Canada: Court Of Appeal Summaries (September 5 – September 9, 2016)

Last Updated: September 13 2016
Article by John Polyzogopoulos

Hello,

There was only one substantive civil decision released this week. It was in the US Steel CCAA proceeding in which the Court of Appeal agreed with the CCAA judge below that he did not have the jurisdiction under the CCAA to grant the remedy of equitable subordination. However, the court did not go so far as the judge below appeared to do and say that equitable subordination does not exist in Canada. It left that issue to another day, and suggested that a judge under the BIA may have the jurisdiction to grant equitable subordination. This provides another example where the lack of complete concurrence between the CCAA and the BIA could result in "forum shopping" as between Canada's two insolvency statutes.

Have a great weekend.

U.S. Steel Canada Inc. (Re), 2016 ONCA 662

Pdf: http://www.ontariocourts.ca/decisions/2016/2016ONCA0662.pdf

[Strathy C.J.O., Lauwers and Benotto JJA]

Counsel:

  1. G. Capern, K. Borg-Olivier and D. Cooney, for the appellant United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (the "Union"), Appellant
  2. A. Hatnay and B. Walancik, for SSPO and non-union retirees and active employees of U.S. Steel Canada Inc.
  3. T. Jacobson, for Her Majesty the Queen in Right of Ontario and the Superintendent of Financial Services (Ontario)
  4. M. Barrack, J.Galway and J. Mather, for United States Steel Corporation, Respondent
  5. S. Kour, for U.S. Steel Canada Inc.

Key Words: Bankruptcy and Insolvency, Companies' Creditors Arrangement Act, s. 11, , Jurisdiction, Remedies, Equity, Equitable Subordination, Bankruptcy and Insolvency Act, s. 183, Century Services v. Canada (Attorney General), 2010 SCC 60, Standard of Review, Correctness

Facts:

U.S. Steel Canada Inc. ("USSC") is under Companies' Creditors Arrangement Act ("CCAA") protection. Its former employees, the appellants, claim that its American parent, United States Steel Corporation ("USS"), ran the company into insolvency to further its own interests. An issue arose as to whether the CCAA judge could apply an American legal doctrine called "equitable subordination" to subordinate USS's claims to the appellant's claims. Under the US doctrine of equitable subordination, a creditor's claims can be subordinated to the claims of other creditors, thereby reordering the priorities between creditors when the following test is met: (a) the claimant must have engaged in some type of inequitable conduct; (b) the misconduct must have resulted in injury to creditors of the bankrupt or conferred an unfair advantage on the claimant; and (c) equitable subordination of the claim must not be inconsistent with the provisions of the bankruptcy statute.

The CCAA judge held he had no jurisdiction to apply the legal doctrine of equitable subordination. The CCAA judge stated that there is no express provision in the CCAA that confers jurisdiction to grant equitable subordination. He was of the view that any jurisdiction to do so would have to be found in s. 11, which provides that "the court ... may, subject to the restrictions set out in this Act ... make any order that it considers appropriate in the circumstances." Further, there is no Canadian case law to support that section 11 of the CCAA confers such an authority on a CCAA judge. In fact, the CCAA actually evidences an intention to exclude equitable subordination.

The United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (the "Union") appealed the CCAA judge's decision. First, the Union argued that it was blindsided by the argument of equitable subordination on a mere scheduling motion, so it made no submissions on equitable subordination. Accordingly, it was inappropriate and unnecessary for the court to shut the door on a novel and controversial remedy without a full factual record. Second, the Union argued that s. 11 of the CCAA gives the CCAA judge jurisdiction to grant equitable subordination. Therefore, the Union argues that the CCAA judge erred in holding that he does not have jurisdiction to grant equitable subordination.

Issue:

(1) Was it unnecessary for the CCAA judge to determine whether he had jurisdiction to grant equitable subordination?

(2) Did the CCAA judge err in deciding that he had no jurisdiction to grant equitable subordination under the CCAA?

Holding:

Appeal dismissed.

Reasoning:

(1) No, it was not unnecessary for the CCAA judge to determine whether he had jurisdiction to grant equitable subordination. The issue of equitable subordination was plainly before the CCAA judge in the submissions made before and after the hearing. Further, the issue before the CCAA judge was not simply scheduling. The motion sought directions on the extent and nature of production and discovery with respect to the various objections. It was appropriate for the CCAA judge to consider whether the court had jurisdiction to address those claims and, if so, how and when. Lastly, an evidentiary record was not required because the CCAA judge was not applying equitable subordination but merely deciding whether he had jurisdiction to grant equitable subordination under the CCAA.

