Canada: Pension Priorities And Fiduciary Duties In Pension Plan Administration

On February 1, 2013, the Supreme Court of Canada rendered its much-anticipated decision in Sun Indalex Finance, LLC v. United Steelworkers et al. (Indalex). This bulletin focuses on pension plan administration issues arising from the Indalex case.

FACTS

Indalex Limited (Indalex) was both the corporate plan sponsor and the plan administrator of two employee pension plans, one for salaried employees and the other for executive employees. Indalex became insolvent and sought protection from its creditors under the Companies' Creditors Arrangement Act (CCAA). The salaried plan was being wound up when the CCAA proceedings began, but the executive plan had not yet been wound up. Both plans had wind up deficiencies.

In a series of court sanctioned steps, Indalex was authorized to enter into debtor-in-possession (DIP) financing in order to allow it to continue to operate. As is common in a CCAA restructuring, the CCAA court granted the DIP lenders a charge with priority over claims of all of the creditors, including claims protected by a deemed trust. Repayment of the DIP lender was guaranteed by Indalex US.

Ultimately Indalex sold its business with the approval of the CCAA court, but the purchaser did not assume the pension liabilities. In addition, the proceeds of sale were not sufficient to pay back the DIP lenders and so Indalex US as guarantor paid the shortfall which it sought to recover under the DIP charge. The CCAA court authorized a partial payment to Indalex US in accordance with the DIP priority but ordered an amount to be held in reserve in order to consider the plan members' arguments in support of their claim to the proceeds of sale at a later date.

The plan members challenged the priority for the DIP loan granted in the CCAA proceedings. They claimed they had priority in the amount of the wind-up deficiencies by virtue of the statutory deemed trust under section 57(4) of the Pension Benefits Act (PBA) and a constructive trust arising from Indalex's alleged breach of its fiduciary duties as the pension plan administrator of both plans. The judge at first instance dismissed the members' motions concluding the deemed trust did not apply to the wind-up deficiencies. The Court of Appeal reversed this ruling and held that the pension plan wind-up deficiencies were subject to a statutory deemed trust in the case of the salaried plan, and a constructive trust in the case of both plans, which had priority over the DIP lenders and other secured creditors.

DECISION

The findings of the Supreme Court may be summarized as follows:

  1. With respect to the statutory deemed trusts, four of the seven justices found that the statutory deemed trust did apply to wind-up deficiency payments required by section 75(1)(b) of the PBA.
  2. Unanimously, the court found that the DIP charge has priority over the deemed trust under the PBA due to the doctrine of federal paramountcy.
  3. Five of the seven justices found that a remedial constructive trust did not apply as there was no evidence to support the contention that any of Indalex's actions resulted in an identifiable asset being acquired by Indalex and therefore it was not reasonable for the Court of Appeal to have imposed such a trust.
  4. Unanimously, the court found that, where there is a conflict of interest between the role of the plan sponsor and the plan administrator, the conflict must be addressed.
  5. In addition, the court agreed unanimously that the Court of Appeal was correct in denying the United Steelworkers their costs because the United Steelworkers represented only seven of 169 members of the salaried plan and they should not, without consultation, be able to have "in effect impose the risks of that litigation on all of the plan members, the vast majority of whom were not union members".

FIDUCIARY DUTIES AND ADMINISTRATION OF PENSION PLANS

For pension plan sponsors and administrators, there are a number of important statements from the Supreme Court of Canada with respect to how sponsors who are also plan administrators need to conduct themselves in light of the fiduciary duties that apply to certain of their actions. The statements with respect to fiduciary duties in the two portions of the decision which constitute the majority are of particular importance.

The reasons of Justice Deschamps (with whom Justice Moldaver concurred) begin the fiduciary duties analysis by confirming that the Supreme Court has previously recognized that there are circumstances in which a pension plan administrator has fiduciary obligations to plan members both at common law and under statute (Burke v. Hudson's Bay Co.).

The decision also includes an express repudiation of the "two hats" analogy where a corporate employer chooses to act as plan administrator.

Instead, Justice Deschamps noted that where a corporate employer is also the plan administrator, which as we know in practice is the dominant model for the administration of Canadian single employer pension plans, the corporate employer must be prepared to resolve conflicts where they arise:

"[66] When the interests the employer seeks to advance on behalf of the corporation conflict with interests the employer has a duty to preserve as plan administrator, a solution must be found to ensure that the plan members' interests are taken care of. This may mean that the corporation puts the members on notice, or that it finds a replacement administrator, appoints representative counsel or finds some other means to resolve the conflict. The solution has to fit the problem, and the same solution may not be appropriate in every case." (emphasis added)

Accordingly, Justice Deschamps gave specific guidance with respect to where a conflict has been identified. There are often times when it is not clear whether there is a conflict between the corporate and administrator roles, however, where a conflict has been identified we now have clearer guidance as to how the conflict is to be dealt with.

