CITATION: Slater Steel Inc (Re) , 2008 ONCA 196
DATE: 20080319
DOCKET: C47155 and C47235
COURT OF APPEAL FOR ONTARIO
O’CONNOR A.C.J.O., GILLESE and ROULEAU JJ.A.
IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, as amended
AND IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF SLATER STEEL INC., SLATER STAINLESS CORP., SOREL FORGE INC., 833840 ONTARIO INC., 1124207 ONTARIO INC. AND 3014063 NOVA SCOTIA COMPANY
Applicants
AND IN THE MATTER OF SECTION 18.6 OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, as amended
AND IN THE MATTER OF SLATER STEEL CORPORATION
AND BETWEEN:
MORNEAU SOBECO LIMITED PARTNERSHIP BY ITS GENERAL PARTNER MORNEAU SOBECO CORPORATION
Plaintiff(Respondent)
and
AON CONSULTING INC. and J. MELVIN NORTON
Defendants(Appellants)
Ian Dick and Elizabeth Brown for the appellant J. Melvin Norton
Barry Bresner and Markus Kremer for the appellant Aon Consulting Inc.
Edward Babin and Jim Bunting for the Proposed Third Parties
A.J. Esterbauer for the plaintiff Morneau Sobeco Limited Partnership by its General Partner, Morneau Sobeco Corporation
Michael McGraw for the Monitor
Deborah McPhail for the Superintendent of Financial Services
HEARD: February 21, 2008
On appeal from the order of Justice J. M. Spence of the Superior Court of Justice dated April 13, 2007, with reasons reported at (2007), 59 C.C.P.B. 286.
GILLESE J.A.:
[1] These appeals involve the alleged underfunding of two pension plans. They raise a question that sounds more like a riddle than a legal question: when are directors and officers not directors and officers? The question is complicated by the fact that it arises in largely uncharted legal waters – a lawsuit brought by a successor pension plan administrator.
BACKGROUND
[2] Slater Stainless Corp. was the sponsor and administrator of certain pension plans (the “Plans”). J. Melvin Norton was the Plans’ actuary at the relevant times and Aon Consulting Inc. was his employer.
[3] By order dated June 2, 2003 (the “Initial Order”), Slater was granted protection under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (the “CCAA”).
[4] Prior to the making of the Initial Order, Slater had dealings with the Superintendent of Financial Services (the “Superintendent”) and the Financial Services Commission (“FSCO”) over alleged improprieties in the Plans’ actuarial reports which had been prepared by Norton.
[5] In the Initial Order, a charge of up to $17.5 million (the “D&O Charge”) was made against the Slater property to indemnify the Slater directors and officers for claims that might be asserted against them (the “D&O Claims”). A process to resolve claims against the directors and officers (the “Claims Bar Process”) was established by order dated April 30, 2004 (the “Claims Bar Order”). The Claims Bar Order also provided that Slater’s directors and officers would be released from all claims for which the directors and officers were liable in their capacity as such and for which no claims notices had been filed by the deadline.
[6] The Superintendent filed a D&O Claim (the “FSCO Claim”) in which it set out a number of regulatory and compliance issues in relation to Slater’s administration of the Plans. One aspect of the FSCO Claim related to the asset valuation methods adopted in the actuarial valuation reports that Slater had filed with FSCO. The reports were said to have contravened the requirements of the Pension Benefits Act, R.S.O. 1990, c. P.8 (the “PBA”) and Regulation 909, R.R.O. 1990. It was alleged that had proper reports been filed, Slater would have been required to make additional contributions to the Plans, thereby reducing or eliminating the alleged deficits in the Plans. Pursuant to s. 109(1) of the PBA, the alleged contraventions constitute an offence.
[7] The FSCO Claim asserted, pursuant to s. 110(2) of the PBA, that the Slater directors and officers were also guilty of offences under the PBA because they “caused, authorised, permitted, acquiesced or participated in” Slater’s various contraventions and failed to take reasonable care to prevent Slater from committing the contraventions.
