The much awaited Supreme Court of Canada decision in Sun Indalex Finance, LLC et al. v. United Steelworkers et al. (Indalex) was released on February 1, 2013. The Supreme Court was split, but agreed with the Court of Appeal that a deemed trust arose from s. 57(4) of the Pension Benefits Act, Ontario (PBA) for wind-up deficiency payments. However, the Supreme Court unanimously disagreed with the Court of Appeal and held that the deemed trust would not have “super-priority” over DIP lenders. The Supreme Court did agree with the Court of Appeal that Indalex had a fiduciary duty in respect of its pension plans, and had breached that duty. Despite this, the majority of the Court disagreed with the Court of Appeal’s remedy and held that a constructive trust was not the appropriate remedy for the breach.
The Indalex case involves restructuring proceedings under the CCAA in Canada and an underfunded pension plan. At the time the proceedings began, Indalex was in the process of winding up its salaried pension plan, which was in deficit. The CCAA court authorized Indalex to enter into debtor in possession (DIP) financing in order for it to operate. Indalex subsequently sold the business, but the proceeds were not enough to pay back the DIP lenders. The members of the Indalex pension plans challenged the priority and claimed that the pension plan deficiency had “super-priority” as a result of a statutory deemed trust under the PBA and a constructive trust that would arise from Indalex’s breach of fiduciary duty as administrator of the pension plan.
Deemed Trust: The Supreme Court found that under the PBA, a deemed trust did arise for the entire amount of the wind-up deficiency, even if the precise amount of the contribution could not be determined as of the time of the wind-up.
Priority of DIP Charge: The Court declined to give the deemed trust priority over DIP lenders, based on the doctrine of paramountcy, in which federal law prevails over conflicting provincial law.
Fiduciary Duty: The Court was unanimous in confirming that Indalex had fiduciary duty in respect of its pension plans, and that it had breached that duty. The Court acknowledged that a conflict can arise where an employer, who is also plan administrator, has conflicting fiduciary duties to the corporation and to plan members. In this case, Indalex failed to address the conflict in the appropriate manner.
Remedy: The majority of the Court declined to impose a constructive trust as a remedy as there was no evidence that the acts gave rise to an identifiable asset that would be unjust for Indalex to retain.
This is a pragmatic decision which will be comforting to those who lend to companies in distress, as they will be assured that their secured claims will not be superseded by the claims of members of an underfunded pension plan. This is particularly relevant as many employer pension plans in Canada are in deficit. The decision does confirm, however, the importance of recognizing the conflicts of interest faced by the sponsor and administrator of a pension plan. The Supreme Court made it clear that companies must take steps to address these conflicting duties.