In the most keenly awaited commercial decision of recent years, the Supreme Court of Canada this morning held that the Ontario Court of Appeal in Indalex Limited (Re), 2011 ONCA 265 (CanLII) was mistaken in stating that deemed trust provisions to contributions to an underfunded pension scheme trumped the interests of a Debtor in Possession lender.
The central issue involved what priority would be given to pension plan wind-up deficits, particularly in insolvency proceedings involving the plan sponsor. Indalex Limited, and its related companies went into the tank. They obtained protection under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36. But at the time, Indalex's two pension plans were underfunded and one was being wound up. The court approved the sale of Indalex’s assets on a going–concern basis and ordered the repayment of a super-priority charge to debtor-in-possession lenders. The United Steelworkers which was the bargaining agent for just 7 of the 169 members of one pension plan, and the representatives of the Retirees' pension plan challenged the distribution of the sale proceeds. They moved for a declaration that there were deemed trusts in favour of pension beneficiaries to the extent of the fund deficiencies and for orders for the release and payment of those amounts. Indalex brought a motion to lift the CCAA stay and assign itself into bankruptcy.
The Supreme Court split 3-2-2 on a variety of issues, so one has to count votes on a variety of issues to see where the court comes down. Justice Abella and LeBel dissented vigorously.
Did the interests of the pensioners trump the regular scheme of priority that governs insolvencies? The Ontario Pension Benefits Act contains deemed trust provisions – but do the contributions that an employer is required to contribute to fund a pension plan wind up deficiency attract the deemed trust protection? The Supreme Court split on the issues with a majority siding with the pensioners on the deemed trust issue. Justice Abella and LeBel dissented vigorously.
The insolvency bar is sighing with relief that some of the uncertainty occasioned by the Court of Appeal decision has been lifted.
In her last major decision Deschamps J dealt with the priority issue:
A statutory deemed trust under provincial legislation such as the PBA continues to apply in federally‑regulated CCAA proceedings, subject to the doctrine of federal paramountcy. In this case, granting priority to the DIP lenders subordinates the claims of other stakeholders, including the plan members. This court‑ordered priority based on the CCAA has the same effect as a statutory priority. The 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.
While McLachlin C.J. and Rothstein and Cromwell JJ disagreed on the scope of the deemed trust, they accepted the logic of paramountcy, as did the two dissenters. So 7-0 that the DIP Lenders win, because of the paramountcy of the CCAA.
The Ontario Court of Appeal decision departed from established law. Insolvency specialists and banking lawyers will be reassured that DIP lenders can protect the value of their security interest against pension claims. Permanent answers to the knotty questions will have to await legislative amendment, perhaps to the Pension Benefits Act at Queen's Park or to the CCAA.
The dissent headnote states:
A fiduciary relationship is a relationship, grounded in fact and law, between a vulnerable beneficiary and a fiduciary who holds and may exercise power over the beneficiary in situations recognized by law. It follows that before entering into an analysis of the fiduciary duties of an employer as administrator of a pension plan under the PBA, it is necessary to consider the position and characteristics of the pension beneficiaries. In the present case, the beneficiaries were in a very vulnerable position relative to Indalex.
Nothing in the PBA allows that the employer qua administrator will be held to a lower standard or will be subject to duties and obligations that are less stringent than those of an independent administrator. The employer is under no obligation to assume the burdens of administering the pension plans that it has agreed to set up or that are the legacy of previous decisions. However, if it decides to do so, a fiduciary relationship is created with the expectation that the employer will be able to avoid or resolve the conflicts of interest that might arise.
Indalex was in a conflict of interest from the moment it started to contemplate putting itself under the protection of the CCAA and proposing an arrangement to its creditors. From the corporate perspective, one could hardly find fault with such a decision. It was a business decision. But the trouble is that at the same time, Indalex was a fiduciary in relation to the members and retirees of its pension plans. The solution was not to place its function as administrator and its associated fiduciary duties in abeyance. Rather, it had to abandon this role and diligently transfer its function as manager to an independent administrator.
In the present case, the employer not only neglected its obligations towards the beneficiaries, but actually took a course of action that was actively inimical to their interests. The seriousness of these breaches amply justified the decision of the Court of Appeal to impose a constructive trust.