Courts and regulators have the nasty habit of throwing wrenches into the best-laid plans of entrepreneurs and buyout moguls.  Last week, a Canadian court stopped dead what would have been the biggest leveraged buyout in history. The $48 billion (U.S.) transaction would have taken Bell Canada, the country’s largest telecom company, private. The surprise ruling did not get as much play in the U.S. as it should have and could scuttle the deal.

On May 21, a Quebec appeals court, in a landmark decision, blocked the deal for BCE on the grounds that it would have been unfair to the company’s current bond holders. The buyers, a consortium led by Providence Equity Capital of Rhode Island and the Ontario Teachers’ Pension Plan, had planned to finance the deal by loading the company up with $34 billion in debt. The court said the debt load would have raised the probability of default of the company’s existing bonds whose ratings would have dropped from blue-chip to junk.

The buyers said they would appeal to Canada’s Supreme Court, but investors who have been left on the outside of deals that dilute or damage the value of their investments must have cheered for this unexpected intervention. Bondholders had the law on their side. Unlike the U.S., where boards are only required to maximize returns to shareholders, Canadian law says the impact on all stakeholders has to be taken into account, including the debtors.

The deal was already in trouble, when, last week, the banks lined up by the consortium to finance the debt demanded changes in the agreement, including higher rates and tougher covenants.  Banks have become more demand in financing deals since the credit crunch shook up the financial markets. Just two weeks ago, Citigroup and Royal Bank of Scotland –both involved in the Bell Canada deal – forced a renegotiation of terms for the leveraged buyout of broadcaster Clear Channel Communications.

The May 26 issue of Fortune magazine featured the deal on its cover and included a glowing article about Providence Equity CEO Jonathan Nelson, leader of a low key firm that has risen into the top 10 of buyout firms.  Focused on media companies, wrote Fortune’s Stephanie Mehta, the company has provided some of the best returns among the mega funds.

Now with the Canadian courts standing up for bondholders, Nelson and his LBO partners may be spending time doing a lot of renegotiation. Buyout firms can only hope that the Quebec decision does not rub off on U.S. courts.