[8] The FSCO Claim sought a fine of $100,000 against the directors and officers for the alleged offences. It also sought an order that the directors and officers pay $18 million plus interest into the Plans, that being the amount of the unremitted contributions to the Plans.
[9] The CCAA proceedings were unsuccessful in that no plan of compromise or arrangement was reached. By order dated August 30, 2004, the CCAA proceedings were terminated (the “Termination Order”). Pursuant to a further order made that day under the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3, Slater was put into receivership. The Termination Order ended the provisions in the Initial Order that had granted Slater creditor protection. However, it allowed the Claims Bar Process to continue for certain claims already underway.
[10] The FSCO Claim was settled. By order dated December 9, 2004, the settlement was approved in the CCAA proceedings (the “Settlement Order”). The Settlement Order required the receiver for Slater to pay $100,000 to FSCO from Slater’s operating reserve, in lieu of a fine under the PBA. As well, judgment against Slater was ordered for the lesser of $18.3 million or the deficiencies in the Plans. The judgment had the status of an unsecured judgment; there are no funds available for distribution to Slater’s unsecured creditors.[^1]
[11] On September 8, 2004, the Superintendent appointed Morneau Sobeco Limited Partnership as the successor administrator of the Plans.
[12] On November 18, 2005, Morneau brought an action against Norton and Aon in which it claimed damages of $20 million, the amount by which the Plans are underfunded as a result of the allegedly improper actuarial reports prepared by Norton. The Morneau action relates to the same actuarial reports and deficiencies as were the subject of the FSCO Claim and the Settlement Order. The Morneau action alleges, among other things, that Norton breached the duties he owed to the Plans’ members and beneficiaries by preparing actuarial valuations that overstated the value of the Plans’ assets and enabled Slater to avoid making additional contributions to the Plans before becoming insolvent.
[13] Aon and Norton each sought to institute third party proceedings (the “Proposed Third Party Claims”) against certain individuals (the “Slater Personnel”). The Slater Personnel are former directors, officers or employees of Slater or a related corporation, Slater Stainless Inc., who served on Slater’s Audit Committee. Slater, as administrator of the Plans, had given the Audit Committee responsibility for management and administration of the Plans. Consequently, the members of the Audit Committee performed Slater’s duties as the Plan administrator at the relevant times.
[14] In the Proposed Third Party Claims, Aon and Norton seek to claim against the Slater Personnel on the basis that the Slater Personnel, as employees or agents of Slater, were the governing mind of Slater qua administrator and caused or contributed to the alleged deficit. Aon and Norton rely on their statutory and common law rights to seek contribution and indemnity from the Slater Personnel for any liability they are found to have in the Morneau action.
[15] The Proposed Third Party Claims allege that the Slater Personnel, in their capacity as agents or employees of the administrator, acted negligently and in breach of statutory and fiduciary duties, induced or committed breaches of fiduciary duty, placed themselves in a position of conflict of interest and engaged in wilful misconduct. The allegations include that the Slater Personnel followed a deliberate strategy to minimize the contributions that Slater would be required to make to the Plans when they knew, or ought to have known, that Slater was insolvent or on the brink of insolvency. This strategy allegedly included instructing Norton to prepare the solvency valuation using an asset “smoothing” method that adjusted the value attributed to the Plans’ assets, without disclosing to Norton or Aon that there were doubts as to whether Slater would remain a going concern. The strategy also allegedly included instructions by the Slater Personnel to Norton in his dealings with the Superintendent and deliberately delaying the proceedings with FSCO in order to avoid having Slater make pension plan contributions prior to seeking protection from its creditors.