(2) No, the CCAA judge did not err in deciding that he had no jurisdiction to grant equitable subordination under the CCAA. Having said that, it was unnecessary for the CCAA judge to appear to come to the conclusion that equitable subordination is not available in Canada. The Supreme Court was silence on that issue in the past, so it remains to be determined whether equitable subordination is available in Canada. As set out below, if it is available, it is not under the CCAA, and there is no jurisdiction for a CCAA judge to order equitable subordination.

The standard of review is correctness. When interpreting the scope of remedies under the CCAA, the court must use the framework in Century Services v. Canada (Attorney General), 2010 SCC 60: a court must go beyond an examination of the wording of the statute and consider the scheme of the Act, its object or the intention of the legislature and the context of the words in issue.

The purpose of the CCAA is to facilitate compromises and arrangements between companies and their creditors. The CCAA fulfills this purpose by granting broad powers to the courts in general terms.

The CCAA's words do not give authority, express or implied, to apply the doctrine of equitable subordination. Equitable subordination also does not fall within the scheme of the statute, which focuses on the implementation of a plan of arrangement or compromise. The CCAA does not legislate a scheme of priorities or distribution, because these are to be worked out in each plan of compromise or arrangement. Further, there is nothing to indicate that the issue of equitable subordination was given serious consideration at the time of the 2009 amendments to the CCAA or that those amendments were intended to import other remedies.

Further, the subordination of "equity claims" is wholly distinct from the concept of equitable subordination. The subordination of "equity claims" is directed towards a specific group, shareholders, or those with similar claims. It also has a specific function, consistent with the purpose of the CCAA: to facilitate the arrangement or compromise without shareholders' involvement. Equitable subordination is the subordination of a creditor's claim based on its inequitable conduct. As such, the scheme regarding the subordination of "equity claims" in s. 2(1), 6(8), and 36.1 of the CCAA does not apply to equitable subordination.

Additionally, though s. 11 of the CCAA gives the court broad powers to make orders, it has two express limitations. The first limitation is that the court must find that the order is "appropriate in the circumstances". The second limitation is that even if the court considers the order appropriate in the circumstances, it must consider whether there are "restrictions set out in" the CCAA that preclude it.

In considering the first limit, judicial discretion must be exercised in furtherance of the CCAA's purposes. There is no support for the concept that the phrase "any order" in s. 11 provides an at-large equitable jurisdiction to reorder priorities or to grant remedies as between creditors. The orders reflected in the case law addressed the business at hand: the compromise or arrangement. In these circumstances, the appellant has not identified how equitable subordination would further the remedial purpose of the CCAA.

Lastly, courts should not use an equitable remedy to do what they wish Parliament had done through legislation. There is no "gap" in the CCAA's legislative scheme to be filled by equitable subordination through the exercise of discretion, the common law, the court's inherent jurisdiction or by equitable principles. There is also no provision in the CCAA that is equivalent to s. 183 of the BIA or §105(a) of the U.S. Bankruptcy Code. If equitable subordination is to become a part of Canadian law, it would appear that the BIA gives the bankruptcy court explicit jurisdiction as a court of equity to ground such a remedy and a legislative purpose that is more relevant to the potential reordering of priorities.

Short Civil Endorsements:

Quinte West (Municipality) v. Balroop, 2016 ONCA 657

Keywords: Endorsement, Provincial Offences Act

Vermette v. Nassr, 2016 ONCA 658

Keywords: Endorsement, Vexatious Litigants

A.A. v. Z.G., 2016 ONCA 660

Keywords: Endorsement, Family Law

Colornow Canada Limited v. Rivage Institute of Advanced Esthetics Inc., 2016 ONCA 661

Keywords: Endorsement, Default Judgments, Setting Aside, Misnomer, Trademarks

Kaptor Financial Inc. v. SF Partnership, LLP, 2016 ONCA 671

Keywords: Endorsement, Bankruptcy and Insolvency, Defamation

Criminal Decisions:

R v. Chhina, 2016 ONCA 663

Keywords: Criminal Law, Trafficking, Evidence, Misapprehension, Credibility, Judicial Notice

R v. Dickson, 2016 ONCA 665

Keywords: Criminal Law, Criminal Code, s. 684, Legal Aid

R. v. Precup, 2016 ONCA 669

Keywords: Criminal Law, Dangerous Driving, Sentencing

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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Authors
John Polyzogopoulos
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