Canada: Buyer Beware – Acquiring A Union Shop Out Of Bankruptcy Could Leave You In For A Surprise

In Bélanger c. Moulin à papier de Portneuf inc., the Quebec Court of Appeal ruled that Canadian corporate directors sued under section 119 of the Canada Business Corporations Act for the recovery of unpaid amounts owed to unionized employees for accrued vacation could call in warranty a subsequent purchaser of the corporation's business where the collective agreement and the resulting rights and obligations had been transferred to the subsequent purchaser pursuant to section 45 of the Labour Code.

The Facts

On July 28, 2003, Cie J. Ford Ltée ("J. Ford"), which had been operating a paper mill in the Portneuf area outside Québec City, made an assignment of its property for the benefit of its creditors. At the time of the assignment, J. Ford's unionized employees claimed to be owed a total of $517,943 in accrued vacation pay. On December 17, 2003, the trustee in bankruptcy sold the majority of J. Ford's assets to Moulin à papier de Portneuf inc. ("MPP") for $1.00. On January 7, 2005, the Commission des relations du travail determined that the assets had been sold and the rights and obligations of J. Ford transferred to MPP pursuant to section 45 of the Labour Code, the whole retroactive to December 17, 2003.

In an attempt to recover the amounts they claimed were owing to them, the unionized employees, rather than filing a grievance against either J. Ford or MPP, decided instead to sue the former directors of the bankrupt J. Ford based on the liability of directors for amounts owed to employees by the corporation in accordance with section 119 of the Canada Business Corporations Act.

The former J. Ford directors, faced with a suit for $517,943 brought against them by J. Ford's 182 former unionized employees, took proceedings in warranty against MPP in which they sought to have MPP ordered to pay any amount that might be awarded to the employees by the court.

MPP tried to have the warranty action dismissed at a preliminary stage, maintaining that there was no legal relationship between MPP and the former directors of J. Ford.

The Trial Judgment

The Superior Court dismissed the action in warranty by the former directors of J. Ford against MPP, finding that there was no legal relationship based on either the rules of subrogation or the rules of solidarity of debtors.

The trial judge concluded that the former directors could not be subrogated to the rights of the unionized employees of J. Ford against MPP, the rights in question being "[translation] collective rights flowing from the collective agreement for the benefit of the employees which they are exercising against those directors in accordance with a statutory provision that entitles them to do so."¹

He also found that no relationship of solidarity of debtors existed between the former and successor employers, i.e., between J. Ford and MPP, adding that "[translation] a solidary obligation surely cannot be said to exist between the former employer's directors and the successor employer."²

The Decision Of The Court Of Appeal

A unanimous decision by the Court of Appeal has now reversed the lower court ruling and declared admissible the warranty proceedings by the former directors of J. Ford against MPP.

The former directors of J. Ford had submitted that "[translation] if they pay the indebtedness, they will be subrogated to the rights of the workers and hence could have a subrogatory action against the respondent [i.e, MPP], the party ultimately responsible, as the successor employer, for the amounts being claimed from them. In the directors' view, the trial judge erred in finding that the employees' rights should be characterized as 'collective rights' and as such not susceptible of subrogation pursuant to subparagraph (3) of article 1656 C.C.Q."³

This argument by the former directors of J. Ford was accepted by the Court.

The Court of Appeal concluded that the decision of January 7, 2005 by the Commission des relations du travail and the application of section 45 of the Labour Code had the effect of putting the unionized employees in the same position vis-à-vis the successor employer as they were vis-à-vis the former employer.

Commenting on the trial judgment, the Court went on to write as follows: "[Translation] The trial judge adds that it would be strange for the directors, called upon to pay a debt resulting from the collective agreement in Ford's [J. Ford's] place and stead, to have a subrogatory action against 'a third party' (par. 54), MPP, the successor employer. With respect for the trial judge, I find nothing strange in that insofar as it is acknowledged that the rights and obligations of Ford [J. Ford] were transferred, via section 45 L.C., to MPP, the successor employer now bound by the collective agreement."⁴

As for whether J. Ford's former directors and MPP should be considered solidary debtors, the Court of Appeal did not analyse that aspect of the case, given its conclusion on the question of subrogation.

Commentary

This ruling by the Court of Appeal highlights a situation that could arise more and more often as these difficult economic times result in increasing numbers of business bankruptcies.

It is now clear that anyone purchasing the assets of a unionized business out of bankruptcy with a view to continuing the operations of the business would do well to be diligent in verifying that no amounts remain unpaid to the various employees of the bankrupt company.

In such a case, having releases signed by all the employees concerned is a possible solution, failing which the purchaser of the assets could be on the hook for any unpaid amounts.

Footnotes

1. Allard c. Bélanger, 2007 QCCS 1499 (CanLII) at par. 51 (available in French only).

2. Ibid. at par. 43.

3. Bélanger c. Moulin à papier de Portneuf inc., 2009 QCCA 98 (CanLII) at par. 34 (available in French only).

4. Ibid. at par. 46.

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