Court File and Parties

COURT FILE NO.: CV-14-10695-00CL DATE: 20160622 SUPERIOR COURT OF JUSTICE - ONTARIO

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, as amended AND IN THE MATTER OF A PROPOSED PLAN OF COMPROMISE OR ARRANGEMENT WITH RESPECT TO U.S. STEEL CANADA INC.

BEFORE: Mr. Justice H. Wilton-Siegel

COUNSEL: Jeff Galway, for United States Steel Corporation Alan Mark, for the Province of Ontario

HEARD: In Writing

Supplemental Endorsement

[1] This Endorsement supplements the Endorsement of the Court dated February 29, 2016, which addressed fourteen Proofs of Claim (the “USS Claims”) filed by United States Steel Corporation (“USS”) in these proceedings under the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (the “CCAA”) regarding U.S. Steel Canada Inc. (“USSC”). Any capitalized terms herein that are not defined have the meanings ascribed to them in the Court’s earlier Endorsement which was released as 2016 ONSC 569.

Unsecured Inter-Company Trade Claim

[2] The Monitor’s Seventh Report dated March 9, 2015 (the “Monitor’s Report”) included, at paragraph 155, an unsecured inter-company trade claim of U.S. $4,280,261. This unsecured claim, which forms a part of Claim #11(c), relates to inter-company trade activity between USSC and USS before October 31, 2013. The claim was not challenged by any of the parties, but it was not addressed in the Court’s earlier Endorsement.

[3] In the absence of any objections in respect of this claim, it is hereby confirmed as an unsecured Claim under the Claims Process Order.

Claim #11(b)

[4] Claim #11(b) in the Monitor’s Report relates to certain credit support payments paid by USS in respect of obligations of USSC owed to certain third-party creditors. USS paid these obligations pursuant to guarantees established in favour of such creditors (the “Guarantees”). The Monitor’s Report notes, at paragraph 149, that the Guarantees were granted by USS in favour of the relevant creditors in 2008. According to the Monitor’s Report, the underlying third-party claims against USSC were outstanding on the date of the Initial Order, but the credit support payments made by USS that give rise to the USS claim were paid after that date in response to demands for payment by the third party creditors that were also made after that date. The Objecting Parties do not challenge the quantum of Claim #11(b). They do, however, challenge its secured status.

Background and Positions of the Parties

[5] USS asserts Claim #11(b) against USSC pursuant to rights of indemnification. The nature of that right is described in Kevin P. McGuiness, The Law of Guarantee, 3d ed. (Markham: LexisNexis Canada Inc., 2013) at §10.90-10.91 as follows:

The basic right of the surety against the principal is a right to be indemnified in respect of the amounts that he or she has paid by reason of the guarantee obligation in answer to any judgment given against the surety on the guarantee or as a result of any compromise reasonably made in any present or pending legal proceeding in respect of the guarantee, together with all costs incurred in relation thereto including legal costs…

A surety who makes a payment under a guarantee has a right of action against the principal debtor to recover the amount of that payment. This right is an independent right of the surety. It is not, strictly speaking, a right acquired by way of subrogation to the rights of the creditor. Although the right of the surety to be indemnified is not strictly subrogatory, as a practical matter, it is very similar to subrogation in its consequences. The primary distinction between subrogation and the rights of the surety is largely although not wholly procedural: the surety is entitled to sue the principal in his own name…

[6] Section 1 of the November Security Agreement defined “Secured Obligations” to mean “all obligations, duties, indebtedness and liabilities of [USSC] from time to time owing by [USSC] to any Secured Party …” Pursuant to section 2 of that Agreement, USSC granted a security interest in the “Collateral”, which was defined to be all of the USSC property, assets and undertaking, to the Secured Party to secure the payment and performance of the Secured Obligations. For the purposes of the November Security Agreement, the “Secured Party” comprised Credit Corp and any of the “USS Sellers”, being USS, United States Steel International, Inc., and Stelco Holding Company. For greater certainty, section 4 of the November Security Agreement further provided that “[USSC] hereby pledges, assigns and grants a security interest in the Collateral … to the Secured Parties to secure the Secured Obligations as described in the Security Agreement as amended hereby, under Section 2 of the Security Agreement.”

[7] USS submits that its rights of indemnification in respect of Claim #11(b) constitute an obligation, a duty, an indebtedness or a liability for the purposes of the definition of “Secured Obligations” under the November Security Agreement and, accordingly, are entitled to the benefit of the security under the November Security Agreement. In short, USS submits that the November Security Agreement secured all obligations of USSC to USS arising after the delivery of the November Security Agreement on November 12, 2013, including any claims arising for payments made after that date under the Guarantees.

