2014 QCCA 1887, 2014 QCCA 1887

Taberna Preferred Funding VI, Ltd. c. Stichting Homburg Bonds 2014 QCCA 1887 COURT OF APPEAL CANADA PROVINCE OF QUEBEC REGISTRY OF MONTREAL No: 500-09-024589-145 ( 500-11-041305-117 ) MINUTES OF THE HEARING DATE: October 15, 2014 THE HONOURABLE MADAM JUSTICE MARIE ST-PIERRE , J.A. PETITIONERS COUNSEL TABERNA PREFERRED FUNDING VI, LTD ET AL. Mtre SYLVAIN RIGAUD Mtre CHRYSTAL ASHBY ABSENT ( Norton Rose Fulbright Canada S.E.N.C.R.L.,s.r.l .) RESPONDENTS COUNSEL STICHTING HOMBURG BONDS Mtre GUY MARTEL Mtre danny dury vu ABSENT ( Stikeman Elliott s.e.n.c.r.l., s.r.l. ) SAMSON BÉLAIR/DELOITTE & TOUCHE INC.

Mtre MASON POPLAW Mtre NICOLAS DESLANDRES Mtre JOCELYN PERREAULT ABSENT ( McCarthy Tétrault s.e.n.c.r.l., s.r.l. ) 1810040 ALBERTA LTD. (FORMERLY KNOWN AS HOMBURG INVEST INC. AND HOMBURG SHARECO INC.) ET AL. Mtre Martin Desrosiers ABSENT ( Osler, Hoskin & Harcourt, S.E.N.C.R.L./s.r.l. )

DESCRIPTION: Motion for leave to appeal ( Art. 13 of the Companies’ Creditors Arrangement Act , R.S.C. (1985) c. C- 36 ( CCAA ) and 29, 494 and 511 C.C.P .) Clerk: Asma Berrak Courtroom: RC-18 HEARING 9: 00 Continuation of the hearing that took place on September 11, 2014. Counsels were excused from appearing in today’s hearing. Judgment – see page 3.

Clerk BY THE JUDGE JUDGMENT [ 1 ] The Appellants seek leave to appeal from a judgment rendered by the Honorouble Mark Schrager of the Superior Court (Commercial Division), district of Montreal, on June 30, 2014 ( 2014 QCCS 3135 ) : [69] GRANTS the Petitioners' Re -amended Motion for Directions (the “Motion”); [70] DECLARES that the payment of any and all amounts owing under and pursuant to: 70.1 Taberna Preferred Funding VI, Ltd.’s US $12 million interest pursuant to a Junior Subordinated Indenture dated as of July 26, 2006 (the “2006 USD Indenture”) by and between Homburg Invest Inc. (“HII”) and Wells Fargo Bank, N.A. (“Wells Fargo”) for the issuance of US $20 million junior subordinated notes due 2036 (the “Original Taberna VI Note”); 70.2 The note issued to Taberna Preferred Funding VIII, Ltd. (“Taberna VIII”) pursuant to a Junior Subordinated Indenture dated as of February 28, 2011 (the “2011 Taberna VIII Indenture”) by and between HII and Wells Fargo (the “2011 Taberna VIII Note”); and 70.3 The notes issued to Taberna Europe CDO I P.L.C. and Taberna Europe CDO II P.L.C. on February 28, 2011 witnessing their respective interest of €20 million and €5 million pursuant to a Junior Subordinated Indenture dated as of February 28, 2011 (collectively with the 2006 USD Indenture and the 2011 Taberna VIII Indenture, the “Taberna Indentures”) by and between HII and Wells Fargo for the issuance of €25 million junior subordinated notes due 2036 (the “2011 Taberna Europe Notes”); (the Original Taberna VI Note, the 2011 Taberna VIII Note and the 2011 Taberna Europe Notes are collectively referred to as the “Current Taberna Notes”) is subordinated to the full and complete payment of any and all amounts owing in respect of the principal of and any premium and interest on all debt of HII (excluding trade accounts payable or liabilities arising in the ordinary course of business), whether incurred on or prior to the date of the Indentures or thereafter incurred, unless it is expressly provided in the instrument creating or evidencing the same that such obligations are not superior in right of payment to the Current Taberna Notes (the “Senior Debt”), including without limitation Stichting Homburg Bonds’ claims against HII pursuant to a Trust Indenture dated as of December 15, 2002, and any related supplemental indentures thereto, and a Trust Indenture dated as of May 31, 2006 as guaranteed by HII pursuant to a

