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Borderlines...Act anywhere, liable everywhere?

|Written By Julius Melnitzer
Borderlines...Act anywhere, liable everywhere?

When it comes to doing business abroad, more and more companies — and their executives — are bumping into conflicting legal environments: as the Enron and Hollinger  cases show, their lawyers need to find out what’s out there, before the trouble starts.

When it comes to doing business abroad, more and more companies — and their executives — are bumping into conflicting legal environments: as the Enron and Hollinger cases show, their lawyers need to find out what’s out there, before the trouble starts.

Soon after Air France Flight 358 crashed at Toronto’s Pearson International Airport last August, Mary Schiavo of Motley Rice LLC, the U.S. firm that made its reputation in the asbestos litigation, showed up in Toronto, making a considerable splash on local television with her comments on the airline’s liability. By August 5, Toronto’s Will Barristers had filed suit against Air France in Ontario Superior Court. The Motley Rice Web site has “Motley Rice and co-counsel Will Barristers” as the plaintiffs’ lawyers.

But as the Enron and Hollinger scandals demonstrate, it’s not just the Americans who are crossing the border. The traffic goes both ways, and it’s creating quite a jam. When the University of California and a host of American pension funds sued some of the nation’s most prominent financial services firms in the wake of Enron’s collapse, for example, the presence of the Canadian Imperial Bank of Commerce (CIBC) among the defendants seemed barely a footnote in the proceedings.

Although CIBC is Canada’s fifth-largest bank, its size and asset base pales beside the likes of JPMorgan Chase & Co. and Citigroup Inc. So when JPMorgan Chase paid $2.2. billion in June as its contribution to a settlement, followed quickly by a $2 billion payout from Citigroup, the action in the litigation appeared to have climaxed.

But there was bigger news to come.

In early August, CIBC kicked in an astonishing $2.47 billion, the largest payment so far in the litigation. The settlement was equal to the entirety of the bank’s profits in 2004 and ten times the reserve the bank had set aside.

If nothing else, it proved that Canadian companies doing business in the United States are significant players. But as Canada’s visibility increases, so does the attractiveness of its corporations as defendants. “Canadian defendants are now squarely in the sights of American lawyers, much as U.S. companies have always been in the sights of Canadian lawyers,” says Paul Morrison, a litigation partner in McCarthy Tétrault LLP’s Toronto office.

So much so that one top U.S. plaintiffs’ firm, Lieff Cabraser Heimann & Bernstein LLP, has already established an “affiliate counsel” relationship with Toronto’s Rochon Genova LLP, a move that, amongst others, has led to parallel securities class actions against Nortel Networks. Other American firms are following Lieff Cabraser north.

“The number-one trend in Ontario is in attempts to leverage U.S. class-action lawsuits using the same factual and expert evidence upon which the American action is based,” says Robert L. Armstrong of Ogilvy Renault LLP’s Toronto office.

But it’s not just a question of Canadians becoming targets in U.S. courts or American companies becoming targets in Canadian courts. The fact is that the legal complexities surrounding the growing integration of the economies of the world’s largest trading partners has created a jurisdictional and procedural maze that makes it ever more difficult and costly for defendants with interests on both sides of the border to resolve their litigation with the finality they seek.

Just ask those involved in the Hollinger debacle, where the Canadian and American versions of the various civil suits and regulatory proceedings against the components of Conrad Black’s empire are inextricably intertwined. From the outset, it seems, the Hollinger litigation was destined to be the mother of cross-border complexity.

Black, a Canadian who gave up his citizenship to accept a British peerage, controls Ravelston Corp. Ltd., a privately held Canadian company that owns a controlling stake in Hollinger Inc. (Inc.), which is in turn the Canadian parent of U.S.-based Hollinger International (International), publisher of the Chicago Sun-Times. Before Black’s fortunes changed, the directorships and management of all three companies were interrelated.

So when Black lost control of International in early 2004, it wasn’t long before his Canadian companies came under the microscope. In October 2004, Justice Colin Campbell of the Ontario Superior Court appointed Ernst & Young (E&Y) to investigate whether anyone benefited improperly from “related party” transactions between Hollinger Inc., Ravelston and their directors and officers, including Black, David Radler and John Boultbee.

Justice Campbell also authorized E&Y to question the three men under oath. They resisted the order, arguing that no protective measures imposed could safeguard their right against self-incrimination in the United States once they had been compelled to answer questions in Canada. “Once the cat’s out of the bag, it’s going to scamper across the border and that will be a big problem for our clients,” says Don Jack of Lerners LLP’s Toronto office, who represents Boultbee.

But Justice Campbell rejected the argument made by Black and his associates. The Court of Appeal upheld the ruling in November 2005. The panel refused to grant constitutional exemptions relieving the men from answering questions posed by the court-appointed inspectors.

