The SCC Clarifies a Corporation’s Employer/Pension Plan Administrator Fiduciary Duties in Sun Indalex Finance, LLC v United Steelworkers
On 01 February 2013 the Supreme Court of Canada (SCC) released Sun Indalex Finance, LLC v United Steelworkers (2013 SCC 6), a landmark decision that clarifies the fiduciary duties of corporations who serve the dual role of employer and employee pension plan administrator. While the SCC splits on the exact content of the fiduciary duty, this decision does put employer/administrator corporations on notice: Leaving a conflict of interest between these roles unaddressed is a breach of the fiduciary duty.
Indalex, a major manufacturer of aluminum extrusions, became insolvent in 2009. Insolvency proceedings began when Indalex applied for protection from its creditors under the Companies’ Creditors Arrangements Act (CCAA), which allows companies to initiate a court-supervised reorganization as an alternative to liquidation under bankruptcy law. At the time of its filing under the CCAA, Indalex was an administrator of two pension plans that served its employees.
Indalex had a joint reorganization strategy with Indalex US, its parent company (together, the “Indalex Group”). Indalex US had also become insolvent and had applied for Chapter 11 protection in Delaware. The plan was for both companies to enter into an agreement for debtor-in-possession financing (DIP), which would allow the companies to rely on joint credit facilities while guaranteeing each other’s liabilities. The Indalex Group made an agreement to borrow US$24.4 million with a group of senior secured creditors that they had dealings with before filing under the CCAA. The CCAA court approved the agreement and its condition that the DIP lenders would have priority over all over creditors. The members of the pension plans did not participate in or receive notice of these proceedings.
The next steps in the insolvency proceedings generated tension between Indalex and the pension plan members. When Indalex received a bid from SAPA Holding AB (SAPA), the pension plan members objected because SAPA did not assume responsibility for the pension plan’s wind-up deficiencies. The CCAA court nevertheless approved the bidding process.
Indalex then brought a motion in the CCAA court to approve the sale of Indalex to SAPA and distribute all the sale proceeds to the DIP lenders. The pension plan members objected on several grounds, but the focus of this post will be on their argument that Indalex “had breached its fiduciary obligations by failing to meet its obligations as a plan administrator throughout the insolvency proceedings.”
The issue of Indalex’s fiduciary obligations arises in this case because the company was acting in two roles with respect to the plan members: Indalex was both an employer and the pension plan administrator to its employees. This dual role demanded dual fiduciary obligations—one to the employees as employer and one to them as the plan administrator. The fiduciary issue in this case is how a corporation should mediate conflicts between these sets of fiduciary duties.
With a quorum of seven, the SCC splits three ways on the nature of Indalex’s fiduciary obligations in this case. Deschamps J wrote the majority reasons with Moldaver J concurring. Cromwell J, who was joined by McLachlin CJ and Rothstein J, wrote a separate set of reasons concurring in the result. Finally, LeBel J wrote a set of dissenting reasons and was joined by Abella J. Each set of reasons will be outlined in turn.
If in conflict, fix it yourself: Deschamps J
Deschamps J begins her reasons by rejecting Indalex’s argument that “decisions made by the employer in its corporate capacity are not burdened by the corporation’s fiduciary obligations to its pension plan members… .” The governing statute for pension plans, the Pensions Benefit Act, provides in s. 22(4) that a pension fund administrator must not allow its own interests to come into conflict with its pension plan duties. Deschamps J takes this to mean that an employer/pension administrator must identify and attempt to resolve conflicts: “An employer acting as a plan administrator is not permitted to disregard its fiduciary obligations to plan members and favor the competing interests of the corporation on the basis that it is earing a ‘corporate hat.’” When a conflict occurs, the corporation is required to tailor a solution that takes care of the plan members’ interests.
The conflict in the insolvency context that Deschamps J identifies is that Indalex, as pension plan administrator, would have to claim accrued contributions from Indalex as an employer (ie Indalex would have to claim accrued contributions from itself).
