The Supreme Court of Canada has concluded, in Sun Indalex Finance, LCC v. United Steelworkers, that pension plan members do not have priority over other secured creditors for assets when a pension plan is wound up in the context of insolvency proceedings.
By way of background, Indalex was both the employer as well as the administrator of its own pension plan. When Indalex became insolvent it sought protection from its creditors under the Companies’ Creditors Arrangement Act (“CCAA”). In order to continue operating, Indalex entered into debtor-in-possession (“DIP”) financing, effectively granting the DIP lenders “super-priority” status over all other existing creditors.
Indalex eventually sold its business, but the sale did not make any provisions for pension liabilities, and did not provide for sufficient funds to pay back the DIP lenders. The Court sanctioned an arrangement whereby Indalex U.S., the guarantor for Indalex, paid the DIP lenders with the proceeds of the sale and took over the DIP lenders’ super-priority status. The pension plan members argued that, despite the court-sanctioned arrangement, they had priority over the DIP lenders with respect to the payment of any pension plan wind-up deficiencies.
The trial court judge, in essence, agreed with Indalex and held that the pension plan members were unsecured creditors, and thus did not have priority over the DIP lenders. The Ontario Court of Appeal reversed this ruling and held that the pensioners claim was subject to both a deemed and constructive trust which had priority over the DIP lenders and other secured creditors. The case was appealed to the Supreme Court of Canada.
Although there was some disagreement between the judges about whether the pensioners were protected by a statutory deemed trust, under the Pension Benefits Act (“PBA”), the Supreme Court was unanimous in its decision that the DIP lenders’ interests took priority over any interests of the pensioners.
Further, the majority of the Court held that while Indalex wore two hats – employer and plan administrator – this did not per se lead to a conflict of interest, as this type of arrangement was expressly permitted by the PBA. Rather, the difficulty in this case was not the existence of a conflict, but rather that Indalex had breached its fiduciary obligations by failing to take steps during the CCAA proceedings to ensure that the pensioners had the opportunity to be fully represented as if there had been an independent plan administrator. Nevertheless, the majority of the Court concluded that there could be no remedial constructive trust in the circumstances, as there was no evidence that any breach of fiduciary duty by Indalex gave rise to an identifiable asset being unjustly retained by any party.
In short, the pension plan members were unsuccessful in obtaining priority over other secured creditors with respect to the plan deficiencies that arose on wind-up. This decision, while specific to the facts of this case, will no doubt have a significant impact on future claims by pension plan members where corporations enter into insolvency or CCAA proceedings.
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