Tervita Corporation (Re), 2016 ABQB 662

Court of Queen’s Bench of Alberta Citation: Tervita Corporation (Re), 2016 ABQB 662 Date: 20161129 Docket: 1601 12176 Registry: Calgary Between: In the Matter of

Section 192 of The

Canada Business Corporation Act , RSC 1985, Cc-44, as amended - and - In the Matter of a Proposed Arrangement in respect of Tervita Corporation, 9894942 Canada Ltd., Red Sky Holdings 1 Inc., Red Sky Holdings 2 Inc., Red Sky Holdings 3 Inc., CCS Canada (Canadian Holdings) Inc., CCS International Holdings Inc., Hazco Industrial Services Ltd., Tervita Equipment Rentals Ltd., Tervita Environmental Services Ltd., Tervita Metal Services Ltd., Tervita Production Services Ltd., Tervita Waste Processing Ltd., and Arkla Disposal Services Inc.

Corrected judgment: A corrigendum was issued on January 30, 2017; the corrections have been made to the text and the corrigendum is appended to this judgment. _______________________________________________________ Reasons for Decisions of the Honourable Madam Justice B. E. Romaine _______________________________________________________ I. Introduction

[ 1 ] This was an application brought by 9894942 Canada Ltd and Tervita Corporation for approval of an interim order relating to a plan of arrangement pursuant to

section 192 of the

Canada Business Corporations Act (the “ CBCA ”). [ 2 ] Certain holders of secured debt opposed the order in the form requested on the basis that, while Tervita characterises the secured debtholders as unaffected by the plan of arrangement, the plan provides otherwise in a number of respects, particularly in that the secured debtholders will not be entitled to be paid an early redemption premium. [ 3 ] The Catalyst Capital Group and other secured debtholders represented by the Ad Hoc Committee of Secured Debtholders (the “Ad Hoc Committee”) do not oppose the recapitalization plan on its merits, but submitted that they were either entitled to a vote on the plan, or that the plan should be amended to provide that they are unaffected, without reference to whether they are entitled to the early redemption premium and other early redemption fees.

They submitted that litigation to determine that issue should then be pursued at a reasonable pace. [ 4 ] Tervita submitted that the early redemption premium is not payable in the circumstances and that the opposing parties are not affected by the plan of arrangement and not entitled to a vote.

However, Tervita recognized that this was an issue, and proposed a litigation plan to determine the issue while the plan of arrangement is considered and voted on by what Tervita says are affected security and equity holders. [ 5 ] Tervita also submitted that, if it is correct that the early redemption premium is not payable, the other issues raised by the opposing parties would melt away.

Tervita said that if its position with respect to whether the secured debtholders are unaffected is found to be incorrect, it may either amend the plan or initiate a filing under the Companies’ Creditors Arrangement Act . [ 6 ] The question at the first stage of the application was whether the interim order should be granted despite the unresolved issue of whether the secured debtholders are affected by the plan and thus entitled to a vote.

Was it so clear that the proposed plan of arrangement was defective in that respect or in respect of the requirement of good faith that I should refuse the interim order and send Tervita back to the negotiationing table? [ 7 ] I approved the interim order, and a week later, approved the litigation protocol with some changes. These are my reasons. Subsequent to my decisions on these issues, the opposing parties and the Tervita group entered into a court approved settlement agreement. II.

Relevant Facts [ 8 ] Tervita is a wholly owned subsidiary of Red Sky Holdings Inc, with Red Sky Holdings 1 Inc as its direct parent. Red Sky Holdings 2 Inc is a wholly-owned subsidiary of Red Sky Holdings 1 Inc, which is the general partner of Red Sky Finance LP, which owns 100% of the preferred shares of Tervita. Tervita has ten wholly-owned Canadian subsidiaries. Arkla is an indirect, wholly-owned subsidiary of Tervita.

The parent Red Sky group, Tervita, the wholly-owned Canadian subsidiaries and ARKLA are all guarantors of the group’s indebtedness. [ 9 ] In December, 2015, Tervita engaged a financial advisor to assist it in exploring the possibility of a consensual restructuring with representatives of its capital structure. This included ad hoc committees of certain lenders and secured noteholders, certain unsecured noteholders and certain subordinated noteholders. [ 10 ] As of August 31, 2016, the Tervita group of companies had total consolidated assets with a net book value of approximately CAD $1.7 billion.

