Thursday, July 9, 1998
ANDRÉ PICARD
The Globe and Mail
Montreal -- The Canadian Red Cross Society, the country's richest and arguably best-known charity, is poised to file for bankruptcy protection.
The beleaguered humanitarian agency will also offer the victims of tainted blood $100-million, the total value of its assets.
In a move designed to ensure the survival of the century-old organization, the Red Cross plans an imminent court filing under the Companies' Creditors Arrangement Act.
It is also the final step in removing the Red Cross from Canada's blood system. A new, independent agency, Canadian Blood Services, will take over that function on Sept. 1.
The filing will take place early next week, on the same day the Red Cross and Canadian Blood Services sign a final transition agreement. Negotiations on the transition are just wrapping up, and final details will be announced soon, likely next Tuesday.
All the technical work is done, and the only remaining hurdle is getting Ottawa and the provincial governments to agree to pay about $150-million to purchase the Red Cross's assets and pay off its creditors.
The Red Cross will net about $100-million from the deal, and it has pledged to put all the money into a trust fund for victims of tainted blood. This money would be added to the $1.1-billion already pledged by governments.
Under the CCAA, a Depression-era statute comparable to the U.S. Chapter 11 procedure, judges have broad discretion to restructure companies that are in financial trouble. Used by many Canadian companies, it is an alternative to invoking the Bankruptcy and Insolvency Act, but nonetheless a form of bankruptcy.
The CCAA is viewed by lawyers as an excellent way of containing legal liability while allowing an organization to survive. The Red Cross is suffocating under the weight of more than $5-billion in outstanding lawsuits, most from transfusion recipients who contracted hepatitis C.
But because of the CCAA process, the transition to the new blood agency could be delayed. As part of the negotiations around the hand-over, the Red Cross asked governments to assume its legal liabilities.
RED CROSS
A3
RED CROSS
A1
They refused, but suggested instead that the agency file for protection under the CCAA.
Parties to the talks have agreed not to discuss any details publicly. But sources confirmed that negotiations have progressed to the point where a Red Cross filing in bankruptcy court is "imminent."
The transition talks revolved around three major areas: personnel, donor records and assets. Staffing issues were resolved a few weeks ago. CBS and Hema-Quebec (the new blood agency in Quebec) agreed to hire virtually all 3,000 full- and part-time employees of the Red Cross blood transfusion service. A deal will also be signed to ensure the confidentiality of blood-donor records.
The most contentious part of the talks has been putting a price on Red Cross assets, which include 17 transfusion centres, a national laboratory and a distribution network.
In the end, governments will pay, more or less, the book value of the assets, although most were paid for by the state in the first place. They are doing so only on the condition that the Red Cross make a symbolic payment to victims.
Provincial governments have been paying the Red Cross more than $300-million annually to collect and distribute blood and blood products to Canadian hospitals, about 60 per cent of its total revenues. But the transfusion service has long been a financial albatross for the charity. Basic operating costs exceeded its government subsidy, and the Red Cross invested heavily in some failed projects. All the charity's debts, close to $50-million, are related to its investment in a blood-fractionation plant that it was to build in Nova Scotia in partnership with Bayer Inc.
Since the tainted-blood tragedy started making news in 1991, the blood-transfusion service has also been a public-relations nightmare.
Even stripped of its primary program, blood, the Red Cross remains an impressive organization, one that is, in many ways, more streamlined and financially sound. It will still have a budget of more than $200-million annually largely from the three levels of government, along with 5,400 employees and 130,000 volunteers.
The principal Red Cross programs are now homemaker services (the agency cares for 80,000 sick and disabled people in their homes) along with international relief and disaster relief in Canada.
The charity is expanding rapidly in the provision of community services like meals-on-wheels, respite care, fitness programs for seniors, babysitter training, and sexual-abuse prevention for young hockey players.
Its water-safety services and first-aid services also remain popular with Canadians. Much of this work has been overshadowed by the media attention that has focused on the tainted-blood tragedy.
About 2,000 recipients of blood and blood products contracted the AIDS virus between 1980 and 1985. As many as 60,000 more contracted hepatitis C from transfusions, though the number of infected is the source of much disagreement.
**************
Tuesday, July 21, 1998
ANDRÉ PICARD, in Toronto
ANNE McILROY, in Ottawa
An Ontario court has granted the Red Cross temporary bankruptcy protection, saying it is clearly in the public interest that the humanitarian agency continue to exist despite the $8-billion in tainted-blood lawsuits it is facing.