Guarantee Agreement dated as of December 15, 2002 (the “Bonds”), unless and until the Senior Debt is fully satisfied; [71] ORDERS that for the purpose of any distribution to occur under the Fourth Joint Amended and Restated Plan of Compromise and Reorganization of HII and Homburg Shareco Inc. dated as of March 27, 2014 (the “Plan”), any distribution to the holders of the Current Taberna Notes by virtue of their status as unsecured creditors and holders of the Current Taberna Notes shall be remitted to the holders of the Senior Debt on a pro-rata basis, including without limitation the Bonds, unless and until the Senior Debt is fully satisfied; [72] CONDEMNS the mis-en-cause Taberna entities to judicial costs in favour of the mis-en-cause Stichting Homburg Bonds including experts' fees of US$76,413.00 subject to taxation but only for conversion to Canadian dollars, and to one half the expert costs of the Monitor regarding the report and testimony of Mr.

Jeffrey Saferstein subject to taxation. [ 2 ] The dispute opposes two groups of unsecured noteholders, on the one hand, the Taberna Noteholders («Taberna») and, on the other hand, the Stichting Homburg Bondholders («Stichting»).

It concerns the right of Taberna to receive and retain the distribution payable under a CCAA plan of arrangement or its obligation to turn-over in favour of Stichting. [ 3 ] Even though the relevant facts are, to a very large extent, undisputed by the parties, the proof and hearing lasted three full days during which the judge heard three expert witnesses on the laws applicable in the state of New York and one full day of argumentation. [ 4 ] In a nutshell, the Appellants respectfully argue that the Judgment (R-1) contains multiple manifest and overriding errors of law which warrant the intervention of this Court. • Contrary to the judge's findings at paragraphs 41 to 51 of his judgment, they claim that the subordination dispute is not governed exclusively by Canadian insolvency law; • They claim that the judge erred in concluding that Canadian insolvency law mandates that the Taberna Noteholders remain subordinate even absent a turnover clause; • Since the actual deletion of the turnover provisions is not contradicted but rather admitted and the object of judicial admissions, they argue that the judge erred in concluding that there was no meeting of the minds on the intended effect of deleting the turnover provisions (at paragraphs 52 to 55 of his judgment); • They claim that the judge made a mistake in concluding as he did in paragraphs 56 and 60 of his judgment that the parties could not alter the rights of Stichting bondholders without their consent while this point had not been argued by the litigants; • They argue that, inasmuch as they specifically relate to the effect of releases contained in CCAA plans, the following statements made by the judge at paragraphs 42 and 64 of his judgment are incorrect : • Paragraph 42 : « the rights of the debtor vis-à-vis its creditors is altered under the proposal but not the rights of the creditors inter se » • Paragraph 64 : « the plan of arrangement does not alter the rights of creditors inter se » based on the Stelco decision. [ 5 ] Appellants urge me to perform my analysis of their motion in light of the British Columbia Court of appeal decision in Edgewater Casino Inc. (Re) ( 2009 BCCA 40 ) a judgment that should be applied by analogy, in their opinion, given the factual background of their case compared, namely, to the following extracts of said judgment : 25 The chambers judge did give consideration to the usual factors in the present case, but none of the considerations I have mentioned were applicable to the two orders.

The CCAA judge was deciding questions of law in each case and was not exercising his discretion. The knowledge gained by the CCAA judge during the reorganization process was not relevant to his decisions , which involved events that occurred prior to the commencement of the CCAA proceeding. The plan of arrangement made by Edgewater has been implemented, and appeals from the two orders will not delay or otherwise jeopardize the reorganization process.

There is no prospect that the outcome of the appeals will affect the continuing viability of Edgewater ; indeed, although the disputes involve Edgewater in name, the parties with a monetary interest in the disputes are the Landlord and the respondents, who are the former shareholders of Edgewater. In the circumstances, there was no reason to give substantial deference to the CCAA judge . 28 There is one other point about the order relating to the utilities dispute that differentiates it from the typical CCAA order.

