In a case with significant consequences for Canadian employers and workers that has echoes of the saga involving Nortel Networks Corp., the British Columbia Supreme Court will soon consider whether U.S. pension funds can assert claims over the assets of insolvent Canadian companies.
“It’s important for both employers and employees to be aware when American pension funds can come in and scoop the assets of Canadian companies,” says Mary Paterson of Osler Hoskin & Harcourt LLP in Toronto.
Paterson and her colleagues are the Ontario lawyers for the Walter Canada Group, the Canadian arm of the U.S.-based Walter Group, a coal mining concern with operations in Canada, Britain and the United States.
Walter Group operated in two distinct segments, comprised of its U.S. operations (Walter Energy Inc.) and its Canadian and British operations (Walter Group Canada). In 2015, the U.S. company filed for bankruptcy under U.S. law; several months later, Walter Group Canada applied for insolvency relief under Canada’s Companies’ Creditors Arrangement Act.
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The B.C. Supreme Court authorized a sale of the Canadian assets under the CCAA. “The sale generated more than enough money to pay off both the secured and unsecured creditors in Canada,” says Craig Bavis of Victory Square Law Office LLP in Vancouver, who represents a group of Canadian employees with claims for severance pay.
But after the sale, a group of unionized U.S. mineworkers who had been unable to recover in the U.S. proceedings against Walter raised a $12-million pension claim in the Canadian bankruptcy. Their claims arose when the presiding U.S. judge terminated their collective agreement and pension plan, something that is permissible under U.S. law but not in Canada.
U.S. law, however, also mandates that pensioners in a terminated plan can make a claim under the Employee Retirement Income Security Act of 1974. The legislation dictates that pensioners can look to the assets of any member of a controlled group of companies to satisfy their pension rights. The U.S. pensioners argued that the Canadian companies were such a controlled group and that they could assert their claims against the proceeds of the sale of the Canadian assets.
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The U.S. pension claim has the potential to change the landscape of CCAA proceedings for the Canadian workers and other unsecured creditors. “If the U.S. claim is upheld, the Canadian miners will recover about five cents on the dollar instead of recovering all the severance to which they are entitled,” says Bavis.
Lawyers for the U.S. miners argue the U.S. pension law applies because the U.S. pension plan was underfunded at the time when the Walter Group spent about $1 billion to purchase its Canadian assets and remained underfunded when the insolvency proceedings started. “Their theory is that the Walter Group in effect moved money to Canada that should have been used to fund the U.S. pension plan,” says Bavis.
Paterson and her colleagues responded that U.S. law has no extraterritorial effect and doesn’t therefore apply to the Canadian proceedings. On behalf of the Walter Canada Group, they also argued that even if the U.S. applies extraterritorially, it’s unenforceable because it conflicts with Canadian public policy.
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No one is laying heavy odds one way or another on the outcome. “The only previous time this issue has arisen is with respect to the claims from the U.K. in the Nortel insolvency, and the court ruled that there was no claim based on the wording of the U.K. legislation,” says Paterson.
In other words, the interpretation of the U.S. legislation and whether it has extraterritorial effect is entirely up in the air when it comes to Canadian jurisprudence. And to make matters even more complex, there’s a political angle here. “Ultimately, this issue pits U.S. unions against Canadian unions,” says Bavis.