CITATION: Zochem Inc. (Re), 2016 ONSC 958
COURT FILE NO.: CV-16-11271-00CL
DATE: 20160208
ONTARIO SUPERIOR COURT OF JUSTICE COMMERCIAL LIST
IN THE MATTER OF THE COMPANIES' CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED
AND IN THE MATTER OF CERTAIN PROCEEDINGS TAKEN IN THE UNITED STATES BANKRUPTCY COURT WITH RESPECT TO HORSEHEAD HOLDING CORP., HORSEHEAD CORPORATION, HORSEHEAD METAL PRODUCTS, LLC, THE INTERNATIONAL METALS RECLAMATION COMPANY, LLC AND ZOCHEM INC. (collectively, the “Debtors”)
APPLICATION OF ZOCHEM INC.
UNDER SECTION 46 OF THE
COMPANIES' CREDITORS ARRANGEMENT ACT
HEARD: February 5, 2016
COUNSEL:
Sam Babe, Martin E. Kovnats, Jeffrey Merk and J. Nemers, for the Applicant
Ryan Jacobs, Jane Dietrich and Natalie Levine, for the DIP lenders
Christopher G. Armstrong, Sydney Young and Caroline Descours, for Richter Advisory Group as proposed Information Officer
Linc A. Rogers and Christopher Burr, for PNC Bank, National Association
Denis Ellickson, for UNIFOR Local 591G
Newbould J.
[1] On February 5, 2016 an application was brought by Zochem Inc. (“Zochem”), in its capacity as foreign representative of itself as well as Horsehead Holding Corp., Horsehead Corporation, Horsehead Metal Products, LLC (“Horsehead Metals”), and The International Metals Reclamation Company, LLC (“INMETCO”) for orders pursuant to sections 46 through 49 of the CCAA recognizing First Day Orders made by Judge Mary Walrath of the U.S. Bankruptcy Court for the District of Delaware in chapter 11 proceedings brought by the debtors under the U.S. Bankruptcy Code.
[2] At the conclusion of the hearing I made the orders sought with reasons to follow. These are my reasons for making the orders.
[3] The debtors operate in the zinc and nickel-bearing waste industries through three business units: Horsehead Corporation and its subsidiaries (collectively, “Horsehead”), Zochem, and INMETCO. Horsehead is a prominent recycler of electric arc furnace (“EAF”) dust, a zinc-containing waste generated by North American steel “mini-mills”, and in turn uses the recycled EAF dust to produce specialty zinc and zinc-based products. Zochem is a producer of zinc oxide. INMETCO is a recycler of nickel-bearing wastes and nickel-cadmium batteries, and a producer of nickel-chromium-molybdenum-iron remelt alloy for the stainless steel and specialty steel industries. Collectively, the debtors hold a market-leading position in zinc production in the United States, zinc oxide production in North America, EAF dust recycling in North America, and are a leading environmental service provider to the U.S. steel industry.
[4] Zochem is a Canada Business Corporations Act corporation with its head office in Pittsburgh, Pennsylvania and its operations located in owned premises at 1 Tilbury Court, Brampton, Ontario. Zochem’s registered office address is the Ontario premises.
[5] Zochem is one of the largest single-site producers of zinc oxide in North America. Zinc oxide is used as an additive in various materials and products, including plastics, ceramics, glass, rubbers, cement, lubricants, pigments, sealants, ointments, fire retardants, and batteries. The debtors sell zinc oxide to over 250 producers of tire and rubber products, chemicals, paints, plastics, and pharmaceuticals, and have supplied zinc oxide to the majority of their largest customers for over ten years.
[6] As of December 31, 2015, Zochem had 19 salaried personnel and 25 hourly personnel. Approximately 25 of these employees are organized under Unifor and its Local 591-G-850, whose collective labour agreement is set to expire on June 30, 2016.
[7] Zochem maintains separate pension plans for its salaried and hourly personnel, which have been closed to new members since July 1, 2012. Newer employees have joined Zochem’s group RRSP. According to a report prepared by Corporate Benefit Analysis, Inc., the pensions were, collectively, overfunded as at December 31, 2015, though the salaried plan had a small unfunded projected benefit obligation in the amount of $181,499, which is to be paid next week. Neither plan has been wound up.
