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!