Its main debt obligations are:

a) a secured revolving credit facility with a maximum principal amount of CAD $325 million and a swingline credit facility with a maximum principal amount of CAD $25 million . As of August 31, 2016, letters of credit under the facility in amounts of approximately CAD $144.7 million and USD $9 million were outstanding;

b) a secured non-revolving loan facility with a maximum principal amount of USD $750 million. As of August 16, 2016, the balance owing under this facility was approximately USD $247 million;

c) two tranches of secured notes: USD $650 million 8.00% secured notes and CAD $200 million 9% secured notes. As of August 31, 2016, USD $665.2 million and CAD $205.3 million were owing under the notes;

d) unsecured notes. As of August 31, 2016, the balance outstanding under the 9.75% unsecured notes was approximately USD $299.3 million and under the 10.875% unsecured notes was approximately USD $354.7 million;

e) subordinated notes. As of August 31, 2016, the balance owing under the subordinated notes was approximately USD $328.5 million;

f) an inter-company loan pursuant to a note issued by Tervita to Finance LP, with a balance owing of approximately CAD $1 billion. [ 11 ] Tervita elected not to make a USD $18.3 million interest payment on debt due on May 15, 2016, which constituted a default under the terms of the subordinated notes and which subsequently resulted in events of default under the subordinated notes, the revolving credit facility and the term loan facility. These defaults would have given each of these creditors the right to accelerate their respective indebtedness.

However, Tervita negotiated waivers from the revolving credit lenders and the term loan lenders and entered into a forbearance agreement with the subordinated noteholders that was due to expire on September 15, 2016. [ 12 ] Tervita also elected not to make an interest payment on the 10.875% unsecured notes.

[ 13 ] On September 14, 2016, Tervita obtained a preliminary interim order that granted it a stay of enforcement on the basis of its intention to proceed with a plan of arrangement. In the meantime, Tervita negotiated a transaction term sheet with certain holders of a material portion of the term loan facility debt, the secured notes, the unsecured notes and the subordinated debt (the “Plan Sponsors”).

The Plan Sponsors hold approximately 30% of the secured notes. [ 14 ] Tervita entered into an accommodation agreement with the holders of the revolving credit facility, which provided it with continued availability to the letters of credit under that facility. It entered into support agreements:

a) with unsecured noteholders holding approximately 67% of the aggregate outstanding principal amount of unsecured notes;

b) with subordinated noteholders holding approximately 90% of the aggregate outstanding principal amount of the subordinated notes; and

c) with shareholders of a Red Sky company holding approximately 69% of that company’s common shares. [ 15 ] These support agreements provide that the unsecured noteholders, subordinated noteholders and shareholders that have signed them will support a recapitalization plan and vote their securities and debt in favour of the resolutions necessary to effect the plan. III. Proposed Plan of Arrangement [ 16 ] The following is a

summary of the proposed plan:

a) holders of secured debt, other than secured debt held by Plan Sponsors as of September 14, 2016, will be repaid in full without any early redemption payments or similar payments. Accrued interest up to the effective date of the arrangement will be paid, except that accrued interest on secured debt held by Plan Sponsors will be paid by the issuance of secured interest notes;

b) new classes of shares of Tervita will be created: i. Class A voting preferred shares; ii. Class B non-voting preferred shares; iii. Class A voting common shares; and iv. Class B non-voting common shares.

c) in consideration for the cancellation of its voting common shares, Tervita will grant Red Sky Holdings 3 the right to receive 20% of the net proceeds of certain litigation previously commenced in Alberta;

d) Tervita will offer up to 46,500,000 new preferred shares (minus certain adjustment and backstop commitment shares) to eligible unsecured noteholders in consideration of gross proceeds of up to CAD $372 million, on a fully-backstopped basis;

e) the Plan Sponsors will receive approximately 47 million new preferred shares and additional “secured exchange shares” in return for the exchange and transfer of their secured debt;