[8] On April 29, 2014, Zochem, as borrower, and Horsehead Holding, as guarantor, entered into a U.S. $20 million secured revolving credit facility (the “Zochem Facility”) with PNC Bank, National Association (“PNC”), as agent and lender. The Zochem Facility is secured by a first priority lien (subject to certain permitted liens) on substantially all of Zochem’s tangible and intangible personal property, and a charge on the Brampton, Ontario premises of Zochem. Zochem’s obligations to PNC are guaranteed by its parent, Horsehead Holding. On January 27, 2016, PNC assigned its position as lender under the Zochem Facility to an arm’s length party. PNC remains the agent under Zochem Facility.
[9] Three out of four of Zochem’s officers and three out of four of its directors are residents of Pennsylvania. Most of Zochem’s officers are also officers of each of the other debtors. Zochem’s statutorily required one Canadian director (representing 25% of the board) is a partner at the law firm Aird & Berlis LLP, the debtors’ Canadian counsel. The only Zochem officer resident in Canada is the plant’s general manager, who formerly was resident in Pennsylvania and employed by the U.S. debtors. Otherwise, all local functions associated with managing and operating the Zochem facility are performed from the debtors’ Pittsburgh, Pennsylvania headquarters in the United States.
[10] Zochem and the U.S. debtors maintain a highly integrated business. Zochem’s communications decisions, pricing decisions, and business development decisions are made in Pittsburgh. Zochem’s accounts receivable, accounts payable and treasury departments are also located in Pittsburgh.
[11] Zochem operates a cash management system whereby:
a. all receipts flow into a collection account at PNC in the United States, in part via a lockbox maintained at PNC;
b. funds from the PNC collection account are transferred daily into an operating account at PNC in the United States; and
c. funds are then transferred, as the debtors’ treasury department (in Pittsburgh) determines is required, to a U.S. dollar operating account and a Canadian dollar operating account at Scotiabank in Canada to pay vendors and payroll, as applicable.
[12] The debtors in the United States have had limited access to liquidity since January 5, 2016 when their lender, Macquarie Bank Limited (“Macquarie”), issued a notice of default and froze certain of their bank accounts, including their main operating account. On January 6, 2016, Zochem’s lender, PNC, also asserted an event of default. On January 13, 2016, PNC froze certain of the debtors’ bank accounts associated with their Zochem operations, and demanded immediate payment of all outstanding obligations. PNC’s demand was accompanied by a notice of intention to enforce security under section 244 of the BIA. Although the debtors entered into forbearance agreements with Macquarie and PNC, the term of those agreements expired on February 1, 2016.
[13] With the assistance of Lazard Middle Market LLC, the debtors reached agreement for a senior secured super priority debtor-in-possession credit facility in the amount of U.S. $90 million from a group of Horsehead Holding secured noteholders. The DIP facility is intended to pay off the Zochem’s obligations to PNC and to finance the debtors’ operations and the chapter 11 proceedings. A condition of advance under the DIP facility is the granting of a super-priority charge over the assets of the debtors in Canada in favour of the DIP lender.
[14] On February 3, 2016 Judge Walrath of the U.S. Bankruptcy Court granted the following First Day Orders:
(a) Joint Administration Order;
(b) Foreign Representative Order;
(c) Interim Cash Management Order;
(d) Interim Wages and Benefits Order;
(e) Interim Shippers and Lien Claimants Order;
(f) Interim Utilities Order;
(g) Interim Insurance Order;
(h) Interim Prepetition Taxes Order;
(i) Interim Critical Vendors Order; and
(j) Interim Financing Order.
Analysis
[15] The purpose of Part IV of the CCAA is to effect cross-border insolvencies and create a system under which foreign insolvency proceedings can be recognized in Canada. See my comments on the BIA version of the same provisions in MtGox Co., Ltd (Re) (2014), 20 C.B.R. (6th) 307.
[16] Pursuant to section 46(1) of the CCAA, a foreign representative may apply to the court for recognition of a foreign proceeding in respect of which he or she is a foreign representative.