[8] The Objecting Parties argue that the security for this claim constituted by the November Security Agreement is either unenforceable or void as a fraudulent preference on the same grounds upon which they rely in respect of Claims #11(a) and #11(c), as set out in the Court’s earlier Endorsement. The Province submits that, if these credit support payments are secured, a consequence would be that the unsecured, pre-filing claims of the third-party creditors have improperly become secured, post-filing claims of USS without any involvement of the Monitor or the Court pursuant to the provisions of section 10 of the Initial Order, which would otherwise govern the payment of pre-filing obligations.

[9] After a review of the documentation pertaining to this claim, the Court concluded that there was also a threshold issue of whether the USS rights of indemnification at issue qualify as “Secured Obligations” under the November Security Agreement. As this issue was not raised directly in the submissions of the parties, the parties were given an opportunity to make submissions regarding this threshold issue to the extent they wished to do so. Each of USS and the Province provided written submissions addressing this issue. The Union advised the Court that it supported the position of the Province.

Analysis and Conclusions

[10] I conclude that the USS rights of indemnification comprising Claim #11(b) are not entitled to the benefit of the security constituted by the November Security Agreement for two reasons.

[11] First, for the following reasons, I am not persuaded that the parties to the November Security Agreement intended the definition of “Secured Obligations” thereunder to extend to rights of indemnification of USS against USSC.

[12] The definition of “Secured Obligations” appears at first reading to be very broad, extending to “all obligations, duties, indebtedness and liabilities” owing by USS to Credit Corp or any of the “USS Sellers”. However, when the November Security Agreement is viewed in its entirety and in context, I conclude that the parties to the Agreement intended that “Secured Obligations” would be limited to contractual obligations between USSC, on the one hand, and Credit Corp and the USS Sellers, on the other hand, pertaining to either advances under the Revolver Loan Agreement or the sale of “Goods” as defined therein. For this purpose, the term “Goods” is defined to be “materials, goods and other products (including inventory and raw materials …” I reach this conclusion for five reasons.

[13] First, in respect of the USS Sellers, the recitals in the November Security Agreement address only the sale of Goods by the USS Sellers. Further, the consideration recited for the execution of the November Security Agreement is the continuation of the sale of Goods in light of the unwillingness of the USS Sellers to continue to do so on credit. There is no mention whatsoever of the provision of financial assistance in the form of the payment of guarantees in respect of the provision of goods or services by third parties as a purpose for the Agreement or as consideration for the Agreement. I note as well that at least a portion of the third party claims appear to relate to the provision of transportation services, which fall outside the definition of “Goods”.

[14] Second, the November Security Agreement expressly secures financial assistance in the form of direct advances under the Revolver Loan Agreement. In these circumstances, the absence of any mention of security for any other form of financial assistance, apart from the limited reference discussed below, is significant.

[15] Third, as a related matter, the Guarantees had been granted in 2008 and were, therefore, in existence in 2013 at the time of the execution and delivery of the November Security Agreement. If the parties had intended that the definition of Secured Obligations was to extend to any USS rights of indemnification arising in respect of payments pursuant to the Guarantees, I think that USS would have required an express statement to such effect in the Agreement. In these circumstances, the silence of the November Security Agreement on this issue is indicative of the fact that the parties did not turn their minds to such rights of indemnification and therefore did not agree on their inclusion within the definition of Secured Obligations for the purposes of that Agreement.

[16] Fourth, the enumeration of the items included in the definition of “Secured Obligations” is restricted to contractual agreements pertaining to the Revolver Loan or the sale of the Goods. There is no general statement extending the definition to include any other obligations that might arise outside of such contractual context.

[17] Lastly, insofar as there is a reference to guarantees in the definition of “Secured Obligations”, such reference is expressly restricted to guarantees “made, delivered or given in connection with any of the foregoing”. In this clause, the word “foregoing” must refer to the Revolver Loan or the sale of Goods by the USS Sellers, as such phrase would otherwise be redundant, and does not extend to the provision of goods or services by third parties. There is therefore no express provision in the November Security Agreement that extends the definition of “Secured Obligations” to rights of indemnification that may arise from time to time. Moreover, given the express reference to guarantees in the specific context of the sale of Goods by the USS Sellers, I conclude that USS and USSC would have included express language regarding non-contractual rights of indemnification arising otherwise than on the sale of Goods if they had intended the November Security Agreement to secure such claims.

[18] The second reason for concluding that the USS rights of indemnification comprising Claim #11(b) are not entitled to the benefit of the security constituted by the November Security Agreement is based on the absence of any consideration flowing from USS to USSC at the time of the execution and delivery of the November Security Agreement or, if relevant, at the time payment was made under the Guarantees.

