Quebec lawyers provide a context to the tobacco industry's insolvency strategy ....

Within weeks of lawyers for injured Quebec smokers being handed resounding support from the Quebec Court of Appeal, they have been landed into the Ontario legal system, where they have to refight the right of victims to compensation. 

In need of an explanation for why this is happening? Look no further than the Factum these plaintiffs filed in advance of the CCAA hearing scheduled for this coming Thursday and Friday.

As they explain, this month's events are just the latest twist in a decades' long history of dirty tricks, illegal behaviour and abuse of process. The introduction to their Factum is pasted below - the complete version provides additional insight and can be read here. 

Extract from the
FACTUM OF THE QUEBEC CLASS ACTION PLAINTIFFS

PART 1 - OVERVIEW

1. The publicly-listed parent of each of the Tobacco Companies issued a press release on the day that its subsidiary filed an ex parte application for an Initial Order. They must all be using the same public relations consultants because they all had the same message - “business as usual”

2. The Initial Orders sought and obtained permit each of the Tobacco Companies to carry on business as usual. All arm’s length parties and even related parties would continue to be paid as in the past. This includes all intercompany payments, as well as payments of interest and royalties which, in the case of JTIM, had already been characterized by the Quebec Courts as artificial creditor-proofing schemes.

3. Although not mentioned in any of the press releases, the Tobacco Companies also intended to conduct their version of business as usual vis-à-vis the Quebec Class Action Plaintiffs, meaning paying no debt arising from the Riordan Judgment and Appeal Judgment and continuing their two-decade long war of attrition. However, because of their striking lack of success before seven judges of the Quebec Courts, this time the Tobacco Companies sought the vehicle of CCAA proceedings in Ontario to continue their business as usual. Consistent with the manner in which they had conducted themselves in the Quebec Class Actions, the Tobacco Companies did not see fit to make full and fair disclosure to this Court in ex parte applications invoking contrived claims of urgency.

4. The egregious conduct of the Tobacco Companies has resulted in an award of billions of dollars of moral damages to the Quebec Class Members who were the victims of that conduct, and a significant condemnation for punitive damages that was confirmed in the Appeal Judgment. The misconduct of the Tobacco Companies occurred over many decades. The first phase was during the 48-year class period preceding the date of institution of legal proceedings in 1998 by the Quebec Class Action Plaintiffs. The second phase comprises the legal proceedings in Quebec until the Appeal Judgment was rendered. The third phase commenced on March 1, 2019, with the release of the Appeal Judgment.

5. The conduct of the Tobacco Companies during the first phase is described in Exhibit 1 to the Johnston JTIM Affidavit. They showed callous disregard for the health of the consumers of their products in a relentless pursuit of profit maximization and colluded with each other to mislead and misinform the public about the dangers of smoking. They cynically disputed clear scientific evidence of the dangers of smoking by publicly questioning the accuracy of scientific research to generate many billions of dollars in profits. Justice Riordan described their faults as "particularly reprehensible", “intentionally negligent”, “so far outside the standards of acceptable behavior”, “egregious”, “immoral” and in “bad faith”.2 The Quebec CA agreed and held that the Applicants “intentionally violated the right to life, security and integrity” of the Quebec Class Members and engaged in “vexatious and malicious commercial conduct”.3

6. During the second phase, the Tobacco Companies waged an unparalleled war of attrition against the Quebec Class Action Plaintiffs, consistently employing abusive and dilatory tactics. Their conduct in the legal process was so beyond acceptable practice that Justice Riordan determined that he would adjudicate upon this procedural abuse when all appeals had been exhausted.4 Imperial’s conduct was so extreme that it even engaged outside counsel to destroy evidence regarding scientific research.5

7. The Tobacco Companies concurrently embarked on an obvious and, at least in the case of JTIM, admitted, strategy of making themselves judgment-proof. They took no provisions for a possible future condemnation against them, and instead used various techniques to distribute funds to their parents or related entities, outside of the jurisdiction. Justice Mark Schrager J.A. remarked that “it would be far too cynical to adopt the position that [they] were so foresightful and efficient in ordering [their] affairs so as not to have the liquidity to satisfy the judgment”.6 He held that “[c]ontinuing the practice of distributing earnings out-of-jurisdiction is at best disingenuous and at worst, bad faith”.7

8. On March 1st, both Imperial and RBH commenced the third phase by immediately serving urgent motions to seek a stay of execution of the Appeal Judgment, returnable before the Quebec CA on March 4th. The Quebec Class Action Plaintiffs served a Motion to Withdraw Security, returnable on March 7th. On March 4th, counsel for Imperial and RBH agreed that their motions as well as the motion of the Quebec Class Action Plaintiffs would be heard on March 25th by the Quebec CA. They were given until March 15th to amend their motions seeking a stay of execution and JTIM had until that date to file its own motion. None of the Tobacco Companies informed the Quebec CA or counsel for the Quebec Class Action Plaintiffs of their intention to seek an Initial Order ex parte under the CCAA.

