Playdium, a leading operator of entertainment and game centres across Canada, filed for protection under the CCAA on February 22, 2001. Notwithstanding best efforts, it appeared that Playdium’s restructuring efforts would be unsuccessful and the prospect of bankruptcy loomed. However, before proceeding to bankruptcy, the Ontario Superior Court of Justice–Commercial List agreed to allow Playdium’s secured creditors time to develop a transaction under which Playdium’s business would be continued by a new corporation, New Playdium, owned by the secured creditors.
On October 29, 2001, Playdium’s secured creditors, led by Covington Capital Corporation, sought court approval for the New Playdium transaction. However, the consent of Famous Players Inc. appeared to be required in respect of the assignment of a key contract under which Playdium operated game centres at approximately 50 Famous Players theatre locations across Canada. The assignment of this contract to New Playdium was critical to the success of New Playdium’s future business operations.
Due to its insolvency, Playdium had been unable to fully perform its obligations under the Famous Players contract, and various events of default existed. Famous Players refused to consent to the assignment of the contract to New Playdium and opposed Covington’s application for approval of the New Playdium transaction. Famous Players also asked the court to lift the CCAA stay to permit Famous Players to terminate the contract with Playdium. Mr. Justice James Spence found that pursuant to the terms of the contract, the contract could not be assigned without the consent of Famous Players. Mr. Justice Spence also found that because of the defaults that existed, Famous Players was acting reasonably in withholding its consent to the assignment.
Notwithstanding these findings, Mr. Justice Spence refused to permit Famous Players to terminate the contract and ruled that he had inherent jurisdiction under the CCAA to authorize the assignment over Famous Players’ objection, holding that the interests of employees whose jobs would be saved, trade suppliers whose contracts would be preserved and members of the public whose game cards would be honoured outweighed the potential prejudice that would be suffered by Famous Players. Mr. Justice Spence also ruled that the contract could be assigned to it without New Playdium assuming liability for Famous Players’ pre-assignment damages claims arising out of Playdium’s contractual defaults. In the end, by order made November 15, 2001, Mr. Justice Spence authorized a transaction under which Playdium’s business was transferred to New Playdium, which is controlled by Covington. The transaction closed on December 3, 2001. TD Bank, another secured creditor, received a minority interest in New Playdium while one of the lenders, a third secured creditor, received warrants pursuant to which it will be entitled to acquire up to 20 per cent interest in New Playdium within three years.
Geoffrey Morawetz and David Bish of Goodmans LLP acted for Playdium. Covington and New Playdium were represented by a team from McMillan Binch that included Andy Kent, Paul Macdonald, Alex MacFarlane, Stephanie Donaher and Waël Rostom (corporate restructuring and litigation), Ted Scott and Lydia Wakulowsky (corporate) and Mark Zwegers (real estate). TD Bank was represented by Robert Rossow and Gavin Tighe of Gardiner Roberts LLP. Michael Rotsztain (corporate restructuring) and Donna Parish (corporate) of Torys LLP acted for one of the lenders. Abraham Costin (real estate) and S. Richard Orzy (bankruptcy) of McCarthy Tétrault LLP acted for OMERS Realty Management Corp., whose secured debt was acquired by Covington as part of the transaction. Craig Hill and Rob MacLellan of Borden Ladner Gervais LLP represented PricewaterhouseCoopers, along with in-house counsel Rick Pettit and Dave Felice. PwC was appointed CCAA monitor and interim receiver of Playdium for the limited purpose of effecting the transfer of Playdium’s business to New Playdium. Famous Players was represented by Mel Rubinoff, Q.C., Gary Grierson and Anthony Caldwell of Fogler, Rubinoff LLP.