[16] The Slater Personnel objected to the issuance of the Proposed Third Party Claims. They maintained that the CCAA orders prevented such claims from being brought. In particular, they relied on paras. 15 and 16 of the Termination Order. Those paragraphs read as follows:
THIS COURT ORDERS that any person who served as an officer or director of any of the Applicants prior to and from and after June 2, 2003 is hereby released, remised and forever discharged of and from all claims, liabilities, obligations, demands or causes of action of whatever nature, including, without limitation, any and all claims in respect of potential statutory liabilities, whether known or unknown, matured or unmatured, foreseen or unforeseen, existing or hereafter arising by reason of, out of or in connection with, such service with respect to any act or omission, transaction or dealing or other occurrence existing or taking place prior to the date of this Order, and including any claim or demand for contribution or indemnity in respect of any act or omission, transaction or dealing or other occurrence which occurred in whole or in part prior to the date of this Order, provided that this paragraph shall not extend to any person that actively and knowingly participated in the breach of any related fiduciary duties or has been grossly negligent or guilty of wilful misconduct and provided that this paragraph shall be without prejudice to the rights of any person whose claim against such directors and officers has been allowed, partially allowed or is being disputed in accordance with the Claims Bar Order.
THIS COURT ORDERS that, until further order of this Court, any and all persons shall be and are hereby stayed from commencing, taking, applying for or issuing or continuing any and all steps or proceedings, including, without limitation, administrative hearings or orders, declarations or assessments, against any or all past, present or future directors or officers of any of the Applicants in respect of any matters referred to in paragraph 15 above, save and except claims brought in accordance with the procedures contained in the Claims Bar Order.
[17] Aon and Norton brought motions for declarations that the CCAA orders did not apply or, alternatively, for leave to bring their claims (the “Underlying Motions”). The Slater Personnel brought a cross-motion for an order striking the Proposed Third Party Claims as disclosing no reasonable cause of action.
[18] In two orders, both of which are dated April 13, 2007, Spence J. dismissed the Underlying Motions and the cross-motion (the “Orders”). He was of the view that the determinative issue on the Underlying Motions and the cross-motion was whether the Proposed Third Party Claims disclosed a “proper cause of action”. He held that they did not. Having decided the Underlying Motions and cross-motion on that basis, the motions judge did not address the CCAA issues.
[19] Aon and Norton appeal. The Slater Personnel bring a motion to quash the appeals, contending that the Orders are decisions made under the CCAA and, thus, leave to appeal the Orders is necessary. They submit that as Aon and Norton did not seek leave to appeal the Orders, the appeals are not properly before this Court and should be quashed.
[20] For the reasons that follow, I would dismiss the motion to quash and allow the appeals.
THE ISSUES
[21] In effect, the motion judge struck the Proposed Third Party Claims on the basis that they failed to disclose a reasonable cause of action. Consequently, to decide these appeals, two issues must be addressed:
Do the Proposed Third Party Claims disclose a reasonable cause of action?
If so, are they precluded by the CCAA orders?
THE PROPOSED THIRD PARTY CLAIMS
[22] There is no dispute about the principles that apply on a motion to strike pleadings for failure to disclose a reasonable cause of action pursuant to rule 21.01(1)(b) of the Rules of Civil Procedure, R.R.O. 1990, Reg. 194. The claim is to be read generously, with allowance for inadequacies in drafting; the material facts pleaded are to be taken as true unless they are patently ridiculous or incapable of proof; and, the threshold is a high one as pleadings are to be struck only in the clearest of cases. Put another way, for the Proposed Third Party Claims to be struck on the basis they did not disclose a reasonable cause of action, the motions judge had to have concluded that it was “plain, obvious and beyond doubt” that Aon and Norton could not succeed in the claims they advanced in those pleadings.
[23] In my view, it was an error for the motions judge to have reached this conclusion.
[24] I understand the chain of reasoning behind the motions judge’s determination that the Proposed Third Party Claims are “fundamentally defective” to be as follows.
Aon and Norton can be held liable in the Morneau action only if they are found to have caused the Plans to suffer damage. In order to find that Aon and Norton caused the Plans to suffer damage, the court must find that Slater[^2] reasonably relied on advice provided by Aon and Norton, and that the advice fell below the requisite standard of care.
