US creditors. For a Chapter 15 proceeding to be effective, both in the foreign jurisdiction and in the US, US creditors cannot be disadvantaged. All creditors must be treated fairly among the larger creditor pool; lumping all creditors together necessarily creates inequality. An example might be helpful to illustrate this concept: Can Co., the parent company of US Co., comes upon difficult times and is unable to meet its obligations as they come due. Receivership proceedings are commenced in Canada, where Can 29 Id. at 1527(5). 30 Id. at 1501(a)(3).

16 By David F. W. Cohen Co. holds $20 million (CAD) in assets. There are 600 unsecured creditors in Canada, owed a total of $1 million (CAD). US Co. was not as poorly hit, holding $4 million in assets, with 100 unsecured creditors owed a total of $5 million. Had proceedings been brought solely in the US, all things being equal, the US creditors would each be entitled to $50,000. However, if the US unsecured creditors were lumped in together with the Canadian unsecured creditors to create one main creditor pool, and correspondingly, the US debt was combined with the Canadian debt, the share apportioned to the US creditors would be significantly lower, being $34,286. Treating all creditors and interested parties fairly therefore demands consideration of opportunities to be heard, financial implications, and local rights afforded to the parties. Administration of an Estate Canadian proceedings may utilize Chapter 15 in the administration of a bankrupt s estate. The presumption of recognition orders empowers trustees to move quickly on estate matters, causing the distribution of assets to be made as quickly and efficiently as possible. Public Interest It is a longstanding concept in both the US and Canada that the public interest should be weighed against the implementation of any policy or practice. Section 1506 of the Bankruptcy Code introduces a public policy exception for the recognition of foreign proceedings, providing that nothing in Chapter 15 prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States Id. at 1506 (The same provision was adopted in the BIA (section 284(2)) and the CCAA (61(2)), albeit without the inclusion of the word manifestly. The exact Canadian wording is: Nothing in this Part prevents the court from refusing to do something that would be contrary to public policy. ).

17 Chapter 15: A Canadian Perspective Canadian Initiated Chapter 15 Cases In recent years, there has been an influx of Canadian Chapter 15 applications. When bringing a Canadian Chapter 15 case, a number of steps and requirements must be satisfied. It is often the Monitor/Receiver who bears responsibility for facilitating the case, but all practitioners should be mindful of the following aspects of a Canadian Chapter 15 application: (i) all Canadian court materials must be submitted to the US court considering the Chapter 15 application; (ii) the application materials should include an affidavit of a Canadian court officer detailing the background of the Canadian case in detail as if the US proceeding were the main proceeding; (iii) the Canadian court officer must be available as a witness to the Chapter 15 case, whether in person in the US, or if that is not possible, via teleconference if the US court will permit; and (iv) a factum is advisable to connect the facts to the legal justification of the granting of the Chapter 15 order. Certain requirements also apply to the Canadian court order submitted before the Chapter 15 court. Most significantly, the Canadian court order must expressly permit the Chapter 15 filing to be made In the case of the monitor or receiver being granted authority under a Chapter 15 order, the Canadian court order must empower the Canadian court officer to take such a role. It must also be structured to satisfy the Chapter 15 requirements and should not be overreaching in scope: i.e., do not ask for more power and relief than is needed. The cases discussed below illustrate key uses and applications of Chapter 15 in the Canadian context. For readers interested in additional Canadian Chapter 15 cases, Appendix I includes a representative list of Canadian proceedings. Where There Is a Clear Main Venue/Forum/Jurisdiction: Gandi Innovations Gandi Innovations 32 involved three debtors subject to CCAA proceedings in Ontario, Canada. The court s approach to granting recognition of the proceeding as a foreign main proceeding under Chapter 15 is helpful in understanding the role of the US court in a Canadian Chapter 15 application. 32 In re Gandi Innovations Holdings, 2009 WL (Bkrtcy.W.D.Tex. May 22, 2009).

