Canada Provinces Accused of Misusing JTI Bankruptcy

Source from:  Bloomberg 10/21/2009

Canadian provinces, seeking more than C$80 billion ($76 billion) from tobacco companies for treatment of smoking-related illnesses, are attempting to improperly use the bankruptcy process to force Japan Tobacco Inc.'s JTI-MacDonald unit to settle, a company lawyer said. "The strategy is to force JTI into an expedited settlement," David Scott, a lawyer for the tobacco company, told Superior Court Judge Peter Cumming in Toronto today. "It's a lever to force JTI to settle these health-care claims." JTI-MacDonald, the maker of Export A cigarettes in Canada, filed for bankruptcy protection in 2004, after a Quebec judge ordered the company to pay C$1.4 billion that the province claims it lost in taxes when tobacco companies exported cigarettes to the U.S. in the 1990s, knowing they would be smuggled back into Canada for resale on the black market. British Columbia, Ontario and New Brunswick today asked Cumming to put a time limit on new lawsuits seeking to recoup health-care costs from JTI-MacDonald and allow their claims to be included in the company's restructuring process. The request put the provinces at odds with the federal government, which sided with the tobacco company and urged the judge to either dismiss it or put it on hold indefinitely. JTI has assets of C$1.81 billion and liabilities of C$1.8 billion, according to its filings, said Laura Donaldson, an attorney for British Columbia. All the liabilities are owed to companies related to Japan Tobacco, having been imposed on JTI during a 1999 restructuring in a bid to make the Canadian unit judgment-proof, Donaldson said. 'No Improper Motive' The provinces will seek access to that money to settle the lawsuits under the bankruptcy process, called the Companies' Creditors Arrangement Act, she said. "There's no improper motive whatsoever" behind the province's request for a time limit on the lawsuits and inclusion as creditors in the JTI bankruptcy, Donaldson said. "It's improper for the company to try and exclude those claims." Such an order, if granted, would be unconstitutional because a judge overseeing a bankruptcy can't prohibit governments from passing laws that can be used to pursue such lawsuits, Ronald Slaght, a lawyer for the federal government, told Cumming. "It's an attempt to twist the CCAA," Slaght said, giving the provinces "a leg up" on all other plaintiffs. The tobacco companies have been sued by groups of Canadians in class-action lawsuits, which also are health claims, and "nobody has given them notice," Slaght said. Billions in Damages Ernst and Young Inc., the accounting firm appointed by the court to oversee JTI's operations while under bankruptcy protection, also urged the judge to reject the provinces' request. British Columbia in 2001 sued tobacco manufacturers, including JTI, British American Tobacco Plc and Rothmans Inc., to recoup the government-funded health-care system's costs of treating smokers for cancer and other tobacco-related illnesses. The province is seeking unspecified damages which will likely be in the billions of dollars, Donaldson said. Ontario sued in September, seeking C$50 billion. Quebec has said it will also sue and will likely seek about C$30 billion, Donaldson said. Imperial Tobacco Canada Ltd. and Rothmans agreed last year to pay about C$1.15 billion in fines and penalties to settle the smuggling case. JTI hasn't settled, although Scott said if the company does it will allow it to exit bankruptcy. The hearing on the provinces' request will resume tomorrow, Cumming said. The case is Between JTI-MacDonald and the Attorney General of Canada, 04-cl-5530, Ontario Superior Court of Justice (Toronto). Enditem