Mr. Justice Robert Blair of the Ontario Court's General Division has given the charity 30 days to come up with a final survival plan, the outline of which was unveiled yesterday.
He also gave the organization, which is insolvent, the right to borrow up to $50-million from the Toronto-Dominion Bank to pay its bills.
The Red Cross will have to return to court next week to seek approval for the $132.9-million sale of its troubled blood-transfusion service to Canadian Blood Services, a new agency that is supposed to begin operating Sept. 1.
After paying its bank loans and commercial creditors, the Red Cross plans to put the proceeds of the sale into a trust fund for victims of tainted blood. It remains unclear exactly how much money that will be, but it is estimated to be in the neighbourhood of $70-million to $100-million.
The charity is essentially asking victims to drop their lawsuits in exchange for the guarantee of some money. The trust fund will bolster a $1.1-billion compensation fund promised by Ottawa and the provinces. The government funds will go only to those infected with hepatitis C between 1986 and 1990; the Red Cross said it will make its money available to all the victims. (The governments announced compensation in 1993 for people infected with HIV-tainted blood.)
The Red Cross was granted protection under the Companies' Creditors Arrangement Act, a Depression-era statute that gives judges broad discretion to restructure companies that are in financial trouble.
Gene Durnin, president of the Red Cross board of governors, said the move was necessary to ensure the survival of non-blood activities, to help ensure a smooth transition to a revamped blood system and to maximize the payout to victims.
"This is in no way intended to deprive victims of money," Mr. Durnin told a news conference in Ottawa. "On the contrary, we are putting the proceeds from our blood network into a trust fund for victims. This proposal to the court is also intended to see to it that the Red Cross can survive in Canada."
Harvin Pitch, a lawyer representing a number of people with tainted-blood lawsuits, summarized the views of most claimants and creditors when he said: "No one wants to see the Red Cross destroyed . . . but we have to see if this plan is realistic."
In particular, victims are troubled that banks and commercial creditors are being given priority. A number of lawyers also stringently opposed raising the charity's borrowing rights, saying it would deplete funds available to victims.
But Judge Blair rejected those complaints, saying that "borrowing authority is imperative at this point" if the Red Cross expects to survive. He said the disappearance of the Red Cross in Canada is unimaginable.
Benjamin Zarnett, counsel for the Red Cross, revealed in court yesterday that the organization faces 239 outstanding lawsuits, and it has been notified of 35 more pending suits. In many cases, the Red Cross has no insurance.
Aside from the legal action, Mr. Zarnett said, the blood program has been chronically underfunded, forcing the agency to exhaust its general funds and borrow substantially.
The lawyer said more borrowing was essential because the Red Cross is only days away from insolvency. "I'm not sure which day of the week we cross that line, but it's a little too close for comfort," he said.
Mr. Zarnett said the public inquiry into the tainted-blood tragedy entailed significant expenses, as did a business partnership with Bayer Inc. to build a blood-fractionation plant. That failed commercial venture cost the Red Cross $33.3-million.
The charity owes commercial creditors about $30-million. Further, it estimates that its borrowing will reach about $45-million by Sept. 1.
At the same time, it has about $30-million in inventory that can be recovered, and it pledged to put all proceeds of insurance settlements into the trust fund.
Lawyer Bob Rae, who negotiated the sale of the charity's blood assets, said victims are being asked to make some sacrifices under the CCAA plan, but he said the organization's future was clearly at stake if they do not accept it.
"Essentially, what the plan is, is to say: 'Here is the trust fund. Would you agree to limit your claims against the Red Cross to the trust fund,' " he told the Ottawa news conference. " . . . The alternative is that all these liabilities will cast a shadow over everything else the Red Cross does. And our point is, we are not a business, we are a charity. And we have a whole bunch of people who are in need, who are depending on us, and it simply isn't possible for us to do our job if we have to carry on with this shadow hanging over us."
Once the transition is complete, the Red Cross will remain a formidable organization, with more than $200-million in annual revenue, 9,000 employees and 130,000 volunteers.
Without a blood program, its biggest service will be the provision of homemakers in Eastern Canada. The Red Cross also maintains disaster relief, international aid, water safety, first and and community health programs. It is one of the country's biggest fund raisers, with more than $34-million in charitable donations annually.
The tainted-blood tragedy is the worst preventable public-health disaster in Canada's history. About 2,000 people contracted the AIDS virus from blood and blood products between 1980 and 1985 and as many as 60,000 more transfusion recipients contracted the potentially debilitating hepatitis C virus between 1980 and 1990.