18 By David F. W. Cohen By the time the case was brought to the US bankruptcy court, the Canadian court had already made a determination on whether the CCAA proceedings were main or nonmain proceedings. The US bankruptcy court found that while this determination was relevant, it did not replace the need for the US court to conduct a separate review of the facts. The eventual task of determining whether a foreign insolvency proceeding is a main or nonmain proceeding falls on the receiving court, not on the initiating court. 33 This unequivocal requirement that the US court make an independent determination on the facts is strengthened more by the fact that the US court insisted on making a separate determination for each debtor. The evidence presented clearly indicated that the COMI of the first two debtors was in Canada. There was mixed evidence presented with respect to the third debtor. Interestingly, while the court was hesitant to conclude that the COMI of the third debtor was in Canada, it did determine that the nerve center of the third debtor was within the province of Ontario. Ultimately, the court looked to the stated purpose of Chapter 15 and the principle of comity and decided that the COMI of the third debtor should be in Canada as well. Concurrent Proceedings with Respect to the Same Debtor Are Pending: In re Abitibibowater Inc. In re Abitibibowater Inc. 34 involved two separate Chapter 11 and CCAA proceedings pending in the US and Canada, respectively. To assist in the administration of the cases and to coordinate the proceedings, both the Canadian court and US bankruptcy court approved a cross-border restructuring protocol with the stated objectives of: (i) harmonizing and coordinating activities before the courts; (ii) promoting the orderly and efficient administration of the restructuring proceedings to, among other things, maximize the efficiency of the restructuring proceedings, reduce the costs associated therewith and avoid duplication of efforts; (iii) honor the independence and integrity of the courts; (iv) promote international cooperation and respect for comity among the courts, the debtors, any representatives, and other creditors and interested parties; (v) facilitate the fair, open, and efficient administration of the restructuring proceedings for the benefit of all the debtor s creditors and other stakeholders, wherever 33 See also In re Bear Stearns High-Grade Structured Credit Stategies Master Fund, Ltd., 389 B.R. 325 (S.D.N.Y. 2008). 34 In re Abitibibowater Inc., (Bankr. D. Del. July 7, 2009).

19 Chapter 15: A Canadian Perspective located; and (vi) implement a framework of general principles to address basic administrative issues arising out of the cross-border nature of the restructuring proceedings. 35 The adoption of the protocol is illustrative of the means by which crossborder insolvency proceedings can be effectuated. In this case, the US bankruptcy court made an independent determination that the facts supported the granting of the motion. The US bankruptcy court found that the protocol was in the best interests of the debtors, their estates, their creditors, and all other interested parties. However, as part of the US order, the US bankruptcy court distinguished between the payment of fees by the Chapter 11 debtors and the CCAA debtors. Creditor and Debtor Interests: CPI Plastics The case of In re CPI Plastics Group Ltd. 36 concerned a plastics/outdoor product manufacturer that was petitioned into bankruptcy in Canada pursuant to the BIA. The Canadian court promptly granted an initial order for relief, staying any proceeding or enforcement process against the debtor or its assets. On the same date, the court-appointed receiver filed a petition in the US bankruptcy court for entry of an order recognizing the Canadian proceeding as a foreign main proceeding. Until the US bankruptcy court granted recognition of the foreign proceeding, there was nothing preventing creditors from taking action against the debtor in the United States. In an attempt to protect the debtor s assets, the court-appointed interim receiver applied to the US bankruptcy court for a temporary restraining order enjoining all persons and entities from commencing or continuing any legal proceeding against the debtor, its assets, and the receiver. The court found a material risk that the debtor s assets could be subject to efforts by creditors in the United States to control or possess such assets. The court explained that 37 : 35 Id. at *4, n. 15 (Crossborder Restructuring Protocol). 36 In re CPI Plastics Group Ltd., No (Bankr. E.D. Wis. Jan. 9, 2009) 37 Id. at *3.