Aon and Norton have defended the Morneau action on the basis that Slater did not rely on their advice. That is, Aon and Norton defend on the basis that even if they were negligent in the preparation of the actuarial reports, it was not their negligence which caused damage. Rather, it was the improper actions of Slater that caused the Plans to suffer harm.
If Aon and Norton succeed in convincing the court that Slater did not rely on their advice when deciding how much to contribute to the Plans, reasonable reliance on the part of the Slater will not be established. If there is no reasonable reliance, there can be no loss as a consequence of the advice, even if the advice is found to have fallen below the requisite standard. The Morneau action would fail and there would be no liability on the part of Aon and Norton. If there is no liability on the part of Aon and Norton, there is no basis on which to seek a finding of concurrent liability on the part of the Slater Personnel.
If, however, there was reasonable reliance on the part of the Slater, then the Proposed Third Party Claims cannot succeed. That is because the Proposed Third Party Claims are based on the allegation that the Slater Personnel caused the damage. It is not possible to find both that Slater reasonably relied on Aon and Norton’s advice and that Slater caused the damage.
Consequently, the Proposed Third Party Claims were not proper claims for contribution and indemnity.
[25] The motions judge erred in assuming that in order for the Morneau action to succeed, reasonable reliance on the part of Slater must be proven. The erroneous assumption flows from a failure to distinguish between Morneau’s role as a successor administrator and Slater’s role as the Plans’ administrator, and to understand the true nature of the claims asserted.
[26] If Slater had sued Aon and Norton, depending on the nature of the claim asserted, reasonable reliance might have been necessary for success.[^3] But, it is not Slater that is suing. It is Morneau that is suing. Morneau may, as the successor plan administrator, pursue any claims that Slater might have taken. In addition, however, Morneau has the right to bring suit on behalf of the Plans’ beneficiaries. Fundamentally, it is the latter which lies at the heart of the Morneau claim. The Morneau claim is asserted on behalf of the Plans’ members and beneficiaries, the people who suffered or will suffer as a result of the underfunding of the Plans due to the allegedly negligent preparation of the solvency valuations. The success of the Morneau claim is not dependent on establishing that Slater reasonably relied on the reports. It is dependent on establishing that the allegedly negligent reports played a role in enabling Slater to avoid making the required payments.
[27] Further, as the successor administrator, Morneau may sue for redress for acts of improper administration by a prior administrator much in the same way that a subsequent trustee can sue a prior trustee for breach of trust.
[28] Moreover, the absence of reasonable reliance is not a complete defence to the Morneau action which asserts a number of other claims, including breach of fiduciary and statutory duties. If relevant at all, reliance is not determinative of those claims.
[29] Accordingly, it cannot be said that it is plain and obvious that the Proposed Third Party Claims could not succeed; the cross-motion to strike the claims on that basis must be dismissed.
THE IMPACT OF THE CCAA ORDERS
[30] In my view, the CCAA Orders ought not to preclude the issuance of the Proposed Third Party Claims. I come to this view for three reasons:
It is not clear to me that the Proposed Third Party Claims are barred by para. 15 of the Termination Order.
The bulk of the claims in the Proposed Third Party Claims fall within the “carve-out” in para. 15 and, thus, are not barred.
Even if the stay imposed under the CCAA Orders applies, the court’s discretion should be exercised and the stay lifted.
The Proposed Third Party Claims May Not be Barred
[31] Paragraph 15 of the Termination Order protects the directors and officers from claims arising from their service as directors and officers. In the Proposed Third Party Claims, the Slater Personnel are not being sued in their capacity as directors and officers of Slater. Rather, the claims are made against them as individuals, in their capacity as agents and employees of Slater qua administrator.
[32] The Slater Personnel argue that they served on the Audit Committee because they were directors and officers.[^4] That may be so. However, this argument fails to account for the change in role that took place when the members of the Audit Committee administered the Plans. At that point, the Audit Committee became the agents and employees of the then-administrator of the Plans, Slater.