9. In their respective CCAA applications, neither JTIM nor ITCAN advised the Court of the pending March 25th hearing before the Quebec CA. JTIM even went so far as to seek a stay of proceedings in favor of Imperial and RBH, without advising the Court that Imperial and RBH had already agreed to the March 25th hearing.

10. The Tobacco Companies’ attempts to game the system were unconscionable. They have shown reckless disregard for the Court in their applications and have presented false and inaccurate reasons for claiming the urgent need for an ex parte hearing on their applications for an Initial Order. There was absolutely no legitimate excuse for the Applicants failing to respect the usual practice of giving prior notice to at least some major creditors and then absolutely no possible excuse for failing to make full and fair disclosure to the Court. In the case of JTIM, for example, it purposely omitted to file the Riordan Judgment, which made specific factual findings about its “creditor-proofing” scheme, which Justice Riordan described as a “sham”, did not disclose to the Court that when it filed for CCAA protection in 2004, it did not ask for the right to continue making payments of interest and royalties to related parties, or that during the six-year period of its prior CCAA proceeding and thereafter, interest and royalty payments were suspended, reduced or amended without consequence to JTIM, “whenever it suits [it]”.8

11. The filings by the Applicants were all made for an improper purpose, including as a transparent collateral attack upon the Quebec CA and its processes. Clearly, the purpose of the CCAA cannot be intended as a shield for unrepentant abusers of the legal system and of the public, against a single group of judgment creditors in class action litigation.

12. All three Tobacco Companies sought Court permission to continue to make intercompany payments as in the past, except for dividends. They consider that it is appropriate for them to conduct business as usual while tens of thousands of Quebec Class Members, who are the victims of the faults of the Tobacco Companies, have not received any compensation in the past 21 years for the serious damages they intentionally and fraudulently caused.

13. All three Tobacco Companies provided spurious pretexts for filing under the CCAA. None of them is insolvent today. The only reason for filing was to frustrate the Quebec Class Action Plaintiffs’ efforts to obtain justice and to seek leverage to use improperly against them. By way of example:

a. they purportedly seek a global settlement of all tobacco claims, despite having never before made the slightest attempt to negotiate a settlement with the Quebec Class Action Plaintiffs, let alone make an offer;

b. they claim to want to treat all tobacco claimants fairly and equitably, but dragged out the litigation for decades and engaged in illegal, abusive and dilatory tactics that gave rise to punitive damages; and

c. they refer to the amount of excise and sales taxes that they pay every year, but that did not stop them from colluding to illegally smuggle cigarettes into Canada prior to 2004 to avoid these taxes, for which they faced criminal charges and paid fines in excess of 1 billion dollars.

14. RBH obtained an exceptional order that would permit it to make a leave application to the SCC but then would freeze all steps in relation thereto. Aside from brazenly seeking to override the CCP, the SCC Act, the SCC Rules and the fundamental rights of the Quebec Class Action Plaintiffs, RBH appears intent on trying to “park” a leave application to the SCC as an insurance policy in the event its CCAA proceeding fails. JTIM considered that this is such a good idea that it is now seeking the same relief. This may be among the more disingenuous devices yet attempted by them in their war of attrition strategy.

15. After using the Appeal Judgment as the pretext for the CCAA filing, they appear to suggest that they want to only "commence" an appeal process of that very judgment, presumably so that it could be revived later if they can't wear down the Quebec Class Action Plaintiffs enough in the present insolvency process. That is such a blatant abuse of both the insolvency process and the appeal process (and so clearly improper and contrary to law) that it must be rejected out of hand. If that were not enough, the Tobacco Companies, clearly have no intention of ever satisfying the Judgment Debt if and when the leave application or appeal to the SCC is ultimately dismissed.

16. Justice Riordan decided that “it is high time that the [Tobacco] Companies started to pay for their sins”9 but they have done everything possible to avoid doing so. This is not a case of an honest and unfortunate debtor that requires CCAA protection to restructure and become profitable. These extremely profitable companies have inflicted grievous and sometimes fatal harm on their victims and have refused to pay anything for their misdeeds. These exceptional circumstances dictate that the Court’s broad discretion be used to severely restrict the Tobacco Companies and achieve justice and fairness for their victims.

17. As stated by Justice Schrager, J.A. in the Security Judgment, “a strategic decision is required by [Applicants] in caucus with their parent companies and related entities who received the benefit of the profitable operations over the years”10, as to whether they intend to resolve the Judgment Debt. If they do not, the Tobacco Companies should be adjudicated bankrupt to avoid wasting tens of millions of dollars in CCAA expenses.

...

62. The CCAA proceedings should not be regarded as typical filings by commercial debtors in financial distress but rather as an exceptional situation where bad corporate actors are seeking the Court’s assistance to avoid paying a judgment debt to the victims of their malicious misconduct.