The Court of Appeal reasoned that it could make a determination of Charter rights only after Justice Campbell determined what, if any, protective mechanisms were necessary to shield answers to individual questions. American law, however, doesn’t allow a piecemeal approach to the Fifth Amendment: once a witness starts to answer questions, he must answer all subsequent ones. In other words, answering one question in Canada could well be taken as a waiver of Fifth Amendment rights in the United States.

For that proposition, Jack points to the affidavit evidence of Barry Bohrer, a partner in the New York firm of Morvillo, Abramowitz, Grand, Iason & Silberberg, P.C. Testifying as an expert on U.S. law, Bohrer concluded that a protective immunity order would not shield incriminating testimony from disclosure in the United States. “It is highly likely that if [a witness] testified and produces evidence in Canada, even pursuant to the maximum protection permitted, the practical consequence of such compelled testimony will be that his privilege under the Fifth Amendment to the United States Constitution will be effectively eviscerated,” Bohrer stated.

Meanwhile, American prosecutors laid criminal charges against Black, Boultbee and Radler in the United States. They and plaintiffs in various U.S. class actions against the group will be anxiously watching Black on the hot seat in Canada, hoping for information that will support the charges and the civil suits. If such information emerges, that would be a bonanza, since Black has already invoked his Fifth Amendment rights in the United States.

From Radler’s perspective, the decision whether or not to testify in Canada presumably became moot when he pleaded guilty to one count of mail fraud on September 20 before Judge Amy St. Eve of the U.S. District Court in Chicago.

But that left Judge St. Eve with another cross-border problem. As it turned out, U.S. prosecutors charged Ravelston with five counts of mail fraud and two counts of wire fraud in the same indictment to which Radler pleaded. After Ravelston was charged, however, RSM Richter Inc., the receiver appointed by the Ontario Superior Court of Justice when Ravelston filed for bankruptcy in April 2005, refused to accept service of the indictment on behalf of the company. That prompted Eric Sussman, an assistant U.S. attorney involved in the case, to accuse Ravelston of acting like a “fugitive from justice.”

Richter’s refusal to accept service prompted a postponement of Ravelston’s arraignment, which St. Eve rescheduled for September 22. But a day earlier, Richter told Justice James Farley that it had not finished its analysis of how Ravelston should respond to the indictment.

According to Ravelston’s lawyer, Alex MacFarlane of McMillan Binch Mendelsohn LLP, the Department of Justice was seeking a “meaningful fine against Ravelston,” and Richter wanted to be sure it did not do anything “that would not be considered prudent” for Ravelston’s creditors in the Canadian insolvency. A guilty plea, MacFarlane added, could cause havoc by impairing Ravelston’s ability to defend itself against civil lawsuits.

Farley gave Richter until October 3 to finish its analysis, prompting criticism from U.S. authorities who claimed Ravelston was delaying to strengthen its bargaining hand in plea negotiations. That prompted Jim Dube of Blake, Cassels & Graydon LLP, an insolvency lawyer who attended the hearing, to lambaste “some overzealous assistant U.S. Attorney in Chicago” for failing to show “proper respect” for Richter, the court’s appointee.

Fortunately, Judge St. Eve restored a measure of order to the proceedings when she agreed to postpone the arraignment to November 5. By the end of the month, Canadian courts had given Ravelston permission to enter a plea. The company pleaded not guilty just a week before Black himself appeared to enter the same plea on his own behalf.

Others in the U.S. are caught in the convoluted meanderings of the cross-border proceedings. American Home Assurance and Chubb Corp., which had extended $100 million coverage to the Hollinger companies and their directors, tried to put an end to their liability by agreeing to a $50 million settlement with Cardinal Capital, which led a class action in the Delaware courts.

The difficulty was that there was a parallel class action north of the border. “The Hollinger class action in Canada is a dead-to-rights copy of the American action,” says J.L. McDougall, a senior litigation partner at Fraser Milner Casgrain LLP’s Toronto office.

If the Delaware court approved the settlement, American Home Assurance and Chubb Corp. would be off the hook — but only in the United States. Despite the $50 million payment, they might still be liable for the entire $100 million in the Canadian lawsuit — especially since the companies purchased their policies in Canada.

“All the D&O insurance was arranged in Canada under one umbrella for all the companies,” Jack says. After protracted negotiations, the parties agreed to let Justice Campbell, who is overseeing the Canadian class action, determine the issue. But the proceedings continue to be mired in procedural wrangling — cross-border and otherwise — that show no signs of ending. “If this keeps up, legal fees will eat up the whole $100 million in coverage in no time at all,” Jack says.

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