The dispute did not involve a claim against Edgewater but, rather, it was a claim by Edgewater to have the Landlord refund utilities payments made by it. Such a claim would normally be pursued in a normal lawsuit and, if it was determined on a

summary application (i.e., a Rule 18A application), there would have be an appeal as of right , and leave would not have been required . It was only because the claim was raised as a setoff to the Landlord's property tax claim that it came to be determined in the CCAA proceeding. (My underlines)

[6] The appellants do not dispute the four elements or four-part test to be taken into account (herein under mentioned) but theysubmit that the deference typically afforded to first instance orders made under CCAA proceedings is not warranted as the judgment wasnot rendered by the supervising judge[1], cannot be considered as a discretionary order, will have limited impact on the debtor'srestructuring itself and will only affect the recovery of the two groups of unsecured creditors (Taberna and Stichting). In their motion,they write : 126.

The Appellants further submit that the applicable factors listed above should not be so strictly applied as to prevent them frombringing before the Court of Appeal a private dispute between two groups of debtholders not subject to CCAA proceedings, the value ofwhich represents tens of millions of dollars, the whole as more fully detailed below, simply because the matter was adjudicated in firstinstance under the umbrella of a CCAA restructuring; 127.

In any event, it is the Appellants' respectful contention that all four criteria are satisfied such that leave to appeal ought to begranted; [7] The motion is contested by Stichting, the Monitor and the debtors who have argued that none of the four relevant elements weresatisfied. [8] The principles to be applied in determining whether leave to appeal should be granted are not in dispute. [9] They are described as follows by our Court in Newfoundland and Labrador c.

AbitibiBowater inc. (2010 QCCA 965) : [25] There is no appeal as of right from decisions made under the CCAA; leave to appeal is a condition precedent to an appeal beingallowed to proceed (s. 13 CCAA). [26] This requirement stems from a clear intention of Parliament to restrict appeal rights having regard to the nature and object of CCAAproceedings; an appeal court should be cautious about intervening in the CCAA process.

This is not to say that leave will never begranted but it should be so only "sparingly" (ln Re Pacific National Lease Holding Corp. (1992), (BC CA), 15 C.B.R.(3d) 265, at 272 (B.C.C.A.)). [27] The test for determining whether leave should be granted was enunciated by Wittman J.A. (as he then was) in Re: CanadianAir/ines Corp. (2000), 2000 ABCA 149 , 19 C.B.R. (4th) 33 (C.A.

Alta): The general criterion is embodied in the concept that there must be serious and arguable grounds that are of real and significant interestto the parties: (...) Subsumed in the general criterion are four applicable elements: (1) whether the point on appeal is of significance tothe practice; (2) whether the point raised is of significance to the action itself; (3) whether the appeal is prima facie meritorious or, on theether hand, whether it is frivolous; and (4) whether the appeal will unduly hinder the progress of the action. [28] This test was considered and applied by this Court in many instances. [29] The burden rests on the party applying for leave to demonstrate that the cumulative criteria set forth above are met. (My underlines) [10] And, similarly, by the Ontario Court of appeal in Stelco Inc. (Re), (ON CA), [2005] O.J.

No. 4883 : 15. (…) Leave is only sparingly granted in such matters because of their "real time" dynamic and because of the generally discretionarycharacter underlying many of the orders made by supervising judges in such proceedings. There must be serious and arguable groundsthat are of real and significant interest to the parties. The court has assessed this criterion on the basis of a four-part test, namely,

a) whether the point on appeal is of significance to the practice;

b) whether the point is of significance to the action;

c) whether the appeal is prima facie meritorious or frivolous; and

d) whether the appeal will unduly hinder the progress of the action. (My underlines) [11] Taking into account the general criterion together with the four-part test, in light of comments made by the British ColumbiaCourt of Appeal in Edgewater Casino Inc. (Re) (2009 BCCA 40), the Appellants succeed to convince me to grant a permission to appealin the present file. [12] In my opinion, they are raising serious and arguable grounds that are of real and significant interest to the parties while JusticeSchrager was not the supervising judge and his judgment does not rest on the exercise of a discretionary power. [13] The wide use of subordinated debt issuances, the use of subordination of mechanisms in inter-creditor financing agreements,various structured financing arrangements involving multiple debt tranches with differing level or priority and the very few precedentsavailable as far as Canadian case-law is concerned bring me to the conclusion that the point on appeal is of significance to the practice. [14] There is no doubt in y mind that the points raised by the appeal are bound to bear a significant economic impact for both Taberna

and Stichting (the later representing approximately 85% of the unsecured creditors). [15] The motion raises several grounds of appeals, none that I am prepared to describe as frivolous. It raises namely the followingground (as articulated in the annotated motion for leave to appeal that I was provided with) which I find, by itself, sufficient to grant therequested permission : 149.