[33] Recognizing the different roles that the Slater Personnel fulfilled while on the Audit Committee makes sense of the inherent conflict of interest that otherwise existed for them. Here is one example of the conflict of interest that would exist if these different roles are conflated. The Audit Committee had to decide how much money Slater would contribute to the Plans annually. If the Slater Personnel, in the guise of the Audit Committee, made that decision in their capacity as directors or officers of Slater, they did so while owing a duty to Slater. Given the financial difficulties that Slater faced, that duty would have led them to minimize the amount that Slater contributed to the Plans.
[34] However, when the Audit Committee made decisions on the quantum of Slater’s contribution to the Plans, it did so in order to fulfill Slater’s obligations as administrator of the Plans. An administrator owes a fiduciary duty to the members of the Plans. The Audit Committee “stood in the shoes” of Slater qua administrator when making the decision; therefore, it too owed a fiduciary duty to the Plans’ members. Fulfillment of that duty would have led to maximizing the contributions that Slater would make to the Plans as that would best protect the Plans members’ pensions. In light of Slater’s precarious financial position -- a fact that was known or ought to have been known by the Slater Personnel -- this duty was heightened because the need for solvency funding should have been apparent.
[35] If the Slater Personnel are treated solely as directors and officers, they were in an impossible position. They could not fulfill their duties both to Slater and to the Plans’ members. That impossibility is obviated if the roles played by the Slater Personnel are kept separate. Viewed in this way, although the Slater Personnel were appointed to the Audit Committee by virtue of their positions as directors and officers, when making decisions in respect of the Plans’ administration they did so as agents and employees of Slater qua administrator – not as directors and officers.
[36] Accordingly, the Proposed Third Party Claims would not be barred by the CCAA orders because those claims do not relate to the Slater Personnel in their roles of directors and officers but, rather, as individuals who were the agents and employees of Slater, the Plans’ administrator. Consequently, leave would not be necessary to bring the Proposed Third Party Claims and there would be no need to lift the stay.
[37] These comments are not intended to be determinative of this issue. They are offered only to explain why I do not view the Proposed Third Party Claims as necessarily within the scope of para. 15 of the Termination Order.
A Majority of Claims in the Proposed Third Party Claims are not Barred
[38] Recall the “carve-out” in para. 15 of the Termination Order, which reads as follows:
…this paragraph shall not extend to any person that actively and knowingly participated in the breach of any related fiduciary duties or has been grossly negligent or guilty of wilful misconduct ….
[39] It can be seen that the carve-out provides that the release in para. 15 does not extend to claims against those who “actively and knowingly” participated in the breach of fiduciary duties or who had been grossly negligent or guilty of wilful misconduct. Many of the allegations in the Proposed Third Party Claims fall within the scope of the carve-out. Consequently, even if the stay otherwise operates, it does not preclude such claims.
Lifting the Stay if Necessary
[40] Further, and in any event, I would lift the stay if that were necessary.
[41] The Slater Personnel acknowledge that even if the CCAA orders otherwise prevent the Proposed Third Party Claims from being initiated, para. 16 of the Termination Order gives this court the power to lift the stay and allow the claims to proceed. They argue that the court should not exercise its discretion because:
the allegations in the Proposed Third Party Claims are frivolous, without merit and do not establish a prima facie case, and
since Slater no longer exists, the directors and officers cannot seek indemnity from it. Whatever claims the directors and officers might have against Slater if the Proposed Third Party Claims are permitted to proceed, in effect, those claims are foreclosed as a result of the CCAA orders and the liquidation of Slater’s assets.
[42] I see no merit in the first objection. As the material facts pleaded in the Proposed Third Party Claims are neither patently ridiculous nor incapable of proof, at this stage they are taken to be true. On that basis, the claims for indemnity and contribution cannot be said to be frivolous or without merit.