Footnotes

2 Riordan Judgment at paras. 239, 269, 288, 339, 369, 378 [ITCAN Application Record, Tab 2J].
3 Appeal Judgment at pars. 98 and 1149 [ITCAN Application Record, Tab 2A].
4 Riordan Judgment at para. 1196 [ITCAN Application Record, Tab 2J].
5 Riordan Judgment at paras. 365-366, 1010-1011 [ITCAN Application Record, Tab 2J].
6 Security Judgment at para. 1101 [ITCAN Application Record, Tab 2M].
7 Security Judgment at para. 52 [ITCAN Application Record, Tab 2M].
8 Schedule J to the Riordan Judgment at para. 2141(g) [ITCAN Application Record, Tab 2J].
9 Riordan Judgment at para. 1200 [ITCAN Application Record, Tab 2J]
10 Security Judgment at para. 52 [ITCAN Application Record, Tab 2M].

Ontario to CCAA: Let our case proceed!

Over the last day, the web-site maintained by Deloitte in its role as Monitor for JTI-Macdonald's creditor protection and the equivalent site maintained by Ernst and Young for Rothmans Benson and Hedges have been enriched by thousands of pages of material submitted by the government of Ontario. (At the time of writing, the equivalent material was not yet posted on the websites of the Imperial Tobacco Monitor (FTI Consulting).

Almost a decade has passed since Ontario filed a claim against tobacco companies, seeking reimbursement of the health care costs that resulted from their wrongful actions. You can be forgiven for not knowing much about this suit -- other than the periodic ruling that surfaced on the CANLII database of judgments, Ontario government lawyers and leaders have kept a studiously low profile.

But within the 42-page Factum and 1168-page Motion Record filed in anticipation of next week's hearing on the Comeback Motions, a lot more about province's intentions have been revealed.

Ontario wants its case to proceed - but Quebec's case should continue to be stayed.
In its Factum, the government of Ontario asks this Ontario court to delete those parts of the orders issued in March which stall Ontario's lawsuits. It promises that doing so will not result in any transfer of money.

2. Ontario seeks Orders varying the JTIM Initial Order, the ITCAN Initial Order and the RBH Initial Order to authorize and permit Ontario to continue the Ontario HCCR Action against all fourteen of the defendants in the Ontario HCCR Action with the exception that the taking of any future proceedings to enforce any judgment and/or collect any amount owing or found to be owing by JTI-Macdonald Corp. (“JTIM”), Imperial Tobacco Canada Limited (“ITCAN”) and/or Rothmans, Benson & Hedges Inc. (“RBH”) in the Ontario HCCR Action shall be stayed pending further Order of this Honourable Court. 

Like other plaintiffs, the Ontario government is calling foul about the use of the CCAA to suspend litigation.

13. Over the past decade, Ontario has invested a tremendous amount of time, money and effort to prosecute the Ontario HCCR Action in order to hold the thirteen defendant tobacco companies and the CTMC accountable for their conduct over the period from 1950 to the present. By obtaining ex parte the stays of the Ontario HCCR Action, JTIM, ITCAN and RBH have used the CCAA as a sword to cut down Ontario’s efforts and cause delay for an indefinite period of time of likely several years and cause serious prejudice to Ontario.

Tidbits

These documents shed a little light on the lawsuit...

Ontario was anticipating that its trial would start in 2020/2021
14... [the stay will undo court efforts] to move the Ontario HCCR Action forward and prepare it for the projected trial commencement date of late 2020/early 2021. 

A trial of one year was foreseen
80. Ontario estimates that the trial of the Ontario HCCR Action may take approximately one year. 

The role of GRE and other third parties was set to be aired
28. In May, 2011, ITCAN, Philip Morris International, Inc., Philip Morris USA Inc., Altria Group, Inc. Rothmans Inc. and RBH commenced third party claims against various corporations and individuals whom they referred to as “Aboriginal manufacturers”. These third party claims have not been discontinued; ,... During the Case Management Conference on March 8, 2019, Master Short set a timetable for the parties to deliver their motion materials in regard to GRE’s motion to strike. Also during the Case Management Conference on March 8, 2019, counsel for several other third parties advised that they are in the process of obtaining instructions regarding whether to bring a motion to strike the third party claims against them.

The court has been holding monthly meetings between litigants
42. Since January, 2018, the parties have participated in monthly Case Management Conferences conducted by Master Short on the second Friday of every month. 

Eight million tobacco industry documents have been handed over to government lawyers
48. The defendants have served Ontario with productions totaling in excess of 8 million documents.

Eight expert reports have been written
On or about June 15, 2018, Ontario served on the defendants the report of five experts whom Ontario retained to provide opinion evidence to establish liability on the part of the defendant tobacco companies. 

