The Supreme Court of Canada's decision in Sun Indalex Finance, LLC v United Steelworkers, 2013 SCC 6, has a number of implications for employers, pension plan administrators, as well as both secured and unsecured creditors. One of the less discussed effects of Indalex however, is on the application of the remedial trust in the commercial context, particularly where insolvency proceedings are at issue.


In Indalex Limited (Re), 2011 ONCA 265, 2011, the Ontario Court of Appeal held that a breach of fiduciary duty by the corporation called for the exceptional remedy of constructive trust because, "Without the proprietary remedy, the Plans' beneficiaries have no meaningful remedy" (at para 204). The Court of Appeal's 2011 decision effectively sent the message that the interests of good conscience were sufficient to justify undermining the legitimate priority of existing secured creditors. This month, the Supreme Court of Canada reversed the Court of Appeal's decision, thereby restoring predictability for secured creditors and rejecting the application of the constructive trust as a remedy for wrongful acts in the commercial context. Ultimately, the message in Sun Indalex Finance, LLC v United Steelworkers is that the constructive trust is not an appropriate remedy where its effect is to undermine the predictability and certainty of commercial transactions.

The wrongful act at issue in Indalex was the breach of fiduciary duty by the employer, Indalex, which also played the role administrator of the pension plan. Indalex was the wholly owned Canadian Subsidiary of a U.S. Corporation, and as a result of the economic downturn Indalex began insolvency proceedings in 2009. In an effort to keep the business a going concern Indalex and its U.S. holding company entered into an agreement for debtor-in-possession financing. The pension plan beneficiaries did not participate in this first round of financing, and when Indalex applied for authorization to increase the amount of debtor-in-possession financing the pension plan beneficiaries did not oppose it. Indalex then brought an application to begin a bidding process where they would sell their assets and distribute the sale proceeds to the debtor-in-possession lenders. The pension beneficiaries objected; such objection was dismissed. Following the sale, the majority of the funds were distributed to the secured creditors, and a portion was kept back pending a conclusion with respect to the entitlement of the pension beneficiaries. The key issue on appeal was whether Indalex had acted in the face of a conflict of interest by acting as both employer and administrator throughout the insolvency proceedings, thereby breaching its fiduciary duty to the pension beneficiaries.

The Supreme Court of Canada agreed with the Court of Appeal's decision that there was a breach of fiduciary duty but disagreed that the proceeds from the sale arrived in the hands of Indalex's creditors as a result of the breach. The SCC recognized the loss to the pension beneficiaries however, it held such loss is not sufficient to justify undoing carefully negotiated commercial agreements. Indalex strongly suggests that the generous application of constructive trusts advocated in Soulos v Korkontzilas, [1997] 2 SCR 217, has no place in the commercial context. In fact, the SCC was unequivocal in its rejection of constructive trust as a remedy in context of complex commercial transactions when it concluded that "imposing a $6.75 million penalty on the other creditors as a remedial response to this breach is so grossly disproportionate to the breach as to be unreasonable" (at para 239).

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