20 By David F. W. Cohen Such acts could: (i) interfere with the jurisdictional mandate of the Chapter 15 court; (ii) interfere with and cause harm to the Canadian Proceeding; and (iii) undermine CPI Plastics and the Receiver s efforts to achieve an equitable result for the benefit of all of CPI Plastics creditors. Accordingly, there is a material risk that CPI Plastics may suffer immediate and irreparable injury for which it will have no adequate remedy at law. This decision illustrates the protections in place for the rights and assets of debtors. While the court has discretion under Chapter 15, Section 1522(a) of the Bankruptcy Code provides that a court may only grant relief under Section 1521 if the interests of creditors and other interested entities are sufficiently protected. 38 In a subsequent decision, the court found that there was sufficient protection and granted additional relief pursuant to Section 1521 of the Bankruptcy Code, staying the commencement or continuation of any action or proceeding concerning the assets, rights, obligations, or liabilities of the debtor, including any action or proceeding against the receiver. Administration of an Estate: Grant Forest Products In Grant Forest Products, 39 the debtors, manufacturers of oriented strand board, commenced an action for bankruptcy protection in Canada pursuant to the CCAA. To effectuate the debtors bankruptcy petition, the courtappointed monitor brought a petition under Chapter 15 for approval of a Canadian order authorizing the monitor to file US tax returns for some of the debtor s subsidiaries, without incurring any liability to the Internal Revenue Service (IRS). The US bankruptcy court issued a decision recognizing the Canadian order, which was subsequently challenged by the IRS. In determining that the order was appropriate under Chapter 15, the court reviewed the power of a court to grant relief. Section 1521 states that upon recognition of a foreign proceeding where necessary to effectuate the purpose of this Chapter and to protect the assets of the debtor or the interests of the creditors, the court may, at the request of the foreign representative, grant any U.S.C.A. 1522(a) (West 2012). 39 In re Grant Forest Products, Inc., 440 B.R. 616 (Bankr. D. Del. 2010).

21 Chapter 15: A Canadian Perspective appropriate relief. 40 As in CPI Plastics, the court noted that the power to grant any appropriate relief is not unrestrained and is contingent on the interests of creditors and other interested parties. The court held that the Canadian order satisfied the requirements under Section 1522, as there would be no harm to the interests of the debtors or their creditors. Furthermore, the relief did not restrict the ability of the IRS to assess and collect taxes from the debtor s subsidiaries. Public Interest: Ephedra Products Liability Litigation The public policy exception contained in Section 1506 of the Bankruptcy Code has been considered and weighed by the US courts when considering the recognition of a Canadian plan, but is generally narrowly interpreted, and does not prohibit the recognition of foreign relief that differs from the relief available in the US. 41 In In re Ephedra Products Liability Litigation, 42 the US bankruptcy court had to determine whether to grant an order recognizing and enforcing a Canadian claims resolution procedure. Muscletech Research and Development Inc. (together with its subsidiaries, Muscletech ) was a Canadian corporation engaged in the manufacture and sale of various health products in the United States. The health products contained ephedra, a substance that caused severe injuries. As a result, more than thirty civil actions from across the United States were brought against Muscletech. In 2006, Muscletech commenced insolvency proceedings in Canada pursuant to the CCAA. The court-appointed monitor then brought a motion under Chapter 15 for recognition of the proceeding. Upon being granted recognition of the Canadian proceeding as a foreign main proceeding, the monitor sought an order recognizing and enforcing the claims resolution procedure approved by the Ontario court. The Canadian procedure was designed to expedite the process by which all creditor claims were valued and administered, including those of US claimants. A number of US creditors opposed the claims resolution 40 Id. at See 11 U.S.C.A (West 2012). 42 In re Ephedra Products Liability Litigation, 349 B.R. 333 (S.D.N.Y. 2006).