Ontario is claiming $330 billion in costs.
61. On January 31, 2019, Ontario served the expert report of Dr. Glenn Harrison (“Dr. Harrison”), an economist retained by Ontario, who has calculated the smoking attributable expenditures due to environmental tobacco smoke (second-hand smoke) in Ontario to be between $9.391 billion and $10.913 billion in present value 2016 dollars, depending on the assumed end-date for the breach exposure.

After 9 months of discussion, the disclosure of individual medical records was coming up for a hearing 
69. During the Case Management Conference held on October 12, 2018, Master Short advised that he had set aside June 4, 5, 6 and 7, 2019 as tentative dates for the hearing of a 25 motion by the defendants to obtain a statistically meaningful sample. The issue of the defendants’ statistically meaningful sample motion has been discussed during the monthly Case Management Conferences held on the following dates: August 10, 2018; September 14, 2018; October 12, 2018; November 9, 2018; December 14, 2018; January 11, 2019; February 8, 2019; and March 8, 2019.

The Comeback Motions 1: Some initial highlights

About a week remains before the April 4 and 5th court hearing on whether tobacco companies can continue to use the Canadian Companies' Creditors Arrangement Act (CCAA) to avoid paying damages to injured Quebec smokers (or other 'creditors'). Last night court filings by those who oppose the motion began to appear on one of the Monitor's websites.

There is a lot to plough through!  Here's a first course,,,,

The new documents:
1) The Quebec Class Action Plaintiffs Motions and Exhibits
2) Motions by lawyers representing 6 provinces (the Consortium).
3) Additional motions by JTI-Macdonald

The objections:

JTI-Maconald should not be able to seek leave to appeal to the Supreme Court while using CCAA.

3. The Consortium submits that to allow the Applicant to seek leave to appeal to the Supreme Court of Canada would be contrary to the stated purpose of the Applicant’s CCAA proceedings and would be an unnecessary, time consuming and costly application, at a time when all parties’ resources and focus should be on an efficient resolution of the CCAA proceedings.


Deloitte should not be appointed as a Monitor for JTI-Macdonald

15. In light of Deloitte’s and/or its affiliates’ relationship with the Applicant and its affiliates, the Consortium has serious concerns about the ability of Deloitte to fulfill the neutral and independent role required of a court-appointed monitor. 

21. The involvement of various Deloitte entities in respect of the intercompany transactions between JTIM and its related parties, its representations made to the Canadian taxing authorities regarding the creditor-proofing purpose of the intercompany transactions, its professional activities on behalf of the JTI Group (including as auditor for Japan Tobacco International), its professional involvement with the other Tobacco Companies, and its general activities on behalf of the tobacco industry (all as detailed in the Johnston JTIM Affidavit), as well as the failure of Deloitte to fully disclose same in its pre-filing report, creates an appearance of conflict that can only be resolved by the replacement of Deloitte as monitor.

Reducing the payments that JTI-M can make while under CCAA.

Lawyers for Quebec smokers have identified a number of expenses that JTIM is permitted to make.
Top of the list are the loan payments and royalty fees to its related companies as a result of "the tangled web of JTIM's intercompany contracts."  They are askign that all of the net cash generated by JTIM during the CCAA process be kept within the company in Canada.

On the strength of these contractual schemes, the JTI Group has been draining the profits out of JTIM year after year. Those contracts include the debentures and trademark agreements pursuant to which JTIM proposes to continue to make payments to its related entity during the pendency of the CCAA Proceeding. 

Other payments they want removed from the protected budget of the CCAA include any fees for a restructuring consultant. They say that this is redundant, given the role of Warren Winkler in the related ITL case.

Disentangling the three stays

The decision of Justice Hainey to prevent the plaintiffs in the Quebec class action from putting the Court of Appeal judgment into effect with respect to all three companies raised a lot of eyebrows. In their motion, lawyers for the injured smokers who might have hoped that a claim process would soon be in place lay out the reasons that the court should back down from this approach.

The CCAA stay of proceedings sought by JTIM, with a view to staying proceedings before the Quebec CA involving only Imperial and RBH, was a collateral attack on the judicial process of the Quebec CA for an improper purpose, to assist Imperial and RBH which had not yet filed for CCAA protection.

JTIM has manifestly not met the test for extending the stay of proceedings to third parties, let alone unrelated third parties. Furthermore, the stay of proceedings in favour of Imperial and RBH is unnecessary now that each of them has obtained an Initial Order. 

The Request for MORE TIME!

In JTIM's motion it is asking for a 3 month extention -- and has signalled that the other companies are doing likewise.

Some numbers

A week from tomorrow, lawyers representing 3 tobacco companies, up to 10 provincial governments and Quebec smokers will be facing off in a Toronto courtroom. Each side will be presenting Justice McEwan with their perspectives on the future of Canadian tobacco companies and the resolution of the lawsuits they face.

Voluminous material has been presented already to the court by the insolvency-pleading  manufacturers. It can be found on the sites of the Monitors (independent 3rd parties appointed to monitor the operations of the company during CCAA proceedings).

