For Leon Kozierok, a retired executive who worked for Toronto-based aluminum processor Indalex Ltd. for 25 years, word that the company had sought court protection from its creditors meant a dramatic drop in his income.
As his former employer descended into bankruptcy protection proceedings in 2009, Mr. Kozierok learned that his pension would be slashed to less than $2,000 a month from $5,000. Plus, the proceeds from the selloff of the company's assets were due to its lenders, not set aside to cover its $6.75-million pension shortfall.
He says he was forced to give up his retirement and head back to work as a consultant. It's a common story, and an issue that made headlines as retirees of Nortel Networks Corp. saw their pension plan shortchanged after the once high-flying firm filed for bankruptcy protection in 2009. Pension plan members are usually last in the lineup of creditors when an employer goes under, and often lose their retirement nest eggs.
But Mr. Kozierok – who used to earn a low six-figure salary heading the company's alloy division until retiring in 2002 – decided to put up a fight. He joined 14 other retired executives and took Indalex and its creditors to court. (A small number of unionized employees also launched a similar case.)
"As a country, we need to protect the rights of working people, whether they are executives, or blue collar workers," Mr. Kozierok, 69, said in an interview. "I mean, when I worked for that company for 25 years, part of my compensation was this money that was put aside for me for my retirement."
The pensioners' surprise victory, in the form of a landmark Ontario Court of Appeal ruling in April, appeared to give hope to others stuck in the same situation. But it set off a firestorm in the world of bankruptcy lawyers.
They warned that reversing the pecking order and putting pensioners ahead of other creditors would make it harder for companies to get financing. They also went straight to work, crafting fine-print escape clauses or workarounds to mitigate the possible effect of the ruling on their financing deals.
Now, Indalex's other creditors have asked the Supreme Court of Canada to weigh in, arguing in submissions to the top court, which could decline to hear the case, that the Indalex ruling has "potentially far-reaching and profound consequences" for everyone in the business of lending money, and has created uncertainty.
In the meantime, before the court decides whether to add the case to its docket, both bankruptcy lawyers and those who work on financings have been sharpening their pencils, looking for ways to Indalex-proof their deals.
"There's a whole industry that's developed around this case," said Andrew Kent, chief executive officer of law firm McMillan LLP in Toronto, who said a recent financing his firm worked on was made much more complex by the Indalex factor.
"We just recently completed a deal in another province which doesn't have quite the same rules," Mr. Kent said. "The effect of the decision, though, was to make it much more difficult to get the deal done. Some lenders refused to participate."
He said the ruling has made lenders – and not just those who make emergency loans to distressed companies – reluctant to finance companies with expensive defined-benefit pension plans, for fear their interests could be trumped if the company goes into restructuring.
"There's still a [government]policy to support defined-benefit plans and to encourage them," Mr. Kent said. "If businesses that have them are going to have trouble getting certain kinds of financing, if they need it, then that's not going to encourage them to have those plans."
Critics say the Indalex ruling creates uncertainty for those companies restructuring under the Companies' Creditors Arrangement Act, which allows troubled enterprises breathing room in order to avoid bankruptcy. Creditors are nervous that their loans could end up trumped by the needs of pension plans in CCAA proceedings, if the Indalex ruling stands.
Among the escape clauses that Bay Street lawyers have come up are so-called bankruptcy triggers that would allow creditors to force a company into full-on bankruptcy, instead of allowing it to restructure under the CCAA. These triggers, lawyers say, is meant to avoid any new obligations to pensioners as a result of the Indalex ruling.
According to a recent seminar on the issue held by lawyers from Blake Cassels & Graydon LLP, lenders are already loading credit agreements with bankruptcy triggers, such as an extra "$1,001 unsecured promissory note," which would allow creditors to petition a company into bankruptcy. (Blakes, which represented Indalex, would not comment.)
Kevin McElcheran, a bankruptcy lawyer with McCarthy Tétrault LLP in Toronto, said another workaround his firm has come up with is the use of Bank Act securities, which he said would allow federally regulated banks to trump the provincial pension legislation relied on in the Indalex decision.
Andrew Hatnay, a lawyer with Koskie Minsky LLP, who fought the case on behalf of Mr. Kozierok and the other executives, pointed out that the Ontario Court of Appeal judgment, written by pension law expert Madam Justice Eileen Gillese, said courts should not look fondly on those who enter bankruptcy in order to avoid pension obligations.
"What she's saying is the courts see through exactly what you're doing, and if a company's trying to do this, it's not going to be received well," Mr. Hatnay said.
Darrell Brown, a lawyer with Sack Goldblatt Mitchell LLP who represented the United Steelworkers union members involved in the case, said the reaction from Bay Street to the Indalex decision has been overblown, and is mostly "posturing" and "hyperbole" ahead of the potential Supreme Court of Canada battle.
He said the Indalex ruling does not mean all pension obligations will jump ahead of other creditors in CCAA proceedings. It means companies need to make a "good faith effort" to meet their pension obligations, and justify what they have done, rather than simply ignore them. Courts would not allow massive pension obligations to derail a restructuring effort and prevent a company from getting emergency financing, he said.
"There's some fear about what the scope is," Mr. Brown said. "But I think that fear has been fostered by the commentary from Bay Street."
For Mr. Kozierok and his fellow Indalex retirees, the prospect of another court battle before their pension cheques see a modest increase is decidedly unappealing, especially with the group's legal bill pegged at $200,000 and mounting.
"It means that it's now going to get dragged out heaven knows how much longer," he said. "I'm hoping that most of us will be around when this thing finally gets resolved. It has dragged out for two years now, and meantime, we're writing cheques for legal fees. It's not a pleasant situation."