22 By David F. W. Cohen procedure, contending that the claims procedure effectively deprived US creditors of due process and their constitutional right to a jury trial. In examining the due process objection, the court found that if enforced, the Canadian order could permit the claims officer to refuse to hear evidence. It was conceivable that the claims officer would be able to liquidate claims without hearing from interested parties. To remedy this issue, the US bankruptcy court requested certain amendments to the Canadian order, which were promptly adopted by the Canadian court. With respect to the second issue, the court denied the argument that fundamental unfairness would result from the denial of a jury trial. Notwithstanding the fact that the US creditors would have had access to a jury trial had the proceeding been brought initially in the United States, the court found that a fair and impartial verdict can be rendered in the absence of a jury trial. The US bankruptcy court did not come to this conclusion lightly. The court recognized the constitutional right to a jury trial in the United States and engaged in a comprehensive analysis of analogous case law. Chapter 15, by nature, is deferential to the laws and procedures of foreign jurisdictions, but it does not require that the US courts recognize procedures that are contrary to the public interest. Nor will the US courts permit such deference. Ultimately, the court reasoned that the absence of a jury trial does not hinder the ability of a court to conduct a fair and impartial proceeding. The court looked to the legislative intent of Congress, highlighting that the public policy exception should be narrowly interpreted, as the word manifestly in intentional usage restricts the public policy exception to the most fundamental policies of the United States. 43 Public Interest: Metcalfe & Mansfield In re Metcalfe & Mansfield Alternative Investments 44 further affirms the narrow interpretation that the US courts have given to the public policy exception in Section 1506 of the Bankruptcy Code. The main issue in this case concerned the enforcement of Canadian orders with respect to the restructuring of the 43 Id at 336 (citing 2005 U.S.C.C.A.N. 88, 172). 44 In re Metcalfe & Mansfield Alternative Investments, 421 B.R. 685 (Bankr. S.D.N.Y. 2010).

23 Chapter 15: A Canadian Perspective Asset Backed Commercial Paper (ABCP) market in Canada. The Canadian proceedings under the CCAA were initiated to effect the restructuring of all outstanding third-party (that is, non-bank sponsored) ABCP obligations. The US bankruptcy court granted recognition of the Canadian proceeding as a foreign main proceeding and enforced the Canadian sanction order and plan implementation order. The key concern of the court was whether the broad third-party non-debtor release and injunction should be enforced in the United States. Non-debtor releases and injunctions are not typically enforced by the bankruptcy courts, as there is a significant opportunity for abuse. 45 The Ontario Court of Appeal, in deciding that the lower court had jurisdiction to approve a third party non-debtor release and injunction, reasoned that a third party release in a plan of comprise or arrangement may be sanctioned where those releases are reasonably connected to the proposed restructuring. 46 In reviewing the facts, the US bankruptcy court acknowledged that the United States and Canada share the same common law traditions and principles of law. In many cases, US courts have granted comity to Canadian proceedings, recognizing the validity of Canadian procedural standards. The court underscored the importance of invoking principles of international comity, noting that relief granted in a foreign proceeding and the relief available pursuant to a US proceeding does not need to be identical. As stated by the court, principles of comity in Chapter 15 cases support enforcement of the Canadian orders in the United States whether or not the same relief could be ordered in a plenary case under Chapter The general success of Chapter 15 cases ancillary to Canadian insolvency proceedings has resulted in increased interest in the use of Chapter 15. It is our view that Canadian debtors and creditors concerned with the costs associated in US foreign main proceedings will work hard to utilize Chapter 15. It can be expected that Chapter 15 will become a normal part of Canadian proceedings where there is a US subsidiary to a Canadian parent and that it may indeed become the structure of choice. 45 Id. at Id. at Id. at 700.