• The Monitor for Rothmans, Benson and Hedges is Ernst and Young.
• The Monitor for Imperial Tobacco is FTI Consulting
• The Monitor for JTI-Macdonald is Deloitte

As part of the application for creditor protection, each company was required to explain its circumstances. Their reports provide some numbers that might be useful to keep in mind.

Provincial government claims

Amount	Claimed by
$500 to $600 billion	Total claims facing industry
$330 billion	Ontario gov’t claim
$61 billion	Quebec gov’t claim
$10 billion	Alberta gov’t claim
$120 billion	British Columbia gov’t claim
$18 billion	New Brunswick gov't claim

Damages ordered in Quebec class action

Amount	Ordered against
$9.16 billion	Imperial Tobacco
$1.75 billion	JTI Macdonald
$2.706 billion	Rothmans, Benson Hedges

Next payment ordered by Quebec Court by May 1, 2019

Amount	Payable by
$759.2 million	Imperial Tobacco
$145 million	JTI Macdonald
$ 257 million	Rothmans, Benson Hedges

Assets (as of December 31, 2018)

Amount	Current assets held by:
$697 million	Imperial Tobacco
$307.3 million	JTI Macdonald
$1.875 billion	Rothmans, Benson Hedges
Amount	Other assets held by:
$4.84 billion	Imperial Tobacco
$1.583 billion	JTI Macdonald
$425 million	Rothmans, Benson Hedges

Liabilities (as of December 31, 2018)

Amount	Current liabilities  held by:
$867 million	Imperial Tobacco
$143,651,000	JTI Macdonald
$279 million	Rothmans, Benson & Hedges
Amount	Other liabilities held by:
$155 million	Imperial Tobacco
$144 million	JTI Macdonald
$60 million	Rothmans, Benson Hedges

Weekly earnings, based on cash forecast

Gross sales	Earned by:
$98,868,538.46	Imperial Tobacco
$19,800,538.46	JTI Macdonald
$57,440,000.00	Rothmans, Benson Hedges
Retained earnings	Earned by
$11,383,538.46	Imperial Tobacco
$1,169,307.69	JTI Macdonald
$13,160,000.00	Rothmans, Benson  Hedges

Number of employees

Number	Employed by
466 total	Imperial Tobacco
255 sales	Imperial Tobacco
800	Rothmans, Benson & Hedges
500	JTI employees

Sources
1. Imperial Tobacco Motion Record, including Thauvette Affidavit

2. JTI-Macdonald Motion record, including McMaster affidavit 

3. Rothmans, Benson and Hedges Motion record, including Luongo affidavit 

Another one bites the bullet - RBH files for creditor protection

There are many times in my life when news that all of Canada's large tobacco companies had been forced into creditor protection would have felt like BIG NEWS.

But when  Rothmans, Benson & Hedges sent the news around yesterday evening that it too had a court order suspending all legal action against it so that it could "carry on its business in the ordinary course",  the moment felt far more bland.Formerly unimaginable events are now occurring weekly.

The order protecting RBH was issued yesterday by Justice Patillo of the Ontario Superior Court. The substance of the Order was roughly similar to those issued by his colleagues over the past couple of weeks. As with the others, there is a comprehensive stay of all legal proceedings other than the rights of the companies to ask the Supreme Court to agree to review the decision of the Quebec Court of Appeal  which landed  on them 3 weeks ago.

With this latest move, the companies are united in sending to governments and other claimants a clear message: "Let's talk".

As Justice Patillo put it yesterday "RBH requires CCAA relieve to enable it to pursue a CCAA plan of arrangement while continuing to operate its business and keep creditors and contingent creditors on an equal footing to allow it to deal fairly with the claims against it, with a view to a global settlement."

Whether negotiations have begun is not known. In the Order issued by Justice McEwan last week, former judge Warren Winkler was given a $1 million budget to act as a "Interim Tobacco Claimant Coordinator".  Presumably he is already at work if he  wants to have something to report when the whole issue is considered again (the 'comeback motions') on April 4 and 5th. That hearing will now involve all three companies.

A modest course correction on JTI-Macdonald's creditor protection

Another day and yet another court order related to Canada's tobacco companies' attempts to avoid having to pay compensation to injured Quebec smokers.

Recap: After Quebec Court of Appeal judgment, tobacco defendants run to Ontario for bankruptcy cover 

• On March 1st, the Quebec Court of Appeal upheld Justice Riordan's multi-billion dollar ruling against the Big Three tobacco companies.
• A week later, on March 8th, JTI-Macdonald successfully asked for creditor protection under provisions of the federal Companies' Creditors Arrangement Act. Among the conditions granted to them by Justice Hainey was the right to keep shipping payments to other companies in the JTI family with whom they had debts.
• Before you could bat an eye, on March 12, Imperial Tobacco was also granted protection, and  was able to get  Justice McEwan to appoint a former judge to 'coordinate' all claims against the company.
• On the same day (March 12), Justice Hainey made public his  reasons for acceding to the requests of the companies. 
• Two days later (March 15), Justice McEwan did likewise with respect to Imperial Tobacco.

