In April 2011, the Ontario Court of Appeal rendered a unanimous judgment in Re Indalex Limited 1 which ordered that the amount the debtor was required to contribute towards its pension plan wind up deficiency be paid in higher priority to repayments to its interim (DIP) lender. This judgment was a departure from prior law and a surprise to the legal community. Leave to appeal has since been granted by the Supreme Court of Canada. In November 2011, groups of White Birch employees and retirees (referred to below as employees) filed motions seeking the application of the legal findings of Indalex to White Birch. Justice Mongeon categorically held that the main legal principles arising out of Indalex cannot be applied in Québec. This judgment could still be appealed by the employees. In any event, stakeholders in the restructuring community will be closely watching the Supreme Court's decision in Indalex and any hints as to its consequences in Québec.
White Birch Paper owns and operates paper mills in Québec and Virginia. Following the 2009 collapse of the world market for paper, White Birch filed for and obtained court protection under the Companies' Creditors Arrangement Act 2(CCAA) in February 2010.
In its Initial Order under the CCAA, the Superior Court of Québec granted a super-priority charge to secure interim financing (the DIP loan) to enable the company to continue to operate while restructuring. The Initial Order also provided for the continued payment of current contributions to the company's defined benefit pension plans and exempted White Birch from making any actuarial deficiency payments (also known as past service cost contributions, special payments or amortization payments).
New law in Ontario under Indalex
In April 2011, the Ontario Court of Appeal rendered a unanimous judgment in Re Indalex Limited 3 which ordered that amortization payments to the debtor's pension plans be made in higher priority to repayments to its interim (DIP) lender. That Court held that the deemed trust created by the Ontario Pension Benefits Act 4 (PBA), which applied to all amounts the employer was required to contribute towards the pension plan wind up deficiency, took priority over the DIP lender's super-priority charge (the DIP charge) created under the CCAA. It also found that the company, as pension plan administrator, had breached its fiduciary duties to the beneficiaries of the plans, which warranted equitable relief and subordination of the DIP charge. 5
This judgment was a departure from prior law and a surprise to the legal community. Leave to appeal has since been granted by the Supreme Court of Canada. 6
Employees seek extension of Indalex to Québec
In November 2011, groups of White Birch employees filed motions seeking the application of the legal findings of Indalex to White Birch. They argued that the company had sufficient liquidity to make the amortization payments and that these payments ought to be made in higher priority to the DIP loan repayment pursuant to a deemed trust created under Québec's Supplemental Pension Plans Act 7 (SPPA).
Most other parties, including the company, the monitor and the DIP lenders (the latter represented by Osler) objected. They argued that the DIP loan was advanced on the basis of the DIP charge and that amortization payments were a debt that could be compromised under the CCAA.
Superior Court confirms Québec law is unchanged
On April 20, 2012, Justice Mongeon of the Superior Court of Québec rendered his judgment. 8
On the facts, the judgment makes clear that the unions had been notified that White Birch was seeking suspension of amortization payments in its application for the Initial Order and chose not to object – until Indalex. Also, liquidity improvements were principally due to the stay obtained under the CCAA, which allowed the company to suspend payment of about $900 million of debt.
Justice Mongeon noted that the pension plan actuarial deficits were estimated at $311 million and the sale of all assets netted approximately $271 million. If the employees are right, he wrote, "might as well close the books right now." 9
Following the Supreme Court of Canada's judgment in Century Services Inc. v. Canada (Attorney General) 10, Justice Mongeon held that the only statutory deemed trusts that are valid under the CCAA are those specifically mentioned therein. The SPPA's deemed trust is not included. At most, the only other enforceable statutory trusts are those having the characteristics of true trusts under provincial law. In this regard, the absence of segregation of funds for amortization payments is fatal, as Québec law only recognizes what is known as an express trust in common law provinces. The judgment is a reminder that there is no equivalent to the constructive trust in Québec – a notion which was key in Indalex.
The Court also held that under Québec law, White Birch was not administrator of the pension plans and therefore did not have any fiduciary obligations towards the employees to make the amortization payments. The trustee of a plan under the SPPA is an independent committee 11, which is not controlled by the company. This is a key difference between Ontario's PBA and Québec's SPPA. Thus, White Birch could not have breached any fiduciary obligation relating to the plans.
Interestingly, Justice Mongeon quoted a pair of recent Ontario decisions that did not reach Indalex's result and granted a DIP charge absolute priority. In Re Timminco Ltd.12, the Ontario Superior Court of Justice found that amortization payments would frustrate the CCAA's purpose and render a restructuring impossible, for lack of DIP financing.
The only alternative to a super-priority DIP charge, Justice Mongeon effectively found, would have been bankruptcy and liquidation. Lenders would not have supported the company, sealing its fate. For White Birch, it would have meant "thousands of job losses, an unending battle among creditors (...) and no chance of substantial recovery of the amortization payments." 13
Appelate courts will have the last word
Justice Mongeon categorically held that the main legal principles arising out of Indalex cannot be applied in Québec. Differences in provincial legislation governing pension plans and trusts are too great.
While the Court concluded that the pension plans' claims for amortization payments are unsecured for reasons particular to Québec law, the judgment also took a decidedly practical view of the implications of deciding otherwise. In a nutshell, the Court wrote: "there is no point in correcting a problem by creating or worsening another." 14
This judgment could still be appealed by the employees. In any event, stakeholders in the restructuring community will be closely watching the Supreme Court's decision in Indalex and any hints as to its consequences in Québec.
The practice of Martin Desrosiers is focused on insolvency and financial restructuring. Sandra Abitan is a Partner in the Insolvency & Restructuring group. Julien Morissette is cross-appointed to the Litigation Department and the Insolvency & Restructuring Group
Footnotes
1 2011 ONCA 265 [Indalex].
2 R.S.C. 1985, c. C-36.
3 2011 ONCA 265 [Indalex].
4 R.S.O. 1990, c. P-8.
5 For more detail, see Osler Update " Ontario Court of Appeal Grants Retirees Priority over Secured Creditors".
6 Leave granted December 1, 2011 (file no. 34308), hearing scheduled for June 5, 2012.
7 R.S.Q., c. R-15.1, s. 49.
8 2012 QCCS 1679.
9 Par. 42. All quotes from the judgment are our translations from the original French.
10 2010 SCC 60, [2010] 3 S.C.R. 379.
11 See s. 150.
12 2012 ONSC 506 and 2012 ONSC 948.
13 Par. 225.
14 Par. 248.
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