Tuesday, 27 October 2015

Appeal Court orders security payment of almost $1 billion

Three months ago, the tobacco companies celebrated an early win at the Quebec Appeal Court when that body struck down a requirement for them to make an up-front payment to the smokers they had injured before they had exhausted their appeals of the ruling against them in the Montreal Tobacco Trials.

It now looks like that celebration may have been shortlived.

While not reversing the decision, the Court today imposed early payments of an equivalent amount on two of the three companies. What the companies won on the provisional execution merry-go-round, they have now lost on the security swings.

(Unlike the provisional execution, the money will not be distributed to class members until the case is finally resolved - but it won't be distributed to the owners and shareholders either.)

The defeat of provisional execution

Justice Riordan thought it was unfair for the victims of the companies' wrong doing to have to wait any longer before receiving some portion of compensation that was owed to them. He was aware that the appeal process could drag on for years, and that many of the victims might not live that long. Besides, as he ruled, "it is high time that the Companies started to pay for their sins."

In his May 27th ruling on the case, he ordered the companies to make a payment of $1.13 billion within 60 days. This amount is roughly equal to their combined yearly income.

The companies rushed to the Appeal Court to have this early payment struck down, arguing that they were unable to finance the payment without becoming insolvent. In support of these claims, they laid bare their current financial situation.

On July 23rd, the Appeal Court agreed to strike down the provisional execution, citing an unwillingness to ever apply such a procedure to a class action.

The judges did, however, give a not-very-subtle hint that they would consider other ways to skin the early payment cat: "This is not to say however that such facts and arguments could not give rise to other recourses or orders."

The subsequent request for security

The lawyers representing Quebec smokers regrouped and returned to the Appeal Court earlier this month to ask for the companies to be told to set some money aside while the appeals were being heard. This security was necessary, they pointed out, because without it the companies would respond to their eventual defeat by filing for bankruptcy and preventing their clients from ever receiving any money.

In the meantime, the companies were trying to make themselves judgment proof by sending all of their money offshore. When the appeals are finished, the Canadian cupboard will be bare.

This, they told Justice Mark Schrager, was a industry's litigation strategy to ensure they would never have to pay. It was put to the judge as a game of "heads I win, tails you lose."

The Court's agreement

Justice Schrager agreed that these concerns were founded. In his ruling issued late today he cited the coin toss analogy: "Sometimes, the vernacular is pointedly apt."

He noted the companies failure to save any money or make other provision to pay victims should Justice Riordan's ruling be upheld. He recalled that the companies had so recently threatened to put themselves into bankruptcy. (Justice Schrager was one of the panel of 3 judges who decided on the provisional execution).

These two behaviours gave him reason to act. These circumstances taken together are a “special reason”. I will order that security be furnished.

And a rejection of the industry's modus operandi

In presenting their case to Justice Schrager, lawyers for the tobacco companies had insisted that it was normal business practice for them to funnel all of their earnings to their off shore owners and to not retain any for future litigation requirements. So, too, they said, was the decision of the parent companies to not bail the Canadian operations out if/when they were faced with court-ordered payments.

This argument got very little sympathy from Justice Schrager.

I do not question [the companies'] right to appeal but neither can I stand idly by while [they] pursue an appeal which will benefit them if they win but which will not operate to their detriment if they lose. Continuing the practice of distributing earnings out-of-jurisdiction at this point is at best disingenuous and at worst, bad faith. 

He did not, however, want to give them an excuse to go into bankruptcy. Rather than require that they change their financial flow or finance a large single payment, he merely ordered them to redirect a significant portion of their earnings for 18 months to a forced-savings account.

The poetry of a security equal to the provisional execution.

The Blais-Létourneau lawyers had asked for $5 billion to be set aside, but Justice Schrager felt this was too much.

Instead, he settled on exactly the same amount that Justice Riordan had identified for provisional execution: $1.131 billion, pro-rated to $984 million for the two companies involved.
  • Imperial Tobacco must provide $758 million in 7 quarterly payments of $108 million between December 2015 and June 2017.
  • Rothmans, Benson and Hedges must provide $226 million in 6 quarterly payments of $37.7 million between December 2015 and March 2017.

The lucky third amigo

Whoever caused Guy Pratte to be so indisposed that he could not argue the case in early October should ask for a reward.