In the Indalex case, Justice Deschamps did find that Indalex breached its fiduciary duty when Indalex as plan administrator knew that it might have to claim accrued contributions from itself at a time when it was adopting a conflicting position in its corporate capacity as to whether contributions had accrued and a deemed trust arisen. She found this situation indicative of clear conflict between Indalex's interest and those of the members. She stated that as soon as Indalex recognized, or ought to have recognized, that potential conflict, it should have taken steps to ensure that the interests of plan members were protected and it did not do so.

Justice Deschamps noted that the breach of fiduciary duty identified was however, in substance, a lack of notice, and since the members were allowed to fully argue their case at the hearing specifically to adjudicate their rights, the courts were in a position to fully appreciate the parties' positions. She also noted that it is difficult to see what gains the plan members would have secured had they received the earlier notice in the circumstances. In addition, Justice Deschamps stated that there was no evidence that the lender committed a wrong or engaged in inequitable conduct.

The reasons of Justice Cromwell (with whom Chief Justice McLachlin and Justice Rothstein concurred) set out the fiduciary breaches of Indalex identified by the Court of Appeal:

"[181] The breaches identified by the Court of Appeal fall into three categories. First, Indalex breached the prohibition against a fiduciary being in a position of conflict of interest because its interests in dealing with its insolvency conflicted with its duties as plan administrator to act in the best interests of the plans' members and beneficiaries: para. 142. According to the Court of Appeal, the simple fact that Indalex found itself in this position of conflict of interest was, of itself, a breach of its fiduciary duty as plan administrator. Second, Indalex breached its fiduciary duty by applying, without notice to the plans' beneficiaries, for CCAA protection: para. 139. Third, Indalex breached its fiduciary duty by seeking and/or obtaining various relief in the CCAA proceedings including the "super priority" in favour of the DIP lenders, approval of the sale of the business knowing that no payment would be made to the underfunded plans over the statutory deemed trusts and seeking to be put into bankruptcy with the intention of defeating the deemed trust claims: para. 139. As a remedy for these breaches of fiduciary duty the court imposed a constructive trust."

Justice Cromwell having set out those breaches identified by the Court of Appeal, then expressly narrowed the application of the fiduciary duties:

"[182] In my view, the Court of Appeal took much too expansive a view of the fiduciary duties owed by Indalex as plan administrator and found breaches where there were none. As I see it, the only breach of fiduciary duty committed by Indalex occurred when, upon insolvency, Indalex's corporate interests were in obvious conflict with its fiduciary duty as plan administrator to ensure that all contributions were made to the plans when due. The breach was not in failing to avoid this conflict — the conflict itself was unavoidable. Its breach was in failing to address the conflict to ensure that the plan beneficiaries had the opportunity to have representation in the CCAA proceedings as if there were independent plan administrators. I also conclude that a remedial constructive trust is not available as a remedy for this breach."(emphasis added)

Accordingly, the reasons of Justice Cromwell, while not expressly repudiating the "two hats" analogy, acknowledge that in the case of corporate plan sponsors acting as the administrator of a pension plan, conflicts will inherently occur. Like Justice Deschamps, Justice Cromwell finds that where the conflict of interest between the two roles occurs, certain action, in this case ensuring that the plan members had an opportunity to have representation, must be taken.

The reasons of Justice Cromwell also noted that the powers and duties conferred on the administrator by legislation are administrative in nature and referenced a number of those duties in paragraphs 190 and 191:

"[190] Not surprisingly, the powers and duties conferred on the administrator by the legislation are administrative in nature. For the most part they pertain to the internal management of the pension fund and to the relationship among the pension administrator, the beneficiaries, and the Superintendent of Financial Services ("Superintendent"). The list includes: applying to the Superintendent for registration of the plan and any amendments to it as well as filing annual information returns: ss. 9, 12 and 20 of the PBA; providing beneficiaries and eligible potential beneficiaries with information and documents: ss. 10(1)12 and 25; ensuring that the plan is administered in accordance with the PBA and its regulations and plan documents: s. 19; notifying beneficiaries of proposed amendments to the plan that would reduce benefits: s. 26; paying commuted value for pensions: s. 42; and filing wind-up reports if the plan is terminated: s. 70."

"[191] Of special relevance for this case are two additional provisions. Under s. 56, the administrator has a duty to ensure that pension payments are made when due and to notify the Superintendent if they are not and, under s. 59, the administrator has the authority to commence court proceedings when pension payments are not made."

Justice Cromwell found that these are "specific legal interests" to which the employer-administrator's fiduciary duties attach.

He also noted the dual role of an employer as administrator is expressly permitted under section 8(1)(a) of the PBA which "creates a situation where a single entity potentially owes two sets of fiduciary duties (one to the corporation and the other to the plan members)". He again narrowed the Court of Appeal's findings on when fiduciary duties are breached:

"[197] The Court of Appeal in effect concluded that a conflict of interest arises whenever Indalex makes business decisions that have "the potential to affect the Plans beneficiaries' rights" (para. 132) and that whenever such a conflict of interest arose, the employer-administrator was immediately in breach of its fiduciary duties to the plan members. Respectfully, this position puts the matter far too broadly. It cannot be the case that a conflict arises simply because the employer, exercising its management powers in the best interests of the corporation, does something that has the potential to affect the plan beneficiaries." (emphasis added)

Justice Cromwell noted that the corporate interest is almost always potentially in conflict with the members' interests. For example, (i) actions of the corporation have the potential to put the solvency of the corporation at risk and therefore the pensions could be required to reduced, and (ii) plan documents permit amendment and termination which may not be in the best interests of plan beneficiaries.

