Give This Post Superpriority - Supreme Court Decides Sun Indalex Finance, LLC v. United Steelworkers
The Supreme Court has issued its much-anticipated decision in Sun Indalex Finance, LLC v. United Steelworkers.
The Supreme Court has issued its much-anticipated decision in Sun Indalex Finance, LLC v. United Steelworkers (“Indalex”). The decision has significant implications for lenders, employers and pension plan administrators of Ontario-registered defined benefit (“DB”) pension plans. First, it clarifies the scope of the deemed trust obligation arising out of subsection 57(4) of the Pension Benefits Act (Ontario) (“PBA”). Second, it confirms the priority of debtor-in-possession (“DIP”) lenders’ security interests under the Companies’ Creditors Arrangement Act (“CCAA”) over claims by pension plan beneficiaries under the PBA’s deemed trust. Finally, it addresses the proper management of conflicts of interest under the CCAA between directors’ fiduciary duties to the corporation on the one hand and (when the corporation also acts as administrator of a pension plan) their fiduciary duties to plan beneficiaries on the other.
Indalex arose out of the insolvency of Indalex Limited (“Indalex”) and its affiliated companies. Indalex was the Canadian subsidiary of an aluminum products manufacturer. It was the sponsor and administrator of two Ontario-registered DB pension plans – one for salaried employees (the “Salaried Plan”) and another for executives (the “Executive Plan”). Indalex obtained protection pursuant to the CCAA on April 3, 2009, at which point both the Salaried and Executive Plans were underfunded. In addition, the Salaried Plan had been terminated and was in the process of being wound up.
Indalex obtained a court order (per Morawetz J.) enabling it to borrow funds pursuant to a DIP credit agreement. The order granted the DIP lender a “super-priority” charge on Indalex’s assets, including priority over any trusts, “statutory or otherwise”. Indalex’s U.S. parent guaranteed Indalex’s obligations to pay the DIP lender.
Indalex’s business was sold in the framework of CCAA proceedings. Indalex moved to approve the distribution of the sale proceeds to its DIP lender. A portion of the proceeds, were held in reserve by the monitor pending resolution of the beneficiaries’ claims under the Salaried and Executive Plans. The remaining sale proceeds were not sufficient to repay the DIP lender. Indalex’s U.S. parent covered the shortfall pursuant to its guarantee and claimed the remaining proceeds pursuant to the DIP super-priority. The United Steelworkers (“USW”), which represented some members of the Salaried Plan, and a group of executives with entitlements under the Executive Plan objected to the distribution of the remaining proceeds to the parent company. They argued that retirees and employees had a claim to these funds on the basis of the PBA’s statutory deemed trust or in any event as a consequence of Indalex’s breach of its fiduciary duty as pension plan administrator. Indalex brought a further motion to lift the stay of proceedings under the CCAA and file for bankruptcy under the Bankruptcy and Insolvency Act, pursuant to which it is settled law that the deemed trust under the PBA is subordinate to DIP and other security interests.
At issue in the approval motion was the interpretation of section 57(4) of the PBA, which provides:
“Where a pension plan is wound up … an employer who is required to pay contributions to the pension fund shall be deemed to hold in trust for the beneficiaries of the pension plan an amount of money equal to employer contributions accrued to the date of the wind up but not yet due under the plan or regulations.”
In the first instance, Campbell J. approved the distribution of the sale proceeds to Indalex’s U.S. parent. The Court held that no deemed trust was created in respect of the Executive Plan, because that plan had not been terminated at the time of the sale, and hence no wind up deficiency yet existed. The Court also dismissed the USW’s argument that the deemed trust applicable to the Salaried Plan applied to the entirety of the wind up deficiency, since the regulations under the PBA permitted the company to make up the deficiency over a series of payments over five years. No deficiency could be said to exist until the company was required to pay such periodic amounts, all of which were up to date. Campbell J. declined to rule on Indalex’s motion to file under the Bankruptcy and Insolvency Act in light of his findings on the deemed trust issue. The USW and executives appealed.
The Ontario Court of Appeal reversed Campbell J.’s decision. The Court held that the full amount of the Salaried Plan’s wind up deficiency was subject to a deemed trust under the PBA, since paragraph 75(1)(b) of the PBA provides that the full amount of the deficiency “accrues” at the wind-up date even if the regulations under the PBA allow it to be amortized over up to five years. Therefore, the deemed trust applied to all amounts that Indalex owed to the Salaried Plan. Furthermore, the Court of Appeal held that the deemed trust had priority over the DIP loan in this case. The Court held that the doctrine of “federal paramountcy” did not apply to resolve the conflicting priorities in favour of the DIP loan because the doctrine had not been specifically pleaded when the order was sought. Moreover, the Court found that there was no inconsistency between the provincial PBA and the CCAA order in this case, since it was possible to comply with both simultaneously. The Court appears to have been motivated in part by the fact that the DIP claimant was not a third-party but Indalex’s U.S. parent, a related entity. The Court of Appeal declined to rule on the question of whether a deemed trust also applied to the Executive Plan’s funding deficiency, since that plan had not been terminated at the time of the sale.
The Court of Appeal further held that Indalex breached its fiduciary obligations to the beneficiaries of both the Salaried and Executive Plans in number of ways, including by failing to take steps to protect the plan funds before filing for creditor protection under the CCAA, failing to provide sufficient notice to the beneficiaries of the Plan before seeking a court-ordered super-priority for the DIP loan, which prejudiced their interests, and in seeking to trigger the priority scheme under the Bankruptcy and Insolvency Act to defeat any PBA deemed trust. As a consequence of this breach, the Court of Appeal awarded beneficiaries of the Executive Plan a constructive trust in the amount of the plan’s funding deficiency in priority to the DIP loan. The Court indicated that it would have also awarded a similar constructive trust in favour of the Salaried Plan had it not found the PBA’s deemed trust to have priority.