f) the unsecured noteholders will receive a number of new common shares representing 80% of the new common shares (which will represent 2.0% of new shares) in exchange for the exchange and transfer of their unsecured notes. Eligible unsecured noteholders will be entitled to subscribe for “new investment shares”;

g) unsecured noteholders that executed the unsecured noteholder support agreement on or before October 14, 2016 will be issued new common shares such that these shares will represent 20% of the new common shares (0.5% of new shares);

h) Tervita will pay $20 million to subordinated noteholders in consideration of the exchange and transfer of subordinated notes;

i) subordinated noteholders that executed the subordinated noteholders support agreement on or before October 14, 2016 will be paid $5 million;

j) the exchanged and transferred unsecured notes, subordinated notes, certain indentures and the term loan facility will be cancelled;

k) all affected existing equity will be terminated and cancelled;

l) there will be a new board of directors acceptable to the Plan Sponsors;

m) new debt in amount of $475 million on terms acceptable to Tervita and the Plan Sponsors will be issued; [ 17 ] The revolving credit facilities will be unaffected; however, the revolving credit agreement must be either reinstated or replaced on terms acceptable to Tervita and the majority of the initial supporting parties. Certain debt held by Finance LP will be transferred to a subsidiary of Tervita for nominal consideration. [ 18 ] Trade debt will not be affected by the proposed arrangement, and the Tervita group will continue to operate, with total debt reduced by approximately $2 billion and annual cash interest expense reduced by approximately $200 million.

[19] If Tervita is obligated to pay an early redemption premium on the secured notes, such a premium would be 102% on the USDsecured notes and 102.25% on the CAD secured notes, assuming that the notes were repaid between November 15, 2016 and November14, 2017. These additional amounts would be approximately USD $13 million and CAD $4.5 million, less amounts that would be due tothe Plan Sponsors. IV. Analysis A.

Interim Order [20] It is important to note that this was an application for an interim order under the arrangement provisions of the CBCA, to “setthe wheels in motion” for the approval process relating to the arrangement, “including the calling of meetings of affected creditors andperhaps equity holders and to set out certain procedural matters”: 45133541 Canada Inc (Arrangement relatif à) [2009] QCCS 6444 atpara 22.

Unavoidably, the parties delved into the question of whether the Court would be satisfied at the time of the hearing of the finalorder that the arrangement is “fair and reasonable”, but that is not the issue at this stage. [21] It can be argued that an application for an interim order is a matter of prudence rather than statutory requirement, although theDirector of the CBCA endorses the practice. The interim order ordinarily only addresses procedural matters.

However, as noted in Re:First Marathon Inc., [1999] OJ No 2805 at para 9, interested parties are entitled to raise legitimate concerns and disputes at this stage. [22] The Court must be satisfied at the interim order stage that the arrangement is put forward in good faith and that the statutoryrequirements of the CBCA have been complied with: Re Essar Steel Canada Inc, 2014 ONSC 4285 at para 25; Re 8440522 Canada Inc,2013 ONSC 2509 (“Mobilicity”); 45133541, supra at para 53. [23] There was no dispute among the parties that the arrangement constitutes an “arrangement” within the meaning of subsection192(1) of the CBCA; that the solvency requirement of subsection 192(2) has been satisfied currently and will be satisfied uponcompletion of the arrangement; and that it is not practicable for Tervita to effect the fundamental changes set out in the plan ofarrangement under any other provision of the CBCA.

Proper notice was given to the Director as required by subsection 192(5). [24] The issue was whether the application for an interim order was brought in good faith and for no improper purpose. [25] The Ad Hoc Committee submitted that Tervita could not satisfy the good faith requirement because:

a) the plan affects the secured debtholders’ legal rights without giving them a right to vote; and

b) Tervita proposes an “unprecedented litigation process” to determine the question of whether the secured debtholders are unaffectedby the plan if they are not paid an early redemption payment or similar payments. [26] The Ad Hoc Committee did not argue that the plan lacks a valid business purpose, but submitted that the proposed method ofachieving that purpose is not consistent with good faith. [27] As previously noted, Tervita proposed to address the issue of whether the secured debtholders are affected creditors under thearrangement by way of court approval of an expedited litigation process. [28] Tervita submitted that this type of process is authorized by subsection 192(4) of the CBCA, and by the Alberta Rules of Court,which provide for resolution of issues through a

