Yesterday, a three-judge panel of the Ontario Court of Appeal unanimously ruled that the plan to restructure the market is fair and legal.
The court rejected an appeal by a group of about a dozen ABCP holders of more than $1-billion of paper, who were angry about legal releases that will be granted under the plan to most of the market's major players - from banks to credit rating agency DBRS.
The releases protect the players from almost all lawsuits related to ABCP, with the exception of some very specific potential fraud allegations, prompting some investors to argue that they are unfairly being forced to give up their right to sue for things such as negligence and misrepresentation.
Following the court's decision, the committee that crafted the restructuring plan, headed by Toronto lawyer Purdy Crawford, said the plan "can now move forward to completion."
"Absent any further appeals, we expect the restructuring to close by Sept. 30, 2008," Mr. Crawford stated.
Some lawyers said their clients will now consider whether to take their cases to the Supreme Court.
Allan Sternberg, one of the lawyers who appealed to the Ontario court, said his client, Montreal businessman Hy Bloom, whose two holding companies own ABCP, has not yet decided whether to appeal to the Supreme Court.
"There are cost consequences," he said, noting that an appeal would likely cost his client more than $50,000.
Howard Shapray, a lawyer for Ivanhoe Mines Ltd., said yesterday he hadn't yet spoken to his client about an appeal.
But "it is a fair expectation that somebody is going to apply for leave to appeal," he said. "It's an issue of national importance, which is the primary ground the Supreme Court of Canada looks to, and they also look to the issue of whether there's a conflict at the appellate level, which we clearly have in this case," he said, suggesting that the Ontario Court of Appeal ruling conflicts with an earlier decision in another case from the Quebec Court of Appeal.
In an interview, Mr. Crawford said that "all we're doing is getting ready as soon as we reasonably can to close this transaction. We don't know whether there will be an appeal or not. If there is an appeal, we will deal with it."
Mr. Crawford declined to comment on whether the committee could complete the restructuring if there were an outstanding application to appeal.
"We don't want to play games with anybody," he said. "On the other hand, we have a lot of clients that need their money, so we'll do the best we can to move this forward as fast as possible."
When individual retail investors threatened to block the plan earlier in the restructuring, brokerages and banks that sold them the paper agreed to deals that would see most of them receive 100 per cent of their money back.
Mr. Crawford said the committee can continue to encourage "people who sold the paper to the potential appellants to do whatever they can to arrive at a reasonable settlement with them."
"The reality is that some of them [the upset investors] are damn lucky they didn't win the appeal here, because they begin to realize they'd be a hell of a lot better off with the restructured paper," he said.
Mr. Crawford noted that the majority of the corporate investors voted for the restructuring.
Benjamin Zarnett, a lawyer for the committee, noted that investors would have to get leave to appeal from the Supreme Court before an appeal could go ahead, and that is granted "in a very, very small minority of cases in which it's asked for. In this case you have two decisions of the Ontario court approving the plan, and a very strong decision from the Court of Appeal today."
Many of the more than 2,000 retail investors who are holding frozen commercial paper cheered the court's decision yesterday, as they are one step closer to recouping their funds.
"I was extremely relieved to hear that the Ontario Court of Appeal not only dismissed the appeal but did so in a unanimous way," Murray Candlish, an investor in Daysland, Alta., who has more than $300,000 tied up in the market, said in an e-mail.
Similarly, Brian Hunter, a Calgary oil and gas engineer who has become an informal leader of the small investors, said, "I think we're done here, and should be moving forward."
"Let's just drive on and don't hold us hostage any more."
It's the second straight legal loss for the opponents, who hold only about 3 per cent of the affected paper but have fought hard.
The decision means that the angry investors, which include companies such as Jean Coutu Group (PJC) Inc., will lose the right to sue except in narrowly defined cases of potential fraud. The opponents argued that was not allowed under bankruptcy law but the judges disagreed, saying the rules allow such a compromise.
The committee that crafted the plan had argued that without the releases some players such as banks would not participate and the restructuring would fall apart with massive losses for all investors.
The appeal court ruled that although approving such legal releases wasn't easy, it was permitted. "While the notion of releases in favour of third parties - including leading Canadian financial institutions - that extend to claims of fraud is distasteful, there is no legal impediment," the court ruled.
"In insolvency restructuring proceedings almost everyone loses something," it said.
WHY DID THE ABCP MARKET FREEZE?
Canada's asset-backed commercial paper market was humming along until last summer's U.S. subprime mortgage crisis sent financial markets around the world into a tailspin.
For decades, banks had been pooling bundles of debt such as mortgages and credit card receivables and selling investors short-term notes that earned interest from them. More recently, a crop of other financial firms waded into the mix, spurring the creation of Canada's $32-billion third-party (not sponsored by the big banks) ABCP sector.
When the U.S. subprime mortgage market cratered last summer, investors realized that some of those mortgages had been pooled into these types of assets, causing them to pull out. While the third-party ABCP sector held a tiny proportion of U.S. subprime, it became a casualty when some banks declined to give the commercial paper trusts emergency funds, citing a technicality in the wording of their emergency funding agreements.