[43] The second objection is founded on the prejudice that the Slater Personnel may suffer if the stay is lifted. In my view, in considering this objection, the court must balance that prejudice against the prejudice that Aon and Norton may suffer if the stay is not lifted. A weighing of such prejudice leads me to conclude that the balance is in favour of Aon and Norton and, therefore, in favour of lifting the stay, if that is necessary.
[44] If the stay is lifted, the Slater Personnel will face significant financial exposure for conduct that occurred while they were directors and officers of Slater or its affiliates. If they are found liable, they will be unable to seek redress from Slater. On the other hand, Aon and Norton face significant financial exposure in the Morneau action. If the stay is not lifted, they will be unable to claim against the very individuals they say caused or contributed to the damages for which they may be held liable in the Morneau action.
[45] If the analysis of prejudice ended there, one might conclude that the balance is roughly even. That, however, would be to ignore the legal proceedings which bring the parties to this point. The Slater Personnel fully participated in the proceedings that now prevent them from looking to Slater for indemnification. Their interests were protected and their voices heard.
[46] The same is not true for Aon and Norton. Morneau brought its action against Aon and Norton almost fifteen months after the Termination Order was issued. Aon and Norton had no notice of the CCAA proceedings and no opportunity to make submissions in respect of the CCAA Orders. They had no knowledge, or means of acquiring knowledge, of any possible claims against them and no ability to assert a D&O Claim. Unlike the Slater Personnel, they were not involved in the FSCO Settlement nor were they given the opportunity to be involved in that process. If the stay is not lifted, Aon and Norton face substantial liability for which they may not claim contribution and indemnity from the very persons whom they say caused the Plans’ deficits. Their legitimate claims will have been barred by a process in which they never had the opportunity to participate.
[47] In the circumstances, as I have said, the balance is in favour of Aon and Norton. Accordingly, I would lift the stay, if that is necessary.
The Court’s Jurisdiction to Make the CCAA Orders
[48] Aon and Norton also argue that if the CCAA Orders purport to bar actions against the Slater Personnel, they ought to be held to beyond the jurisdiction of the court because the CCAA proceedings were terminated and no proposal or compromise had been sanctioned. In light of the conclusions reached above, there is no need to address these jurisdictional arguments.
DISPOSITION
[49] Accordingly, if leave to appeal is necessary, I would grant leave. It follows that I would dismiss the motion to quash.
[50] I would allow the appeals and set aside the Orders, apart from those parts of the Orders which dismiss the cross-motion. I would grant the Underlying Motions and declare that Aon and Norton may initiate third party claims. Aon’s third party claim is to be substantially in the form of its First or Second Proposed Claim. Norton’s claim is to be substantially in the form attached to its Notice of Motion. Having said that, Aon and Norton may advance any legal ground available to them – they are not limited to those that fall within the carve-out. I would extend the time for initiating a third party claim to fourteen days from the date of release of these reasons.
[51] Aon and Norton are entitled to their costs below and of these appeals from the respondents, the proposed third parties. If those parties are unable to agree on costs, they may make brief written submissions on the same within fifteen days of the date of release of these reasons. I would make no costs order in respect of the plaintiff, the Monitor and the Superintendent.
RELEASED: March 19, 2008 (“DOC”)
“E.E. Gillese J.A.”
“I agree Dennis O’Connor A.C.J.O.”
“I agree Paul Rouleau J.A.”
[^1]: Para. 24 of the Monitor’s Nineteenth and Final Report to the Court dated August 17, 2006.
[^2]: The motions judge treats Slater and the Slater Personnel as interchangeable. For ease of reference, when summarizing the motions judge’s reasoning, when I refer to Slater, it encompasses both.
[^3]: Although I fail to see what damages Slater could sue for: if there was negligence in the preparation of the report, it appears that Slater benefited from it.
[^4]: One member of the Slater Personnel, Doug Brown, was neither a director nor officer.