Grant Forest Products Inc. v. The Toronto-Dominion Bank, 2015 ONCA 570

In 2009, Grant Forest Products Inc. (GFPI) and related companies (collectively, Applicants) sought protection under the Companies’ Creditors Arrangement Act (CCAA) in response to a secured creditor’s application for a bankruptcy order under the Bankruptcy and Insolvency Act (BIA). The Applicants eventually entered into a liquidation process under the CCAA. Under the initial CCAA order, GFPI was entitled but not required to pay outstanding and future pension contributions to its two defined benefit pension plans (Plans). In February 2012, Ontario’s Superintendent of Financial Services (Superintendent) ordered the Plans wound up. The wind-up order gave rise to significant wind-up payment remittance obligations for GFPI. GFPI made contributions to the Plans until June 2012, when it sought an order declaring that it not be required to make further contributions pending the Supreme Court of Canada (SCC)’s decision in Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6 (Indalex). The CCAA judge joined this motion with a motion by the then-highest ranking secured creditor (Second Lien Lenders) seeking to lift the CCAA stay of proceedings and petition the Applicants into bankruptcy.

In Indalex, a majority of the SCC held that the deemed trust arising under subsection 57(4) of the OntarioPension Benefits Act (PBA) continues under the CCAA subject to the doctrine of federal paramountcy. Following release of the Indalex decision, the CCAA judge ultimately allowed the motion for bankruptcy. The CCAA judge ordered that the deemed trust provisions under subsections 57(3) and (4) of the PBA did not provide the pension beneficiaries with priority over the Second Lien Lender. The CCAA judge relied on the SCC decision inIndalex for the principle that the PBA deemed trust will prevail prior to insolvency; however, once the federal statute is invoked, the insolvency regime applies. The CCAA judge stated that the wind-up deemed trust will prevail in an insolvency where the wind-up occurs before insolvency, but not when the wind-up occurs after the initial order is granted as it did in this case. The CCAA judge then ordered that GFPI and the court-appointed monitor (Monitor) were prohibited from making further payments to the Plans.

On appeal to the Ontario Court of Appeal (Court of Appeal), the Superintendent argued that the CCAA judge had erred in finding that no statutory deemed trust arose under the PBA in respect of the wind-up deficiency during the CCAA proceeding. Relying on Indalex, the Superintendent argued that the PBA wind-up deemed trust was valid during the CCAA proceeding and, therefore, the claims of the pension beneficiaries should be given priority over the Second Lien Lenders.

The Court of Appeal dismissed the appeal and held that the decision by the CCAA judge as to whether to terminate the CCAA proceeding and allow the bankruptcy to proceed was a discretionary one. The CCAA judge made a reasonable exercise of discretion in allowing the motion for bankruptcy without first requiring that the wind-up payments be made.

Although the Second Lien Lenders brought the motion for bankruptcy in order to take advantage of the more favourable scheme of priorities under the BIA, the Court of Appeal held that such motivation was not evidence of a lack of good faith nor was it a disentitlement to the relief sought.

The Court of Appeal distinguished the facts of Indalex on the basis that the pension plan giving rise to the PBA deemed trust held to be valid in the CCAA proceeding in Indalex had been wound up prior to the initial CCAA order. The Plans, in contrast, were only declared wound up after the initial CCAA order was made. The Court of Appeal also distinguished Indalex on the basis that only the CCAA was at issue whereas in Grant Forest, the BIA was clearly also at issue.

Ontario Court of Appeal Decision

Royal Bank of Canada v. Galmar Electrical Contracting Inc., 2015 ONSC 5561

Royal Bank of Canada (RBC) was a secured creditor of Galmar Electrical Contracting Inc. (GECI), Brenmar Heating & Air Conditioning Ltd. (Brenmar), Galmar Electric Limited (GEL) and 1125055 Ontario Limited (112) (collectively, Galmar Group). These entities were placed in receivership and subsequently petitioned into bankruptcy. The receiver brought a motion for, among other things, approval of a proposed distribution of funds to creditors. The International Brotherhood of Electrical Workers, Local 353 (Union) opposed the proposed distribution. The Union also brought a cross-motion seeking payment of what it asserted was a “super-priority” claim under sections 81.3 to 81.6 of the Bankruptcy and Insolvency Act (BIA) for amounts owing for pension benefits and other benefits provided under the collective agreement. Only GECI was party to the collective agreement.

Canada Revenue Agency (CRA) asserted a claim against GECI for unpaid source deductions. CRA also asserted priority for its claim over all other creditors on the basis of subsections 227(4) and 227(4.1) of theIncome Tax Act (ITA), which provide that unremitted source deductions are deemed to be held in trust for the Crown.

With respect to the relevant bankruptcy legislation, subsection 67(1) of the BIA preserves the priority for this deemed trust on a bankruptcy. While subsection 67(2) of the BIA provides that all deemed trusts in favour of the Crown created by federal or provincial legislation are rendered invalid in a bankruptcy, subsection 67(3) of the BIA provides an exception for deemed trusts on account of source deductions arising pursuant to subsections 227(4) and (4.1) of the ITA. Sections 81.4 and 81.6 of the BIA provide a super priority for unpaid wage claims of employees of an employer in a receivership and for unpaid pension benefits deducted, but not remitted by the employer. Sections 81.3 and 81.5 of the BIA provide for the same super priority for employees of an employer in bankruptcy.

The Union asserted a difference in the two sets of provisions which, it argued, indicated that the CRA deemed trust ranks behind the Union’s super priority in a receivership proceeding (and which it also argued should apply to GECI rather than the bankruptcy provisions). The Union argued that the priority for unpaid employee wage and pension claims of a bankrupt employer pursuant to sections 81.3 and 81.5 of the BIA makes an express exception for the CRA’s priority for unremitted source deductions pursuant to subsection 67(3) of the BIA. However, the same exception to the employees’ super-priority claim is not included in sections 81.4 and 81.6 of the BIA for employers in a receivership. Accordingly, the Union asserted that it had priority over the CRA’s source deduction claims under sections 81.4 and 81.6 of the BIA.

The Ontario Superior Court (Court) dismissed the Union’s argument and held that the priority for source deductions not remitted to the CRA applies equally in both a receivership and a bankruptcy (and therefore did not have to consider the Union’s claim that only the receivership provisions applied in the circumstances of this case). The Court held that subsection 67(3) of the BIA was not referenced in sections 81.4 and 81.6 of the BIA as having priority over the employees’ priority claim because subsection 67(3) of the BIA applies by virtue of its terms to a bankruptcy and not to a receivership. Therefore, it was not necessary for Parliament to expressly exclude CRA’s priority under subsection 67(3) of the BIA in sections 81.4 and 81.6 of the BIA, as the deemed trust in favour of CRA had not been displaced by a bankruptcy proceeding. The Court held that the CRA’s priority under subsections 227(4) and (4.1) of the ITA therefore survives in both receivership and bankruptcy proceedings. Accordingly, the Court held that CRA’s claim ranked in priority over any claims the Union may have against the assets of GECI for unpaid wages and pension benefits.

The Union also argued that its claims should apply against all entities in the Galmar Group on the basis of the common employer doctrine. The Court dismissed this argument and held that there was no basis to apply the common employer doctrine and that the Union had failed to file a satisfactory proof of claim against any entity other than GECI. The Union’s motion was ultimately dismissed and the Court approved the receiver’s proposed distributions to RBC.

Ontario Superior Court Decision