GMAC Commercial Credit Corporation v TCT Logistics

The protective dimensions of labour and employment law regularly collide with the norms of corporate and commercial law. In some instances, legislators have expressly overridden those norms, for example, through related employer provisions that treat two or more legally distinct entities as a single employer, making each jointly and severally liable for the obligations owed to employees.

In a similar vein, labour relations and employment standards statutes typically contain successor rights provisions that preserve collective bargaining rights and employment continuity when a business or part of a business is sold. The enactment of such legislation, however, does not put an end to the collision of norms, as inevitably the scope of these provisions needs to be administratively or judicially interpreted. This has certainly been the case when successor rights claims are made in context of bankruptcies.

In the past, this conflict between labour law and bankruptcy was manifested in litigation over the question of whether the sale of a business had occurred for the purposes of successor rights under labour relations acts. A key determinant of the outcome was whether the issue was to be determined according to commercial law or labour law norms. For many years, the Canadian courts insisted that the question was to be answered according to commercial law and so they held that the question of whether a sale of a business had occurred was not a matter within the jurisdiction of the labour board to decide. Rather, its correct resolution determined whether the board had jurisdiction to issue a successor rights order.

So even though labour boards decided the question in the first instance, a court was free, indeed bound, to substitute its view, the “correct” view, for that of the board if the board got it “wrong” (see, for example Parkhill Bedding & Furniture Ltd v International Molders & Foundry Workers Union of North America, Local 174 (1961), 26 DLR (2d) 589). As the test for jurisdictional error changed, so too did the courts’ language, but the result remained the same: because the question of whether there was a sale of a business was a matter of commercial rather than labour law, it was not within the boards’ expertise and so was to be judicially reviewed on a correctness standard (UES, Local 298 v Bibeault, [1988] 2 SCR 1048).

More recently, the Supreme Court of Canada (“SCC”) shifted its position and accepted that the question of whether the sale of a business had occurred for the purposes of successor rights applications was a matter within labour boards’ expertise and, therefore, its decisions on this question are to be reviewed on a standard of patent unreasonableness (Ivanhoe inc v UFCW, Local 500, [2001] 2 SCR 565).

The decision of the Supreme Court of Canada in GMAC Commercial Credit Corporation v TCT Logistics Inc, [2006] 2 SCR 123, is the most recent iteration of this ongoing conflict between labour and bankruptcy law, but its legal setting has changed.

Facts

The facts of the case are prosaic. A unionized company, TCT, became insolvent and a secured creditor, GMAC Commercial Corporation, obtained an order appointing KPMG as an interim receiver. The order provided that the employees were effectively terminated but also authorized KPMG to rehire any of TCT’s former employees. Additionally, it provided that KPMG was not and was not to be deemed a related or a successor employer within the meaning of any statute. One month later TCT was assigned into bankruptcy and KPMG sold most of the assets of the warehousing business to a phoenix company, Spectrum, incorporated for the purpose of acquiring TCT’s assets. It was operated by former TCT managers. The warehousing operations resumed at a different location but most of TCT’s old employees were rehired.

The union brought a successor rights application to the Ontario Labour Relations Board but under s. 215 of the Bankruptcy and Insolvency Act, RSC 1985, c B-3 [BIA], it needed to get leave from the bankruptcy judge. The bankruptcy judge, however, refused to grant leave, having determined that GMAC was not a successor employer because it was merely acting as a realizer of assets, not operating TCT’s business as a going concern.

On appeal, the court unanimously agreed that the labour board had exclusive jurisdiction to determine whether GMAC was a successor employer, but a majority was of the view that in deciding whether to grant leave under s. 215 the bankruptcy judge was entitled to take into account the impact a successful successor rights claim would have on the bankruptcy process. As a result, it held there was a higher threshold for granting leave to bring a successor rights application than is normally the case under the Mancini test (from Mancini (Bankrupt) v Falconi (1993), 61 OAC 332) which is designed to filter out manifestly unmeritorious claims. The union appealed.

The Majority Judgment

In an 8-1 judgment, the majority of the Supreme Court of Canada held that the Mancini test applies equally to all applications made under s. 215 and that a higher test for successor rights applications is not warranted. The majority judgment, written by Abella J. (a former chair of the Ontario Labour Relations Board) clearly favoured the protection of labour law norms in the bankruptcy process and this was reflected in both its interpretation of the substantive and procedural sections of the BIA.

Substantively, the court held that provincial labour law was not in conflict with the BIA even though it imposes obligations on the receiver that might interfere with the maximization of stakeholder value. Thus, not only are receivers prevented from paying the workers they hire less than the minimum wage and subjecting them to hazardous working conditions that violate occupational health and safety laws, so too they cannot avoid the incidents of collective bargaining law, including successor rights provisions, simply because it would make stakeholders better off.

Presumably, then, a more fundamental compatibility between the operation of provincial labour laws and federal bankruptcy and insolvency law would have to be shown to convince the court that labour norms are incompatible with bankruptcy law and so must give way because of federal paramountcy. From that substantive position, it followed that procedurally to allow a bankruptcy judge to withhold consent when workers sought permission to enforce their provincial labour rights before labour boards and tribunals would, as Macpherson J.A. of the Ontario Court of Appeal observed in his dissent, “introduce through the side door of s. 215… precisely what [is not permitted] through the front door…”

The Dissent

In a lengthy and spirited dissent, Deschamps J. attempted to identify some fundamental conflicts that might emerge as the result of a successful successor application, but in my view (and presumably those of her colleagues) her examples were improbable. For instance, Deschamps J. suggested that a successor rights declaration might make the receiver liable for unpaid wages owed by the insolvent firm, thereby giving them a priority that they did not enjoy under the BIA. Yet to my knowledge there is no evidence that boards have ever made such orders in the past or are likely to do so in the future.

Successor rights orders made under labour relations acts, after all, preserve existing collective bargaining rights; it is doubtful that workers rehired by the successor employer could pursue claims for wages unpaid by the bankrupt against the successor. Moreover, in the off chance an order fundamentally incompatible with a specific provision of the BIA was made, the receiver could apply to have it judicially reviewed and, notwithstanding the lower standard, be successful. The alternative of giving bankruptcy judges power to filter out claims in advance poses too great a risk that the norms of bankruptcy law will be interpreted expansively at the expense of the norms of labour law.

Conclusion

The practical implications of the SCC’s judgment on the bankruptcy process will depend on several factors, including how expansively labour boards interpret “sale of a business” and the extent of the courts’ willingness to defer to board decision-making. I suspect the case will not have a significant impact on the bankruptcy process. Rather, the decision is more likely to be cited for the proposition that protective labour law norms are highly valued by the courts and that the administrative tribunals that interpret and apply those norms ought to be given ample leeway to do so.