summary process. Tervita also submitted that such a

summary process is in accordancewith the “culture shift” endorsed by the Supreme Court of Canada in Hryniak v Mauldin, 2014 SCC 7 , [2014] 1 SCR 87 atparas 23 and following. I agree that subsection 192(4) allows this Court to make any interim order it thinks fit with respect to proceduralaspects of the plan of arrangement, not restricted to the types of orders listed in the subsection. I also accept that there is precedent forthe resolution of issues such as this in a

summary fashion in the context of arrangement proceedings under the CBCA. Examples appearin Re BCE Inc, 2008 SCC 69, where a number of applications for declaratory relief were brought by trustees under certain trustindentures during the arrangement process, and in Mobilicity, where the order emanating from the application appears to envisage anapplication within the arrangement proceedings to determine the requirement of certain additional amounts payable to senior noteholders,albeit with the establishment of an escrow fund.

While these precedents differ in some respects from this application, these types ofdisputes have been decided by interim orders within the arrangement process. [29] The Ad Hoc Committee cited recent authority for the proposition that it is clear that the legal rights of the secured debtholdersare affected under the plan: Re 9171665 Canada Ltd, 2015 ABQB 633 (“Connacher”); Re Marquee Energy Ltd, 2016 ABQB 563(“Marquee”). (This matter was heard before the release of the Court of Appeal decision in Smoothwater Capital Corp v Marquee EnergyLtd, 2016 ABCA 360.) However, this is not an issue that can be decided at the interim order stage.

It involves

interpretation of theindenture under which the secured debt was issued in accordance with New York law, and the determination of whether any provisionsof the plan of arrangement that remain relevant to the secured debtholders once the question of liability for early redemption payments isdetermined result in the secured debtholders being “affected” by the plan within the meaning of the CBCA so as to entitle them to a vote.It is noteworthy with respect to the question before me, that in both Connacher and Marquee, the issue of whether certain stakeholderswere entitled to a vote was decided at hearings held after the initial order was granted.

These authorities may indeed be relevant at a laterstage of the process, but they do not stand for the proposition that entitlement to a vote is a certainty at this stage in this case, or that thisissue must be decided at this stage. [30] At the initial hearing, the Ad Hoc Committee and Catalyst expressed concerns over the specific terms of the litigationprotocol, which I will address later in this decision, including whether the New York courts were the preferable forum for the issue of theinterpretation of the indenture.

As these concerns relate to the issue of whether Tervita’s proposal for a litigation protocol fails the test ofgood faith, I note that, unlike in Connacher, the parties here have submitted to the non-exclusive jurisdiction of the New York courts.The question of whether the New York courts or the Alberta courts are the appropriate forum for the determination of this issue is an

arguable question. The preference of Tervita in that regard as set out in the proposed litigation protocol is not a sign of bad faith that would preclude an interim order [ 31 ] What Catalyst characterized as the “threat” of CCAA proceedings if the CBCA plan of arrangement is unsuccessful was not bad faith, but a statement of fact.

Whether, or not such a filing would meet the test for an initial order under the CCAA or is being filed for an improper purpose is an issue for the CCAA justice, and there is no reason to require Tervita to obtain leave of this Court before filing. [ 32 ] Thus, I found no grounds to refuse the interim order on the basis that the arrangement was not put forward in good faith or that the statutory requirements have not been satisfied. [ 33 ] However, I was concerned that there had been insufficient opportunity for discussion and negotiation over the litigation protocol with the opposing secured debtholders.

I delayed consideration of that protocol for one week to allow such discussions. [ 34 ] I noted that, whether this Court or a New York court was the best forum for the determination of the dispute can be discussed by the parties, but that it was clear that there were valid and legitimate reasons why this plan of arrangement must be completed by year- end, both with respect to the financial statues of the Tervita group and market uncertainty.