[17] Pursuant to section 47 of the CCAA, two requirements must be met for an order recognizing a foreign proceeding:
a. the proceeding is a “foreign proceeding”; and
b. the applicant is a “foreign representative” in respect of that foreign proceeding.
[18] Section 45(1) of the CCAA defines a “foreign proceeding” as any judicial proceeding, including interim proceedings, in a jurisdiction outside of Canada dealing with creditors’ collective interests generally under any law relating to bankruptcy or insolvency in which a debtor company’s business and financial affairs are subject to control or supervision by a foreign court for the purpose of reorganization.
[19] Section 45(1) of the CCAA defines a “foreign representative” to include one who is authorized in a foreign proceeding in respect of a debtor company to act as a representative in respect of the foreign proceeding. In the chapter 11 proceeding, the debtors applied to have Horsehead Holding Corp. named as the foreign representative. Judge Walrath for reasons I will discuss had concerns regarding the position of Zochem and directed that Zochem be named as the foreign representative.
[20] There is no question but that the chapter 11 proceeding is a foreign proceeding and that Zochem is a foreign representative. Thus it has been established that the chapter 11 proceeding should be recognized in this Court as a foreign proceeding.
[21] Once it has determined that a proceeding is a foreign proceeding, a court is required, pursuant to section 47(2) of the CCAA, to specify in its order whether the foreign proceeding is a foreign main proceeding or a foreign non-main proceeding.
[22] Section 45(1) of the CCAA defines a foreign main proceeding as a “foreign proceeding in a jurisdiction where the debtor company has the centre of its main interests” (“COMI”). Section 45(2) of the CCAA provides that, in the absence of proof to the contrary, a debtor company’s registered office is deemed to be its COMI. In circumstances where it is necessary to go beyond the s. 45 (2) registered office presumption, the following principal factors, considered as a whole, will indicate whether the location in which the proceeding has been filed is the debtor's centre of main interests:
(1) the location is readily ascertainable by creditors,
(2) the location is one in which the debtor’s principal assets or operations are found; and
(3) the location is where the management of the debtor takes place.
[23] See Lightsquared LP, Re, (2012), 2012 ONSC 2994, 92 C.B.R. (5th) 321 (Ont. S.C.J. [Commercial List]. In Lightsquared, Justice Morawetz further stated:
- In most cases, these factors will all point to a single jurisdiction as the centre of main interests. In some cases, there may be conflicts among the factors, requiring a more careful review of the facts. The court may need to give greater or less weight to a given factor, depending on the circumstances of the particular case. In all cases, however, the review is designed to determine that the location of the proceeding, in fact, corresponds to where the debtor’s true seat or principal place of business actually is, consistent with the expectations of those who dealt with the enterprise prior to commencement of the proceedings.
[24] In this case, all of the factors do not point to a single jurisdiction as the COMI as Zochem’s operations are located in Brampton, Ontario.
[25] In the present case, the applicants, supported by the proposed Information Officer, contend that Zochem’s COMI is in the United States because:
(i) all the debtors other than Zochem, comprising Zochem’s corporate family, are incorporated, and have their registered head office, in the United States;
(ii) all the debtors, including, Zochem are managed from Pittsburgh, Pennsylvania;
(iii) all three of Zochem’s “inside” directors (comprising 75% of the board) are residents of Pennsylvania;
(iv) all of Zochem’s officers are Pennsylvania residents, with the one exception of its general manager who is a former Pennsylvania resident and employee of the other debtors;
(v) most of Zochem’s officers are also officers of each of the other debtors;
(vi) Zochem is operational in its focus and all local functions associated with managing and operating the Zochem facility are performed from the debtors’ Pittsburgh headquarters;
(vii) Zochem’s communications decisions, pricing decisions, and business development decisions are made in Pittsburgh;
(viii) Zochem’s accounts receivable, accounts payable and treasury departments are located in Pittsburgh;
(ix) Zochem’s cash management system is centred in the United States;
(x) Zochem’s existing credit facilities are with a bank in Pittsburgh; and
(xi) the debtors are all managed in the United States as an integrated group from a corporate, strategic, financial and management perspective.
