Sun Indalex Finance v. United Steelworkers
Supreme Court overturns the Ontario Court of Appeal decision in the Indalex case. What will it mean for active and retired employees and pension plan deficiencies?
On April 7, 2011, the Ontario Court of Appeal held that the deemed trust provisions in the Ontario Pension Benefits Act required Indalex Ltd., an insolvent company under Companies’ Creditors Arrangement Act (CCAA) protection, to use the proceeds of the sale of its assets to satisfy significant deficiencies in one of its two employee pension plans (the Salaried Plan, which had been wound up as of December 31, 2006) before paying its secured creditors. Further, it held that the other pension plan (the Executive Plan) was subject to a constructive trust resulting from the Plan administrator’s breach of fiduciary duties owed to the Plan beneficiaries, such that proceeds of the sale would also be used to satisfy its funding deficiencies prior to payment to other secured creditors.
The effect of the decision was that the monies owing to the pension plans would have to be paid before Indalex Ltd.’s parent company, Indalex U.S., could collect the money it was owed (Indalex U.S. had guaranteed the money Indalex Ltd. had borrowed while under CCAA protection).
Sun Indalex, the principal secured creditor of Indalex U.S., appealed to the Supreme Court of Canada, as did the U.S. Trustee and the Monitor acting on behalf of Indalex Ltd.
On February 1, 2013, the Supreme Court of Canada allowed the appeal and overturned the Court of Appeal’s decision.
The Supreme Court issued three separate rulings in its decision. Justice Deschamps gave reasons for judgment on behalf of herself and Justice Moldaver. Justice Cromwell wrote concurring reasons on behalf of himself, Chief Justice McLachlin and Justice Rothstein. Justices LeBel and Abella dissented.
Although the Supreme Court’s decision was disappointing, it addressed a number of critical issues including:
- the scope of the windup deemed trust provided for under the Pension Benefits Act
- the relationship between a director’s duties to the corporation and shareholders and the common law and statutory duties owed to pension plan beneficiaries
- the application of provincial law in a CCAA proceeding
- whether the court should look through various related corporate entities when assessing the behaviour, obligations and liabilities of a pension plan sponsor
- the scope of fiduciary duties owed to pension plan beneficiaries
- whether a constructive trust is an appropriate remedy in the event that a pension plan administrator has been found to have breached fiduciary duties owed to pension plan beneficiaries
The Deemed Trust: A majority of the judges (Justices Deschamps, Moldaver, LeBel and Abella) held that a deemed trust under the Pension Benefits Act encompasses the entire windup deficiency. This is important since, for the past two decades, employers have argued that it does not. Consequently, in a non-insolvency situation, if an employer chooses to wind up a plan with a deficit, the deemed trust in s. 57(4) of the Pension Benefits Act provides a basis for unions and employees to seek an order to recover the balance (subject to the amortization period for employer contributions that is permitted under the Act).
However, in an insolvency situation, the likelihood is that there will be an order that provides a super-priority for Debtor-in-Possession (DIP) lenders. Applying the doctrine of paramountcy, as the Supreme Court did in Indalex, the deemed trust will be superseded by the DIP Order. However, if funds remain after satisfaction of the DIP Loan, it will be open to plan beneficiaries to argue that the deemed trust continues to apply and ranks above the remaining secured creditor claims.
Breach of Fiduciary Duty: The Supreme Court unanimously held that Indalex Ltd. – which was the administrator of the pension plans – had breached its fiduciary duty to employees, although the breadth of the finding differed among the individual judges. The Court rejected the argument that an employer’s duties as pension plan administrator cannot run concurrently with its corporate duties to shareholders during insolvency proceedings. In a CCAA proceeding, a company cannot solely focus on honouring its corporate responsibilities. At the least, the company must take steps to resolve the inherent conflicts that can surface between the duty it owes pension plan beneficiaries and the duty it owes its shareholders.
