I have trust issues – pension plan trust claim priorities in bankruptcy in Anthony Capital Corporation (Re), 2021 NLSC 91

Joe Thorne, with the assistance of Stuart Wallace (summer student)

In a bankruptcy, there is inevitable conflict between all manner of creditors with competing claims. Our federal and provincial legislatures have identified certain claims as attracting a higher priority than others – including amounts owed to a pension plan for the bankrupt company’s employees.

In a recent decision, the Newfoundland and Labrador Supreme Court considered whether the statutory trust created for amounts owing to a pension plan take priority over a secured creditor.

Background

Anthony Capital Corporation and participating companies (“Anthony Capital”) administered an executive pension plan (“Pension Plan”) which was owed approximately $571,900 in outstanding normal costs, special payments and wind-up deficiencies when Anthony Capital became bankrupt.

The Bank of Montreal (“BMO”) held money from the proceeds of sale of two Anthony Capital properties pursuant to mortgages with BMO. The trustees of the Pension Plan applied to the Supreme Court for an order requiring proceeds from those sales to be paid to the Pension Plan.

The $571,900 owing to the Pension Plan included:

• $454,100 of contributions receivable in respect of normal costs for the period prior to declared wind-up date, including interest (“normal costs”);
• $45,300 in contributions receivable in respect of special payments owing as established at wind-up, including interest (“special costs”);
• $42,500 in residual wind-up deficit in the Pension Plan required to complete its termination as ordered November 15, 2016; and
• $30,000 estimated wind-up expense for actuarial, financial and legal support.

As the Pension Plan was underfunded, if the funds held by BMO were not paid to the Pension Plan, the two pensioners would likely see an 80% reduction in monthly payments.

The parties agreed that the effect of sections 32 of the Pension Benefits Act¹ (“PBA”) and 81.5 of the Bankruptcy and Insolvency Act² (“BIA”):

• created a deemed trust for all amounts owing to the Pension Plan;
• gave the Pension Plan a “super-priority” over all other creditors for the normal costs; and
• all other amounts owed to the Pension Plan constituted a secured claim in the bankruptcy.

The main argument by the Trustee was that all other amounts (i.e. the shortfalls outside of normal costs) were subject to a common law trust. If so, they would fall outside the scope of Anthony Capital’s property in bankruptcy and become available to the Pension Plan.

The decision

Special costs have no super-priority in bankruptcy

Section 81.5 of the BIA creates a super-priority for the “normal costs” of a pension plan. “Normal costs” are defined as “…the cost of benefits, excluding special payments, that are to accrue during a plan year, as determined on the basis of a going concern valuation” (emphasis original in the decision).

Justice Stack quickly dispensed with the Trustee’s argument that special costs fell within s. 81.5 of the BIA, noting that such costs are explicitly excluded within the definitions in the PBA.

There is no common law trust over the amounts owing to the Pension Plan

BMO conceded that s. 32 of the PBA created a deemed trust over all amounts owing to the Pension Plan. However, BMO argued that those amounts were subject to a statutory trust only, and were governed by s. 81.5 of the BIA, which creates a super-priority for normal costs only.

The Trustee argued that the amounts owing under s. 32 of the PBA are properly characterized as subject to a common law trust, and were governed by s. 67 of the BIA. That section effectively removes those amounts from the assets of the bankrupt and from the claims of its creditors.

To determine the issue, Justice Stack reviewed the law regarding creation of a common law trust, including the “three certainties” – certainty of intention, certainty of subject matter and certainty of object.
Justice Stack held that intention and object were met. However, with respect to subject matter, Justice Stack concluded that the Pension Plan claims could only have attached to Anthony Capital’s equity of redemption under its two mortgages (i.e. its right to retake title to the two mortgaged properties after the mortgages were paid). When the two properties were sold by BMO, the alleged subject matter of the trust could no longer be established.

As a result, the common law trust claim over all amounts owing to the Pension Plan failed.

The secured claim for other Pension Plan costs does not survive bankruptcy

Section 32(4) of the PBA creates a “lien and charge” on the assets of Anthony Capital with respect to the amounts owed to the Pension Plan. Those charged amounts are required to be held in trust for the Pension Plan. In Reference re Pension Benefits Act³, the Newfoundland and Labrador Court of Appeal confirmed that the s. 32(4) charge was a secured claim.

However, that reference case did not address the status of s. 32(4) claims in a bankruptcy or restructuring. Justice Stack adopted the reasons of the Court of Appeal for Ontario in a similar case⁴ and determined that the Pension Plan administrator was not a “secured creditor” for the purpose of the BIA because the Trustee did not hold the s. 32(4) charge “as security for a debt due or accruing due to” the Trustee. The Trustee was merely the administrator of the Pension Plan; the Trustee was not owed anything by Anthony Capital.

Justice Stack did suggest that the impact of s. 32(4) may be different under the other most popular federal insolvency statute, the Companies’ Creditors Arrangement Act.⁵ That question remains open to be determined another day.

Conclusion

Justice Stack ordered:

• the normal costs of the Pension Plan have a super-priority pursuant to section 81.5 of the BIA;
• the special costs of the Pension Plan do not have a super-priority pursuant to section 81.5 of the BIA;
• there is no common law trust over the amounts owing to the Pension Plan; and
• the lien and charge in s. 32(4) of the PBA do not constitute a secured claim in bankruptcy, and are extinguished.

Impact

Companies nearing insolvency or actual bankruptcy are faced with myriad financial and legal issues. Obligations to employees, both present and past, are amongst the most important.

Determining the competing claims of creditors can be particularly challenging where the “ordinary” priorities are altered by statute – as is the case with employee pension plans.

The main takeaway from this case is that, in a bankruptcy, normal costs of a pension plan have an enhanced priority over all secured and unsecured creditors. When considering the assets and liabilities of a company nearing bankruptcy, particular care should be taken regarding employee obligations.

This article is provided for general information only. If you have any questions about the above, please contact a member of our Pensions & Benefits Group.

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¹ SNL 1996, c P-4.01.
² RSC 1985, c B-3.
³ Reference re Section 32 of the Pension Benefits Act, 1997, Re, 2018 NLCA 1.
⁴ General Chemical Canada Ltd., Re, 2007 ONCA 600.
⁵ RSC 1985, c C-36.