This week: Ontario courts revisit the JTI bankruptcy order, and annul one section favourable to JTI.

While we ordinary folk were still wading through the voluminous background material on the monitor's web-sites (FTI Consulting for Imperial Tobacco and Deloitte for JTI-Macdonald), lawyers representing the Quebec class actions were preparing their own request, which they filed with the court last Friday. 

Their request? An order that prohibited any payment of principal interest and royalties from JTI- Macdonald to its related companies. Today, Justice McEwan issued a 9-page hand-written "yes".

  

In doing so, he nodded to the views of Quebec courts that JTI-Macdonald was up to no good when it created a paper debt to itself. Today, Justice McEwan wrote: "The comments of Justice Riordan  and Justice Schrager raise clear concerns about the legitimacy of the inter-company contracts."

Justice Riordan's take on the ploy was described in his final ruling on the case:

[1101] In the first, we cannot but conclude that this whole tangled web of interconnecting contracts is principally a creditor-proofing exercise undertaken after the institution of the present actions by a sophisticated parent company, Japan Tobacco Inc., operating in an industry that was deeply embroiled in product liability litigation. Even Mr. Poirier could not deny that. And on paper, the sham may well succeed.

[1102] Unless the Interco Contracts are overturned, something that is not the subject of the present files, JTM appears to be nothing more than a break-even operation. So be it, but that is an artificial state of affairs that does not reflect the company's true patrimonial situation. Absent these artifices, JTM is earning an average of $103,000,000 a year before taxes and that is the patrimonial situation that we will adopt for the purpose of assessing punitive damages.

[1103] Then there is the qualitative side. The Interco Contracts represent a cynical, bad-faith effort by JTM to avoid paying proper compensation to its customers whose health and well-being were ruined, and the word is not too strong, by its wilful conduct.
This deserves to be sanctioned and we shall do so by setting the condemnation for punitive damages above the base amount

In the nick of time

As part of its request for protection, JTI was obliged to provide a forecast of its earnings over the next several weeks. Among them was a scheduled shipment of $7.648 million. Today's order will prevent that from happening -- although whether that money will ever be received by members of the Quebec class action is still not made certain!

Justice Hainey gives his reasons for siding with JTI-Macdonald.

In the middle of the week, Justice Glenn Hainey of the Ontario Superior Court issued his reasons for granting JTI creditor protection in a way that sideswiped ability of some Quebec injured smokers to claim compensation.

His ruling is now downloadable (2019 ONSC 1625). In case the spring thaw was beginning to make you feel better, reading his explanation will quickly restore your winter depression.

Justice Hainey seems to feel his job is to ensure that lawsuits against tobacco companies don't put them out of business.

[3] As a result of a judgment of the Quebec Court of Appeal released on March 1, 2019 in a class proceeding (“Quebec Class Action”), JTIM and two other defendants are liable for damages totaling $13.5 billion (“Quebec Judgment”). If this judgment is not stayed, its enforcement could destroy the company because JTIM does not have sufficient funds to satisfy the judgment. [emphasis added]

To be precise, he identifies concerns about the impact of "enforcement of the Quebec Judgment" on employees, suppliers, retailers and taxes. His expressed concerns for the 790,000 customers of JTIM does not extend to those whose claims against the company have been tried and proven.

"Is it appropriate to grant the requested stay of proceedings?" he asks and then replies in the affirmative based on the importance he sees in the court protecting the economic interests of the company.

[13] JTIM cannot pay the amount of the Quebec Judgment. Any steps to enforce the judgment could cause serious harm to JTIM’s business to the detriment of all of its stakeholders. In my view, it is appropriate for this reason to grant the requested stay of proceedings in favour of JTIM. 

And why did he extend his generosity to the other two companies? Because it was "just and reasonable" to do so, and that "the balance of convenience" the protection of the companies. Not once does he acknowledge the impact of his actions on Quebec class action members, or even how they might factor into his "balance of convenience."

Carved out of his general stay is the right of JTI-Macdonald to appeal the Appeal Court ruling to the Supreme Court. He gives no rationale for this decision - other than it being asked and considered by him to be "reasonable to permit" it happening.

Those who disagree will likely be in his court at 10 a.m. on April 4th when the "comeback motion" will be heard.

April 4th will be a busy day

It would appear that both the Imperial Tobacco and JTI Macdonald comeback motions will be heard on April 4th.  Not clear yet how this will be managed -- but the ITL date is clearly laid out in the notice to creditors that appeared in the Globe and Mail (and La Presse) this morning.

BAT tells investors it's "business as usual" for this "going concern" as it tries to force a settlement "plan of arrangement"

Every day seems to bring more paper to read.

