Sun Indalex Finance, LLC v United Steelworkers, arising from the Ontario courts as Re Indalex Limited, is a decision of the Supreme Court of Canada that deals with the question of priorities of claims in proceedings under the Companies' Creditors Arrangement Act, and how they intersect with the fiduciary duties employers have as administrators of pension plans.
Facts Indalex was a major North American manufacturer of aluminum extrusions, with six plants in the United States and four in Canada. In March 2009, the American parent corporation of Indalex sought bankruptcy protection under Chapter 11, and Indalex Limited sought similar protection under the Companies' Creditors Arrangement Act (CCAA) in April 2009.
Debtor in possession financing was secured in both proceedings for maintaining operations until a suitable resolution could be achieved. In that regard, Indalex US issued a guarantee with respect to the financing given to Indalex Limited.
In June 2009, the business assets of Indalex were sold to Sapa Group.
Indalex Limited was the sponsor and administrator of two pension plans: one for the salaried employees, and another for the executives. At the time of the proceedings, they were underfunded in the amount of CA$6.75 million.
At the court hearing to approve the sale, the United Steelworkers (representing the salaried employees) and a group representing the executives appeared to object to the planned distribution of sale proceeds, asking that a sufficient amount be retained to cover the pension plans' deficiencies, pursuant to the deemed trusts established under the Ontario Pension Benefits Act.
The sale closed on July 31, 2009, but the proceeds were insufficient to cover outstanding liabilities. Indalex US remitted US$10.75 million to cover the shortfall owing to the DIP lenders, and the Monitor withheld an amount equal to the deficiencies of the plans.
The courts below In the Superior Court
In August 2009, motions were heard by the court from the USW and the executive group, arguing that the withheld amounts should be remitted to the pension plans, as the deemed trusts under the PBA had priority over the DIP lending. In addition, they argued that Indalex breached its fiduciary obligations to the Plans’ beneficiaries. In response, Indalex filed a motion to lift the stay of proceedings in effect under the CCAA, and to assign itself into bankruptcy.
In February 2010, the judge ruled that no deemed trusts had arisen in respect of either plan, and that it was unnecessary to rule on the bankruptcy motion.
In the Court of Appeal The 2010 ruling was reversed by the Ontario Court of Appeal in April 2011. The court held:
the trial judge erred in declaring that no deemed trust existed Indalex breached its fiduciary obligations as administrator of the pension plans by doing nothing to protect the best interests of their beneficiaries as a result, Indalex was in a conflict of interest position in its roles as employer and administrator there was no collateral attack on prior orders in the CCAA proceeding there was no undermining of the principles relating to cross-border insolvencies although the super-priority charge granted for the DIP lending is valid, it does not override valid provincial laws there was no question of the CCAA having paramountcy over the PBA in this case, as the doctrine was never argued during the proceedings, and prior court orders made no mention of it accordingly, a statutory trust under the PBA was deemed to exist for the Salaried Plan, but not for the Executive Plan (as a deemed trust comes into existence only when the plan is wound up)
On the issue of staying CCAA proceedings and making an assignment in bankruptcy, the court made the following obiter comment:
Costs endorsement In September, the Ontario Court of Appeal issued a separate ruling with respect to the allocation of responsibility for the costs of the appeal. As there was no agreement among the parties, the court ruled:
For the 14 retirees of the Executive Plan that had launched the appeal, the full legal fees and disbursements would be paid from the fund of the Executive Plan attributable to each of their accrued pension benefits. The three retirees that were not party to the appeal would not be affected. The 14 retirees had previously consented to allow that to happen. For the appeal launched by the USW, no legal fees and disbursements would be paid from the Salaried Plan. The union was the bargaining agent for only 7 of the 169 beneficiaries of the Plan, and no beneficiary had previously given their consent for such an arrangement to occur. Costs of $40,000 were ordered to be awarded to the appellants jointly and severally on a partial indemnity basis.
The USW appealed their portion of the Costs Endorsement to the Supreme Court of Canada. Leave to appeal was granted by the court on 19 January 2012, adding the issue to the docket of the main appeal.
Consequences and debate
There was much discussion about the consequences that arose from this decision, both in Canada and internationally, specifically relating to:
the ability of the employer to be a plan administrator as well how plan beneficiaries are to be treated during CCAA proceedings the security to be given to lenders providing DIP financing the creditworthiness of companies that have underfunded pension plans
It was argued that the decision also gave an increased measure of protection to existing pensioners, who had seen their benefits being reduced in other CCAA proceedings, notably at Nortel Networks. As a result, Canada would have ranked with the United Kingdom as having the most aggressive pension protection in the Commonwealth.