24 By David F. W. Cohen Conclusion In the seven years since the introduction of Chapter 15, significant progress has been made in how cross-border insolvencies are administered. The Model Law has codified and entrenched many of the practices of the Canadian judiciary prior to 2005, and facilitated the cooperation and comity between Canadian and US courts. It is our view that the utility and acceptability of the use of Chapter 15 proceedings to recognize Canadian insolvency proceedings will be enhanced with experience. It is reassuring that there appears to be a growing knowledge among both US and Canadian insolvency practitioners as to the intricacy of the two regimes and growing comfort in the use of Chapter 15 as another tool for efficient administration of bankruptcy cases. With the world markets in a state of flux, and the uncertain future of many business operations, the utility of Chapter 15 is certain to evolve and expand. Chapter 15 and the related amendments to the CCAA and, to a lesser degree, the BIA, afford global creditors the opportunity to draw benefits from various jurisdictions. Where, for instance, the Canadian courts would be more efficient or the US courts would be more sympathetic, creditors who would have recourse in either jurisdiction now may have the ability to influence certain proceedings. Chapter 15 should not be viewed as a limited tool. It fits many circumstances and it facilitates a speedy reorganization or sale. In many cases, it may actually be a preferred process, achieving efficiency and progress without doing harm to due process. A benefit of the Model Law is that it allows cooperation among multiple jurisdictions. In that respect, it is important to remember that Chapter 15 functions as a two-way street: Canada has an equivalent process for US main proceedings to be recognized by a Canadian insolvency court in a Canadian equivalent foreign main proceeding/canadian ancillary proceeding recognition case. Just as Chapter 15 aids in the resolution of Canadian insolvency matters, so do the CCAA and the BIA for US main proceedings.

25 Chapter 15: A Canadian Perspective Key Takeaways Keep in mind that Chapter 15 proceedings can be used to mitigate the difficulties posed by the dissolution of cross-border business operations, and has been applied frequently in Canadian insolvency matters. Both US and Canadian insolvency practitioners are using Chapter 15 as a tool for the efficient administration of bankruptcy cases. Understand that if there is no foreign proceeding pending, Chapter 15 is not available to the applicant. In Canada, under the CCAA, a foreign nonmain proceeding is simply defined as a foreign proceeding, other than a foreign main proceeding. 48 Inform the client that while the court has discretion under Chapter 15, Section 1522(a) of the Bankruptcy Code provides that a court may only grant relief under Section 1521 if the interests of creditors and other interested entities are sufficiently protected. 49 In many ways, Chapter 15 proceedings operate in tandem with foreign main proceedings. Canadian courts endeavor to cooperate with Chapter 15 courts. David F. W. Cohen is a partner in Gowling Lafleur Henderson LLP s Toronto office. He practices restructuring, insolvency, and debt finance law domestically and cross-border. He is national leader of Gowlings s Restructuring and Insolvency National Practice Group and coordinates Gowling s Distressed M&A Practice. He acts for secured creditors, debtors and other stakeholders in insolvencies and restructurings. Mr. Cohen is corporate secretary on the executive board of the TMA. He is also one of four members of the TMA Operations Committee. He served six years as a director of the TMA (Toronto Chapter) Board in a number of executive positions. He served as chair of the Canadian Bar Association National Bankruptcy and Insolvency Section for a two-year term ending in September Mr. Cohen taught the only bankruptcy law course at Osgoode Hall Law School (one of the top law schools in Canada) for five years. Mr. Cohen has been recognized as a leading expert in Restructuring and Insolvency Law 48 See Companies Creditors Arrangement Act, R.S.C. 1985, c. C U.S.C.A 1522(a) (West 2012).

26 By David F. W. Cohen in Canadian Legal Lexpert Directory 2012, PLC Which Lawyer? 2012 and Chambers Global Acknowledgment: The author wishes to express his gratitude to Cara Sklar, associate at Gowling Lafleur Henderson LLP, for her extensive assistance in the research and preparation of this chapter. Ms. Sklar is an associate in the Financial Services Group in Gowling s Toronto office where she practices in the areas of banking, restructuring and business law. As a member of Gowling s Restructuring and Insolvency Practice Group, she has acted for secured creditors on a wide range of commercial insolvency matters. Ms. Sklar summered and articled with Gowling Lafleur Henderson LLP after obtaining her law degree. During her articling term, she was seconded to the legal department of a multinational food and beverage company.