We were retained by condominium developers Minco-Division Construction Inc. and Sleb 1 Inc. (collectively “Minco”), after a project in downtown Montreal (the “Sleb Property”) fell behind schedule and over budget. Minco filed for court protection under the Companies’ Creditors Arrangement Act (the “CCAA”) in November 2005 with debts of more than $32 million. Minco obtained interim financing from its first-ranking lender, a Canadian chartered bank (the “Bank”), which was not prepared to fund the completion of the project.

To fund a plan of arrangement, complete construction and save the Sleb Property from the Bank’s Court-authorized marketing and sale process, Minco’s principals and their business associates formed a company (the “White Knight”) that purchased all of the Bank’s claims, including the interim financing loan and the corresponding priority security created by court order, having a total face value of approximately $17.5 million, for $10.25 million. The White Knight also subsequently purchased claims of the mezzanine lender having a face value of approximately $14 million, for $800,000.

Before long, there was a falling out between the principals of Minco and the majority shareholder of the White Knight. The Quebec Superior Court (Commercial Division) (the “Court”) concluded that the objective of the White Knight was thereafter to defeat Minco’s restructuring efforts and take the Sleb Property in payment.

Minco’s restructuring efforts would be doomed to failure if the White Knight could claim the full face value of all debt it had purchased at a substantial discount, so FFMP brought proceedings under article 12 of the CCAA to have the amount of the White Knight’s claim determined by the Court. The Court maintained our motion and determined that the White Knight and its controlling shareholders were each a “rogue white knight” that had turned on its benefactors (Minco and its shareholders) for its own Machiavellian purposes. The Court thus declared that the claim of the White Knight would be satisfied in full if it received an amount equivalent to what it had paid for the claims, rather than the substantially higher face value thereof.

This unique judgment, resulting from our creative and tenacious arguments, recognizes the inherent jurisdiction of Canadian insolvency courts to take into account the circumstances under which distressed debt is acquired in insolvency proceedings, especially where the purchaser pursues a hidden agenda, acts in bad faith or “tramples on the rights and expectations of others”.

Minco - Division Construction inc. c. 9170-6929 Québec inc., 2007 QCCS 236

Rogue White Knights and Strategic Buyers of Distressed Debt (2007), 29 C.B.R. (5th) 183