When scheduling the hearing on the securuity, the Blais-Létourneau lawyers were faced with a lengthy delay resulting from Mr. Pratte's (unspecified) inability to attend court. Rather than delay proceedings, they decided to move forward against only two of the companies. They renounced their right to do so later for JTI-Macdonald.

As a result, JTI is off the hook for the $143 million it would otherwise similarly have been expected to provide in security.

Am I the only one who suspects there is an interesting but not-yet-told story behind this?

And there will be more!

There are not one but two court hearings related to this case next week. In Toronto's commercial court, the Blais-Létourneau lawyers will challenge a proposed settlement between the insolvent Reliance Insurance Company and Rothmans, Benson and Hedges, and Imperial Tobacco.

At the Montreal Court of Appeal on November 5th, Simon Potter will present his request that Justice Riordan be told to stop making any further decisions on the case until the appeals are finalized.

Tuesday, 6 October 2015

Trying to keep tobacco profits from fleeing the country

Today's event was another preliminary round in the Appeal Court review of the Blais-Létourneau tobacco trials. Lawyers representing Quebec smokers came asking for an order to force the defendant tobacco companies to stop shipping their money overseas while the appeal is underway.

It has been almost exactly three months since the Court was persuaded by the defendant tobacco companies to overturn the $1 billion provisional execution that Justice Riordan had included as a kicker in his excoriating May 27th ruling against them. With their decision that there was insufficient basis for this unusual pre-paymentm  the prospect of a change in money-flow went up in smoke, as it were.

The panel of 3 judges was not without some sympathy to the class members, and in their ruling hinted at other tactics - "recourses or orders" - that the lawyers representing smokers in these class actions might want to consider. One of the lawyers writing that decision was Justice Mark Schrager.

Today, Justice Schrager was given the chance to explore the different "recourse or order" proposed by the plaintiffs to address their concern that after 17 years of trial, and despite a precedent-setting judgment vindicating their efforts, they might well end up empty-handed if the companies were able to keep their money out of reach. It was to Gordon Kugler that the task of presenting their "Motion to order appellants to furnish security" was assigned.

For the past two  years it has been Mr. Kugler who has stick-handled his team's attempts to prevent the companies from becoming effectively judgment proof.  His first attempt was two years ago before Justice Mongeon, when JTI's corporate reorganization came under scrutiny.

Conspicuous in its absence.

But today, JTI was no-where to be seen.

Before the hearing got underway, Mr. Kugler explained that scheduling conflicts and medical issues on JTI' and his own side would have resulted in an unreasonable delay, had they continued to include JTI in this motion. Instead, he proposed to withdraw (permanently) his request for a order on JTI, and to forego the 13% of the funds they wanted secured.

As head-scratchingly fishy as this sounded (really? with such big legal teams, no one could pinch-hit?), this sudden adjustment passed without much further comment or objection from the other two defendant companies.

For want of its lawyer, JTI was dropped from this aspect of the case. Yet several members of JTI's legal team watched from public benches  as their co-defendants presented reasons why they should be able to continue with the "business as usual" of sending all their money to their foreign owners.

The Plaintiffs:
Money flows to shareholders, but none is saved for victims

Mr. Kugler's arguments today, like the motion, were clear and unornamented.

Since the companies were first facing these lawsuits in the late 1990s, Mr. Kugler said they had reorganized their business and "Shielded themselves from unfavourable judgment by paying money to their offshore owners. In the 17 years since the suits were initiated, they have paid collectively almost 20 billion to their related companies, and they didn't put aside any money to satisfy this judgment."

It is not just that they failed to save before the ruling against them, he pointed out, but "In going forward there is no indication that any money has been or will be put aside."

He cited the positions taken by the companies earlier this summer, and their threats that they would go bankrupt if they were required to come up with $1 billion dollars. By that logic, one should expect that they would seek bankruptcy protection if they ultimately lost their case. The $15+ billion award is growing -- with a mind-boggling $1 million in interest being added every day.

Mr. Kugler suggested that they might elect to bankrupt before the appeal was finished, knowing that the creditor protection act (CCPA) could result in all other proceedings - even the appeals -- being suspended.

As their motion puts it, the companies "brazenly seek to unjustly benefit from the appeals process by putting themselves in a position whereby they will not be obliged to satisfy the judgment if their appeals are maintained and they will be unable to satisfy the judgment if their appeals are dismissed."

