The British Columbia Supreme Court has rejected an American multi-employer pension plan’s claim for $1.25 billion against a U.S. company’s Canadian subsidiary.
The case revolved around the claim that a Canadian subsidiary was on the hook for the unfulfilled pension withdrawal liabilities of one of its parent company’s U.S. subsidiaries. The parent company, Walter Group, includes U.S., Canadian and British coal-mining operations. In July 2015, the U.S. company filed for bankruptcy, while Walter Group Canada applied for insolvency relief under Canada’s Companies’ Creditors Arrangement Act in December 2015.
One of the Walter Group’s U.S. subsidiaries, Jim Walter Resources, had unfulfilled pension withdrawal liabilities to an American multi-employer plan, the United Mine Workers of America 1974 pension plan and trust. Although no Walter Canada Group entity was a party to the pension, the plan sought to claim the withdrawal liability from the Canadian subsidiary under the so-called “long-arm” provision of the Employee Retirement Income Security Act of 1974.
In her ruling, B.C. Supreme Court Justice Shelley Fitzpatrick held that Canadian law, not the U.S. statute, governed the pension plan’s claim. “This is the first time it’s been fully litigated in front of the court,” says Patrick Riesterer, an associate at Osler Hoskin & Harcourt LLP who acted as counsel for the defendant. Similar cases in the past, he notes, had all settled.
The U.S. act disregards the separate corporate identities of companies in a controlled group or any family of businesses that are owned 80 per cent or more by a common parent, says Kenneth Laverriere, a partner at Shearman & Sterling LLP in New York. “What ERISA does is that it says . . . some very specific types of liabilities, such as the pension plan liability when a plan is terminated, is joint among all members of the controlled group,” says Laverriere. “If there is a termination and the liabilities under the plan are greater than the assets, the delta is essentially the obligation of everybody.”
Laverriere notes the provision is an effort to protect retirees, such that “companies can’t avoid pension liabilities by setting up corporate structures that isolate the business operations from the pension liabilities. When a company leaves a multi-employer plan, it has to pony up for its share [of] withdrawal liabilities, essentially, their share of the underfunding. That, too, is the joint responsibility of all companies in the family. ERISA does not distinguish between U.S. and non-U.S. subsidiaries; it’s just a blanket rule.”
In this case, the U.S. pension plan argued the Walter Canada Group was part of the same controlled group as Jim Walter Resources and was therefore responsible for its pension withdrawal liabilities.
In her ruling, Fitzpatrick concluded that Canadian law applied to govern the claim. “In conclusion, I find that the 1974 plan’s claim is characterized as one of corporate or partnership law and specifically, one relating to the status, legal existence and personality of corporations and partnerships,” she wrote. “The appropriate choice of law rule is one of domicile or place of incorporation or organization. In the case of the entities within the Walter Canada Group, that is British Columbia or Alberta. . . . ERISA is not part of British Columbia or Alberta law. Accordingly, the 1974 plan’s claim must fail for that reason.”
Laverriere calls the case seminal and a “game changer in the U.S.,” suggesting companies that need to use insolvency proceedings in the United States will take note of it. “In many instances, there’s always been a concern when there’s pensions in the U.S. companies about whether the non-U.S. subsidiaries, particularly if they weren’t in the bankruptcy themselves, would be liable for any underfunding.”
The case will likely be relevant when foreign subsidiaries that have U.S. operations are going through a similar process, according to Laverriere. “There’s still some risk for non-U.S. subsidiaries if they have U.S. operations. That’s clearly something that has to be taken into account.”