Indalex Limited (Re)

On April 7, 2011, the Ontario Court of Appeal issued an important decision respecting an insolvent company's obligation to pay deficiencies in its employee pension plan in preference to paying its other secured creditors.

On December 31, 2006, Indalex Limited, an aluminum extrusions manufacturer, wound up the retirement plan for its salaried employees (the “Salaried Plan”). Seven members of the Salaried Plan were members of the United Steelworkers. At the time of the plan windup, the Plan was underfunded. Indalex made special payments in 2007, 2008 and 2009 to partially pay down the deficiency, but at the end of 2008, the deficiency in the Salaried Plan was $1,795,600.

The financial crisis of 2007 through 2009 depressed aluminum markets and the Indalex group of companies was in financial distress. In March of 2009, Indalex’s U.S. parent company filed for Chapter 11 (bankruptcy) protection in the U.S. In April 2009, Indalex filed for and obtained protection from its creditors under the Companies’ Creditors Arrangement Act (CCAA). Indalex obtained interim financing to continue operations during the CCAA proceeding while it sought to sell its assets. The US parent guaranteed the interim financing. Indalex sold substantially all of its assets in a court-approved sale in July 2009.

At the hearing that approved the sale, both the Steelworkers and counsel for members of the Executive Pension Plan asserted that deemed trusts applied to require Indalex to use the proceeds of the sale to satisfy the deficiencies in both Plans. Justice Campbell, the CCAA judge, deferred consideration of the deemed trust claim for several weeks, but ordered $6.75 million to be held in reserve pending the decision.

Justice Campbell subsequently dismissed the deemed trust claims, finding that no deemed trust existed at July 20, 2009, the date the sale was approved. He concluded that, since there was no amount due and payable on that day (the next periodic special payment was due December 31), there could be no deemed trust. Both the Steelworkers and the Executive members appealed, seeking to have the funds that had been held in reserve in the CCAA proceeding paid into the respective pension plans to satisfy the deficiencies.

The Ontario Court of Appeal agreed with the employees and allowed the appeals. The ruling is significant for a number of reasons.

First, it clearly establishes the scope of the deemed trust provisions of the Ontario Pension Benefits Act clarifying a long-disputed issue – that the deemed trust covers both current service costs and special payments. It confirms that, in the absence of a conflict with the underlying purpose of the federal CCAA, the deemed trust establishes a priority claim on the assets of a company in a CCAA proceeding. In this case, Indalex failed to demonstrate that there was a conflict between the provincial and federal legislation and, in fact, had indicated that it would honour deemed trust obligations. The Court of Appeal ruled that, despite the CCAA Judge’s approval of interim financing that granted a super-priority over secured claims including statutory trusts, the employees' deemed trust claim should prevail.

Second, the decision emphasizes that the fiduciary duty owed by a pension plan sponsor does not disappear when it enters into a CCAA proceeding. Indalex had argued that the decision to enter into CCAA proceedings was made in its capacity as an employer, and not in its role as Plan administrator. It claimed that, as a result, it was not compelled to honour the common law and statutory fiduciary duties plan administrators owe to plan beneficiaries. The Court of Appeal rejected this argument, holding that an administrator's fiduciary duties are not extinguished when it enters CCAA proceedings. It concluded that Indalex had placed its interests above that of the Plan beneficiaries. Further, the fact that Indalex's parent company - the secured creditor - was an affiliated entity reinforced the Court's finding that Indalex had disregarded beneficiary interests to support its corporate interests.

Since the Steelworker Salaried Plan had been wound up prior to the onset of the CCAA proceeding, the Court of Appeal declared that a deemed trust existed and ordered the deficiency to be paid to the Fund on the basis that the Personal Property Security Act established the deemed trust as a superior claim to that of the secured creditor.

As for the Executive Plan, it had not been wound up prior to the CCAA proceeding. Consequently, the deemed trust applicable to deficiencies on wind up under the PBA could not be applied to order payment of the deficiency from the reserve funds. Instead, the Court of Appeal found a breach of fiduciary duty and a constructive trust, so as to order payment of the deficiency for the benefit of the Executive Plan members.

Had this appeal been lost, members of both Plans would have suffered significant reductions in their pension benefits (ranging from 20 to 40 percent) while an affiliate of the company that chose not to take steps to address the funding deficiency would have received $6.75 million.

Click here to read the Court of Appeal's decision.

The United Steelworkers were represented by Darrell Brown.