On February 1, 2013, the Supreme Court of Canada (SCC) released its long-awaited decision in Sun Indalex Finance, LLC, et al. v. United Steelworkers, et al., 2013 SCC 6.
The SCC has affirmed that priority charges created by courts in insolvency proceedings supersede provincial statutory deemed trusts for pension claims.
The SCC decision is welcome news for “debtor-in-possession” (DIP) lenders, who questioned their priority position in the face of the Ontario Court of Appeal judgment in this proceeding, which reached the opposite conclusion.
Indalex, a manufacturer of aluminum extrusions, was the sponsor and administrator of two registered employee pension plans. In 2009, it obtained protection from its creditors under the Companies’ Creditors Arrangement Act (CCAA). At that time, one pension plan was being wound up, and both plans were underfunded (by a total $6.75 million). In a series of court-sanctioned steps, Indalex was authorized to enter into DIP financing arrangements to enable it to operate while it sought to restructure. The CCAA court granted the DIP lenders a super-priority charge over the assets of Indalex, in priority to the claims of all other creditors. The CCAA court subsequently approved the sale of Indalex’s assets on a going-concern basis but the purchaser did not assume pension liabilities. The proceeds of the sale were not sufficient to repay the DIP lender and therefore Indalex US, which had guaranteed the DIP loan, paid the shortfall and stepped into the shoes of the DIP lender in terms of priority.
Beneficiaries of the underfunded pension plans argued that assets of Indalex equal to the funding deficiencies were deemed to be held in trust under Ontario’s Pension Benefit Act (PBA), and that equivalent proceeds from the sale should be paid to the pension plans, despite the court order granting super-priority to the DIP loan. The CCAA court rejected the position of the pension holders, concluding that the deemed trust did not apply to wind up deficiencies, and that plan members were unsecured creditors.
ONTARIO COURT OF APPEAL DECISION
The Ontario Court of Appeal (OCA) reversed this ruling, holding that the pension deficiencies were subject to deemed and constructive trusts which had priority over the DIP facility and other secured creditors. In the result, the OCA ruled that: (a) the super-priority DIP charge did not have priority over such deemed trusts; (b) there was a breach of fiduciary duties since Indalex did nothing to protect the best interests of the plans’ beneficiaries; and (c) all contribution obligations to fund the shortfall accrue as of the date the plan is wound up. Accordingly, the OCA ordered the Monitor to pay from the Reserve Fund into the plans an amount sufficient to satisfy the deficiencies.
The decision of the SCC deals with a number of issues of interest and significance to restructuring professionals, and a further Bull Housser update with a detailed analysis of the SCC decision will be released later in February 2013.
The two primary issues addressed in this summary are the SCC’s treatment of the court-ordered DIP super-priority and its conclusion that Indalex had breached a fiduciary duty it owed to the plan members.
In reversing the OCA’s decision, the SCC held that statutory deemed trusts created under provincial legislation continue to apply in federal-regulated CCAA proceedings, but are subject to the doctrine of federal paramountcy. In the case of Indalex, the federal and provincial laws were inconsistent, giving rise to different, and conflicting, orders of priority. The SCC unanimously held that, due to the application of the doctrine of federal paramountcy, the DIP charge, which was established under the federal CCAA, superseded the provincial statutory deemed trust.
Breach of Fiduciary Duty
In rejecting the OCA’s analysis, the SCC held that seeking an Initial Order under the CCAA does not give rise to any conflict of interest or duty on the part of the debtor. Likewise, failure to give notice of initial CCAA proceedings is not a breach of any fiduciary duty. However, the SCC warned that a debtor can come into conflict with its duties as a pension plan administrator at the point of seeking and obtaining DIP and sales orders without notice to plan beneficiaries. At the heart of the decision, the SCC concluded that an employer-administrator who finds itself in a conflict must bring the conflict to the specific attention of the CCAA judge. It is not sufficient to include the beneficiaries in the list of creditors; the judge must be made aware that the debtor, as an administrator of a pension plan, is, or may be, in a conflict of interest. The employer-administrator also has a duty, at the very least, to provide reasonable notice of applications for DIP financing. In the case at hand, the SCC majority concluded that Indalex breached its fiduciary obligations by failing to take steps to ensure that the pension plans had the opportunity to be represented on the DIP financing motions. However, the SCC concluded that the remedy of constructive trust, ordered by the OCA, was unreasonable, since it resulted in the reordering of priorities. In consequence, the DIP super-priority prevailed over the PBA deemed trust.
The SCC’s decision in Indalex, covering several notable issues over 160 pages of reasons, will be mined for guidance in future insolvency scenarios, but has resolved for now the vexing issue of a DIP lender’s priority, which had created much uncertainty for both the restructuring and financial services industries following the OCA’s remarkable and controversial decision.
Review the SCC decision here.
Bull Housser Articled Student Helen Sevenoaks was a contributing author.