June 29, 2021

Reviewing CCAA Disclaimers Requires Balancing of Interests

The Court of Appeal for Ontario has confirmed the detailed decision of Chief Justice Morawetz (the “CCAA Judge”) regarding the law of disclaimers pursuant to section 32 of the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (the “CCAA”).

In Laurentian University of Sudbury (Re), 2021 ONSC 3272, the CCAA Judge heard a motion brought by Thorneloe University (“Thorneloe”) opposing a Notice of Disclaimer issued by Laurentian University of Sudbury (“Laurentian”) pursuant to section 32 of the CCAA.

Laurentian operated under a federated university model whereby three separate religiously-affiliated institutions, including Thorneloe (collectively, the “Federated Universities”) taught courses and programs to Laurentian students in accordance with certain contractual agreements that were established 60 years ago. Funding agreements in operation between Laurentian and the Federated Universities governed the payment the Federated Universities would receive from Laurentian in exchange for teaching these courses.

In Laurentian’s ongoing CCAA proceedings, it identified that the Federated Universities’ model resulted in a loss of approximately $7.7 million in annual revenue. Laurentian determined that in order to put forward a viable plan of compromise or arrangement to its creditors and effect a successful restructuring, it was necessary to retain this lost revenue. Accordingly, Laurentian issued Notices of Disclaimer to each of the three Federated Universities, terminating the relationship.

Thorneloe asked the CCAA Judge to prohibit the Notice of Disclaimer that had been issued to it from coming into effect. The CCAA Judge reviewed the law of disclaimers, including the factors enumerated in section 32(4) of the CCAA. The Court found that a section 32(4) analysis requires a balancing of interests. In particular, the test for upholding disclaimers was synthesized at paragraph 44 of the Court’s decision:

The [disclaimer] test does, however, require the court to balance the benefit of the proposed disclaimer for Laurentian against the detrimental impact on Thorneloe.  The disclaimer of a contract must be fair, appropriate and reasonable in all the circumstances. Ultimately, it is a discretionary decision to determine whether the disclaimer should be upheld. This discretion is exercised by weighing the competing interests and prejudice to the parties and assessing whether the disclaimer or resiliation is fair and reasonable.

The Court rejected Thorneloe’s primary argument that its potential impact on Laurentian’s restructuring was minimal, when viewed separate from the other two Federated Universities.  The CCAA Judge found that the three Federated Universities were “interlinked and interrelated to such a degree” that the total lost revenue of $7.7 million was at stake in Thorneloe’s motion.

The CCAA Judge accepted Laurentian’s argument that the Notices of Disclaimer were central to the Applicant’s restructuring. In doing so, the following findings of fact were made:

(a) the Disclaimer will result in millions of dollars of additional tuition and grant revenue remaining within Laurentian every year;

(b) each time a Laurentian student takes an elective course offered through Thorneloe, revenue associated with that course is transferred from Laurentian to Thorneloe; and  

(c) Laurentian has the capacity to independently offer students the vast majority of all necessary programs and electives, and therefore each course taken by a Laurentian student through Thorneloe represents lost revenue for Laurentian.

Ultimately, the balancing of interests analysis favoured upholding the Notice of Disclaimer. To not do so would result in the potential demise of Laurentian. While the CCAA Judge acknowledged that Thorneloe may have to cease its operations due to the disclaimer, prohibiting the disclaimer from taking effect would likely result in the cessation of both Laurentian’s and Thorneloe’s operations, which was the least desirable outcome.

In reaching this conclusion, the CCAA Judge rejected Thorneloe’s ancillary arguments, including: (i) that Laurentian was using section 32 of the CCAA for an “improper purpose”, being the elimination of a competitor; (ii) that Laurentian was acting in bad faith; and (iii) that the DIP Lender was improperly seeking to influence the proceedings.

Thorneloe sought leave to appeal the decision of the CCAA Judge. In Laurentian University of Sudbury (Re), 2021 ONCA 448, the Court of Appeal dismissed Thorneloe’s motion for leave to appeal and, in a detailed 18 page decision, upheld the findings of the CCAA Judge.

The Court of Appeal acknowledged that leave to appeal in CCAA proceedings is to be granted sparingly and only where there are serious and arguable grounds that are of real and significant interest to the parties. It further noted that factual findings of a motion judge are owed considerable deference as are discretionary decisions, absent an extricable legal error.

The four factors relevant to addressing whether leave should be granted were analyzed:

(a) Whether the Proposed Appeal is Meritorious: The Court of Appeal was not persuaded that there was an arguable basis for interfering with the CCAA Judge’s factual findings or legal conclusions. The CCAA Judge’s factual findings were sound and there was a proper analysis of the balancing of interests. Notably, the Court of Appeal held that “[t]he CCAA judge expressed the choice succinctly and accurately – it was between allowing the disclaimer, recognizing the hardship it would cause Thorneloe, and disallowing the disclaimer, recognizing the hardship it could cause Laurentian and Thorneloe. In our view, the choice he made cannot be faulted.”

(b) Whether the Proposed Appeal was Significant to the Action: The Court of Appeal accepted that the proposed appeal was significant to the action, however, this was not sufficient to justify granting leave to appeal.

(c) Whether the Proposed Appeal was Significant to the Practice: The Court of Appeal was not satisfied that the proposed appeal was of significance to the practice as the issues that were raised turned on the application of the law to the very specific facts of the case.

(d) Whether the Proposed Appeal would Hinder Progress of the Proceeding: The Court of Appeal held there was a risk that an appeal would be a distraction from Laurentian’s real-time restructuring efforts.

Accordingly, the Court of Appeal refused to grant leave to appeal and confirmed the CCAA Judge’s findings.

Thornton Grout Finnigan LLP acts as counsel to Laurentian University.

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