Lexpert Magazine

62 LEXPERT MAGAZINE | JULY/AUGUST 2017 Canada applied for insolvency relief under Canada's Companies' Creditors Arrange- ment Act (CCAA). e BCSC authorized a sale of the Can- adian assets under the CCAA. e sale generated more than enough money to pay off both the secured and unsecured credit- ors in Canada, including Canadian work- ers' severance pay claims. Aer the sale, however, a group of unionized US mine- workers who had been unable to recover in the US proceedings against Walter raised a $12-million pension claim in the Can- adian bankruptcy. e US Employee Retirement Income Security Act (ERISA), however, entitles pensioners whose plans have been termin- ated to recover in insolvency proceedings by looking to the assets of any member of a "controlled group" of companies in order to satisfy their pension rights. e US pen- sioners argued that the Canadian compan- ies were such a "controlled group" and that they could assert their claims against the proceeds of the sale of the Canadian assets. If the ERISA claim was upheld, the Can- adian miners stood to recover only about five cents on the dollar instead of all the severance pay they claimed. Lawyers for the US miners argued that ERISA applied because the US pension plan was underfunded when the Walter Group spent about $1 billion to purchase its Canadian assets, and remained under- funded when the insolvency proceedings started. ey claimed that the monies moved to Canada to make the purchase should have been used to fund the plan in the United States. Paterson and her colleagues responded that ERISA had no extraterritorial effect and therefore did not apply to the Can- adian proceedings. ey also argued that, even if ERISA did apply extraterritorially, it was unenforceable because it conflicted with Canadian public policy. Justice Shelley Fitzpatrick ruled that Canadian law, which was the law of the jurisdiction in which Walter Group Can- ada had been incorporated, recognized the distinct entities within Walter's organiza- tional structure. "According to Justice Fitzpatrick, ERISA's scheme of controlled group lia- bility had the legal effect of dissolving the boundaries between Canadian and American corporations and therefore ig- nored the principle of separate corporate personality enshrined in Canadian law," Paterson explains. Fitzpatrick's conclusion parallels the thinking of US courts. "Of late, American courts have been interpreting their own legislation so as to limit its extraterritorial effect," says Simon Archer of Goldblatt Partners LLP in Toronto. Still, Archer believes this approach can be inequitable. "If you're a Canadian mem- ber of a Canadian trade union, Re Walter is good for you because you're going to get all your severance pay," he says. "But if you're an American pensioner, you're asking your- self how the company could hide all that money in Canada." In the Nortel bankruptcy of 2009, by contrast, "the court applied a theory of sub- stantive consolidation, where the whole of the company is regarded as one substantive enterprise, and the result considered as if all the assets and liabilities had been in a single jurisdiction," Archer says. But in the Nortel case, all entities went bankrupt at once, allowing for a cross-bor- der parallel trial in which both the US and Canadian judge arrived at the same conclu- sion. Re Walter engaged two insolvencies that occurred at different times, meaning the Nortel approach was not feasible. THE BRITISH COLUMBIA Supreme Court (BCSC) has thwarted an American pension fund's attempt to assert a claim over the assets of an insolvent Canadian company by relying on the extraterritorial effect of a US law. "e case [Re Walter Energy Canada Holdings] is a precedent-setting decision that provides clarity on an issue that has arisen in other proceedings but has either been settled or resolved without judicial intervention," says Mary Paterson of Osler, Hoskin & Harcourt LLP in Toronto. "It marks the first time that a Canadian court has considered whether a foreign party can claim against a Canadian debtor solely pur- suant to a 'long arm' foreign statute." Paterson and her colleagues are the Ontario lawyers for the Walter Canada Group, the Canadian arm of the US- based Walter Group, a coal-mining con- cern with operations in Canada, the UK and the US. Walter Group operated in two distinct segments: its US operations (Walter Group US) and its Canadian and UK operations (Walter Group Canada). In 2015, Walter Group US filed for bankruptcy under US law; several months later, Walter Group BC thwarts American fund's attempt to assert claim over assets of insolvent Canadian company BY JULIUS MELNITZER Court denies US pension fund claim PHOTO: SHUTTERSTOCK | INSOLVENCY | THE BORDER

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