Law Times

Page 10 March 20, 2017 • Law TiMes www.lawtimesnews.com Ruling rejects American-style doctrine BY MICHAEL MCKIERNAN For Law Times T he American doctrine of equitable subordina- tion could be on its last legs in Canada after the province's top court refused to apply it in Companies' Creditors Arrangement Act proceedings concerning the insolvency of Stelco, formerly known as U.S. Steel Canada. In its Sept. 9 decision in U.S. Steel Canada Inc. (Re), a unani- mous three-judge panel of the Court of Appeal for Ontario found the doctrine, which allows for the re-ordering of creditor claims in favour of lower-ranked creditors due to inequitable con- duct by those higher up the pri- ority list, does not fall within the scheme of the CCAA. In the Stelco case, the steel- works' unionized employees have called for the doctrine to be applied to boost their claims ahead of the firm's Pittsburgh- based parent company, United States Steel Corporation, which has claimed $2.2 billion in inter- corporate debt against its own subsidiary. The union blames the par- ent company for the underper- formance of its Canadian oper- ations, and it has made various allegations of misconduct re- lating to its treatment of union- ized workers and pension plan members. And they will get a final kick at the can at the Supreme Court of Canada after it agreed to hear the case following a leave ap- plication that claimed the On- tario appeal court's ruling on equitable subordination "fun- damentally and inappropriately narrows the scope of a court's jurisdiction and its remedial powers under the CCAA." Jeremy Opolsky, an insolven- cy and restructuring lawyer in the Toronto office of Torys LLP, wrote a paper on the doctrine's uncertain status in this country back in 2015. He says the Ontario decision "gets us much closer to some fi- nality in terms of its application in Canada," but he adds that the upcoming hearing at the Su- preme Court "may once and for all tell us where we stand." Andrew Hatnay, a partner at Koskie Minsky LLP who acts for non-unionized Stelco employ- ees, says some of the hesitance to embrace the concept may lie in its U.S. origins, where the doctrine has been enshrined in that country's Bankruptcy Code since 1978. "It's more formally recog- nized in the U.S., so when you talk about equitable subordina- tion here, the question becomes whether we should import a U.S. doctrine," he says. It's not the first time the obit- uaries have been prepared for equitable subordination in Can- ada in the three decades since it was recognized by a U.S. court for the first time and then incor- porated into legislation. The Supreme Court of Can- ada considered the doctrine in a 1992 case, but it declined to rule on whether it should be applied. The issue returned to the na- tion's top court in 2013 in the case of Sun Indalex Finance, LLC v. United Steelworkers, but they again found it unneces- sary to deal with the controversy as part of their disposition. That silence across 21 years was enough for the CCAA judge in the Stelco case, Herman Wil- ton-Siegel, who the appeal court judgment says appeared to read the Supreme Court's refusal to rule as an outright rejection of the principle. Wilton-Siegel found he lacked jurisdiction under the CCAA to apply the doctrine, in part because a legislative review of the act in 2009 gave Parlia- ment the chance to explicitly add equitable subordination. While the reform of the act included a number of other re- ranking mechanisms, he con- cluded the failure to add the doctrine was a policy decision he must respect. The appeal court decision upheld Wilton-Siegel's ruling, but it gave differing reasons. Ontario's Chief Justice George Strathy, writing for the court, looked at the act as a whole, concluding that "no- where in the words of the CCAA is there authority, express or im- plied, to apply the doctrine of equitable subordination." "Nor does it fall within the scheme of the statute, which fo- cuses on the implementation of a plan of arrangement or com- promise," Strathy added. Michael Barrack, a partner in the litigation and dispute reso- lution practice group at Blake Cassels and Graydon LLP, says even if the case were proceed- ing under the U.S. Bankruptcy Code, the circumstances would not justify application of the doctrine. In any event, the decision puts an end to uncertainty over its applicability in CCAA pro- ceedings, he says. "I think the fact of the matter is we don't need it," says Barrack, who acted for Stelco's U.S. parent before the appeal court. "I don't think there is any im- pediment for a person who faces the sort of conduct that would ground an application of equi- table subordination from find- ing an appropriate remedy in Canada." And Hatnay says he is in- clined to agree. 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