This is another post-Indalex pension deficit priority case. Due to factual differences from Indalex, however, the pension claims were largely rejected.
In the fall of 2008, Northern Sawmills Inc. idled its operations and laid off most of its employees. In January 2011, PricewaterhouseCoopers was appointed as Receiver over the assets of Northern Sawmills Inc., pursuant to s. 243(1) of the Bankruptcy and Insolvency Act (BIA), and began liquidating the company’s assets – the net proceeds of which were to be distributed amongst the company’s secured lenders. Prior to making any distributions to the secured lenders, the Receiver brought a motion seeking advice and direction from the Ontario Superior Court of Justice to determine what, if any, reserves were required in respect of claims for outstanding normal cost contributions and wind-up deficiencies under Northern Sawmill’s defined benefit pension plans.
The company’s unionized and non-unionized employees were covered under a plan (the hourly plan) registered under the Ontario Pension Benefits Act (the PBA). The company had established a separate plan for salaried employees, effective June 1, 2007, which had been filed for registration under the PBA in March 2008. In September 2010 (i.e., prior to the Receiver’s appointment), the Superintendent of Financial Services for Ontario, ordered the hourly plan to be wound up effective January 1, 2008 and “revoked” the salaried plan’s registration (formal registration had never been granted, but all parties agreed that such revocation had the same effect as a refusal to register) as at a date yet to be specified.
As at the effective date of the hourly plan wind up, there were no unpaid normal cost contributions owing, although there was a sizeable wind up deficiency (estimated at over $5 million). With respect to the salaried plan, assuming a wind up date of November 16, 2010, the normal cost deficiency was $147,732 and, like the hourly plan, there was a sizable wind up deficiency.
Following its appointment as the successor administrator for both plans in 2011, Morneau Shepell Ltd., suggested to the Superintendent that the plans should be merged, and treated as one plan with a wind up date of November 16, 2010. Such a merger would have caused normal cost arrears to arise in the hourly plan. Morneau calculated that the resulting combined unpaid normal cost for both plans would be $335,777 plus interest. Morneau also took the position that ss. 57(4) and (5) of the PBA operated to establish a deemed trust over Northern Sawmill’s assets in respect of the merged plans’ wind up deficiency (in excess of $12 million as at December 31, 2010).
The Receiver and secured creditors challenged the Superintendent’s authority to change the hourly plan wind up date, but did not object to the Superintendent carrying out his statutory obligation to set the wind up date for the salaried plan. Nor did they object to the Superintendent considering Morneau’s proposal to merge the salaried plan into the hourly plan.
What are the implications of the stay in the initial receivership order?
The Court began by determining that the stay in the initial receivership order preventing proceedings and remedies in respect of Northern Sawmill’s property operated to preclude the Superintendent from changing the original January 1, 2008 hourly plan wind up date.
The Court also refused to lift the stay. Since the hourly plan wind up had been initiated by the Superintendent and was not appealed at the time, the Court recognized it as a final order under the PBA and held that, in that regard, the Superintendent was “functus officio”. The Court further held that since the proposed change in the hourly plan wind up date occurred very late in the receivership process, lifting the stay in such circumstances would be prejudicial to the secured creditors.
Do the Plans have BIA super priority in respect of normal cost arrears?
Based on these findings, the Court considered what, if any, reserve should be held by the Receiver with respect to potential claims under s. 81.6 of the BIA, which grants a super priority to any normal cost arrears owing to a pension plan. Since the hourly plan’s wind up date was unchanged (and there were no unpaid normal cost contributions owing as of the original wind up date), the Court confirmed that no reserve was required with respect to the hourly plan.
With respect to the salaried plan, the Court ordered a holdback to cover the potential normal cost deficit ($147,732 using an assumed termination date of November 16, 2010). The actual amount of the normal cost arrears was left to be determined later. While the secured creditors argued that the salaried plan was never registered and thus there could be no normal cost super priority under s. 81.6, the Court held that since this argument was not included in the filed factums, the issue would have to be brought back in a separate motion.
Is there a PBA deemed trust?
Turning to Morneau’s argument that the combined hourly and salaried plan wind up deficits of over $12 million are subject to a deemed trust under ss. 57(4) and (5) of the PBA, the Court:
- recognized the PBA deemed trust priority over prior security interests in respect of the hourly plan, as limited by s. 30(7) of the Personal Property Security Act (the PPSA) [Note: PBA deemed trusts will prime any existing PPSA secured interest in the debtor’s accounts receivable and inventory assets, but will only rank on a first-in-time priority over the debtor’s other property behind previously perfected security interests] ; and
- held that the PBA deemed trust in relation to the hourly plan only had priority over the proceeds from the sale of Northern Sawmill’s inventory, amounting to $4,725.
With respect to the balance of the hourly plan deemed trust, the Court noted that unlike Indalex, where the contested DIP charge had been imposed some two years after the Indalex plan had been terminated, the security interests of Northern Sawmills’ lenders had been perfected well before the Superintendent took steps to wind up the hourly plan. As such, the balance of the hourly plan deemed trust did not have first-in-time priority over the interests of Northern Sawmill’s secured lenders on the company’s remaining property other than inventory and accounts receivable.
What about the constructive trust argument adopted by the Ontario Court of Appeal in Indalex as a way for the balance of pension wind up deficit claims to prime prior secured lender interests over such remaining property?
In Northern Sawmill’s case this balance was over $12 million (the total salaried plan wind up deficit, plus the balance of the hourly plan PBA deemed trust ranking behind secured lender claims) which greatly exceeded available company assets. Nevertheless, these assets could have been applied to reduce some of the wind up deficits. The Court briefly referred to this, but since Morneau did not make any claims regarding a constructive trust over company property, the Indalex constructive trust analysis was not considered by the Court as a possible way of expanding the priority granted to pension wind up deficits over prior secured lender claims against all company property. Such priority was therefore governed solely by the available PBA deemed trusts, as limited by the PPSA.
In the end, however, Morneau agreed not to require a reserve for the relatively insignificant amount of $4,725 in order to avoid any risk that the Receiver would force a bankruptcy under the BIA to eliminate the PBA deemed trust and protect the interests of secured lenders. Thus, the Court held that the Receiver need not hold anything back in respect of the hourly plan PBA deemed trust claim.
The Court went on to approve the receiver’s report and distribution schedule which included a BIA s. 81.6 holdback of $147,732 for the potential salaried plan normal cost arrears claim.