Law Times

www.lawtimesnews.com Page 12 March 31, 2008 / Law TiMes MuscleTech produced many significant decisions W hen Chapter 15 of the U.S. Bankruptcy Code was enacted in April 2005, one of its key features was a grant of authority to American bankruptcy courts to assist in the administration of insolvency, bankruptcy, or debt-restructuring proceedings pending in foreign courts. The first Canadian company to commence proceedings under Chapter 15 of the U.S. Bankruptcy Code was MuscleTech Research and Development Inc. The case produced a number of decisions highly significant for other cross- border restructuring cases. MuscleTech developed and sold health supplement, weight-loss, and sports- nutrition products. Some of its products contained a common industry ingredient, ephedra, which became the source of over 1,000 lawsuits industry-wide. The lawsuits against MuscleTech involved about 140 co-defendants in 100 personal-injury and consumer class-action lawsuits. When MuscleTech ran into financial trouble, the Ontario Superior Court of Justice granted Companies' Creditors Arrangement Act protection to the company. After a long and complex mediation process, MuscleTech's creditors approved the company's plan of arrangement. The plan provided for distributions to all creditors in return for broad releases that extended to MuscleTech and the third parties involved in the litigation. Following a number of groundbreaking rulings on both sides of the border, the Ontario Court sanctioned the plan in February 2007. The U.S. District Court for the Southern District of New York recognized and gave effect to it under Chapter 15 one month later. The groundbreaking rulings included the first judicial consideration of s. 1506 of the U.S. Bankruptcy Code. It arose when certain creditors with product-liability claims asserted that the Canadian order requiring all claims against MuscleTech to be proved in the CCAA proceedings was contrary to public policy because the Canadian claims process denied claimants the right to a jury trial. The District Court, however, held that the public-policy exception in s. 1506 should be narrowly interpreted. The court also ruled that the proposed Canadian claims process was fair and impartial. "The District Court accorded comity to the claims-resolution order on the basis that it provided the same substantive and procedural due-process protection as would be available in the U.S., despite the absence of a jury trial," says Sheryl Seigel, the Toronto-based chair of Lang Michener LLP's restructuring and insolvency group. Subsequently, various U.S. creditors sought representative status in the Ontario court, claiming that they represented a body of claimants alleging false advertising because the MuscleTech products they purchased did not work. Representative action had been commenced in several states before the insolvency proceedings started in either Canada or the U.S., but none had been formally certified as a class proceeding. The court ruled that the claims were not valid representative claims. The claims processes had been well publicized, the proofs of claim forms were in plain language, and the creditors could easily have availed themselves of the claims-resolution process in Canada. Reopening the claims could jeopardize the progress that had been made in the insolvency proceedings. Also, the parties seeking representative status had not appealed the orders establishing the claims process, nor had they applied to lift the CCAA stay of proceedings. "One specific lesson to be taken from this experience is that a foreign creditor seeking to object to a Canadian claims process ought to do so at the time that the claims process is initially proposed," Seigel says. MuscleTech is also the first Canadian decision that sanctioned releases and injunctions in favour of unrelated, non- debtor third parties who were not officers or directors of the debtors. Just as significantly, MuscleTech obtained an order from the District Court recognizing the CCAA order, including the non-debtor releases and related injunctive relief. "The court accepted MuscleTech's argument that the permanent injunctive relief it sought furthered the purpose of Chapter 15 was an appropriate remedy in the circumstances, ensured the just treatment of creditors, and was consistent with principles of comity that should be accorded to foreign law," Seigel says. According to Siegel, MuscleTech succeeded because it advised the court from the outset that it would be seeking non-debtor releases as part of its plan for the global resolution of all product-liability claims. "The Ontario Court understood and appreciated, at an early stage in the process, that the success of the plan required funding from, and release of, claims for indemnity by the third parties," Siegel tells Law Times. "The inclusion of the non-debtor releases in the plan and CCAA sanction order therefore did not come as a surprise." FOCUS Canadian Commercial Reorganization: Preventing Bankruptcy Richard H. McLaren This comprehensive service takes you step by step through the restructuring process, making it easy to understand even for those practitioners unfamiliar with the legislation. No other text integrates years of principles and case law from the Companies' Creditors Arrangement Act with the Bankruptcy and Insolvency Act in such a powerful and practical way. Looseleaf & binders (2) • $224 • Supplements invoiced separately (3-4/yr) P/C 0413030000 • Vol 1/2 ISBN 0-88804-147-0/-294-9 Federal & Ontario Insolvency Legislation Consulting Editor: Richard H. McLaren This easy-to-use annual consolidation offers practitioners the most thorough collection of laws available on insolvency. Perfectbound • 828 pp. • Published September each year • Standing order $63 P/C 0825140000 • Current edition only $73 • P/C 0825010000 • ISSN 1195-3144 caseAlert – Bankruptcy & Insolvency An easy to use electronic service that keeps you up to date with the latest decisions in bankruptcy and insolvency. Each week subscribers receive an e-mail bulletin summarizing recent court decisions in the bankruptcy and insolvency law area. These summaries are arranged in various sub-topics to provide a quick overview of what's happening in the courts today, and are linked to the case digest and the full text decision in pdf format. 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Looseleaf & binders (2) • $242 • Supplements invoiced separately (3-4/yr) P/C 0125030000 • Vol. 1/2 ISBN 0-88804-393-7/-419-4 Debt Restructuring: Principles and Practice John D. Honsberger, Q.C. and Vern W. DaRe This is the authority on reorganization and debt restructuring of insolvent, or near insolvent, commercial and financial institutions and farmers in Canada. Looseleaf & binders (2) with CD-ROM • $246 • Supplements invoiced separately (1-2/yr) • P/C 0460030000 • Vol. 1/2 ISBN 0-88804-098-9/-200-0 Canada Law Book is A Division of The Cartwright Group Ltd. • Free Shipping on pre-paid orders. Prices subject to change without notice, and to applicable taxes. For a 30-day, no-risk evaluation call: 1 800 263 2037 or 1 800 263 3269 www.canadalawbook.ca LT0331 CA007 CA007 3/27/08 3:45 PM Page 1 BY JULIUS MELNITZER For Law Times The free preview of Law Times innovative digital edition ends in April. To continue having access to the easy-to-read full online version of Law Times Subscribe today Call: 1-888-743-3551 or 905-713-4376 or online at www.lawtimesnews.com If you've not already seen it, visit our web site and experience Law Times in a fully interactive digital format. represented a body of claimants alleging false advertising because the MuscleTech products they purchased did not work. Representative action had been commenced in several states before the insolvency proceedings started in either Canada or the U.S., but none had been formally certified as a class proceeding. The court ruled that the claims edition ends in April. false advertising because the MuscleTech products they purchased did not work. Representative action had been commenced in several states before the insolvency proceedings started in either Canada or the U.S., but none had been formally certified as a class proceeding. The court ruled that the claims The free preview of Law Times innovative digital edition ends in April. Going, going, (almost) gone! LT

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