We previously reported on Basis Points that the Ontario Court of Appeal unanimously ordered that employer pension contributions required under Ontario’s Pension Benefits Act primed charges securing the company’s DIP financing in Re Indalex Limited, 2011 ONCA 265 (Apr. 7, 2011) (see blog post: Canadian Court Cracks the Nut of a Priming DIP; Are Secured Claims Next?). But, sacrebleu, put down your poutine! While waiting for an appeal to the Supreme Court of Canada, it turns out that Les Habitants still reign supreme—at least in Québec. In a return to old-style hockey, the Québec Superior Court boarded Indalex in Québec and sounded the goal horn for the super-priority claim of the DIP lenders ahead of the claims of the defensive-minded pension participants in Re White Birch Paper Holding Co., 2012 QCCS 1679 (April 20, 2012) (available here, mais uniquement en français).
An operator of paper mills in Canada and the U.S., White Birch found itself mal pris and skated into the Companies’ Creditors Arrangement Act (CCAA, somewhat analogous to Chapter 11 in the US) in early 2010. The Superior Court of Québec granted a super-priority charge to secure White Birch’s DIP financing pursuant to its initial order and also ordered the company to continue contributing to its defined benefit pension plans, albeit without making certain deficiency payments.
Dissatisfied, White Birch’s pension participants (both current employees and retirees) wanted tout le kit (et le caboodle?) and argued that the Indalex holding should be applied in Québec so that their claims would prime the DIP lenders’ claims. Given that White Birch’s pension deficits exceeded the liquidation value of the company by about 40 million loonies, White Birch intended to suspend certain amortization payments required under Québec’s Supplemental Pension Plans Act (“SPPA”) but continue to make its DIP payments. Trying to score as quickly as Guy Lafleur on a power play (ask your father about Le Démon Blond), the pension participants argued that the company’s obligation to make the amortization payments pursuant to a statutory deemed trust should prime DIP payments in accordance with Indalex. But the court, with a kick save à la Jacques Plante, held that the pension participants were skating on thin ice and did not prime the DIP under the CCAA because a Québec SPPA deemed trust (1) is not specifically referenced in the CCAA and (2) is not characteristic of a trust under relevant provincial law.
The White Birch court held that Indalex was playing in the Ontario Hockey League, where Ontario’s trust law provides for constructive trusts and that Indalex was bound by certain fiduciary duties as the administrator of its pension plans. In contrast, White Birch was in la Ligue de hockey du Québec and, under Québécois law, there is no provision for constructive trusts and the company is not the administrator of its pension plans, so the pension participants were sent to the sin bin sans Lord Stanley’s cup.
C’est magnifique for the DIP lenders but seemingly tragique for the pension participants—or is it? While the particularities of Québécois law constituted the legal basis for the court’s decision, the court also cited policy concerns. The court observed that, without a super-priority DIP charge, the company would have been unable to put enough skaters on the ice, thousands of fans (and employees) would have been sent home joyless, creditors would be subject to major misconduct penalties due to endless on-ice fights over the remaining assets and, ironically, the pension participants would be kicked off the ice altogether and lose any chance of substantial recovery. In other words, mangez-vous du pain blanc (enjoy what you have before it gets worse)! The court’s policy arguments align nicely with two recent Ontario decisions it cited. In Re Timminco, Ltd., the Ontario Superior Court also rejected the reasoning in Indalex and confirmed the super-priority of DIP charges on the basis that the CCAA preempts provincial law and that the very purpose of the CCAA would be thwarted by an inability to restructure a company in the absence of DIP financing. 2012 ONSC 506 and 2012 ONSC 948.
While everything may be okey dokey (or tiguido) in Québec, at least for DIP lenders, lenders and pension plans alike will be up late ordering double doubles at Timmy’s until the Supreme Court makes a final decision in Indalex. And even if the Supreme Court upholds Indalex as to Ontario, query whether it will rely on provincial rather than federal law and, therefore, leave White Birch intact in Québéc.