Mr. Kugler was more pithy in describing this strategy to Justice Schrager. The companies would use bankruptcy and appeal courts to play "heads we win, tails you lose."

The remedy he proposed was to use the Quebec Code of Civil Procedure provision that "a judge of the Court of Appeal may, on a motion, for a special reason ...order the appellant to furnish, within the time fixed in the order, security in a specified amount to guarantee in whole or in part the payment of the costs of appeal and the amount of the condemnation, if the judgment is upheld." (Article 497)

Justice Schrager was asked to require the companies to stop sending their profits ($1 billion per year for all 3 companies) to their owners, and instead make quarterly payments of about $217 million into "irrevocable letters of credit".

If the companies win their appeal, they get their money back. If they lose the appeal, or if they put themselves into bankruptcy court, the money would be made available to members of the class.

Business as usual 

Deborah Glendinning presented Imperial Tobacco's explanation as to why there was no exceptional circumstance to justify an order to stop sending their profits overseas. (Eric Préfontaine provided the legal precedents).

The realignment of BAT's operations in Canada had happened in 2000, she said, well before 2005, when the court authorized the class action suits, filed in 1998, to proceed.

She admitted that ITL had made no provision for litigation payments up to this point and confirmed that they had no intention of doing so now. "No provision will be made before final judgment."

This, she said, was the normal way of doing things. To impose a letter of credit on the companies would give a special status to the class action plaints and elevate their interests above others (in a bankruptcy proceeding). 

No new exceptional events justified such a decision. "This is not a case where after a judgment the party undertakes transactions to move assets away from a judgment creditor. To the contrary, all of the evidence before the court is that things are business as usual."

Moreover, such an order would not be a practicable option. "It is a stretch to suggest that somehow a company that wants to remain a going concern can pay all its earnings out either by cash or by letter of credit every quarter. It just cant happen."  

Because her client doesn't have the ability to raise money in the market (it has an agreement with BAT that it will not do so), its "back will be up against the wall" and this, she said, would diminish the appeal rights of the company.

The plaintiffs need the companies to be 'going concerns'

Simon Potter, speaking for Rothmans, Benson and Hedges, continued on the theme that a Court order that required profits to be banked would be both unfair and unrealistic.

In doing so, he made clear some points that have not been raised earlier in the trial.

He said firmly that PMI, his parent company, is "not stepping up to pay this judgment". The parent company that benefitted from cigarette sales would not contribute to paying for the damage.

He warned that the assets of RBH, which were stockpiles of cigarettes, manufacturing equipment and cigarette trademarks, were not the type of asset that could be usefully handed over in lieu of cash to the winners in the lawsuit. No option for the plaintiffs but to keep those assets in production, he suggested.

He identified the realpolitik of a large award. From the outset of the trial, he said, the plaintiffs had known that they would not receive a big cheque at the end. They would have understood that they would "have to rely on the revenues of those companies and come to some kind of arrangements. No one ever thought that 27 billion or 15 billion or 1 billion would be paid the day after a final judgment."  

By keeping on trucking, he suggested, his client was staying in a position that would allow it to begin to make payments later, and this was something that the plaintiffs should appreciate. "The company is a good going concern... The only way they going to get money is to make sure these companies are good going concerns. There are no assets being sold. No conversion of assets. No rendering of RBH less solvent than it was before. No one is making the plaintiffs position worse."

Instead, he said, the plaintiffs should be accepting of business as usual at this time. "The proper protection for them is to hurry along towards the final judgment and to leave the companies as a going concern, without having a run of creditors on them, without signalling to the rest of the world that everyone who shows up should get security."

11 months and counting

Simon Potter confirmed the rumour that the main appeal of Justice Riordan's decision will be heard in September 2016.

Justice Schrager:
Reaction but not ruling

Justice Schrager has possibly the world's most expressive eyebrows.

At several times during the day he shrugged, rolled his eyes and otherwise communicated that he was not buying the arguments he was being given. This happened once or twice with Gordon Kugler, and multiple times with the companies' lawyers.

The judge also showed that he was very familiar with the file. He put his finger on errant figures before counsel could, and challenged their claims and suggestions by quickly pointing to contradictory facts on file.

But he gave very little indication of where he was leaning. Or when he would decide.