Supreme Court of Canada Issues Decision on Lender/Pension Priorities

In Sun Indalex Finance, LLC v. United Steelworkers, a majority of the Supreme Court of Canada allowed an appeal from a decision of the Ontario Court of Appeal in a seminal case which involved priorities in a restructuring proceeding.

Indalex Limited (Indalex) was a Canadian subsidiary of a US company (together with its US affiliates, Indalex US), which as a group operated the second largest aluminum extrusion business in the US and Canada.

Indalex US filed for Chapter 11 bankruptcy protection in the US and Indalex was granted protection from its creditors in Canada in April 2009 under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C 36 (CCAA).

At that time, Indalex was the sponsor and administrator of two defined benefit pension plans, one for salaried employees and the other for retired executives. The salaried plan was being wound up when the CCAA proceedings began. The executive plan had been closed but not wound up.

Although Indalex had paid all of the required contributions up to the beginning of the CCAA proceedings, it was projected that both plans would suffer deficits on wind-up.

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 a going concern during the insolvency.

The CCAA court granted the DIP lenders priority over the claims of all others. Repayment of the Canadian DIP loan was guaranteed by Indalex US.

Ultimately, with the approval of the CCAA court, Indalex sold its business as a going concern. However, the purchaser did not assume liabilities for the two registered pension plans.

At the sale approval hearing the CCAA court ordered an amount of the sales proceeds held in reserve, pending determination of the pension plan members' arguments about their rights to the proceeds of the sale.

The proceeds of sale from Canada were insufficient to repay the Canadian DIP loan in addition to the reserve. Indalex US, as guarantor, paid the shortfall of approximately US$10.75 million so the sale would close, and stepped into the shoes of the DIP lenders in terms of priority.

At a hearing after the sale closed, members of the executive plan and the United Steelworkers union (USW), on behalf some members of the salaried plan, argued that the projected deficits in the respective pension plans should recover in priority to Indalex US and secured creditors by virtue of a statutory deemed trust under s. 57(4) of the Pension Benefits Act, R.S.O. 1990, c. P.8 (PBA) and a constructive trust arising from Indalex's alleged breaches of fiduciary duty as administrator of the pension funds.

The CCAA judge dismissed the plan members' motions concluding that the deemed trust did not apply to wind-up deficiencies and therefore the plan members were unsecured creditors.

The Court of Appeal reversed this ruling and held that the projected wind up deficits in both pension plans were subject to deemed and/or constructive trusts which had priority over the DIP financing priority and over secured creditors.

In addition, the Court of Appeal rejected a claim by the USW seeking payment of its costs from the salaried pension fund.

The Court of Appeal's decisions were appealed by a secured creditor, by the US Bankruptcy Trustee of Indalex US (US Trustee), and by FTI Consulting Canada ULC as court appointed monitor of Indalex (FTI).

The USW, a respondent in the main appeals, appealed the denial of its costs motion.
The Supreme Court of Canada allowed the main appeals. The decision was delivered in three sets of reasons that, in various combinations, created the majority rulings on issues raised on the appeals.

The Supreme Court unanimously held that the rights of the DIP lenders granted under the CCAA had priority over claims protected by a statutory deemed trust created under provincial legislation such as the PBA.

The Court held that where the federal and provincial laws are inconsistent, giving rise to different, and conflicting, orders of priority, the application of the doctrine of federal paramountcy required that the DIP priority supersedes any PBA deemed trust.

Two members of the majority (Justice Marie Deschamps and Justice Michael J. Moldaver) and the two judges who dissented in the result (Justice Louis LeBel and Justice Rosalie Silberman Abella) held that the deemed trust contemplated by s. 57(4) of the PBA applied to the wind-up deficiency payments required by s. 75(1)(b) of the PBA. Three members of the majority (Chief Justice Beverley McLachlin, Justice Marshall Rothstein and Justice Thomas Albert Cromwell) held that it did not so apply.

The Court held that Indalex breached its fiduciary duty to the pension plan members by permitting a conflict of interest to develop between its duties as plan administrator and its corporate duties.

A majority (Chief Justice McLachlin, Justice Rothstein, Justice Cromwell, Justice Deschamps and Justice Moldaver), however, held that regardless of this breach, a remedial constructive trust should not have been granted here because the proceeds of sale of Indalex's business were not the result of or related to the breaches of fiduciary duty.

Accordingly, no remedy in favour of the pension plan members was justified. The dissenting two judges (Justice LeBel and Justice Abella) would have upheld the constructive trust remedy.

The Supreme Court dismissed the USW appeal seeking payment of its costs from the salaried pension fund.

Goodmans LLP represented the Appellant Sun Indalex Finance, LLC with a team that included Benjamin Zarnett, Fred Myers, Brian Empey and Peter Kolla.

Stikeman Elliott LLP represented the Appellant FTI with a team that included David Byers, Ashley Taylor, Nicholas McHaffie and Andrea Boctor.

Chaitons LLP represented the Appellant US Trustee with a team that included Harvey Chaiton and George Benchetrit.

Sack Goldblatt Mitchell LLP represented the Respondent/Appellant USW with a team that included Darrell Brown.

Koskie Minsky LLP represented the Respondents Keith Carruthers et al. (members of the executive plan) with a team that included Andrew Hatnay and Demetrios Yiokaris.

Cavalluzzo Shilton McIntyre & Cornish LLP represented the Respondent Morneau Shepell Ltd. (formerly known as Morneau Sobeco Limited Partnership) with a team that included Hugh O'Reilly and Amanda Darrach.

The Attorney General of Ontario represented the Respondent/Intervener Superintendent of Financial Services with a team that included Leonard Marsello, Mark Bailey and William MacLarkey.

Thornton Grout Finnigan LLP represented the Intervener Insolvency Institute of Canada with a team that included Robert Thornton and D. J. Miller.

Sack Goldblatt Mitchell LLP represented the Intervener Canadian Labour Congress with a team that included Steven Barrett and Ethan Poskanzer.

Paliare, Roland, Rosenberg, Rothstein LLP represented the Intervener Canadian Federation of Pensioners with a team that included Kenneth Rosenberg, Andrew Lokan and Massimo Starnino.

McMillan LLP represented the Intervener Canadian Association of Insolvency and Restructuring Professionals with a team that included Éric Vallières, Alexandre Forest and Yoine Goldstein.

Osler, Hoskin & Harcourt LLP represented the Intervener Canadian Bankers Association with a team that included Mahmud Jamal, Jeremy Dacks and Tony Devir.