There was also discussion of the impact Indalex might have in the area of corporate governance, as it was seen to be extending on the principles expressed by the Supreme Court of Canada in BCE Inc. v. 1976 Debentureholders.
The decision could also be seen as extending beyond the immediate question of pension protection to affect any question of the existence of a constructive trust (in contrast to the Supreme Court's recent ruling in Century Services), especially in cases of cross-border insolvencies and ring-fencing of a corporate group's assets. There were also concerns as to the effects it may have on cash collateral being held in derivatives and other securities financing transactions.
The Court of Appeal's ruling on the existence of a constructive trust is relevant only to the common law provinces of Canada. The Superior Court of Quebec has ruled that such a concept does not exist under Quebec's civil law, and therefore Indalex is not applicable in that province.White Birch Paper Holding Company (Arrangement relatif à), 2012 QCCS 1679 (CanLII)
Many creditors sought to modify their lending agreements by incorporating provisions that are meant to circumvent the perceived uncertainty that may arise in similar CCAA proceedings. Significant clauses that were introduced include:
the inclusion of bankruptcy triggers that would allow creditors to send a company directly into BIA proceedings (and thus preempt the protective provisions of the PBA), and the use of securities registered under the Bank Act, for the same reason
In the Supreme Court of Canada Leave to appeal was granted by the Supreme Court of Canada, and the hearing was set for 5 June 2012.
At the hearing, the justices focused on the pensioners’ concern about the lack of notice they received of the insolvency arrangements, while the appellants submitted that creditors would prefer bankruptcy to waiting behind pensioners in a CCAA restructuring.
Judgment was reserved. On 28 January 2013, the court announced that it would be released on 1 February 2013.
Decision The main appeal was allowed, and the appeal with respect to the costs order was dismissed.
The majority opinion, written by Justice Marie Deschamps, opened with these words:
The issues in the appeal were dealt with by varying majorities of the justices that heard the case. Their holdings are summarized in this table:
= majority = dissent
+ Analysis of rulingIssueRulingDeschamps, joined by MoldaverCromwell, joined by McLachlin and RothsteinLeBel, joined by Abella Statutory deemed trust4–3The Court of Appeal correctly held with respect to the salaried plan, that Indalex was deemed to hold in trust the amount necessary to satisfy the wind‑up deficiency.The deemed trust under the PBA does not apply to the wind‑up deficiency.Concur with Deschamps.Priority ranking7–0The federal and provincial laws are inconsistent, as they give rise to different, and conflicting, orders of priority. As a result of the application of the doctrine of federal paramountcy, the DIP charge supersedes the deemed trust.Although there is disagreement with respect to the scope of the deemed trust, it is agreed that, if there were one in this case, it would be superseded by the DIP loan because of the operation of the doctrine of federal paramountcy.Concur with Deschamps.Constructive trust as a remedy for breach of fiduciary duties5–2Indalex's fiduciary obligations as plan administrator did in fact conflict with management decisions that needed to be taken in the best interests of the corporation. Specifically, in seeking to have a court approve a form of financing by which one creditor was granted priority over all other creditors, Indalex was asking the CCAA court to override the plan members’ priority. The corporation's interest was to seek the best possible avenue to survive in an insolvency context. The pursuit of this interest was not compatible with the plan administrator's duty to the plan members to ensure that all contributions were paid into the funds. In the context of this case, the plan administrator's duty to the plan members meant, in particular, that it should at least have given them the opportunity to present their arguments. This duty meant, at the very least, that they were entitled to reasonable notice of the DIP financing motion. The terms of that motion, presented without appropriate notice, conflicted with the interests of the plan members.
As for the constructive trust remedy, it is settled law that proprietary remedies are generally awarded only with respect to property that is directly related to a wrong or that can be traced to such property. There is agreement with Justice Thomas Cromwell that this condition was not met in the case at bar and his reasoning on this issue is adopted. Moreover, it was unreasonable for the Court of Appeal to reorder the priorities in this case.An employer‑administrator who finds itself in a conflict must bring the conflict to the attention of the CCAA judge. It is not enough to include the beneficiaries in the list of creditors; the judge must be made aware that the debtor, as an administrator of the plan is, or may be, in a conflict of interest. Accordingly, Indalex breached its fiduciary duty by failing to take steps to ensure that the pension plans had the opportunity to be as fully represented in those proceedings as if there had been an independent plan administrator, particularly when it sought the DIP financing approval, the sale approval and a motion to voluntarily enter into bankruptcy.