"[202] In light of the foregoing, I am of the view that the Court of Appeal erred when it found, in effect that a

conflict of interest arose whenever Indalex was making decisions that "had the potential to affect the Plans beneficiaries' rights": para. 132. The Court of Appeal expressed both the potential for conflict of interest or duty and the fiduciary duty of the plan administrator much too broadly. (emphasis added)

In addition, Justice Cromwell found "it cannot seriously be suggested that some other course would have protected more fully the rights of the plan beneficiaries". Justice Cromwell noted, that in viewing the conflict of interest, the question is how the conflict must be addressed. (In the circumstances of Indalex, Justice Cromwell found that the fact that the plan beneficiaries were represented in the subsequent steps in the CCAA mitigated the earlier Indalex breach.)

In addition, Justice Cromwell set out what an employer should do in the context of such an insolvency:

"[217] Nevertheless, for the purposes of providing some guidance for future CCAA proceedings, I take this opportunity to briefly address what an employer-administrator can do to respond to these sorts of conflicts. First and foremost, an employer-administrator who finds itself in a conflict must bring the conflict to the attention of the CCAA judge. It is not enough to include the beneficiaries in the list of creditors; the judge must be made aware that the debtor, as an administrator of the plan is, or may be, in a conflict of interest."

"[218] Given their expertise and their knowledge of particular cases, CCAA judges are well placed to decide how best to ensure that the interests of the plan beneficiaries are fully represented in the context of "real-time" litigation under the CCAA. Knowing of the conflict, a CCAA judge might consider it appropriate to appoint an independent administrator or independent counsel as amicus curiae on terms appropriate to the particular case. Indeed, there have been cases in which representative counsel have been appointed to represent tort claimants, clients, pensioners and non-unionized employees in CCAA proceedings on terms determined by the judge: Rescue!, at p. 278; see, e.g., First Leaside Wealth Management Inc. (Re), 2012 ONSC 1299 (CanLII); Nortel Networks Corp., Re, (2009), 75 C.C.P.B. 206 (Ont. S.C.J.). In other circumstances, a CCAA judge might find that it is feasible to give notice directly to the pension beneficiaries. In my view, notice, though desirable, may not always be feasible and decisions on such matters should be left to the judicial discretion of the CCAA judge. Alternatively, the judge might consider limiting draws on the DIP facility until notice can be given to the beneficiaries: Royal Oak Mines Inc., Re (1999), 6 C.B.R. (4th) 314 (Ont. Ct. J. (Gen. Div.)), at para. 24. Ultimately, the appropriate response or combination of responses should be left to the discretion of the CCAA judge in a particular case. The point, as well expressed by the Court of Appeal, is that the insolvent corporation which is also a pension plan administrator cannot "simply ignore its obligations as the Plans' administrator once it decided to seek CCAA protection": para. 132."

In this case, Justice Cromwell found that the only breach by Indalex was failing to ensure that its pension plan beneficiaries had "the opportunity to be as fully represented in those proceedings as if there had been an independent plan administrator".

Justice LeBel (with whom Justice Abella concurred) agreed with Justices Deschamps and Cromwell by finding that a breach of fiduciary duty had occurred. But unlike the other five Justices of the Court, Justice LeBel found that the imposition of a constructive trust was the appropriate remedy.

Justice LeBel also considered the "two hats" analogy and found that it offered "no defence to Indalex". Like Justice Cromwell, Justice LeBel stated that the standard of an independent administrator was the relevant test:  "But, in my opinion, nothing in the PBA allows that the employer qua administrator will be held to a lower standard or will be subject to duties and obligations that are less stringent than those of an independent administrator."

Justice LeBel finds that Indalex should have relinquished its role as pension plan administrator in the circumstances of the conflict in which it found itself: "Given the nature of its obligations as administrator and fiduciary, it was impossible to wear the 'two hats'. Indalex had to discharge its corporate duties, but at the same time it had to address its fiduciary obligations to the members and beneficiaries of the plans. I do not fault it for applying under the CCAA, but rather for not relinquishing its position as administrator of the plans at the time of the application."

CONCLUSION

The Supreme Court of Canada in the Indalex case has decided the scope of the deemed trust under the PBA as extending to wind-up deficiencies, and the ability of a CCAA court to grant priority over such deemed trusts in favour of a DIP lender. It has also given guidance on how a corporate plan sponsor must deal with the conflicts that inherently occur in the administration of a Canadian registered pension plan. The circumstances in which the conflict arises must be carefully considered in order to determine the action to be taken by the administrator.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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