THE EMPLOYERS' EDGE
Pension Fund Crisis in Canada Averted? Supreme Court of Canada Releases Decision in Indalex
Sun Indalex Finance, LLC v. United Steelworkers represents the most recent example of the growing number of clashes over pension security, the result of which could signal the commencement of a crisis in the field of private pensions. At issue before the highest court was the imposition of a deemed trust provision being found for all fund deficiencies during insolvency and sale proceedings by the employer and pension fund administrator/sponsor, that being Indalex Industries. At stake was the security of the employees’ pensions, and by extension, the continued ability of companies to find adequate funding during insolvency proceedings.
Background
In 2009, Indalex and its US parent sought protection from creditors, by application under the Companies’ Creditors Arrangement Act (“CCAA”). They were given approval to seek Debtor-In-Possession (“DIP”) financing to permit the company to maintain operations while searching for a suitable purchaser. The CCAA decision imposed a “super priority” for the DIP lenders, where they were deemed to have priority over all “statutory and other” trusts, including the pension beneficiary’s windup deficiencies which are protected by deemed trust pursuant to Ontario’s Pension Benefits Act (“PBA”). The decision of the CCAA decision was appealed to the Ontario Court of Appeal (“ONCA”), which found decidedly in favor of the interests of the Plan Beneficiaries.
The ONCA held that the entire amount that an employer is required to contribute to fund a pension plan wind up deficiency under the Ontario PBA is subject to the deemed trust provisions of the PBA and, in the circumstances, the amount subject to the deemed trust should be paid in priority to outstanding secured creditor claims. This was in contrast to established jurisprudence which held that deemed trust provisions in the PBA only apply to contributions accrued and due at the date of wind up. The Court, when it considered this in relation to the specific circumstances arising in Indalex, where the Employer was sponsor and administrator to two separate pension funds; the “Salaried” fund, which was wound up in 2006, and the “Executive” Fund, which had ceased to operate in terms of accepting new members, but had not been wound up, found that that the deemed trust provision under subsection 57(4) extended to all amounts owing on plan wind up as determined pursuant to section 75 of the PBA.
The Court ordered the funding deficiency relating to the Salaried Plan to be paid out into the pension fund in priority to that of the DIP lenders’ security rights. However, noting that the wind up of the pension plan is a requirement for s. 57(4) of the PBA to be triggered, the Court chose not to decide whether the deemed trust provisions applied to the deficiency in the Executive Plan, which was not subject to wind up. To address that issue, the ONCA went on to consider Indalex’s obligations as plan administrator and fiduciary. Finding that Indalex was in a conflict of interest with respect to these two roles in the context of dealing with pension issues under the CCAA proceedings, the ONCA held that it could not resolve this conflict “by simply ignoring its role as administrator.” They subsequently ordered a constructive trust in favor of the Executive Plan Beneficiaries, granting priority over the DIP lenders for the deficiency that existed. Leave to appeal to the Supreme Court of Canada (“SCC”) was granted.
The SCC identified the following four issues they would consider in this matter and decided as outlined below:
Does the deemed trust provided for in s. 57(4) of the PBA apply to wind-up deficiencies?
If so, does the deemed trust supersede the DIP charge?
Did Indalex have any fiduciary obligations to the Plan Members when making decisions in the context of the insolvency proceedings?
Did the ONCA properly exercise its discretion in imposing a constructive trust to remedy the breaches of fiduciary issues?
SCC Decision
The SCC upheld the ONCA that the deemed trust imposed under subsection 57(4) of the PBA applies only to a pension plan that is terminated, but, when it applies, extends to the entirety of a defined benefit plan’s "wind up deficiency." This finding may affect a company’s ability to find lenders, who are relying on security interests in accounts and/or inventory, since, under the Ontario Personal Property Security Act, these interests are expressly made subordinate to "deemed trusts" under the PBA.
The SCC overturned the ONCA’s finding that the deemed trust had priority over the claim of the debtor in possession (DIP) lender in this case. The CCAA judge had made an order granting the DIP loan "super-priority" over any statutory trusts, including those arising under the PBA. In overturning the ONCA, the SCC held that the doctrine of federal paramountcy means that the court-ordered DIP priority supersedes claims under the PBA’s deemed trust provision, without need to have paramountcy asserted in the relevant court order.
The SCC’s decision is consistent with the ONCA’s finding that the directors of Indalex Limited failed to properly manage a conflict of interest when they proceeded to seek a court order granting priority to the DIP loan without sufficient notice to the beneficiaries.
Although the SCC found that the directors of Indalex had acted in a conflict of interest vis-à-vis plan beneficiaries, a majority of the judges overturned the ONCA’s award of a constructive trust, on the basis that it is established law that proprietary remedies are generally awarded with respect to property that is directly related to a wrong or that can be traced to such property. Such was not the case in the instant matter.
The Supreme Court’s decision upheld the status quo, restoring the original order that pension plan members were unsecured creditors and reasserted the supremacy of existing federal legislation, which holds that secured lenders take precedence over other stakeholders when a company sells assets and divests the proceeds during a restructuring. While some view the decision extending the “deemed trust” to the entire wind-up deficiency as a victory to pensioners, others fear the decision may force lenders to push companies into full-blown bankruptcy sooner in order to obtain more favourable creditor status from the Courts.
The lawyers at Crawford Chondon & Partners LLP can assist employers in addressing employment related issues during insolvency and restructuring.
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