The Court’s rulings are clear that employers must apprise pension plan members or their representatives of actions that may be taken under the CCAA that could affect their rights, and advise the CCAA judge when they are in a conflict of interest. It is also clear that where a conflict between the employer’s fiduciary duty to plan members and its obligations to shareholders exists, steps must be taken to ensure that plan members can obtain independent representation (i.e. through the appointment of representative counsel or an independent Plan administrator).
Application of provincial law in a CCAA proceeding: Justice Deschamps’ ruling explicitly recognizes that the statutory deemed trust continues to apply in CCAA proceedings, but is subject to the doctrine of federal paramountcy. All of the judges agreed that a DIP Order that gives priority over statutory trusts will prevail over the provincial deemed trust, thereby rendering the provincial deemed trust inoperative.
The Ontario Court of Appeal had determined that, prior to giving effect to a DIP Order nullifying a deemed trust, the employer must present evidence demonstrating why the deemed trust priority could not apply in a CCAA proceeding. In this respect, the Court of Appeal noted that at no time during the motion to authorize the DIP financing had the implications of giving effect to the provincial deemed trust been considered. However, the Supreme Court essentially held that the DIP Order, in and of itself, becomes a federal statutory order that, once issued, supersedes the deemed trust (assuming the DIP Order states that it takes priority over statutory trusts) – apparently without regard to the nature of the deemed trust obligations or the need to show why an employer could not honour the obligations during the CCAA proceeding. Consequently, despite holding that all efforts should be made to give effect to provincial legislation in CCAA proceeding, the Supreme Court’s decision essentially preserves what was assumed to be the status quo prior to the Court of Appeal’s decision.
Constructive Trust: The Court of Appeal had held that the finding of a breach of fiduciary duty gave rise to a constructive trust remedy. However, despite finding that Indalex had breached its fiduciary duties, a majority of the Supreme Court held that the test for the application of a constructive trust had not been met. In particular, it held, the assets that had been held in reserve by the CCAA judge pending the outcome of this dispute, were not directly related to the wrongs that had led to the conclusion that Indalex had breach its fiduciary duty. Consequently, although there had been a wrong, there was no remedy.
Related Parties: One of the reasons the Ontario Court of Appeal ordered a constructive trust was that Sun Indalex, the secured creditor, was related to Indalex and had been directing the affairs of Indalex U.S. Indeed, it controlled 100% of the voting shares of Indalex U.S. and was essentially the operating mind behind the company. The Court of Appeal did not want to benefit a party that it perceived as having been responsible for the fiduciary breaches.
In his reasons, Justice Cromwell rejected the argument that the relationship between the Indalex corporations was relevant in assessing whether to apply the constructive trust, holding that there was no legal basis to pierce the corporate veil. He also held that the constructive trust remedy was disproportionate to Indalex’s breach of fiduciary duty.
However, in the course of his reasons, Justice Cromwell misstated certain undisputed facts. At paragraph 219 of the decision, he states: “At the same time Indalex applied for the sale approval order, it also applied to lift the CCAA stay so that it could file an assignment in bankruptcy.”
In fact, that is not what occurred. The sale approval motion was heard on July 20, 2009. At that motion, counsel for the United Steelworkers (whose members were part of the Salaried Plan) and counsel for the retired employees covered by the Executive Plan raised the deemed trust issue. The sale was approved but the motions judge ordered that an amount roughly equivalent to the deficiencies be reserved from the sale proceeds. On July 31, 2009, the sale closed and the directors of Indalex resigned. On August 12, 2009, by a Shareholder Declaration, a senior manager of the Monitor’s parent company, Keith Cooper, was given authority to direct the affairs of all Indalex entities. Only then did Indalex file a motion to lift the CCAA stay so that it could make a voluntary assignment into bankruptcy. The sole purpose of bankrupting the company was to defeat the deemed trust claims and allow Sun Indalex to lay claim to the funds held in reserve. That motion was scheduled to be heard at the same time as the motions concerning the deemed trust on August 28, 2009.
