Indalex: The Ontario Court Of Appeal Extrudes The CCAA

As most are aware by now, the Ontario Court of Appeal (the "OCA") recently caused alarm by finding that claims of pension plan beneficiaries ranked higher than the super-priority debtor-in-possession financing charge (the "DIP Charge") created by the amended initial order (the "CCAA Order") in the Companies' Creditors Arrangement Act (the "CCAA") proceedings of the Indalex group of Canadian companies (collectively, "Indalex"). The OCA ordered that the remaining proceeds of a going concern sale (the "Sale") be paid to cover shortfalls in two pension plans, instead of being paid to Indalex's US parent group ("Indalex US") which had been subrogated to the DIP Charge after covering a would-be short-fall to the original DIP lenders pursuant to its cross-guarantee. The OCA thereby reversed the earlier rulings of Justice Campbell of the Ontario Superior Court Commercial List (the "CCAA Court"), who had found that none of the funds in question were subject to a deemed trust under the Ontario Pension Benefits Act (the "PBA") which might prime the DIP Charge.

One of the pension plans, that of the salaried employees (the "Salaried Plan"), was already in the process of being wound-up pursuant to the PBA prior to the start of the CCAA proceedings. The second pension plan, that benefitting retired executives (the "Executive Plan," and, together with the Salaried Plan, the "Plans"), did not begin its wind-up process until sometime after the relevant CCAA Court decisions and the closing of the Sale. Both Plans were underfunded and the purchaser assumed no responsibility of liability for the Plans.

The OCA based its decision on two main lines of argument. The first, applied only to the Salaried Plan, was based on the existence of a provincial statutory deemed trust. The second, applied to both Plans, was based on the equitable remedy of the constructive trust.

In its first line of analysis, the OCA held that, in the case of the Salaried Plan, the amount of the shortfall had accrued as of the commencement of the wind-up, and thus was subject to a deemed trust (backed by a charge on Indalex's assets) under the PBA, even though it would not, in the ordinary course, have been payable in full for a number of years.1 Under Subsection 30(7) of the Ontario Personal Property Security Act (the "PPSA"), a security interest in accounts or inventory and proceeds therefrom (other than a purchase money security interest) is subordinate to the claims of a beneficiary of a deemed trust under the PBA.2 The OCA held that the CCAA Order could not have wiped out the PBA deemed-trust claim, or reversed its PPSA-imposed priority, unless the CCAA Order had included an explicit ruling that the purpose of the CCAA was paramount in this case to the PBA and the PPSA. The OCA noted that the CCAA Court had not been alerted to any pension shortfall issues and, rather, had been told that Indalex intended to satisfy any statutory deemed trust obligations. The OCA held that, in the absence of an explicit paramountcy ruling, the general DIP Charge super-priority language of the CCAA Order was not sufficient to give the DIP Charge priority over the PBA deemed trust claim of the Salaried Plan beneficiaries.

One difficulty with the OCA's deemed trust priority argument is that the DIP Charge, being a lien created by order of a court, was likely not subject to the PPSA.3 In the decision of the Supreme Court (the "SCC") in Bank of Montreal v. i Trade Finance Inc. (released six weeks after Indalex) the SCC held that, where rights resulted from a court order (rather than from a transaction that in substance creates a security interest), the PPSA did not apply.4 Another OCA decision, Bulut v. Brampton (City), is cited by commentators as authority for the same proposition (though it appears that, rather than being ruled on, the point was simply conceded by counsel in that case).5 If the DIP charge was not subject to the PPSA, it could not be subordinated to the PBA deemed trust by Subsection 30(7) of the PPSA. Moreover, the mere creation of the DIP charge (ignoring, for purposes of argument, the priority conferred on it) is not inconsistent with the existence of the PBA deemed trust. The statutory conflict that concerned the OCA therefore had to have been between the priority granted to the DIP Charge by CCAA Order, and the priority held to have been given to the PBA deemed trust by operation of Subsection 30(7) of the PPSA. If that conflict does not exist, then the OCA's demand that the CCAA Court had to have given an explicit paramountcy ruling to defeat the PBA deemed trust also loses its relevance.

Looking forward, another reason why Subsection 30(7) of the PPSA may not apply in future cases is that the provision appears to conflict with the new pension provisions of Subsection 6(6) of the CCAA, which came into effect after the date of the CCAA Order, and thus did not bind the Indalex proceedings. CCAA Subsection 6(6) prohibits a court from sanctioning a CCAA plan unless the plan...