The treatment and protection of members’ accrued pensions in an underfunded DB pension plan following the insolvency of the plan sponsor has been the subject of many discussions since the 2008 financial crisis.
Consultation papers, private members’ legislation and employee and union advocacy groups have all proposed (albeit unsuccessfully, at least to date) methods of strengthening the protection provided to vulnerable employees. A recent decision of the Ontario Court of Appeal applied trust law and equitable principles to protect the members of the underfunded pension plans of Indalex Canada (Indalex).
However, while this decision comes as welcome news to the affected plan members, it should not be seen as a sign that the courts will automatically use trust law to protect members of all underfunded plans.
In the Indalex decision, released April 7, 2011, the Court of Appeal found that a deemed trust under the Ontario Pension Benefits Act (PBA) existed in favour of the beneficiaries of one Indalex’s two underfunded pension plans, while the other plan was found to have a constructive trust claim based on the plan sponsor’s breach of fiduciary duty. As a result, the finding granted priority of the plan members over secured creditors for payment from a reserve fund held by the Monitor.
The Court decision was based largely on the actions of Indalex and its parent company, Indalex U.S., which began reorganization proceedings under the United States Bankruptcy Code in March 2009. Indalex Canada commenced proceedings under the Companies’ Creditors Arrangements Act (CCAA) in April 2009. At that time, Indalex sponsored two pension plans, a salaried plan and an executive plan, both of which were underfunded.
Once under CCAA protection, Indalex received court authorization to borrow funds pursuant to a debtor-in-possession (DIP) credit agreement, which gave DIP lenders a “super-priority” charge over Indalex’s property, while its repayment obligations were ultimately guaranteed by Indalex U.S. Subsequently, Indalex Canada sought court approval to sell its assets on a going concern basis, and to distribute sale proceeds.
The remainder of the proceeds, after the DIP lenders were paid, would ultimately be payable to the principal secured creditor of Indalex U.S., Sun Indalex. After paying the lenders, this series of events would result in no remaining money to fund the deficiencies in the salaried plan (which was being wound-up) and the executive plan (which was ongoing), resulting in significant reductions to members’ pension entitlements.
Based on the deemed trust provisions in subsection 57(4) of the PBA and the wind-up requirements in section 75, the Court found that a deemed trust existed in favour of the Salaried Plan for its entire wind up deficiency. In terms of the executive plan, the OCA did not decide whether a deemed trust could apply, as payment of the wind-up deficiency was the equitable remedy for Indalex’s breaches of fiduciary duty to the plan’s members. The Court rejected the argument that the super-priority guarantee in the DIP agreement took priority over the deemed trust. While noting that it is possible to grant an order giving super-priority that effectively overrides provincial legislation, like the PBA, the Court stated that appropriate procedural requirements must be followed for such an order to be effective, which was not the case in Indalex.
The remedy ordered in this case has as much to do with the parties involved in the dispute as with the provisions of the PBA and CCAA. Indalex U.S., and its principal secured creditor, Sun Indalex, were not only involved in the negotiation of the DIP agreement, but were aware of Indalex’s obligations to the members of the salaried plan and the executive plan. As noted by the Court, allowing them to receive payment would effectively allow them to profit from Indalex’s breach of fiduciary duty, which they effectively sanctioned.
As a result, the Court crafted an equitable remedy based on the particular circumstances of this case. It is not clear whether a similar conclusion would be reached if the dispute was between the members of the two plans and the DIP lenders, who may have been unaware of Indalex’s fiduciary obligations, and neglect thereof.
The Indalex case highlights the important and delicate balance between a sponsor’s decision-making authority and its fiduciary responsibilities to plan members. Given that the decision is based on the specific circumstances at Indalex, it should not be taken as a sign that the courts will intervene to impose a trust law remedy to protect plan members in all cases.
This case may make it more difficult for financially troubled pension plan sponsors to obtain financing needed to restructure. Further, it serves as a reminder that DB sponsors should closely monitor the funded status and pension risk factors to minimize the likelihood that pension deficits impair an organization’s ability to generate additional operating capital in a time of need.