[19] As mentioned, the Guarantees pre-dated delivery of the November Security Agreement. There is no evidence that USS gave any fresh consideration at the time of delivery of the November Security Agreement in the form of a new or continuing commitment to USSC to honour any demands for payment under the Guarantees that might be made after November 12, 2013. In particular, consistent with the absence of any reference to the Guarantees and related rights of indemnification in the November Security Agreement, there is no evidence that USS advised USSC that it was unwilling to continue to extend the Guarantees without the benefit of the security constituted by the November Security Agreement.

[20] Similarly, USS did not give, and USSC did not receive, any consideration at the time that USS paid the third-party creditors the amounts of the credit support payments. Unlike the circumstances in respect of the Cliffs Transaction, being Claim #11(a), the third party suppliers had already supplied the services for which payment was sought at the time USS made the payments under the Guarantees. In respect of USSC, the only consequence of such payments was to change the identity of the creditors in respect of the relevant amounts from the third-party creditors to USS. In particular, the amount of such claims remained unaffected by such payments.

[21] The lack of consideration at the time of the execution and delivery of the November Security Agreement, and at the time of payment of the third-party creditors by USS if relevant, has two consequences. First, and most significantly, in the absence of consideration, I conclude that the grant of security in respect of such rights of indemnification pursuant to the November Security Agreement constitutes a fraudulent preference under section 95 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the "BIA").

[22] Section 95 of the BIA provides as follows:

(1) A transfer of property made, a provision of services made, a charge on property made, a payment made, an obligation incurred or a judicial proceeding taken or suffered by an insolvent person

(a) in favour of a creditor who is dealing at arm’s length with the insolvent person, or a person in trust for that creditor, with a view to giving that creditor a preference over another creditor is void as against — or, in Quebec, may not be set up against — the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy; and

(b) in favour of a creditor who is not dealing at arm’s length with the insolvent person, or a person in trust for that creditor, that has the effect of giving that creditor a preference over another creditor is void as against — or, in Quebec, may not be set up against — the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is 12 months before the date of the initial bankruptcy event and ending on the date of the bankruptcy. [italics added]

(2) If the transfer, charge, payment, obligation or judicial proceeding referred to in paragraph (1)(a) has the effect of giving the creditor a preference, it is, in the absence of evidence to the contrary, presumed to have been made, incurred, taken or suffered with a view to giving the creditor the preference — even if it was made, incurred, taken or suffered, as the case may be, under pressure — and evidence of pressure is not admissible to support the transaction.

[23] In respect of the USS rights of indemnification giving rise to Claim #11(b), insofar as the USS claim constitutes a Secured Obligation under the November Security Agreement, the effect of the execution and delivery of that Agreement was that USSC purported to grant security in favour of USS in respect of any claims based on rights of indemnification in the absence of any fresh consideration from USS at such time. Such action would have the result of giving USS a preference over the other unsecured creditors of USSC for the purposes of section 95 of the BIA.

[24] Similarly, in the absence of any consideration from USS to USSC at the time of payment under the Guarantees, the purported extension of the security constituted by the November Security Agreement to the USS rights of indemnification arising at such time also constituted a fraudulent preference under section 95 of the BIA. On this analysis, both the USS rights of indemnification, that is the USS claim, and the grant of security in favour of USS would have arisen and occurred, respectively, simultaneously and without any consideration flowing from USS to USSC at that time for the grant of the security.

[25] As it is acknowledged that USSC was insolvent for the purposes of the BIA at the time of execution and delivery of the November Security Agreement and that the Filing Date occurred within the time limit provided for in section 95, and as the credit support payments under the Guarantees to the third-party creditors that give rise to the USS rights of indemnification occurred after the date of the Initial Order, I conclude that the security constituted by the November Security Agreement is void, insofar as it purports to secure the USS rights of indemnification that comprise Claim #11(b).

[26] The second consequence of the absence of consideration relates to the submission of the Province of Ontario that the November Security Agreement is unenforceable for want of consideration. I have addressed the legal issue of the requirement for consideration for the enforceability of a security interest in the earlier Endorsement. I concluded therein that consideration is not required for a grant of security to be effective, although a security interest will not be effective until an obligation arises in favour of the grantee that is secured by the security interest. To the extent that the Court may have erred in reaching this conclusion and that consideration is a requirement for enforceability of the November Security Agreement in respect of the USS claims for indemnification, the Agreement would also be unenforceable for want of consideration both at the time of execution and delivery of the November Security Agreement and at the time of the payment of the third-party creditors giving rise to the USS claims for indemnification, if applicable.

[27] Based on the foregoing, I conclude that the USS rights of indemnification constituting Claim #11(b) in respect of the credit support payments described in the Monitor’s Report are not entitled to the benefit of the security constituted by the November Security Agreement and are therefore not Secured Claims under the Claims Process Order.

Wilton-Siegel J. Date: June 22, 2016