Today, the Supreme Court of Canada denied a group of investors leave to appeal the approval of a settlement releasing Ernst & Young LLP from any claims arising from its auditing of Sino-Forest Corporation. The settlement is part of Sino-Forest’s Plan of Compromise and Reorganization following a bankruptcy triggered by allegations of corporate fraud.

The Settlement

Recent developments in the bankruptcy arena have placed a greater burden on claimants. Creditors are now required to make additional disclosures in their proof of claim forms, and courts are under no obligation to recognize late-filed claims. Proposed changes to the Bankruptcy Rules, including an amendment slashing the time to file a proof of claim, highlight the need for creditors to exercise extra vigilance.

GREATER DISCLOSURE

The Third Circuit recently held that claims purchased from trade creditors by a claims trader will be disallowed under section 502(d) of the Bankruptcy Code when the seller of the claim received, and did not repay, a preference. In doing so, the United States Court of Appeals for the Third Circuit expressed its disagreement with a relatively recent decision in the United States District Court for the Southern District of New York which reached the opposite conclusion.

On October 28, 2013, the Ontario Ministry of the Environment (MOE) announced that it had reached a settlement with the former directors and officers of Northstar Aerospace whereby those former directors and officers agreed to pay $4.75 million for costs associated with the remediation of contaminated lands owned by the now-bankrupt company. The Environmental Review Tribunal approved the Minutes of Settlement at the hearing held on October 28.

Upon the filing of an appeal of a bankruptcy order, that order is stayed pursuant to section 195 of the Bankruptcy and Insolvency Act (“BIA”). In Msi Spergel v. I.F. Propco Holdings (Ontario) 36 Ltd., 2013 ONCA 550, the Ontario Court of Appeal had to decide whether that stay suspends the limitation period applicable to a motion by a trustee to set aside a preferential payment by a bankrupt under s. 95 of the BIA.

A make-whole premium is a lump-sum payment that becomes due under a financing agreement when repayment occurs before the stated maturity date, thereby depriving the lender of all future interest payments bargained for under the agreement. Make-whole provisions, ubiquitous in the bond market, are becoming more prevalent in commercial loan transactions, including in the distressed context. That trend is spurred by favorable court rulings for lenders enforcing make-whole premiums when the borrower files for bankruptcy protection.

In a decision rendered on August 15, 2013, the Ontario Court of Appeal in Re Nortel denied a motion for leave to appeal in a CCAA proceeding, reiterating the stringent test for leave to appeal in such circumstances. More importantly for our purposes, the court reiterated the necessity for a motion for leave to adduce fresh evidence where the moving party seeks to rely upon such evidence.

The test for granting leave to appeal in Companies Creditors’ Arrangement Act proceedings is well-settled:

Unsecured creditors in chapter 11 cases face the prospect of two financial blows: the possibility of not receiving full payment of their claims and the cost of attorney's fees for defending their interests. But these creditors may be able to take comfort in a small but growing trend -- the ability to have the attorney's fees paid from the debtor's assets under the debtor's chapter 11 plan. This outcome occurs in only a small number of cases, and unsecured creditors would be advised to not assume their attorney's fees will be reimbursed by the debtor.

The "WARN Act" (Worker Adjustment and Retraining Notification Act) requires that larger employers provide 60 days' notice in advance of plant closings or other mass layoffs. This has long been in conflict with bankruptcy practice. A recent Fifth Circuit decision, In re Flexible Flyer Liquidating Trust, 2013 WL 586823, at *1 (5th Cir. Feb. 11, 2013), confirms that exceptions to the WARN Act apply in bankruptcy and interprets these exceptions more broadly than previous decisions.