I directed that the litigation protocol must result in the determination of the issues in a timely way. [ 35 ] Catalyst and the Ad Hoc Committee submitted that, it was not just the failure of the plan to provide for early termination payments and associated payments that was in issue, but that the plan purported to bind the secured debtholders to third party releases in favour of the Plan Sponsors (among others) and affected the secured debtholders in other ways: Thus, I directed that, the question to be referred for resolution should be, not only whether Tervita may satisfy all obligation to the secured debtholders without paying an early redemption payment or similar payment, but also whether any of the other terms of the plan of arrangement affect the secured debtholders in such a way as to entitle them to a vote pursuant to the CBCA. [ 36 ] Catalyst asked for an order exempting it from the stay on the basis that it intended to commence an oppression action.

As noted in Re Canadian Airlines , 2000 ABQB 442 at para 145 , “(t)he antithesis of oppression is fairness, the guiding test for judicial sanction”. While this is a CBCA proceeding and not a CCAA proceeding, the Court must be satisfied that the plan is fair and reasonable. If Tervita cannot meet that test, the plan of arrangement will fail. If Tervita meets the test, there can be no basis for oppression arising from the plan. Catalyst has not identified any other conduct that may be characterized as oppressive.

I refused to lift the stay on that basis. [ 37 ] Certain objections raised by Catalyst with respect to its ability to participate in the proposed litigation, the disclosure of plan sponsor identities and holdings and the concern of transfer of value among the secured debtholders were addressed during the first hearing B. Litigation P rotocol [ 38 ] At the October 24, 2016 hearing, the secured debtholders were in agreement that the matter in dispute should be heard by the Court in Alberta.

However, they submitted that the issue should be decoupled from the scheduled meetings of affected parties and the closing of the transaction, and heard on a more reasonable timetable, extending into early 2017. Alternatively, they submitted that a decision on the litigation timetable should be adjourned until after receipt of the opinion on New York law was filed by Tervita, so as to give the parties and the Court a clearer idea of the time the process would involve.

They noted that, under New York law, they would be allowed full production and discovery on the issue, and submitted that they should be allowed the same procedural rights in Alberta.

The Ad Hoc Committee submitted that this would properly balance Tervita’s need to complete a recapitalization within 2016 with the opposing parties’ right to a fair and proper hearing. [ 39 ] The Ad Hoc Committee submitted that there was no prejudice to decoupling the issue of an early termination premium from the approval of the arrangement and suggested that to do so was similar to what had occurred in Mobilicity and in In re Energy Future Holdings Corp ., 527 B.R. 178 , a decision of the US Bankruptcy Court for the District of Delaware a US case, in which the issue of liability for an early redemption premium in the context of a bankruptcy was decided in a bifurcated adversary proceeding in March, 2015. (This application was heard before the decision in In In re Energy Future Holdings Corp , --- F. 3d --- (2016) was released on November 17, 2016, which reverses the Bankruptcy Court decision on the liability issues.) [ 40 ] Tervita responded that this would be a change to the plan of arrangement that would require renegotiations with the various parties to the plan, which could not be accomplished by year-end.

In particular, Tervita noted that the revolving credit facility creditors have only agreed to forbear until December 31, on the basis that the plan as negotiated will be approved by that date, and that similar deadlines are in place with other creditors. [ 41 ] Tervita noted that the plan requires that $475 million be raised in the bond market before the end of the year, and submitted that it was necessary that marketing of this significant new funding commence in early December, as the holiday season would interfere with the process.

Tervita submitted that it was essential to the plan that it have certainty on this issue by the end of November. [ 42 ] The Ad Hoc Committee was critical of Tervita’s failure to produce an opinion on New York law earlier than as proposed in the litigation timetable. I adjusted the timetable to ensure that the opinion was produced a few days earlier, but I accept that there was no reason why the opposing parties could not be retain their own expert before receiving Tervita’s expert report. It was clear from the first hearing of these issues what the positions of the parties were on the somewhat discrete issue of

interpretation. [ 43 ] The Ad Hoc Committee submitted that the issues require full production and discovery. Tervita stated that the only additional evidence it would seek to present would be the opinion of its expert, which would be based in the wording of the indenture. The Ad Hoc Committee submitted that it required full production of all documents and communications between Tervita and the Plan Sponsors concerning the treatment of secured noteholders under the plan. The Ad Hoc Committee’s position on the relevance of this material

appears to be based on the decision in Energy Future Holdings Corp . [ 44 ] In that case, the trustee for certain noteholders objected to a DIP approval motion during