Moving to identify the point at which Indalex should have taken steps to address a conflict, Deschamps J is careful to note that initiating insolvency proceedings will not necessarily bring about such a conflict. Rather, Deschamps J finds that Indalex should have taken steps when it sought to have the DIP financing authorized by the CCAA court because the consequence of this would be to override the pension plan members’ priority: “The corporation’s interest was to seek the best possible avenue to survive in an insolvency context. The pursuit of this interest was not compatible with the plan administrator’s duty to the Plan Members to ensure that all contributions were paid into the funds.”
Since the motion to the CCAA court to approve the DIP financing was presented without notice to the pension plan members, they could not present arguments and represent their interests at the proceeding. Deschamps J identifies this as a concrete example of Indalex’s breach of its fiduciary duty as administrator of the pension plan.
If in conflict, tell the judge: Cromwell J
Cromwell J endorses and elaborates on Deschamps J’s analysis of the nature of Indalex’s fiduciary obligations to its employees as both their employer and plan administrator.
His reasons provide detailed guidance on how corporations that act as pension plan administrators and employers can avoid fiduciary duty breaches in CCAA court proceedings. Cromwell J suggests that the corporation bring any conflict of interest to the attention of the CCAA judge, who would then be responsible for calibrating a response.
While he agrees with Deschamps J that Indalex breached its fiduciary duty to the plan members by not giving them adequate notice of the DIP approval proceeding, Cromwell J’s suggestion for how employer/administrator’s should deal with conflicts of interest places a much lighter responsibility on corporations for resolving these conflicts. Whereas Deschamps J suggests that the onus is on Indalex to “take steps” to resolve a conflict, the only step recommended by Cromwell J is notifying the CCAA court.
If you think about CCAA proceedings, you’re in conflict: LeBel J
Lebel J’s dissent differs sharply from the other two sets of reasons with respect to when the conflict of interest arose. The majority reasons pinpoint the conflict of interest at the time Indalex sought approval for DIP financing, but Lebel J argues that the conflict arose as soon as Indalex even began contemplating protection under CCAA proceedings.
LeBel J argues that triggering CCAA proceedings would have inevitably led to conflicts of interest in Indalex’s dual role as employer and administrator.
What is the law?
Given the split between the two sets of majority of reasons in this case, the content of the corporation’s fiduciary duties upon the discovery of a conflict of interest remains uncertain. Does the corporation have to take steps to resolve the conflict itself, as Deschamps J suggests? Or, as Cromwell suggests, does the corporation merely have to alert the CCAA judge of the conflict and let him or her propose solutions?
At the very least, this judgment suggests that corporations would be wise to inform the CCAA judge of conflicts of interest even if they decide to resolve the conflicts themselves. It is not clear that the CCAA judge in this case would have made an order that plan member representatives attend the DIP funding approval proceedings had he known about the conflict. However, a judge that is cognizant of a potential conflict may cast a more scrutinizing look on proceedings if he or she knows that they could either alleviate or exacerbate this conflict.
A middle way?
Deschamps J’s suggestion that the corporations themselves resolve the conflicts seems preferable to Cromwell J’s more minimalist approach. Deciding how to resolve a conflict between its dual roles of employer and administrator may involve business decisions that could come under the purview of the business judgment rule. Also, asking the court to resolve the conflict may put the judge too deeply into the shoes of the administrator. Essentially, Cromwell J’s approach pushes for heavier intervention of courts into the business and administrator affairs of corporations. This level of intrusion could serve as a disincentive for corporations to alert courts to potential conflicts of interest, which could ultimately undermine Cromwell J’s approach.
This decision does not seem to bar a hybrid approach: the corporation could alert the CCAA judge of the conflict, but then resolve it itself. A regime of disclosure and corporate initiative could keep the business and administrative decisions in the hands of the corporation while also allowing for an adequate level of judicial scrutiny.