UPDATE 3-Canada ABCP plan upheld, but appeal possible

(Adds comment from lawyer predicting appeal, details)

By Lynne Olver

TORONTO, Aug 18 (Reuters) - The Ontario Court of Appeal has upheld a lower court's approval of a restructuring plan for asset-backed commercial paper, putting investors a step closer to recovering at least some of the C$32 billion ($30.2 billion) the securities were worth before the market froze a year ago.

The unanimous ruling of three judges, released on Monday, is a blow to corporate noteholders who had objected to the restructuring plan for nonbank-sponsored commercial paper, known as ABCP.

This segment of the short-term debt market seized up in August 2007 as concerns grew about U.S. subprime mortgages, although it later became clear that subprime mortgages were not the main type of asset backing the securities.

The committee of large investors that drafted the restructuring plan last fall and winter said it expects the process to close by Sept. 30, if there are no further appeals.

But a lawyer for one corporate investor said he expects somebody will take the matter to the Supreme Court of Canada.

"I think there is likely to be an appeal from some source or another," said Howard Shapray, a Vancouver, British Columbia-based lawyer whose client, Ivanhoe Mines (IVN.TO), bought about C$70 million of asset-backed commercial paper in July and August of 2007.

Shapray said he was "disappointed" with the Ontario appeal court's analysis, but would have to discuss the matter of an appeal with his client.

Most of the 2,000 or so retail investors with frozen ABCP are eligible for special repurchase programs.

But corporate noteholders, including mining, drug and high-tech companies, are not eligible for such buybacks. They had objected to the restructuring plan, arguing that it improperly cut off their rights to sue banks and investment dealers, except in cases of possible fraud.

A number of them appealed a June 5 decision from Ontario Superior Court Justice Colin Campbell that had allowed the fix-it plan to proceed.

The three-judge appeal panel concluded Campbell had the authority to approve the plan and it declined to "interfere" with his finding that the plan was fair and reasonable.

"He was required to consider and balance the interests of all noteholders, not just the interests of the appellants, whose notes represent only about 3 percent of that total," the appeal panel said in its written decision.

"That is what he did."

The plan, crafted by industry participants, is considered the largest and most complex restructuring effort attempted in Canada.

It calls for investors to get new floating-rate notes that will mature in up to nine years. But the market value of the notes is uncertain, so many corporate investors had wanted to preserve their rights to sue.

In its 55-page decision, the Ontario Court of Appeal noted that third-party "releases" that extinguish legal claims against various parties "have become a frequent feature in Canadian restructurings" since a 2000 Alberta court decision.

The Ontario court judges described the creditor law governing the commercial paper restructuring as "skeletal in nature," and designed to be flexible.

"It does not contain a comprehensive code that lays out all that is permitted and barred," the court stated.

Some observers have drawn comparisons between Canada's ABCP crisis and the U.S. auction-rate securities market, which collapsed earlier this year when potential buyers stayed away from the regular auctions that set their interest rates.

While U.S. regulators have stepped in to force U.S. banks and brokerages to buy back the illiquid auction-rate securities from their clients, Canadian regulators have so far stayed out of the ABCP matter.

Canadian brokerages Canaccord Capital CCI.TO and Credential Securities have agreed to buy back the new ABCP notes from most of their retail clients, while National Bank of Canada (NA.TO), the country's sixth-largest bank, agreed last year to buy back existing ABCP from retail clients and from the bank's mutual funds. ($1=$1.06 Canadian) (Reporting by Lynne Olver; editing by Rob Wilson)