Pension Deemed Trust Outranks Secured Creditor in Recent Quebec Decision

A long-awaited decision of the Quebec Superior Court in the Timminco CCAA1 matter has decided upon the priority ranking of pension deemed trusts. On January 24, 2014, Justice Robert Mongeon released his 54-page decision2. The team, led by Tina Hobday, included Guy de Blois and Jessica Syms. 

Justice Mongeon reconsidered his earlier decision in White Birch3 in which he held that section 49 of Quebec’s Supplemental Pension Plans Act4 (the “SPPA”) did not create a deemed trust. Following a thorough analysis of Articles 1260, 1261 and 1262 of the Civil Code of Québec (the “Civil Code”) and of various provisions of the SPPA, he has now concluded in Timminco that section 49 of the SPPA does indeed create a valid deemed trust for all pension contributions, including unpaid special payments. 

However, Justice Mongeon indicated that in his view, a valid deemed trust on its own would not rank ahead of the universal movable hypothec5 in favour of the creditor (Investissement Québec in this case). Following a thorough analysis of section 264 SPPA and case law on general principles, he concludes that it is clear that the contributions are unassignable and unseizable. The combined effect of sections 49 and 264 SPPA is to exclude the unpaid contributions from the assets of the company, and therefore the amount of the unpaid contributions should not have been used to repay the creditor’s secured loan. 

Moreover, while other Canadian provinces have a Personal Property Security Act (“PPSA”) providing that deemed trusts have priority over security interests, Justice Mongeon points out that there is no identical legislative provision in Quebec. However, he is of the opinion that the effect of section 264 SPPA is the same as that of section 30(7) of the Ontario PPSA6

Justice Mongeon went on to conclude that the reasoning of the Supreme Court of Canada in Sparrow7 does not apply in this case. It is interesting to note that in the Aveos8 CCAA, where the same issue was argued pursuant to the Pension Benefits Standards Act, 19859, Justice Schrager relied on Sparrow to deny priority of any pension deemed trust over the secured creditor. 

Relying on the reasons of Madam Justice Deschamps in Indalex10, Justice Mongeon concludes that the existence of any priorities must be determined by provincial legislation, and that they continue to have effect even in CCAA proceedings subject only to the doctrine of paramountcy. However, in Timminco there is no question of paramountcy (which was dispositive in both White Birch and Indalex), as the secured creditor is not the DIP lender. 

Finally, with respect to the actuarial deficit, Justice Mongeon concludes that the deemed trust under section 49 SPPA must be read restrictively and therefore cannot encompass that deficit. There is no legislative provision that could be interpreted in such a way as to include the entire actuarial deficit in the section 49 SPPA deemed trust, especially in light of section 228 SPPA which specifically refers to the deficit as being a mere debt. 

It must be noted that the Timminco case does not end here. Indeed, the amounts to be returned to the pension funds by Investissement Québec remain to be determined. Furthermore, it also remains to be seen whether either of the parties will appeal Justice Mongeon’s decision.

1 Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36.
2 Timminco Ltée (arrangement relatif à), (24 January 2014) Montreal 500-11-043844-121 (QCCS)
3 White Birch Paper Holding Company (Arrangement relatif à), 2012 QCCS 1679.
4 C.Q.L.R. c R-15.1.
5 A type of security interest under the Civil Code, charging all property other than real estate.
6 R.S.O. 1990, c P.10.
7 Royal Bank of Canada v. Sparrow Electric Corp., [1997] 1 R.C.S. 411.
8 Aveos Fleet Performance (Arrangement relatif à), 2013 QCCS 5762.
9 R.S.C. 1985 c 32 (2nd Suppl).
10 Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6, at paras 51 and 52.