In a split decision, the Supreme Court of Canada (“SCC”) reversed parts of the Court of Appeal’s decision. Four of the seven judges upheld the Court of Appeal’s finding that, when a pension plan is wound up, the deemed trust contemplated by subsection 57(4) of the PBA extends to the entire amount of the wind up deficiency. It held that the employer’s obligations to fund the entirety of this amount is complete (i.e., has “accrued”) at the wind up, even if the precise amount of the obligations cannot be calculated until a later date. However, the SCC overturned the Court of Appeal’s decision that granted the deemed trust under the Salaried Plan priority over the DIP lender. The SCC unanimously agreed that the doctrine of federal paramountcy applied, regardless of whether it was specifically pleaded, and resulted in the court-ordered “super-priority” under the federal CCAA taking precedence over conflicting provincially-legislated statutory trusts. In doing so, Deschamps J. stated:
“The harsh reality is that lending is governed by the commercial imperatives of the lenders, not by the interests of the plan members or the policy considerations that lead provincial governments to legislate in favour of pension fund beneficiaries. The reasons given by Morawetz J. in response to the first attempt of the Executive Plan’s members to reserve their rights … are instructive. He indicated that any uncertainty as to whether the lenders would withhold advances or whether they would have priority if advances were made did ‘not represent a positive development.’”
In contrast to the Court of Appeal, which declined to rule on the point, the SCC held that no deemed trust had arisen under the Executive Plan, since it was not yet wound up at the time of the sale.
On the question of the scope of Indalex’s fiduciary duties and the consequences of any breach, the SCC agreed and disagreed with the Court of Appeal. In the first place, the SCC upheld the Court of Appeal’s finding that the directors of Indalex owed a fiduciary duty both to the corporation and to the plan beneficiaries, and that these two duties irreparably came into conflict in this case. Contrary to the argument of the company and the monitor, the fiduciary duty to plan beneficiaries continues to apply outside decisions that immediately relate to plan administration. It continues to apply, for example, when management is wearing its “corporate hat” and making decisions in the best interests of the corporation as a whole. The judges disagreed on when precisely an impermissible conflict of interest arose in this case, but all agreed that Indalex failed to properly manage a conflict of interest when it sought an order approving the DIP financing without providing sufficient notice to the plan beneficiaries and thereby giving them a chance to present their arguments opposing DIP financing to the Court. Deschamps J. wrote:
“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. This was a case in which Indalex’s directors permitted the corporation’s best interest to be put ahead of those of the Plan Members. The directors may have fulfilled their fiduciary duty to Indalex, but they placed Indalex in the position of failing to fulfil its obligations as plan administrator. 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.”
Notably, despite a finding of a conflict of interest and breach of fiduciary duty, the majority (five of seven judges) overturned the constructive trust over the assets of the estate imposed by the Court of Appeal in favour of the beneficiaries of the Executive Plan. In this regard, the majority held that a constructive trust could only be imposed over identifiable property that can be linked to the wrongdoing, a condition not satisfied in this case. Furthermore, it noted that the Plan Members presented no evidence to indicate that had the fiduciary duty owed to them been fulfilled, and had they been given a chance to oppose DIP financing at the motion, their position would have been any better.
The decision clarifies that the scope of the PBA’s deemed trust extends to the entirety of a DB plan’s wind-up deficiency, which scope is much broader than previous court decisions have established. The majority’s holding may have ramifications for lenders whose security interests in accounts or inventory are registered pursuant to the Personal Property Security Act (Ontario), since subsection 30(7) of that statue explicitly gives deemed trusts under the PBA priority over such security interests. Notably, the decision did not definitively rule on the appropriateness of a CCAA debtor seeking to file under the Bankruptcy and Insolvency Act in order to trigger the latter’s distribution scheme, under which provincial deemed trusts do not generally have any special priority.
Although the CCAA order in issue in Indalex was granted before amendments to the CCAA came into force in 2009 expressly allowing a court to grant DIP claims priority over “secured creditors”, the decision nevertheless confirms previous decisions (as well as some lower court decisions released since the Court of Appeal’s decision) that a CCAA judge is empowered to award a DIP loan “super-priority” over provincial statutory deemed trusts, and that the DIP lender can rely on the doctrine of federal paramountcy (regardless of having first to plead it) to give effect to this priority. The certainty inherent in this decision will likely have a positive effect on availability of DIP financing in the province.
The decision also has major implications for the management of companies as they approach insolvency. It stands for the proposition that, when the employer also acts as administrator of its pension plans, management has a fiduciary duty to plan members and must take that duty into account in discharging its fiduciary duty to the corporation as a whole when managing the corporation’s insolvency. In practice, this could mean providing notice of major CCAA proceedings to the plan members, so that their voice can be heard at the stages of the CCAA process which affect their interest. It may also require the appointment of an independent pension plan administrator before or during insolvency proceedings. Each case will be different, and for many companies, legal advice on how best to manage conflicts of interest may be necessary.
Sun Indalex Finance, LLC v. United Steelworks, 2013 SCC 6
SCC Docket: 34308
Date of Decision: February 1, 2013
Bankruptcy and Insolvency Act credit agreement debtor-in-possession deemed trust defined benefit pension plans executive plan Ontario Court of Appeal Pension Benefits Act pension plan administrators salaried plan super-priority Supreme Court of Canada