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Canada Imperial Tobacco Canada granted creditor protection after losing Quebec legal battle

Two Canadian tobacco giants have entered creditor protection after losing a landmark legal battle in Quebec, raising questions about whether plaintiffs will receive billions in damages they are owed and if other lawsuits against the companies will proceed.

A judge granted Imperial Tobacco Canada Ltd. creditor protection Tuesday, days after JTI-Macdonald Corp. was granted creditor protection. In an e-mail statement Wednesday, a company spokeswoman for the third defendant, Rothmans, Benson & Hedges Inc., wrote the company is “assessing RBH’s options” and has no further comment.

Earlier this month, the Quebec Court of Appeal upheld a 2015 ruling in a lower court that found the tobacco companies concealed the health risks of smoking from the public. The decision means the three companies have to pay about $13.5-billion in damages to about 100,000 Quebec smokers who were harmed by cigarettes or who couldn’t quit smoking. It’s believed to be the biggest award in Canadian history.

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Tobacco firm JTI-Macdonald granted creditor protection, liable for $1.77-billion

Analysis: The long, long fight against Big Tobacco

In the case of JTI-Macdonald, a judge ordered all litigation against the company and its co-defendants to be temporarily suspended.

In addition to the Quebec class-action, all provinces are suing the tobacco companies to recoup the costs that smoking-released diseases have imposed on the health-care system. The first trial is scheduled to start in New Brunswick this fall. During the stay period, the companies are still able to seek permission to appeal the Quebec decision to the Supreme Court of Canada.

Tobacco control advocates have criticized the suspension and say they don’t understand why legal proceedings against all of the companies are being temporarily stopped. They fear creditor protection will allow the companies to avoid paying penalties and indefinitely delay other legal proceedings.

“The tobacco industry strategy is one of delay, delay, delay and pay as little as possible,” said Rob Cunningham, senior policy analyst with the Canadian Cancer Society.

JTI-Macdonald issued a news release stating the “extraordinary judgment” in Quebec forced the company to seek creditor protection in order to avoid job losses and continue normal business activities. Imperial Tobacco issued a statement Tuesday saying it decided to seek creditor protection as a result of the Quebec judgment and the fact that another co-defendant had entered creditor protection. Otherwise, Imperial Tobacco “could have been required to pay for all or part of JTI-Macdonald’s share of the Quebec judgment, in addition to its own," the company statement said.

Mr. Cunningham said one concern is the companies will use the creditor protection in order to settle all outstanding provincial cost-recovery lawsuits out of court. When settlements are reached, the amounts are typically much lower than they would be if awarded after a trial, he said.

In its news release, Imperial Tobacco said the company is looking to “resolve all tobacco litigation in Canada under an efficient and court supervised process.”

As far as the creditor protection hearings go, Alfonso Nocilla, an insolvency law professor at the University of Western Ontario, said the next step will be for the companies to present restructuring plans at separate hearings, which will take place in about a month.

At each subsequent hearing, the judge may decide to grant a further delay. Eventually, the court may order the companies to pay a reduced amount to the class-action plaintiffs, or may order the companies to set up a trust through which plaintiffs could be paid out over a long period of time. A similar scenario unfolded after the Canadian Red Cross entered creditor protection after the tainted-blood scandal in the 1980s.

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