Pension Deemed Trust Outranks Secured Creditor in Quebec Decision
This article first appeared on the website of The Canadian Bar Association.
On January 24, 2014, Justice Robert Mongeon of the Quebec Superior Court released his decision1 on pension deemed trusts in the context of the insolvency of Timminco Ltd. and Bécancour Silicium Inc. (together the “Timminco Entities”).
This case involves an insolvent company, a secured creditor and two pension plans with significant deficits. The insolvent company was sold, and the secured creditor was reimbursed from the proceeds of the sale, subject to being required to reimburse any other creditors who were subsequently determined to have prior ranking. The pension plans claimed priority over the secured lender, and the Quebec Superior Court agreed, at least in part.
The competing creditors are:
- The secured creditor, Investissement Québec (a government entity), pursuant to a loan it had made to Bécancour Silicium Inc. It is important to note that Investissement Québec is a secured creditor and not the Debtor-in-Possession lender.
- The Pension Committees, who are the administrators of the BSI Union Pension Plan and the BSI Non-Union Pension Plan in accordance with Quebec pension legislation.
A brief history
The CCAA2 restructuring of the Timminco Entities began on January 3, 2012, with an Initial Order issued by Justice Morawetz of the Ontario Superior Court of Justice (the Ontario Court).
That order was followed on January 16, 2012, by an order suspending the special payments owed to the pension plans during the stay period.
A few months later, the Timminco Entities succeeded in selling substantially all of their assets.
Creditors were then asked to file their claims in order for the proceeds of the sale to be distributed among them. The pension plan administrators each filed a proof of claim for the amounts owed to fund the solvency deficits of the pension plans, as well as for the special payments that had been suspended by the Ontario Court.
Immediately thereafter, the Timminco Entities came to an agreement with Investissement Québec to repay its loan to BSI so as to avoid paying the ongoing interest payments on the loan. This reimbursement agreement, which was approved by the Ontario Court, provides that Investissement Québec’s loan would be repaid, with partial interest. However, it also requires that any creditors who are subsequently determined to have priority ranking be reimbursed by Investissement Quebec. The pension plan administrators therefore filed priority claims in regards to Investissement Québec, and were ultimately the only creditors to do so.
Since the questions raised by the pension plan administrators concerned the interpretation and application of Quebec law, the parties agreed to an adjudication protocol, essentially transferring the issue to the Quebec courts and setting out the process and timelines to be followed. This protocol was approved by Justice Morawetz on October 18, 2012.
The pension plan administrators filed a motion with the Quebec Superior Court to have their claims declared priority claims, which was assigned to Justice Robert Mongeon. It should be noted that Justice Mongeon had previously rendered a decision regarding pension deemed trusts in the White Birch CCAA matter.3
In the Timminco decision, Justice Mongeon reconsidered his earlier decision in White Birch in which he held that section 49 of Quebec’s Supplemental Pension Plans Act4 did not create a deemed trust. Following an analysis of Articles 1260, 1261 and 1262 of the Civil Code of Québec and of various provisions of the SPPA, he concluded in Timminco that section 49 of the SPPA does indeed create a valid deemed trust for pension contributions, including unpaid special payments.
However, Justice Mongeon stated that, in his view, a valid deemed trust on its own would not rank ahead of the universal movable hypothec5 held by the creditor (Investissement Québec in this case). Following an analysis of section 264 SPPA, he concluded that the pension contributions are non-assignable and exempt from seizure. The combined effect of sections 49 and 264 SPPA is to exclude the unpaid special payments from the assets of the company, and therefore the amount of the unpaid special payments should not have been used to repay the creditor’s secured loan.
Moreover, while other Canadian provinces have, unlike Quebec, a Personal Property Security Act expressly providing that deemed trusts have priority over security interests, Justice Mongeon was of the view that section 264 SPPA has essentially the same effect.
Relying on the reasons of Madam Justice Deschamps in Indalex,6 Justice Mongeon concluded 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 was no question of paramountcy, since the secured creditor is not the DIP lender.
Finally, with respect to the actuarial deficit, Justice Mongeon concluded that the deemed trust under section 49 SPPA must be read restrictively and therefore cannot encompass the entire deficit.
It’s not over
The Timminco case does not end here, as the amounts to be reimbursed to the pension funds by Investissement Québec remain to be determined. Moreover, at the time of writing this article, neither the pension plan administrators nor the secured creditor had sought leave to appeal. However, on the last day of the appeal deadline, the Monitor filed a motion for leave to appeal Justice Mongeon’s decision to the Quebec Court of Appeal, and also indicated that he would seek directions from the Ontario Court before proceeding. There will certainly be more to report in the coming weeks and months.
If this decision stands, it will represent a shift in Quebec law that will have an impact on the various stakeholders in pension plan matters. Pension plan members and retirees appear to have gained some additional protection, while employers and lenders will likely need to pay increased attention to the funding of pension plans.
1 Timminco Ltée (Arrangement relatif à), 2014 QCCS 174.
2 Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36.
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 Sun Indalex Finance, LLC v. United Steelworkers, 2013 SCC 6, at paras 51 and 52.