Moreover, the fact that the Judgment (R-1) relies in a large measure on arguments that were not made by the parties in itselfconstitutes an error of law tainting the Judgment (R-1) irredeemably and warranting appellate intervention; 150. Indeed, the First Instance Judge evidently came to the conclusion that the amendments made

Article XII of the indentures enteredinto between HII and the Taberna Noteholders (which amendments, and the impact thereof, constituted the crux of the dispute, asappears from the Debtors' own Motion for Directions), somehow were unenforceable as against Stichting Homburg Bonds, due to theirnot being a party to the 2011 Transaction: [56] Most significantly, and in itself fatal to Taberna's position is the fact that Stichting was not a party to the negotiations leading upto the 2011 Taberna Indentures nor to the documents themselves. 151.

In doing so, the First Instance Judge ventured beyond the arguments made in support of the Stichting Homburg Bonds' position bythe latter, the Debtors, and the Monitor, and introduced a whole new theory of the case, one that had never formed part of the joinder ofissue, the whole in clear contravention of the "… fundamental [principle] to the litigation process that lawsuits be decided within theboundaries of the pleadings" (Rodaro, para. 60).

See: [62] ln addition to fairness concerns which standing alone would warrant appellate intervention, the introduction of a new theory ofliability in the reasons for judgment also raises concerns about the reliability of that theory. We rely on the adversarial process to get atthe truth. That process assumes that the truth best emerges after a full and vigorous competition amongst the various opposing parties.

Atheory of liability that emerges for the first time in the reasons for judgment is never tested in the crucible of the adversarial process. [ ...] [63] Spence J. erred in finding liability on a theory never pleaded and with respect to which battle was never joined at trial. This erroralone requires reversal. Rodaro v. Royal Bank of Canada (2002), (ON CA), 59 O.R. (3d) 74, Doherty, Weiler and Feldman JJ.A.("Rodaro") [Tab 8]; 152.

No party argued before the First Instance Judge that the amendments made to the Taberna Indentures in 2011 were somehow illicit,and in fact the documentary evidence adduced by consent tends to demonstrate that any concern in this regard was considered andaddressed in due course back then; 153. Had the question of the enforceability as against Stichting Homburg Bonds of the February 2011 amendments been raised in theproceedings, it could have been properly canvassed by counsels for the Taberna Noteholders, both through the examinations of therelevant witnesses and during oral arguments; 154.

The fact is that this never formed part of the debate surrounding the Taberna Claim; 155.

In this regard, the fact that, in its intervention, Stichting Homburg Bonds framed the issue of its jeopardized seniority as a questionof reasonable expectations (an argument that was later abandoned at trial during argumentation), rather than complaining of a breach ofcontract, is very telling; [16] The proposed appeal will not unduly hinder the progress of the ongoing restructuring of the debtors since the plan has alreadybeen approved by the creditors, sanctioned by the supervising judge and implemented by the Monitor - facts confirmed by JusticeSchrager in the following paragraphs of his judgment : [17] As stated above, the Debtors' plan of arrangement was sanctioned by the Court on June 5, 2013, in other words after the Motion forDirections was filed but before the present matter was set down for hearing. [18] Under the plan of arrangement, all ordinary creditors including holders of Stichting bonds and Taberna notes were grouped in oneand the same class.

The intention of the Debtors supported by the Monitor was to pay nothing on account of the Taberna claim given theprovisions of the subordination clauses referred to above and the fact that Stichting would not, under the plan, be paid in full. This wasand is not acceptable to Taberna. However, in order to allow the HII plan to be confirmed and allow HII to move forward with itsreorganization, the following was provided in the plan: "9.6

b) Notwithstanding any other provision in the Plan, HII and the Monitor shall comply with the Taberna Order in making anydistributions on account of the Taberna Claim under the Plan, using the reserves created under the HII/Shareco Plan, as applicable.