Today more filings appeared on the website of FTI Consulting, which is the firm acting as a Monitor and charged with making public official documents related to Imperial Tobacco's use of federal bankruptcy laws to stop the clock on all litigation against it in Canada. The new material filed today relate to filings in the U.S. for "Chapter 15 Proceedings".

Meanwhile, information was circulated also in the United Kingdom where BAT talked about the case during its scheduled "Capital Markets Day" presentations to investors. 

Rather than paraphrase, here are some extracts from the 14-slide presentation.

Quebec Court of Appeal Decision: Supreme Court Appeal

• ITCAN continues to disagree with the judgments of the Quebec Court of Appeal and the Quebec Superior Court
• While ITCAN intended to seek leave to appeal the decision to the Supreme Court of Canada, all proceedings are now stayed due to ITCAN's decision to seek protection under the Companies' Creditors Arrangement Act (CCAA) on 12 March 2019.

CCAA Filing: Background

• 12 March: Board of Directors of Imperial Tobacco Canada Limited informed BAT that it sought protection for the company under CCAA. (CCAA: A federal statute that allows corporations to restructure their affairs while continuing to operate in the ordinary course of business.)
• The decision to file follows the Quebec Court of Appeal decision and the recent decision of a local competitor to seek CCAA protection.
• Initial Order obtained from the Ontario Superior Court of Justice on March 12.

CCAA Filing: Process - Appointment of a Monitor

• FTI has been appointed as Monitor to the company. Monitor's role:
• A court appointed position.
• Will have full access to the business and will monitor finances.
• Report periodically to the Court on business matters and matters related to the development of the plan.
• Assist with negotiations and the development of a final settlement.
• Can seek advice and directions from the Court as required.

CCAA Filing: Expected impact is 'Business as Usual' operations

• ITCAN will continue to operate as a going concern. 
• We expect the CCAA process to follow its normal course, under court supervision and that the company will continue to operate as usual in the meantime.
• All tobacco litigation is stayed with respect to the company and all of its affiliates, including BAT defendants.
• CCAA provides an opportunity to finally resolve all tobacco litigation in Canada within a structured negotiation process.

CCAA Filing: Next Steps

• A comeback hearing will occur on 4 April whereby:
• All claimants and stakeholders can appear and challenge any aspect of the initial order.
• It is likely that challenges will occur, but none have yet been received.
• In the meantime, all litigation is stayed and stakeholders are being informed of the filing.
• Imperial will now begin engagement with claimants and other stakeholders to advance a Plan of Arrangement. 

Hundreds of pages have been put on record. You think it unlikely that all of this was written in the two weeks since the Court of Appeal ruled? Me neither. 

Turns out the this development has been four years in the making. As the Monitor's first report notes "In anticipation of the Quebec judgment and pursuant to an engagement letter dated March 13, 2015, FTI was engaged to prepare, on a contingency basis, for the possibility of insolvency proceedings in which FTI would act as Monitor..."  (emphasis added)

Imperial Tobacco gets Ontario Court to give it creditor protection, freeze the security deposit and set up an arbitration body

Yesterday evening, while the rest of us were busy with dinner, Imperial Tobacco Canada Ltd let it be known that earlier in the day it had received creditor protection from the Ontario Superior Court (Justice McEwen). Within a few hours, the background documents had been posted by the monitor.

Lo and behold!  Like the order issued earlier this week by Justice Hainey, this one puts the brakes on all the lawsuits currently facing the company.

But there's a couple of added wrinkles!  This stay order also freezes the money that the Quebec Court of Appeal had required the companies to deposit.

THIS COURT ORDERS that during the Stay Period, all rights and remedies of any individual, firm, corporation, governmental body or agency, or any other entities (all of the foregoing, collectively being "Persons" and each being a "Person") against or in respect of the Applicants, the ITCAN Subsidiaries or the Monitor or their respective employees and representatives acting in that capacity, or affecting the Business or the Property or to obtain the funds deposited pursuant to the Deposit Posting Order (including, for greater certainty, any enforcement process or steps or other rights and remedies under or relating to the Quebec Class Actions against the Applicants, the Property or the ITCAN Subsidiaries), are hereby stayed.

(You will remember that Imperial Tobacco had been required in 2015 by the Quebec Court of Appeal to post $785 million. Following the court's affirmation of the award for Quebec class action members, this money was expected to be handed over so that some victims could begin receiving payments).

And more! The stewardship of tobacco litigation seems to be assumed by a new officer of this Ontario Court.

Former judge (Warren Winkler) is made an officer of the Court "to assist and to coordinate the interests of all persons... in connection with the pending litigation" and to set up a "Tobacco Claimant Committee".  A $1 million budget is set up for this purpose.

(You might remember the name -- Justice Winkler was the one who denied the Caputo class action. Intriguingly, one of the tobacco industry defendant lawyers in that case, Glenn Hainey, is the judge who only last week issued the first stay on the Quebec ruling).

