In a much awaited decision, on February 1, 2013, the Supreme Court of Canada ("SCC") set aside the Ontario Court of Appeal's ("ONCA") decision in Sun Indalex Finance, LLC v. United Steelworkers.1 While the SCC was split, the majority agreed with the ONCA that a deemed trust arose from section 57(4) of the Pension Benefits Act (Ontario) ("PBA") for defined benefit pension plan wind-up deficiency payments. However, the SCC reversed the ONCA decision and held that the deemed trust did not have super-priority over lenders providing debtor-inpossession ("DIP") financing.2
Indalex Limited ("Indalex") was the sponsor and administrator of two pension plans, one for salaried employees and one for executive employees. In 2009, Indalex became insolvent and sought creditor protection under the Companies' Creditors Arrangement Act ("CCAA"). Both plans had solvency deficiencies. The salaried employee plan was in the process of being wound-up. The executive employee plan was closed but not in the process of being wound-up.
With the authorization of the CCAA court, Indalex obtained DIP financing to be able to continue its operations. The DIP lenders were granted a charge having priority over "all other security interests, trusts, liens, charges and encumbrances, statutory or otherwise". The DIP loan was guaranteed by Indalex's US parent, Indalex Holding Corp.
Indalex sought court approval for the sale of its assets and distribution of the sale proceeds to the DIP lenders. The proceeds were not sufficient to satisfy the pension plan deficiencies and the amounts owing to the DIP lenders. The plan members objected on the basis that the PBA provided them with a deemed trust over the sale proceeds and a constructive trust arising from Indalex's breach of fiduciary duty as administrator of the plans. The CCAA court approved the sale but ordered that the amount of the funding deficiencies be retained by the monitor pending the outcome of the case. Indalex Holding Corp. paid the shortfall on the DIP loan pursuant to its guarantee and became subrogated to the DIP lenders, seeking recovery from the funds held by the monitor.
The CCAA court held that the deemed trust did not apply to the wind-up deficiency. Accordingly, the plan members were considered unsecured creditors with respect to the wind-up deficiency. The ONCA reversed that decision and held that the funding deficiency was subject to a deemed trust which had priority over the DIP lenders' charge.
The majority of the SCC held that the deemed trust provided for in section 57(4) of the PBA applied to the wind-up deficiency relating to the salaried employee pension plan, even though the exact amount could not be determined at the time of wind-up. The deemed trust did not apply to the executive plan as it had not been wound-up.
The SCC disagreed with the ONCA and held that the DIP charge granted in the CCAA proceeding had priority over the deemed trust. While a deemed trust created under provincial legislation, such as the PBA, still applied in federal CCAA proceedings, it remained subject to the doctrine of federal paramountcy, even though the doctrine of paramountcy had not been invoked in the CCAA proceeding. As the DIP charge was created under federal legislation, the CCAA, it had priority over the deemed trust, which was created under provincial legislation, the PBA.
The ONCA's finding that a deemed trust under the PBA took priority over the DIP charge had been of concern to lenders. The SCC reversing the ONCA finding, and confirming that the doctrine of federal paramountcy results in a DIP charge having priority over a conflicting provincially-created deemed trust, should provide comfort to lenders.
However, as a result of its ruling that windup deficiencies are included in section 57(4) of the PBA in cases where a defined benefit pension plan is being wound-up, the SCC does confirm the expanded scope of the statutory deemed trust under the PBA. Given that section 30(7) of the Personal Property Security Act (Ontario) provides that, "[a] security interest in an account or inventory and its proceeds is subordinate to the interest of a person who is a beneficiary of a deemed trust arising under the...Pension Benefits Act ", a lender could find its security on accounts and inventory subordinated to the full amount of a wind-up deficiency.3
The ONCA decision had in some cases led to heightened due diligence, more restrictive covenants and larger reserves against borrowing bases when lending to borrowers with defined benefit pension plans. Depending on their borrowers' credit profiles and other relevant factors, lenders may still need to take such precautions when lending to borrowers with defined benefit pension plans.
1 2013 SCC 6
2 The SCC also found that Indalex Limited had a fiduciary duty in respect of its pension plans, which duty it had breached. Indalex Limited had failed to address the conflict between its fiduciary duty as plan administrator and its duty to act in the best interests of the corporation. However, the SCC declined to impose a constructive trust as a remedy as there was no evidence that such failure resulted in an identifiable asset that would be unjust for Indalex Limited to retain. See also: Andrew Harrison, BLG Pension Alert, February 2013, and James Szumski, BLG Insolvency and Restructuring Bulletin: Supreme Court of Canada Rules on Indalex, February 2013.
3 The SCC was rather spare in its discussion of when section 30(7) of the Personal Property Security Act (Ontario) would apply. Century Services Inc. v. Canada (Attorney General), 2010 SCC 60 had held that the deemed trust for unpaid GST under the Excise Tax Act was excluded from applying in a CCAA proceeding. In response to the appellants' similar argument that the PBA deemed trust does not apply in CCAA proceedings because the relevant priorities are those of the federal insolvency scheme, Deschamps J. found that, "[p]rovincial legislation defines the priorities to which creditors are entitled until that legislation is ousted by Parliament. Parliament did not expressly apply all bankruptcy priorities either to CCAA proceedings or to proposals under the BIA. ...The provincial deemed trust under the PBA continues to apply in CCAA proceedings, subject to the doctrine of federal paramountcy. ... The Court of Appeal therefore did not err in finding that at the end of a CCAA liquidation proceeding, priorities may be determined by the PPSA's scheme rather than the federal scheme set out in the BIA."
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