In ruling on Indalex’s motion, the CCAA judge stated:
In my view, a voluntary assignment under the BIA should not be used to defeat a secured claim under valid Provincial legislation, unless the Provincial legislation is in direct conflict with the provisions of Federal Insolvency Legislation such as the CCAA or the BIA. For that reason I did not entertain the bankruptcy assignment motion first.
The Ontario Court of Appeal also reached this conclusion, holding that a related party should not be able to benefit from a corporation’s attempt to defeat a deemed trust motion. This was particularly the case in light of the record in this case which showed that Indalex operated as an integrated company, essentially under the direction of Indalex U.S. The majority of the Supreme Court did not seem to share this concern.
In any event, as a result of the Supreme Court’s decision, Indalex U.S. was to receive the amounts held in reserve (less payment of certain other priority expenses). Those funds were then likely given to Sun Indalex, as the secured creditor. The Court did not comment on the fact that the U.S. Trustee (who was one of the appellants in this case and who supported the positions of Sun Indalex) has taken the position in U.S. insolvency proceedings that Sun Indalex is not a secured creditor of Indalex U.S. It claimed that Sun Indalex was the recipient of substantial dividend payments when Indalex was already in distress, and should not be entitled to any further payments from Indalex U.S. Indeed, the Sun group of companies that orchestrated the purchase of Indalex from Honeywell in 2006 withdrew well over a third of Indalex’s assets in 2007-2008 amounting to over $100 million.
The Salaried Plan was wound up effective December 31, 2006. The deficit in the plan was a mere 1.75 million dollars – an amount that pales in comparison to the amount of money the Sun companies took from Indalex. Justice Cromwell’s reasons fail to acknowledge or deal with the significance of these actions and certainly fail to provide any redress for pension plan beneficiaries, whose benefits will be significantly reduced.
The Decision’s Implications
From the perspective of employees and retirees, the positive aspects of the Supreme Court’s decision are the holdings that a wind-up deemed trust includes the full wind-up deficiency and that a plan administrator’s fiduciary responsibilities continue to apply during insolvency proceedings. Thus, in a non-insolvency situation, another enforcement tool has been added to the tool box. In addition, if assets are available for distribution after satisfaction of DIP loan obligations, the deemed trust may be used to secure a claim for pension fund beneficiaries over other secured creditors provided the claims process remains within the CCAA (as opposed to conversion to a dissolution proceeding under the Bankruptcy and Insolvency Act).
Moreover, going forward, plan administrators can no longer simply ignore their obligations during CCAA proceedings and representatives of pension plan members can insist on early involvement in the CCAA process. This may allow for better protection of plan members’ interests and a greater opportunity to obtain negotiated settlements on behalf of plan members.
The negative aspects for retirees are that a DIP Order, in most instances, will automatically trump the rights provided under a provincial wind-up deemed trust. Further, while a plan administrator’s fiduciary duties will continue during CCAA proceedings, a breach of those duties may not give right to any remedy since there may not be a sufficient nexus between the breach and any assets held in reserve to warrant the granting of a constructive trust. This, of course, will always turn on the facts of a particular case.
The bottom line is that, in the absence of federal insolvency legislative reforms that recognize and enforce the windup deficiency deemed trusts, pension plan members will likely continue to see their benefits reduced when a plan is underfunded, there are insufficient assets to meet creditor claims, and the sponsoring employer is in CCAA proceedings.
As a final note, the Supreme Court’s decision may make for relative calm in the credit markets (though there will be concern regarding the conclusion on the scope of the wind-up deemed trust). At the same time, in failing to recognize the active role Indalex took in resisting plan member interests during the CCAA proceedings and the influence of its parent company and principle creditor, the decision is also likely to be interpreted as privileging corporate self-interest over a plan administrator’s fiduciary duties to plan members during CCAA proceedings, and leaving little or no protection for pension plan members.
Click here to read the Supreme Court’s decision.
The United Steelworkers were represented by Darrell Brown.
The Canadian Labour Congress intervened in support of the United Steelworkers and the retired executives, and was represented by Steven Barrett