Pension Rights in Restructuring Proceedings

March 11, 2013

In
Sun Indalex Finance, LLC v. United
Steelworkers
, 2013 SCC 6, the Supreme Court of Canada overturned a decision
of the Ontario Court of Appeal and held that members of an underfunded pension
plan did not have priority over “debtor in possession” (“DIP”) creditors in a
proceeding under the Companies Creditors
Arrangement Act
(“CCAA”).

Indalex
was a sponsor and administrator of the underfunded pension plan. The Company
became insolvent and sought protection under the CCAA. In the course of these
proceedings, the CCAA court authorized the Company to enter DIP financing so
that it could continue its business. The CCAA court granted the DIP creditors “super
priority” over the claims of all other creditors including the pension plan
members.

The
pension plan members challenged this priority. They argued that they had
priority by virtue of a statutory deemed trust under s. 57(4) of the Pension Benefits Act and a constructive
trust arising from the breach of Indalex’s fiduciary duties to the plan
members.  At first instance, the judge
dismissed the motion.  However, the Court
of Appeal reversed this ruling and held that the pension plan wind-up
deficiencies created deemed and constructive trusts that had priority over the
DIP financing priority.

The
Supreme Court of Canada overturned the Court of Appeal’s decision. While the
Court held that there was a deemed trust under the Pension Benefits Act for the deficiency, this trust was subject to
the doctrine of federal paramountcy.  As
a result, the priority granted to the DIP lenders in the CCAA proceedings under
federal statute had priority.

The Supreme Court of Canada was
unanimous that Indalex had a fiduciary duty to pension plan members and that the
Company failed to address a conflict of interest that arose during the CCAA
proceedings.  The conflict in this case
arose when the Company sought the DIP orders without notice to the plan
members.  The Company failed to take
steps to ensure that plan members had the opportunity to protect their
interests in the CCAA proceedings.  The
Company also failed to bring the conflict of interest to the attention of the
CCAA judge.

Notwithstanding the Court’s decision
that the Company breached its fiduciary duties, it did not grant a remedy.  The breach was not related to a specific
identifiable asset that would be unjust for the Company to retain.  As a result, the remedy of constructive trust
was inappropriate.

This
decision highlights the importance of proper notice and communications to
employees in the course of restructuring proceedings.

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