NORTH OF THE BORDER UPDATE
This article has been contributed by Martin Desrosiers, Sandra Abitan and Julien Morissette. Martin Desrosiers and Sandra Abitan are partners in the insolvency and restructuring group of Osler, Hoskin & Harcourt LLP, and Julien Morissette is an associate in the group.
In April 2011, the Ontario Court of Appeal rendered a unanimous judgment in Re Indalex Limited which ordered that the amount the debtor was required to contribute towards its pension plan wind up deficiency be paid in higher priority to repayments to its DIP lender. This judgment was a surprise to the legal community. Leave to appeal has since been granted by the Supreme Court of Canada. In November 2011, groups of White Birch employees and retirees (referred to below as employees) filed motions seeking the application of the legal findings of Indalex to White Birch. Justice Mongeon categorically held that the main legal principles arising out of Indalex cannot be applied in Québec. Leave to appeal of this judgment has now been sought by the employees. Stakeholders in the restructuring community will be closely watching this appeal and the Supreme Court’s decision in Indalex.
White Birch Paper owns and operates paper mills in Québec and Virginia. Following the 2009 collapse of the world market for paper, White Birch filed for and obtained court protection under the Companies’ Creditors Arrangement Act (CCAA) in February 2010.
In its Initial Order under the CCAA, the Superior Court of Québec granted a super-priority charge to secure a DIP loan enabling the company to continue operations while restructuring. The Initial Order also provided for the continued payment of current contributions to the company’s defined benefit pension plans and exempted White Birch from making any actuarial deficiency payments (also known as amortization payments).
New law in Ontario under Indalex
In April 2011, the Ontario Court of Appeal decided in Indalex that amortization payments to the debtor’s pension plans ought to be made in higher priority to repayments to its DIP lender. That Court held that the deemed trust created by the Ontario Pension Benefits Act (PBA), which applied to all amounts the employer was required to contribute towards the pension plan wind up deficiency, took priority over the DIP lender’s charge created under the CCAA. It also found that the company, as pension plan administrator, had breached its fiduciary duties to the beneficiaries of the plans, which warranted equitable relief and subordination of the DIP charge. For more detail, see our previous blog post, Ontario Court of Appeal Grants Retirees Priority over Secured Creditor, by Rupert Chartrand, Marc Wasserman and Martino Calvaruso.
This judgment was a departure from prior law and a surprise to the legal community. Leave to appeal has since been granted by the Supreme Court of Canada.
Employees seek extension of Indalex to Québec
In November 2011, groups of White Birch employees filed motions seeking the application of the legal findings of Indalex to White Birch. They argued that the company had sufficient liquidity to make the amortization payments and that these payments ought to be made in higher priority to the DIP loan repayment pursuant to a deemed trust created under Québec’s Supplemental Pension Plans Act (SPPA).
Most other parties, including the company, the monitor and the DIP lenders objected. They argued that the DIP loan was advanced on the basis of the DIP charge and that amortization payments were a debt that could be compromised under the CCAA.
Court confirms Québec law is unchanged
In his judgment of April 20, 2012, Justice Mongeon makes clear that the unions had been notified that White Birch was seeking suspension of amortization payments in its application for the Initial Order and chose not to object – until Indalex. Also, liquidity improvements were principally due to the stay obtained under the CCAA, which allowed the company to suspend payment of about $900 million of debt.
Justice Mongeon held that the SPPA’s deemed trust was invalid under the CCAA and did not otherwise have the characteristics of a true trust. In this regard, the absence of segregation of funds for amortization payments is fatal, as Québec law only recognizes what is known as an express trust in common law jurisdictions. There is no equivalent to the constructive trust in Québec – a notion which was key in Indalex.
The Court also held that under Québec law, White Birch was not administrator of the pension plans and thus did not have any fiduciary obligations towards the employees to make the amortization payments. The trustee of a plan under the SPPA is an independent committee, which is not controlled by the company. This is a key difference between Ontario’s PBA and Québec’s SPPA.
The only alternative to a super-priority DIP charge would have been bankruptcy and liquidation. Lenders would not have supported the company, sealing its fate. For White Birch, it would have meant “thousands of job losses, an unending battle among creditors (…) and no chance of substantial recovery of the amortization payments.”
Appelate courts will have the last word
Justice Mongeon categorically held that the main legal principles arising out of Indalex cannot be applied in Québec. While the Court concluded that the pension plans’ claims for amortization payments are unsecured for reasons particular to Québec law, the judgment also took a decidedly practical view of the implications of deciding otherwise. In a nutshell, the Court wrote: “there is no point in correcting a problem by creating or worsening another.”
On May 9, 2012, the employees sought leave to appeal of the judgment. Stakeholders in the restructuring community will be closely watching this appeal and the Supreme Court’s decision in Indalex.