We previously reported on Basis Points that the Ontario Court of Appeal (OCA) unanimously ordered that employer pension contributions required under Ontario’s Pension Benefits Act “prime” (rank ahead of) charges securing a company’s DIP financing in proceedings under the Companies’ Creditors Arrangement Act (CCAA) (see blog post: Canadian Court Cracks the Nut of a Priming DIP; Are Secured Claims Next?). We followed this with a second Basis Points update that the Québec Superior Court more reasonably held that DIP lenders primed the claims of pension participants (see blog post: A Priming DIP in Québec? Beau Dommage!). The stakes involved are considerable – were the OCA position ultimately to be victorious, the decision in favor of DIP liens would enable more pension-saddled Canadian companies to obtain CCAA financing, thereby substantially increasing their Vegas odds for restructuring. With the regular season over, the Ontario and Québec views squared off in the Canadian Superpriority Bowl, with the Supreme Court of Canada (SCC) serving as referee. While the first half favored the Québécois, the Ontarians staged a strong second-half comeback. In the end, however, a goal-line stand saved the day and the SCC awarded victory to the Francophones. As a result, it can now be definitely stated that, in Canada, DIP liens come first. Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6 (Feb. 1, 2013) (available here).
Having lost in the regular season, the Appellants argued on appeal to the OCA that claims of a provincial deemed trust are subordinate to DIP liens because provincial deemed trusts are not included in the federal insolvency scheme and, therefore, should not be included in CCAA proceedings. However, this screen pass was ruled incomplete by the OCA. But then the Appellants recalled Doug Flutie, who (among other exploits) led both the Calgary Stampeders and Toronto Argonauts to Canadian Football League championships. Reminiscent of the Notre Dame-Miami classic, Appellants heaved a Hail Mary, arguing that federal CCAA law superseded Ontario’s provincial pensions statute. The SCC signaled a touchdown, ruling that, under the doctrine of federal paramountcy, provincial trust law was as ineffective as the 49ers’ first-half offense where (1) it is impossible to comply with valid federal and provincial laws or (2) where applying the provincial law would frustrate the purpose of the federal law.
Applying that doctrine to the play in process, the SCC ruled that Appellants had hauled down the pass with both feet inbounds. Compliance with provincial law granting superpriority to the plan beneficiaries necessarily entailed defiance of the CCAA order made under federal law, and Indalex’s ability to restructure as a going concern (the purpose of the CCAA) would be frustrated without a superpriority DIP charge. In finding that the CCAA order preempts provincial law, the SCC noted that the priming of the DIP is key to the debtor’s ability to attempt a workout and that “[t]he harsh reality is that lending is governed by the commercial imperatives of the lenders, not by [provincial policy concerns and pension fund legislation].” Move over retirees, the Indalex DIP lenders won the Canadian Superpriority Bowl, and they’re going to Canada’s Wonderland!