[26] In this case it is perhaps an academic exercise to decide if the foreign proceeding is a main or non-main proceeding because it is appropriate for a stay to be ordered in either event. However, I am satisfied that for our purposes the applicants have established that the foreign proceeding is a foreign main proceeding.
[27] The only matter that is somewhat contentious is the recognition of the interim financing order (interim DIP order) made by Judge Walrath and the request for an order providing for a charge for the benefit of the DIP lender.
[28] Counsel for the Union went on the record as opposing the granting of a charge because although there will be no underfunding of the pension plans upon the granting of the DIP facility, it is possible in the future that there may be underfunding. The pension plans are not being wound up and there is no evidence at the moment that there is a risk of future underfunding or in what amount. In the circumstances I do not see the position of the Union as an impediment to the granting of the relief requested.
[29] When recognizing a financing order granted by a foreign court, consideration should be given as to whether there would be any material adverse interest to any Canadian interests. See Re Xinergy Ltd., 2015 ONSC 2692 (Ont. S.C.J. [Commercial List]), at para 20.
[30] It was such a concern that led Judge Walrath to require changes to the interim DIP order that was applied for.
[31] The debtors sought interim approval from the U.S. Court of a senior secured super priority DIP credit facility in the amount of $90 million offered by the DIP lenders. The Proposed DIP Facility contemplated that the liens granted in connection with the DIP Facility would be first-priority liens over a portion of the debtors’ assets (including all of the assets of Zochem and the assets of the debtors subject to a first-priority lien in respect of the Senior Secured Notes), and second-priority liens with respect to the assets of the U.S. debtors that are presently subject to a first-priority lien in favour of Macquarie.
[32] Under the Proposed DIP Facility, the maximum amount permitted to be advanced on an interim basis was $40 million, and it was contemplated that all of the debtors would be jointly and severally liable for all advances made. The contemplated uses of the initial $40 million DIP advance were approximately $18.5 million to pay out the Zochem Facility (including a $1 million forbearance fee), with the balance of the advances being used to fund the operations and restructuring activities of the Debtors during the interim period until a final order approving the Proposed DIP Facility is sought from the U.S. Court in late February.
[33] At the hearing on February 3, 2016, Judge Walrath raised concerns about the position of Zochem, including her concern that no independent counsel for Zochem considered whether the DIP facility was in the best interest of Zochem as there was a conflict of interest in the three U.S. directors of Zochem approving Zochem to be jointly and severally liable for the entire DIP loan. Judge Walrath stated that she would consider a DIP facility that obligates Zochem only to the extent there is a direct benefit to Zochem, i.e. payment of its debt or a loan which they use in their operations for working capital.
[34] After an adjournment, the debtors and the DIP lenders agreed to certain interim amendments to the Proposed DIP Facility including a provision that the maximum liability of Zochem pursuant to the Proposed DIP Facility in the interim period would be capped at $25 million (reduced from the prior contemplated maximum amount of $40 million). Counsel for the debtors advised Judge Walrath that the $25 million would reflect both the payoff of the PNC loan and reflect the fact that Zochem continues to have a funding need. The debtors also proffered testimony that
Zochem is approximately break-even on a cash flow basis, and was projected to be approximately $1 million dollars cash flow positive over the following four week period, not accounting for any disruption in its business, including, for example, a notice that the debtors received from one of the largest vendors saying that they will reprice their business with the debtors, and that they will demand that the debtors pay one month in advance.
The break-even cash position did not take into account any bankruptcy related costs, all of which are allocated to Horsehead.
The debtors, in their business judgement, determined that it would not be prudent to operate the business on a break-even basis given business pressures, and liquidity from the Proposed DIP Facility would be available to Zochem to provide a liquidity cushion for the first four weeks of the case.
[35] What essentially Judge Walrath was told in answer to her concerns was that the difference between the approximately $18.5 million needed to pay Zochem’s loan facility with PNC and the $25 million limit of Zochem’s liability was to be used as a cushion for Zochem’s cash flow needs. In the circumstances, and taken the proffered testimony that Zochem required a cushion, I suggested to the parties that a term of my order recognizing the U.S. interim financing order should be that the difference between the $18.5 million and the $25 million was in the interim to be used only for Zochem working capital requirements.