Chapter 11 bankruptcy proceedings on three grounds:

a) the noteholders were entitled to an early redemption premium;

b) the debtors had intentionally defaulted by filing bankruptcy to avoid paying the premium; and

c) the repayment would be a breach of the noteholders’ right to rescind the acceleration of the notes in question; [ 45 ] The second ground, which is the basis for the Ad Hoc Committee’s position that communications between the Plan Sponsors and Tervita are relevant in this case, was an alternative ground of objection, separate from the issue of whether the noteholders were entitled to a premium. [ 46 ] The US Bankruptcy Court approved the DIP financing and a settlement involving certain noteholders.

The decision relied upon by the Ad Hoc Committee involved a later adversary proceeding brought by non-settling noteholders. Phase One of that proceeding involved the first two grounds of objection and a full trial process. The debtors and the trustee for the noteholders filed cross-motions for

summary judgment after production and discovery. [ 47 ] The Court found that the noteholders were not entitled to relief on the second ground, that the default was done with intent to deny the Trustee the applicable premium, because:

a) the indenture in question did not contain a provision stating that a premium would be owed if the debtor intentionally caused an event of default to avoid paying the applicable premium; and

b) the trustee had the burden of supplying sufficient evidence for a reasonable fact finder to conclude that there was an intentional default, and it could not do so in the face of “overwhelming evidence” of a “severe liquidity crisis”. [ 48 ] I was not referred to any provision in the indenture in this case that requires a premium if the debtor intentionally structured a transaction that would avoid paying the applicable premium, nor was I able to locate such a provision in the indenture on review.

I was not persuaded that evidence of communication among the Plan Sponsors and the Tervita group at the time of formulation of the plan of arrangement was relevant. New York procedural laws in a trial situation such as Energy Future Holdings Corp are not applicable in this Canadian

summary proceeding, and therefore, no discovery is necessary. However, I directed that, if the opposing parties wished to present affidavit evidence of the factual context at the time the indenture was entered into, they may do so, and if it appears from that evidence that production from that period is required from Tervita, that issue may be addressed at the time of reply submissions. [ 49 ] My decision on procedure was made in the context of an arrangement that, if successful, will result in a continuing business, with a healthier debt structure, unaffected trade debt and continued employment.

It was also relevant that the secured debtholders would be paid all principal and interest owed to them. The issue of early termination premium involves entitlement to roughly $15 million in a complex reorganization involving roughly $2.5 billion. [ 50 ] The use of the CBCA restructuring rules in cases of near-insolvency can give rise to risks of manipulation and unfair dealing among affected parties, and these arrangements must be scrutinized carefully to ensure that the rights of all interested parties are respected.

While the opposing parties are entitled to affair hearing on the issues, that right must be balanced with the interests of all stakeholders in a complex reorganization. [ 51 ] I am satisfied that the adjusted litigation timetable will give the opposing parties that right of hearing while allowing Tervita the opportunity to proceed with the proposed plan of arrangement in a timely manner in an uncertain economic climate. [ 52 ] I directed that the Plan Sponsors would be able to participate in the litigation by filing a brief and participating in oral argument.

Dated at the City of Calgary, Alberta this 29 th day of November, 2016. B. E. Romaine J.C.Q.B.A. Appearances:

Colin Feasby, Marc Wasserman, Michael De Lellis, Melissa N. Burkett, John Grieve and Travis Lysak for the Tervita Group Brendan O’Neill, D.D. Conklin, Robert Chadwick, Christopher Armstrong, A.J. Mc Connell, for the Ad Hoc Committee of Secured Debtholders Andrew Kent, Caireen E.

Hanert and Caitlin Fell for the Catalyst Capital Group Chris Simard, Kevin Zych and Sean Zweig for the Plan Sponsors Howard Gorman for the Revolving Credit Facility Sean Smyth QC and Sean Collins for Wells Fargo Bank, N.A. _______________________________________________________ Corrigendum of the Reasons for Decision of The Honourable Madam Justice B. E. Romaine _______________________________________________________ On page 10, under Appearances- the names of John Grieve and Travis Lysak have been deleted from “for the Ad Hoc Committee of Secured Debtholders” and added to the “Tervita Group.”