Caputo vs. Imperial Tobacco Ltd., 1997 CanLII 12162 (ON SC)

The function of the Committee that Mr. Winkler will sets up is, as explained elsewhere in their application to "represent the interests of all Tobacco Claimants in negotiating a settlement with the Applicants and others."

All that in one afternoon!  Things move faster in Toronto.

Turns out it only takes one Ontario judge to stall six Quebec ones.

As reported here and in the mainstream media yesterday, JTI-Macdonald had asked for (and received) court protection under the Canada's bankruptcy laws (the Companies' Creditors Arrangement Act). Wanting to know more, I asked for (and received) copies of the court documents involved. They make for very disturbing reading.

It would appear that JTIM was able to ask for (and receive) the complicity of an Ontario lower court judge in suspending action on the Quebec tobacco trials.

Not just creditor protection for JTIM- but a stay of proceedings that favours all three companies

The kicker paragraphs of the 30-page "Initial Order" issued by Justice Glenn Hainey of the Ontario Superior Court begin about a third of the way in. After laying out the right of JTI to continue to do business as usual (and to continue to ship its profits to its off-shore owner), the Ontario judge sets a one month period when the rulings of the Quebec Court are effectively null and void.

"19. This court orders that during the Stay Period [until April 5, 2019 or later] none of the Pending Litigation or any Proceeding in relation thereto shall be commenced, continued or take place against or in respect of any Person named as a defendant or respondent in any of the Pending Litigation  ... and any all all such Proceedings currently underway or directed to take place against or in respect of any of the Other Defendants or any member of the JTI Group or affecting the Business or Property are hereby stayed and suspended pending further Order of this Court."

To add insult to injury, the order makes clear that governments will continue to get taxes, landlords will continue to get rent, corporate directors will get an extra $4 million and the bankruptcy managers will get $3 million  -- but that Quebec smokers will be SOL.

Same ruse, different court

The rationale that JTIM provided to Justice Hainey for bankruptcy protection is exactly  the same as Justice Riordan's rationale for slapping them with extra punitive damages: - the corporate restructuring that turned them from a profitable to a heavily indebted cigarette company.

The details are laid out in its 132-page application record and 34 page Factum but boil down to a massive phony paper debt owed by JTIM to its owners in return for being able to use its unique Canadian trademarks like Export A. As a result, instead of sending post-tax earnings to its Tokyo-based owners, it sends income tax-free loan payments. Importantly in this context, the Tokyo company is a priority creditor who stands in line ahead of anyone else with a financial claim.

This ploy has been hashed out multiple times in Quebec Courts - before Justice Mongeon in 2013,  before Justice Riordan in 2014, and as part of JTI's arguments during the appeal hearing in 2016.  The corporate restructuring (I once heard it referred to as a fraudulent conveyance) is so transparently offensive that it became the basis of additional punitive damages in Riordan's ruling (paras 1092 to 1104).

"The Interco Contracts represent a cynical, bad-faith effort by JTM to avoid paying proper compensation to its customers whose health and well-being were ruined, and the word is not too strong, by its wilful conduct."

JTI asked the Appeal Court to take back those harsh words, but the court found no reason to. In last week's ruling (paras 1158-1163], it said instead that after opening up the sealed financial records, it found it agreed with Riordan's condemnation of this restructuring as as creditor proofing.

A surprise Friday afternoon hearing in a different city

JTIM seeing bankruptcy cover is no surprise, but this particular Ontario development opens up a new bag of dirty tricks. No notice was given to the other parties and they had no ability to make representation.

In its application, JTIM acknowledged that it had been asked to provide advance notice of any bankruptcy applications. It notes that the Quebec class action lawyers asked in 2015 for 7 days prior notice, and that last week, counsel to most provinces had similarly done so. In all cases, the company reports,  "JTIM did not reply to the request". 

It did not admit that this was because it didn't want them in the room. The reason provided was that the private late-afternoon meeting was required to protect the share value and avoid speculative stock-trading.

Rubber stamp? Surely not!

At first glance, the order issued by Justice Hainey is word-for-word the text drafted by JTIM and included in their application. Conveniently, they also include the 'track version' copy of their additions to the boilerplate application. This makes it clear where they were asking for consideration (like stay of execution) that goes beyond the normal bankruptcy request.

Justice Hainey seems to have nodded along to the whole thing. I know they do things differently in Toronto, but this seems so extremely one-sided.

Next Steps 

The order suggests that the next step in this court is a hearing on April 4th.

Questions

• How can it be that a solitary Ontario judge can wade in late one Friday afternoon - without any notice or participation of affected parties -- and stay a Quebec appeal court ruling.?
• Is Justice Glenn Hainey bilingual enough to have read the Appeal Court ruling? If not, why would he have ruled without doing so? If so, why would he have ruled the way he did?
• If Justice Hainey can suspend a Quebec court ruling, can a Quebec court suspend his?