On April 7, 2011, the Ontario Court of Appeal (the “OCA”) released its decision in Indalex Limited (Re), 2011 ONCA 265, ordering that the remaining proceeds of a going concern sale (the “Sale”) consummated in the context of the Companies’ Creditors Arrangement Act (the “CCAA”) proceedings of the Indalex group of Canadian companies (collectively, “Indalex”) be paid to cover shortfalls in two pension plans, instead of being paid to the debtors’ US parent group (“Indalex US”). Indalex US had been subrogated to a super-priority DIP-charge (the “DIP Charge”) after covering a would-be short-fall to the original DIP lenders pursuant to a cross guarantee. The OCA thereby reversed the earlier rulings of Justice Campbell of the Ontario Superior Court Commercial List (the “CCAA Court”), who had found that none of the funds in question were subject to a deemed trust under the Ontario Pension Benefits Act (the “PBA”) which would have been required to prime the DIP Charge.
One of the pension plans, that of the salaried employees (the “Salaried Plan”), was already in the process of being wound-up pursuant to the PBA prior to the start of the CCAA proceedings. The second pension plan, that benefitting retired executives (the “Executive Plan,” together with the Salaried Plan, the “Plans”), did not begin its wind-up process until some time after Justice Campbell’s rulings and the closing of the Sale. Both Plans were underfunded and the purchaser assumed no responsibility for liability under the Plans.
The OCA held that Indalex continued to carry the responsibility of administrator of the Plans in the CCAA proceedings, and that it had breached its fiduciary duty as administrator of the Plans, a duty which arose both under the PBA and at common law. The OCA found that Indalex knew the Plans were underfunded and that pension entitlements would be reduced unless additional funds were paid into the Plans, but took no steps to correct the underfunding. Instead, Indalex took a number of actions to prevent further Plan funding: it applied for CCAA protection, and then for the DIP-Charge, both without notice to the Plans’ beneficiaries; it entered the Sale transaction and moved for distribution of the proceeds without providing for any payment to the Plans; and it also sought to make a voluntary assignment in bankruptcy to defeat any deemed trust claims by the Plans’ beneficiaries.
The OCA held that the appropriate equitable remedy was to impose a constructive trust on the remaining Sale proceeds and pay them out to the Plans. Key to this conclusion was the finding that the subrogated secured creditor, Indalex US, was not an arm’s-length third party and, in fact, had shared management with Indalex during the relevant time period. The OCA also held that, in the case of the Salaried Plan, the amount of the shortfall had accrued as of the commencement of the wind-up, and thus was subject to a deemed trust (backed by a charge on Indalex’s assets) under the PBA, even though it would not, in the ordinary course, have been payable in full for a number of years. Under Subsection 30(7) of the Ontario Personal Property Security Act (the “PPSA”), a security interest in accounts or inventory and proceeds therefrom (other than a purchase money security interest) is subordinate to the claims of a beneficiary of a deemed trust under the PBA or the Ontario Employment Standards Act, 2000 (the “ESA”). The OCA held that the PBA deemed-trust claim could not be wiped out, nor could its PPSA-imposed priority be reversed, by order of the CCAA Court, unless the CCAA Court had explicitly ruled that the purpose of the CCAA was paramount in this case to the PBA and the PPSA. The OCA noted that the CCAA Court had not been alerted to any pension shortfall issues and, rather, had been told that Indalex intended to satisfy any statutory deemed trust obligations. In the absence of a paramountcy ruling, the general DIP Charge super-priority language of the amended initial CCAA Court Order was not sufficient to give the DIP Charge priority over the PBA deemed trust claim of the Salaried Plan beneficiaries.
Because the breach of fiduciary duty finding was enough to order proceeds of the Sale to be paid, in part, to satisfy the Executive Plan shortfall, the OCA declined to rule on the issue of whether Executive Plan beneficiaries also had a secured deemed trust claim ranking above the DIP Charge.
The OCA’s ruling on the fiduciary duty issue may have relatively narrow future application. For example, it would not seem to apply in a case where the interests of an arm’slength secured creditor would be prejudiced; if the original DIP Lenders had not been made whole pursuant to the Indalex US guarantee, the OCA would not have been dealing solely with the equities between Indalex US and the Plan beneficiaries, and it therefore would likely not have imposed a constructive trust in response to the fiduciary breach. The fiduciary issue also centered on the fact that Indalex remained the administrator of the Plans, and was found not to have been released from its administrative duties by the CCAA proceedings. The fiduciary issue might therefore have been avoided had an independent Plan administrator been appointed in advance and given adequate notice of the CCAA proceedings.
The OCA’s ruling on the existence of a deemed trust in respect of the Salaried Plan would also appear to have narrow future application, applying only to similar cases where a pension plan is already being wound up. However, the OCA’s ruling on the necessity for an explicit paramountcy ruling would seem to have broader potential application. One obvious scenario for consideration would be a fact pattern involving secured deemed trust claims for unpaid vacation pay under the ESA, since Subsection 30(7) of the PPSA gives such claims the same priority over other secured claims as it does to PBA deemed trust claims. In such a case, it would appear that an order establishing a super-priority DIP charge would have to (i) expressly reverse the PPSA-imposed priority of ESA secured deemed trust claims; and (ii) be based on an express conclusion by the court that the purpose of the CCAA as a restructuring statute was in conflict with and paramount to the effect of the provincial statute.
A final point of note is that both the OCA and the CCAA Court expressed the view (without having to rule on the issue) that a debtor should not assign itself into bankruptcy to defeat secured claims arising under provincial legislation.