While there has been plenty of attention on the affect of Nortel Networks Corp.’s bankruptcy on its pension plan members, the struggle by a group of employees to receive what the company owes them in long-term disability benefits plan has been less prominent.
But amid years of legal wrangling, a group of 350 long-term disabled former employees is consulting with the federal government as part of a bid for a regulatory change to the Companies’ Creditors Arrangement Act that would elevate the priority of the members of Nortel’s self-insured long-term disability benefits plans above the unsecured creditors or deem the arrangements to be an eligible financial contract.
The notion of an eligible financial contract is a provision in the CCAA regulations that so far has only been used for derivatives, margin loans and other specialized contracts typically owned by banks, pension funds and other financial institutions, says Diane Urquhart, an independent financial analyst and advisor to the group of former employees.
“Our opinion is that if you’re prepared to prescribe this long list of contracts for the benefits of the banks, such that they don’t have to be held back by a bankruptcy court and they can terminate their contracts and seek payment, that they should be doing this for the long-term disabled in these self-insured long-term disability benefits plans,” she says.
Read: Nortel pensioners face decision on payment options
The group of disabled employees had originally sought protection in 2010. At that time, four bills tabled to address the issue had the support of the Liberal party, the Bloc Québécois and the New Democratic party. The Conservative party, however, opposed the changes. “They were willing at that time to introduce new legislation, retroactively, which would force the court to raise the priority of this group above the unsecured creditors,” says Urquhart. “We’ve come back to ask for those to be reintroduced and for the continuing support of those three parties. And, of course, since the Liberals are a majority, we feel they’re in a position to implement what they intended to do before.”
Mark Zigler, a senior partner at Koskie Minsky LLP and the court-appointed legal counsel for all former Nortel employees, disagrees with the approach sought by the group. “Yes, you could change the law to do that,” he says of the proposal.
“In the United States, they require employers to keep paying benefits during a restructuring, except that the court has the authority to stop that on notice and often they do. They did at Nortel, too. Nortel, which had some cash when it filed, did keep paying benefits for two years. So there’s no easy answer. It’s not an ultimate solution because it won’t work in every case.”
Read: Nortel employees seek legal clarity around health and welfare trust
The group is asking for the regulations to be retroactive to Jan. 13, 2009, because, in March 2010, a representative of the Nortel disabled group signed a settlement agreement that offered nine months of benefits “in exchange for a broad legal release of no litigation for causes except fraud,” says Urquhart. At that time, Zigler notes, the legal team ensured those benefits continued at least until the end of 2010, which meant the employees actually got two years of payments, even though the company was insolvent.
The group is alleging fraud, however. In 2005-06, Nortel took $32 million out of the group’s health and welfare trust to pay for the health-care benefits of active workers and pensioners. “And so our view that fraud had occurred was that Nortel executives authorized the release of the reserve funds for the disabled used to pay these active benefits, which were the responsibility of Nortel to pay from its own financial capability,” says Urquhart, noting that an executive gave testimony confirming that fact as well as the intention to pay it back.
Zigler, however, sees the issue differently. “What Nortel did wasn’t unlawful,” he says. “Nortel self-insured its disability benefits and it didn’t have enough money in this trust to fund it all. That was a problem, largely, with the insurance laws in a lot of provinces that allow employers to self-insure these benefits.”
If there’s anything to take away from the case, says Zigler, it’s the question of whether a single employer should be able to self-insure benefits. “You may be working for a big company today that’s trying to self-insure these benefits as people get disabled, but it’s a promise to go for 30 to 40 years if you’re young, and who knows if the company is going to be around that long?” he says.
Read: Court denies Nortel employees’ appeal
“Yes, they save some money because they’re not paying an insurance company to take on that risk. I’m sure a lot of the actuarial consulting firms have sold that over the years as a way to save some money on your benefits costs, but it’s a hollow promise if the company ever becomes insolvent.”
The group of disabled former employees have gotten nothing since 2010, says Urquhart, noting $80 million remains owing to the group. It expects to recoup only about 45 per cent of that amount, however. “The $44 million we’re asking for as a forced payment would be to pay all the actuarial liabilities owed to this group, to deal with the fact that money had been taken from the trust . . .,” says Urquhart.
“Our view is that the disabled are the worst impacted group and substantially more negatively impacted than the Canadian pensioners. This group can’t live on CPP disability and they’ve been six years without their income. They are in dire straits.”
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For Zigler, the best solution would be to prevent the self-insurance of long-term disability benefits because no company can guarantee it will be in business long into the future. “I think all the groups agree that would be a good thing, but if you speak to the actuarial firms and the large employers, they’ll say: ‘No, we need to be able to self-insure this stuff, because if we don’t, we might never provide it.’ The chickens come home to roost when the employer becomes insolvent and can’t pay.”