Tothe extent that the Taberna Order directs that the distribution entitlement under the Plan in respect of the Taberna Claim shall be remittedto any Person or Persons other than the holders of the Taberna Claim, any Newco Common Shares Cash-Out Election made by anyholders of the Taberna claim shall be null." "Taberna order" means a Final Order of the Court addressing the distribution entitlement of the holders of the Taberna Claim under thePlan in respect of the Taberna Claim and authorizing and directing HII and the Monitor to rely on such Order in connection with thePlan;"

[…] [65] Equally, neither Stichting nor the Monitor can validly argue that Taberna renounced its position or waived any right by not contesting the classification. The Motion for Directions was tabled prior to the plan. Everyone involved knew what the issue was. Taberna voted against the plan and awaited its day in court on the Motion to learn how its claim would ultimately be treated. It bought into the same commercially reasonable approach as the other parties in resolving the issue while allowing the plan to move forward .

There was no waiver or renunciation by Taberna of its rights. (My underlines) [17] With the express consent of all the parties involved, the undersigned will set an expedited timetable to ensure that the appeal be heard as soon as practically possible. [18] It is not necessary to order the stay of execution of the Judgment pending the appeal since a stay is already part of

article 9.6 b of the plan (herein above reproduced) which provides that « HII and the Monitor shall comply with the Taberna Order (a final order of the court) ». [ 19 ] Finally, I reproduce rules 54 and 55 of the Rules of the Court of Appeal in Civil Matters , which reads as follows: 54. Abandonment . Where the appellant’s argument and documents standing in lieu of appellant's factum are not served and filed within the established time limit, the appeal shall be deemed to be abandoned and

article 503.1 of the Code of Civil Procedure shall apply, mutatis mutandi . 55. Foreclosure . Where the respondent’s argument and, if applicable, documents standing in lieu of the factum are not served and filed within the established time limit, the respondent shall be foreclosed from filing and

article 505 of the Code of Civil Procedur e shall apply, mutatis mutand i.

THEREFORE, THE UNDERSIGNED: [ 20 ] GRANTS leave to appeal; [ 21 ] ORDERS the appellants (Taberna), after having served a copy upon the respondents (Stichting, the Monitor and the debtors), to file in the office of the Court, no later than November 7, 2014 , five copies of the document that would normally have made up schedules I, II and III of its factum, including the motion for leave to appeal and the present judgment, as well as a written argument not exceeding 25 pages , and its authorities; [ 22 ] ORDERS the respondent Stichting, after having served a copy upon the appellants and the other respondents (Monitor and debtors), to file in the office of the Court, no later than November 28 2014 , supplementary documents, as well as a written argument not exceeding 25 pages , and its authorities; [ 23 ] ORDERS the respondent (Monitor), after having served a copy upon the appellants, the other respondents (Stichting and debtors), to file in the office of the Court, no later than November 28 2014 , supplementary documents, as well as a written argument not exceeding 10 pages , and its authorities; [ 24 ] ORDERS the respondents (Debtors), if they elect to do so, after having served a copy upon the appellants, and the other respondents (Stichting and Monitor) to file in the office of the Court, no later than November 28 2014 , supplementary documents, as well as a written argument not exceeding 5 pages , and its authorities; [ 25 ] ORDERS the parties to present their written arguments on 21.5 cm X 28 cm (8 ½ X 11 in.) paper, with line spacing of at least 1.5 lines (except in the case of quotations, which must be single-spaced and indented), and the computer-prepared text shall be in 12- point type, with no more than 12 characters per 2.5 cm; [ 26 ] ORDERS that the documents filed by the parties carry a continuous pagination or tabs, a front cover and a general table of contents; [ 27 ] DEFERS the file to the Master of the rolls to determine the date of the hearing at the earliest possible available date for a total period of 150 minutes (75 minutes for the appellants (including rebuttal time), 50 minutes for respondent Stichting, 20 minutes for respondent Monitor and 5 minutes for respondents Debtors ; [ 28 ] Cost to follow.

MARIE ST-PIERRE , J.A.