In ITB Marine Group Ltd. v. Northern Transportation Company Limited, Inuvialuit Development Corporation and Norterra Inc., the Court was required to determine the priority of claims in a bankruptcy between a secured creditor and a deemed trust provided by the Pension Benefits Standards Act, 1985 ("PBSA")..

Northern Transportation Company Limited ("NTCL") was a marine shipping and transportation company. During a period of insolvency in 2011, NTCL was unable to rectify a shortfall in its pension plan. NTCL reached a "Workout Agreement" with representatives of the NTCL pension plan and unions representing NTCL employees that provided that NTCL would make payments to ameliorate the pension plan shortfall over the next 10 years.

In 2012, NTCL agreed to purchase 19 vessels and related equipment from ITB. The purchase was financed by ITB through a charter party and equipment lease with NTCL. Pursuant to the financing arrangements, ITB retained title to the vessels and equipment until the purchase price was paid, while NTCL had possession and use of the assets. ITB registered its security interest in the vessels and equipment in the Alberta Personal Property Registry and the Northwest Territories Personal Property Registry on October 31 and November 1, 2013 respectively.

NTCL made an assignment in bankruptcy on December 30, 2016.

After the bankruptcy, NTCL's receiver sold the marine vessels and equipment for $6.1 million. ITB claimed it was entitled to the proceeds of the sale of the marine vessels and equipment by virtue of its security interest in the assets. Contrastingly, Morneau Sheppell Inc. (the "Pension Administrator") argued that a deemed trust pursuant to section 8 of the PBSA existed over the proceeds, which entitled it to the proceeds in priority to ITB.

In order to determine which claim held priority, the Court asked three related questions:

  1. Does a deemed trust arise under section 8(2) of the PBSC in respect of the payments made in the Workout Agreement?
  2. Does the deemed trust attached to the marine vessels and equipment purchased from ITB?
  3. Does the deemed trust rank in priority to ITB's claim as a secured creditor in a bankruptcy?

On the first question, the Court held that the scope of the deemed trust under the PBSC included the payments that are required under a workout agreement that have "accrued to date". The Court found that the amount "accrued to date" was the amount of NTCL's obligation to make future payments that was fully constituted and precisely ascertainable at the time of the bankruptcy. In the Court's view, the entire remaining amount under NTCL's Workout Agreement was fully constituted and precisely ascertainable, despite not being payable at the date of the bankruptcy. As a result, the deemed trust extended to the payments that were required to be paid in the future under the Workout Agreement.

On the second question, ITB argued that since title to the marine vessels and equipment remained with ITB until the purchase price was paid, that the PBSA's deemed trust did not attach to those assets. The Court disagreed in part, and held that NTCL held a proprietary interest in the marine vessels and equipment, notwithstanding the fact that title had not yet passed. As a result, the PBSA's deemed trust attached to NTCL's proprietary interest in the vessels and equipment, not to the assets themselves.

Regarding the final question, The Court found that ITB's security interest held priority over the deemed trust set out by the PBSA. Justice Bowden held that the deemed trust in the PBSA arose upon the bankruptcy of NTCL. Since it did not arise until the bankruptcy, the Court determined that giving it priority over previously perfected security interests would complicate creditors' rights, and make it difficult to assess an entity's creditworthiness.

To illustrate why granting the deemed trust priority under these circumstances is a problem, consider the following example. If you were a creditor, looking to extend credit to a business, you would be unable to ascertain in advance whether there was a deemed trust in priority to your own security. Even if you could uncover that there was a pre-existing workout plan, or amounts owing by the business to their pension plan, whether or not the pension plan's claim would rank ahead of your security would only be triggered by the bankruptcy, an event that may not be foreseeable years in advance. As a result, it would make extending credit to most business a much more uncertain proposition.

As a result, the Court found that ITB had a valid and enforceable security interest in the vessels and equipment which ranked in priority to the deemed trust provided by the PBSA.

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