[36] After a break to permit the parties to discuss this situation, counsel for the DIP lenders said they were not prepared to lend on that basis and that they wished to adjourn the matter until the following Monday. The problem with this request was two-fold. The first was that it was a requirement of the DIP that an order be made by this Court by the date of the hearing on February 5, 2016, and without an order the debtors had no right to the DIP facility. The second was that the interim advance under the DIP was required to meet the payroll that day.
[37] The proposed Information Officer pointed out that it is estimated by the debtors that up to $38.5 million will be drawn under the Proposed DIP Facility in the interim period to be used as follows:
(a) approximately $18.5 million will be used to repay the Zochem Facility (including the $1 million forbearance fee payable to PNC);
(b) approximately $4 million will be used to pay fees associated with the Proposed DIP Facility; and
(c) approximately $15.6 million will be used to finance the debtors’ operations and restructuring activities pursuant to an agreed upon budget, including payment of professional fees, utility deposits and certain critical materials and freight vendors.
[38] In the circumstances I made the order recognizing the U.S. interim financing order, and granting the security requested for the DIP, which in my view met the tests as enunciated in the authorities, including the factors set out in Indalex Ltd. (Re), (2009), 52 C.B.R. (5th) 61 for the guarantee of a Canadian debtor of its U.S. parent’s obligations under the DIP facility, and as set out in Crystallex International Corp. (Re) (2012), 2012 ONSC 2125, 91 C.B.R. (5th) 169; aff’d (2012), 4 B.L.R. (5th) 1.
[39] However I stated at the hearing, and reiterate, that if in the interim period a request is made for further funding for working capital requirements of Zochem because not enough available cash was kept for that purpose, I would be extremely loathe to grant any such further relief.
[40] The directors of Zochem have fiduciary duties to Zochem. In 820099 Ontario Inc. v. Harold E. Ballard Ltd. (1991), 3 B.L.R. (2d) 113 at 123; aff’d (1991), 3 B.L.R. (2d) 113 at 122 Justice Farley stated clearly that the directors’ duties are to the corporation of which they are directors and they cannot just be yes men for the controlling shareholders:
It may well be that the corporate life of a nominee director who votes against the interest of his "appointing" shareholder will be neither happy nor long. However, the role that any director must play (whether or not a nominee director) is that he must act in the best interests of the corporation. If the interests of the corporation (and indirectly the interests of the shareholders as a whole) require that the director vote in a certain way, it must be the way that he conscientiously believes after a reasonable review is the best for the corporation. The nominee director's obligation to his "appointing" shareholder would seem to me to include the duty to tell the appointer that his requested course of action is wrong if the director in fact feels this way. Such advice, although likely initially unwelcome, may well be valuable to the appointer in the long run. The nominee director cannot be a "Yes man"; he must be an analytical person who can say "Yes" or "No" as the occasion requires (or to put it another way, as the corporation requires).
[41] I trust the directors of Zochem will keep these principles in mind. I direct that they be given a copy of these reasons for judgment.
[42] I also recognized all of the other First Day Orders made by Judge Walrath. They were appropriate and no opposition to their recognition was voiced.
Newbould J.
Released: February 8, 2016
CITATION: Zochem Inc. (Re), 2016 ONSC 958
COURT FILE NO.: CV-16-11271-00CL
DATE: 20160208
ONTARIO SUPERIOR COURT OF JUSTICE COMMERCIAL LIST
IN THE MATTER OF THE COMPANIES' CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED
AND IN THE MATTER OF CERTAIN PROCEEDINGS TAKEN IN THE UNITED STATES BANKRUPTCY COURT WITH RESPECT TO HORSEHEAD HOLDING CORP., HORSEHEAD CORPORATION, HORSEHEAD METAL PRODUCTS, LLC, THE INTERNATIONAL METALS RECLAMATION COMPANY, LLC AND ZOCHEM INC. (collectively, the “Debtors”)
APPLICATION OF ZOCHEM INC. UNDER SECTION 46 OF THE COMPANIES' CREDITORS ARRANGEMENT ACT
REASONS FOR JUDGMENT
Newbould J.
Released: February 8, 2016