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National Insolvency Review September 2006 Volume 23, No. 4 NATIONAL INSOLVENCY REVIEW The National Insolvency Review is published bi-monthly by LexisNexis Canada Inc., 123 Commerce Valley Drive East, Suite 700, Markham, Ontario L3T 7W8 Design and Compilation © LexisNexis Canada Inc. 2006. Unless otherwise stated, copyright in individual articles rests with the contributors. All rights reserved. No part <strong>of</strong> this publication may be reproduced or stored in any material form (including photocopying or storing it in any medium by electronic means and whether or not transiently or incidentally to some other use <strong>of</strong> this publication) without the written permission <strong>of</strong> the copyright holder except in accordance with the provisions <strong>of</strong> the Copyright Act. ISBN: 0-433-43350-7 ISSN: 0822-2584 ISBN: 0-433-44393-6 (Print & PDF) ISBN: 0-433-44674-9 (PDF) Subscription rates: $299 plus GST/year (Print or PDF) $365 plus GST/year (Print & PDF) Please address all editorial inquiries to: Verna Milner, Journals Editor LexisNexis Canada Inc. Tel. (905) 479-2665; Toll-Free Tel. 1-800-668-6481 Fax (905) 479-2826; Toll-Free Fax 1-800-461-3275 E-mail: nir@lexisnexis.ca. EDITORIAL BOARD GENERAL EDITOR Justin R. Fogarty, B.A., LL.B., LL.M. Bennett Jones LLP, Toronto EDITORIAL BOARD MEMBERS • Gerald N. Apostolatos, Langlois Kronström Desjardins S.E.N.C.R.L./LLP, Montréal • Frank Bennett, Bennett & Company, Toronto • Nicolas Brearton, KPMG Inc., Toronto • David F.W. Cohen, Gowling Lafleur Henderson LLP, Toronto • Wayne Ehgoetz, Congress Financial Corporation, Toronto • Jean-Yves Fortin, Brouillette Charpentier Fortin, Montréal • William Neville, Neville ADR Services Inc., Ottawa • William Riley, Barrister & Solicitor, Vancouver • Melvin Zwaig, Zwaig Consulting Inc., Toronto. Note: This newsletter solicits manuscripts for consideration by the General Editor, who reserves the right to reject any manuscript or to publish it in revised form. The articles included in National Insolvency Review reflect the views <strong>of</strong> the individual authors. This newsletter is not intended to provide legal or other pr<strong>of</strong>essional advice and readers should not act on the information contained in this report without seeking specific independent advice on the particular matters with which they are concerned. Receivership Order directed KPMG to take control <strong>of</strong> TCT’s property and operations as the <strong>court</strong>’s <strong>of</strong>ficer with a view to winding down the business in an orderly manner and specifically provided that KPMG would not be considered a successor employer in so doing. It is <strong>important</strong> to note that at no time did the Union challenge such protective provision. KPMG quickly liquidated or shut down the various divisions and subsidiaries <strong>of</strong> TCT. The last major component <strong>of</strong> TCT’s business to be sold was the warehousing division, which included the Union’s employees. The sale occurred within four months <strong>of</strong> the initial filing. The terms <strong>of</strong> the sale <strong>of</strong> that division as a going concern to a newly created company were approved by the Bankruptcy Court on notice to the Union. Pursuant to the agreement <strong>of</strong> sale, KPMG dismissed all employees except for those required to manage the wind down. The purchaser rehired approximately three-quarters <strong>of</strong> the warehousing division employees, including 19 <strong>of</strong> 42 <strong>of</strong> the Union’s active members. The Union applied to the OLRB seeking among other things a declaration that the purchaser was a successor employer to TCT and/or KPMG. The OLRB stayed the application as against KPMG pending the necessary <strong>court</strong> approval from the Bankruptcy Court pursuant to s. 215 <strong>of</strong> the Bankruptcy and Insolvency Act. Once again, it is noteworthy that the Union did not assert its successor employer claim until after the sale was completed. THE DECISIONS BELOW The Bankruptcy Court denied the Union leave to pursue its successorship employee. It amended the Receivership Order to provide that KPMG was only immunized from “successor employer” status if it was acting “qua realizer” (i.e., its operation <strong>of</strong> the business was for the limited purpose <strong>of</strong> marshalling the assets for sale) and determined that, in the case <strong>of</strong> TCT, it had been doing so and should therefore be protected from such claims. On appeal, the majority <strong>of</strong> the Court <strong>of</strong> Appeal determined that the Bankruptcy Court had not properly applied the test for leave under s. 215 and remitted the issue <strong>of</strong> leave to be determined by that <strong>court</strong> in accordance with a test which considered factors relating to the impact <strong>of</strong> the proposed claim upon the bankruptcy process. The Receivership Order was again amended 46
