Setting the record straight on pension plan deficits and CCAA

May 2, 2012

In a decision issued on April 20th, 2012, Justice Robert Mongeon of the Superior Court of Quebec gave a decisive answer to one of the most troubling questions facing debtors and DIP lenders in reorganizations under the Companies' Creditors Arrangement Act (CCAA). Justice Mongeon’s decision in White Birch should go a long way to calming concerns stemming from last year’s decision of the Ontario Court of Appeal in Indalex, at least with regard to proceedings in Quebec.

The Indalex decision, now before the Supreme Court of Canada, caused a stir because it reduced the rank of claims that had been granted “super-priority” status in the context of CCAA proceedings. Most notably, these include claims of the debtor-in-possession (DIP) lender, which are typically accorded a rank ahead of all pre-filing creditors pursuant to the terms of the Initial Order. DIP lenders provide capital essential to permit an insolvent company to successfully reorganize its affairs, and without a guarantee of super-priority status, that capital would simply not be made available.

In the Indalex matter, DIP financing had been provided and super-priority status had been granted for the DIP loan under the terms of the Initial Order. Despite this fact, the Ontario Court of Appeal ordered that a claim relating to deficits in the company’s pension plans be paid in priority to the claim for reimbursement of the DIP loan. The Court’s justification for reaching that decision was that the pension plan deficiencies were protected by a deemed trust created under Ontario pension legislation and/or by a constructive trust established by the Court as a result of perceived inequitable behaviour by Indalex. The Court of Appeal ruled that such trust claims ranked ahead of the super-priority claims of the DIP lender.

Many observers wondered whether this decision might have a chilling effect on the availability of interim financing in Canada, as lenders might be concerned that their super-priority status could be lost.

At the same time, pension plan beneficiaries saw the decision as an opportunity to seek a similar order in CCAA proceedings across the country. Indeed, in the White Birch file, the pension plan beneficiaries opted to seize this opportunity.

In October 2011, nearly a year and a half after the Initial Order was issued in White Birch, the labour unions, as well as a group of retirees and the company’s pension committees all made motions based on the Indalex decision, seeking an order that would grant certain pension plan claims a rank superior to the super-priority DIP claims established by the Initial Order. The Court was also asked to order that the company recommence making past service contribution payments, which had been stayed since the Initial Order, and to further order that those payments (which would serve to reduce the pension plan deficit) receive priority over any repayment of the company’s DIP loan.

Summary of the Findings in White Birch

In its April 20th decision, the Court dismissed the Applicants’ motion and held that the legal principles on which the Indalex (Re) decision was based did not apply in Quebec. Below is a brief summary of the reasoning the Court used to come to this conclusion.

Deemed Trusts Cease to Apply

Firstly, and perhaps most importantly, the Court held that in light of the Supreme Court of Canada’s decision in Century Services Inc. v. Canada (Attorney General), the deemed trust found in Article 49 of the Supplemental Pension Plans Act, RSQ, c R-15.1 (SPPA) had no further effect once a debtor had been afforded protection by the Court under the CCAA. The Court explained that for any such trust to have survived, Section 37 of the CCAA would have had to confirm in clear and unmistakable terms the survival of the deemed trust created by Section 49 of the SPPA. This is a very significant finding that may have a major impact in CCAA files. A number of deemed trusts will be affected.

Section 49 of the SPPA Does Not Create a Valid Trust

The Court then proceeded to assess whether the trust created by Section 49 of the SPPA qualified as a trust under Quebec law. To make that determination, the Court held that it must rely on the Supreme Court of Canada’s judgment in Bank of Nova Scotia v. Thibault, which outlined the requirements that must be met for a Quebec trust to be constituted. These requirements are: “property must be transferred from an individual’s patrimony to another patrimony by appropriation; the property must be appropriated to a particular purpose; and the trustee must accept the property.”

Based on a three-pronged analysis, the Court held that Section 49 of the SPPA could not give rise to a real trust within the meaning of Quebec law. In doing so, Justice Mongeon concurred with Superior Court Justice Danièle Mayrand’s conclusion in AbitibiBowater inc. (Arrangement relatif à).

In addition, the Court held that Section 49 of the SPPA did not give rise to a floating charge on the assets of the Debtor. For this conclusion, the Court relied on the Minister of Justice’s commentary to Article 2715 CCQ, which specifically stated that the notion of floating charge in common law did not exist in Quebec law.

The Court further considered whether, as the employer, White Birch had a fiduciary duty to the pension plan or pension fund. In answering this question, the Court pointed to several articles of the SPPA, including Section 147, which specifies that every pension plan is to be administered by a pension committee, and Section 150 of the SPPA, which states that it is the pension committee that is to act in the capacity of a trustee. In light of these provisions, the Court held that unlike the Ontario Pension Benefits Act, the SPPA does not impose an obligation on an employer to act as an administrator of the pension plans belonging to the unionized and non-unionized employees, and therefore, White Birch was not in violation of the kind of fiduciary duty that applies to a constructive trustee in common law.

Res Judicata

As a final note, in his analysis of the motions before him, Justice Mongeon made some interesting comments as to the nature of CCAA orders. White Birch had argued that the motions by the labour unions, retirees and pension committees should be dismissed because the issue of rank had already been dealt with under the terms of the Initial Order and various subsequent decisions. White Birch pointed out that the labour unions had received service of the motion for an initial order and were called on to make representations at the hearing, but declined to do so. In addition, all subsequent decisions (notably with regard to the stalking horse sales process and the entitlement to the proceeds from that process) were also served on the interested parties, and none chose to make representations asserting prior rank at the hearings. White Birch, therefore, insisted that the petitioners were no longer entitled to seek such relief, as much time had passed and many parties had relied on the rank conferred by the Court’s previous orders.

Justice Mongeon concluded that the CCAA orders in question were subject to what he termed “chose decidee” (i.e. something similar to “chose jugée” or res judicata). Although he recognized that certain CCAA orders may be varied by the CCAA judge (notably by way of the comeback clause), he went on to state that a court asked to vary an order must take into account the rights of all interested parties who may have made decisions based on the order. In this light, he ruled that unless the previous orders were issued without notice to the petitioners, they cannot be varied to the prejudice of parties that relied on the orders in good faith.

In the White Birch matter, as the DIP lender had disbursed significant sums based on the super-priority granted by the Initial Order, the subsequent reduction of the rank of its claim would obviously cause it significant prejudice.

,strong>Where Do We Go From Here?

It remains to be seen whether any or all of the petitioners will seek to appeal from Justice Mongeon’s decision. What appears clear, however, is that this decision will have a major impact on present and future CCAA filings in Quebec and in the rest of Canada.

Of particular interest is the Court’s adoption of Justice Morris Fish’s position in Century Services with respect to the survival of deemed trusts in the CCAA context. If followed, this will align CCAA proceedings more closely with the Bankruptcy and Insolvency Act framework, in which only security explicitly recognized in the Act continues to apply post-filing. Clearly, a number of current beneficiaries of deemed trusts will be dissatisfied with this result.

Notwithstanding the dissatisfaction from this quarter, we expect that the insolvency community as a whole will receive this decision in White Birch very positively. It will restore DIP lenders’ confidence in the process and thus ensure that essential capital is available to companies seeking to reorganize under the CCAA. This, in turn, should be a positive outcome for all stakeholders, as a successful reorganization is virtually always better than an outright bankruptcy.

We look forward to seeing how the courts of Quebec and of the other Canadian provinces will react.

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