Court denies US pension fund claim

BC thwarts American fund’s attempt to assert claim over assets of insolvent Canadian company
THE BRITISH COLUMBIA Supreme Court (BCSC) has thwarted an American pension fund’s attempt to assert a claim over the assets of an insolvent Canadian company by relying on the extraterritorial effect of a US law.

“The case [Re Walter Energy Canada Holdings] is a precedent-setting decision that provides clarity on an issue that has arisen in other proceedings but has either been settled or resolved without judicial intervention,” says Mary Paterson of Osler, Hoskin & Harcourt LLP in Toronto. “It marks the first time that a Canadian court has considered whether a foreign party can claim against a Canadian debtor solely pursuant to a ‘long arm’ foreign statute.”

Paterson and her colleagues are the Ontario lawyers for the Walter Canada Group, the Canadian arm of the US-based Walter Group, a coal-mining concern with operations in Canada, the UK and the US.

Walter Group operated in two distinct segments: its US operations (Walter Group US) and its Canadian and UK operations (Walter Group Canada). In 2015, Walter Group US filed for bankruptcy under US law; several months later, Walter Group Canada applied for insolvency relief under Canada’s Companies’ Creditors Arrangement Act (CCAA).
The BCSC authorized a sale of the Canadian assets under the CCAA. The sale generated more than enough money to pay off both the secured and unsecured creditors in Canada, including Canadian workers’ severance pay claims. After the sale, however, a group of unionized US mineworkers who had been unable to recover in the US proceedings against Walter raised a $12-million pension claim in the Canadian bankruptcy. 

The US Employee Retirement Income Security Act (ERISA), however, entitles pensioners whose plans have been terminated to recover in insolvency proceedings by looking to the assets of any member of a “controlled group” of companies in order to satisfy their pension rights. The US pensioners argued that the Canadian companies were such a “controlled group” and that they could assert their claims against the proceeds of the sale of the Canadian assets.

If the ERISA claim was upheld, the Canadian miners stood to recover only about five cents on the dollar instead of all the severance pay they claimed.

Lawyers for the US miners argued that ERISA applied because the US pension plan was underfunded when the Walter Group spent about $1 billion to purchase its Canadian assets, and remained underfunded when the insolvency proceedings started. They claimed that the monies moved to Canada to make the purchase should have been used to fund the plan in the United States.

Paterson and her colleagues responded that ERISA had no extraterritorial effect and therefore did not apply to the Canadian proceedings. They also argued that, even if ERISA did apply extraterritorially, it was unenforceable because it conflicted with Canadian public policy.

Justice Shelley Fitzpatrick ruled that Canadian law, which was the law of the jurisdiction in which Walter Group Canada had been incorporated, recognized the distinct entities within Walter’s organizational structure. 

“According to Justice Fitzpatrick, ERISA’s scheme of controlled group liability had the legal effect of dissolving the boundaries between Canadian and American corporations and therefore ignored the principle of separate corporate personality enshrined in Canadian law,” Paterson explains.

Fitzpatrick’s conclusion parallels the thinking of US courts. “Of late, American courts have been interpreting their own legislation so as to limit its extraterritorial effect,” says Simon Archer of Goldblatt Partners LLP in Toronto.

Still, Archer believes this approach can be inequitable. “If you’re a Canadian member of a Canadian trade union, Re Walter is good for you because you’re going to get all your severance pay,” he says. “But if you’re an American pensioner, you’re asking yourself how the company could hide all that money in Canada.”

In the Nortel bankruptcy of 2009, by contrast, “the court applied a theory of substantive consolidation, where the whole of the company is regarded as one substantive enterprise, and the result considered as if all the assets and liabilities had been in a single jurisdiction,” Archer says. 

But in the Nortel case, all entities went bankrupt at once, allowing for a cross-border parallel trial in which both the US and Canadian judge arrived at the same conclusion. Re Walter engaged two insolvencies that occurred at different times, meaning the Nortel approach was not feasible.