National Insolvency Review September 2006 Volume 23, No. 4 to delete the “qua realizer” qualification and to provide instead that the protection remained only unless or until a determination to the contrary was made by the OLRB upon leave <strong>of</strong> the Bankruptcy Court. THE SUPREME COURT DECISION Justice Abella reversed the Court <strong>of</strong> Appeal and the Bankruptcy Court. Instead, she found: • the Bankruptcy Court does not have the jurisdiction to determine whether an interim receiver is a successor employer; • the Bankruptcy Court must apply the same uniform test for leave in all cases; • that test is the Mancini test (Mancini (Trustee <strong>of</strong>) v. Falconi, [1993] O.J. No. 146 (C.A.) (QL)), which requires only a factual basis for a proposed claim which, as drafted, discloses a cause <strong>of</strong> action against the receiver or trustee; • all other considerations are to be left to the OLRB and the Bankruptcy Court is not to make the final assessment <strong>of</strong> the merits <strong>of</strong> the claim. Justice Abella found that the test proposed by the majority in the Court <strong>of</strong> Appeal was inappropriate, both because it was “more vague and more elaborate” and because it undermined the OLRB’s jurisdiction over successorship determinations. She held instead that the Mancini test was sufficient to protect the integrity and efficiency <strong>of</strong> the bankruptcy process and that it was not inconsistent with the desired “single control” theory <strong>of</strong> bankruptcy litigation. In the case <strong>of</strong> TCT, the Supreme Court was satisfied that the Mancini test was met (“it cannot be said that the Union’s claim is frivolous or without an evidentiary foundation”) and directed that the claim should therefore proceed before the OLRB. Justice Abella indicated that the OLRB was the proper forum to address the arguments <strong>of</strong> KPMG and GMAC, as secured creditor, concerning the impact upon such a finding on the federal bankruptcy system and issues <strong>of</strong> constitutional paramountcy. The Bankruptcy Court now has very clear guidance from the Supreme Court as to the test for leave to commence actions against trustees and receivers under s. 215 <strong>of</strong> the Bankruptcy and Insolvency Act. It is also clear that trustees and receivers cannot be ‘immunized’ in any manner against successorship claims in their appointment orders. Finally, through dicta in her final remarks, Abella J. was critical <strong>of</strong> the practice <strong>of</strong> failing to provide unions with advance notice <strong>of</strong> motions to appoint interim receivers. She did not accept the submissions <strong>of</strong> GMAC and KPMG in this case that such advance notice to the numerous stakeholders involved was impracticable — or indeed, impossible — in the circumstances. Instead, she urged that “advance negotiations” with unions in the future may lead to compromise rather than litigation. It remains to be seen in what circumstances, if any, the OLRB will find that an interim receiver is a successor employer (with the result that such claims as termination and severance pay, which would otherwise rank after the secured creditors, will become their responsibility by virtue <strong>of</strong> indemnities and/or priority charges for the interim receiver). In the interim, creditors should be cognizant that a labour board, in considering whether to impose successor employer liability, may have a different focus than a Bankruptcy Court which must consider and balance all stakeholder interests before it. The Supreme Court <strong>decision</strong>, while procedural in nature, might also be seen as a shift in favour <strong>of</strong> union interests over secured creditors in the insolvency process and any uncertainty may force a re-examination <strong>of</strong>: • the reserves established by lenders; • the circumstances in which insolvent businesses continue as a going concern; and • the importance <strong>of</strong> entering into prior agreements with any unions. Since the <strong>decision</strong> was released, our law firm has already restructured one imminent filing to eliminate any receiver-like powers and instead the creditor will rely solely upon the “Monitor” functions in a CCAA filing. [Editor’s note: Susan Rothfels and Orestes Pasparakis are both Partners at the law firm Ogilvy Renault LLP. Ms. Rothfels and Mr. Pasparakis were counsel to GMAC Commercial Credit Corporation in this case.] 1 The full text <strong>of</strong> the <strong>decision</strong> can be found at: . 47
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