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Court File No. CV-14-10695-00CL
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 A PROPOSED PLAN OF
COMPROMISE OR ARRANGEMENT WITH RESPECT TO
U.S. STEEL CANADA INC.
NOTICE OF OBJECTION
April 14, 2015
Paliare Roland Rosenberg Rothstein LLP
155 Wellington Street West, 35th Floor
Toronto, ON M5V 3H1
Ken Rosenberg (LSUC #21102H)
Email: [email protected]
Lily Harmer(LSUC #31880T)
Email: lily.harmerapaliareroland.com
Gordon Capern (LSUC #32169H)
Email: gordon.capernapaliareroland.com
Tel: 416-646-4300/Fax: 416-646-4301
Lawyers for United Steel, Paper and Forestry,
Rubber, Manufacturing, Energy, Allied Industrial
and Service Workers International Union (USW)
INCH HAMMOND Professional Corporation
500 — One King Street West
Hamilton, ON L8P 4X8
Sharon L.C. White
Email: [email protected]
Tel: 905-525-4481
Fax: 905-525-0031
Lawyer for Local 1005
Local 8782
Attn: Bill Ferguson, President
TO: THE SERVICE LIST
NOTICE OF OBJECTION
(USS Claims Approval Motion returnable on a date to be determined)
A.
OVERVIEW — SUMMARY OF OBJECTION
1.
The United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied
Industrial and Service Workers International Union ("USW") is an international
trade union representing the interests of the active and former hourly workers at
U.S. Steel Canada Inc.'s ("USSC") Hamilton Works ("HW"), and Lake Erie Works
("LEW"). The USW is working with Locals 1005 (HW) and 8782 (LEW)
(collectively, the "Union").
2.
The Union is one of the most significant stakeholders in these proceedings. It
represents workers, retirees, and beneficiaries of USSC's defined benefit
pension plans sponsored by USSC (the "Pension Plans") (the "Beneficiaries").
Many of the Union's members will lose their jobs, pensions, and other postemployment benefits ("OPEBs") if United States Steel Corporation's ("USS")
request
that
its
non-contingent
secured
claim
in
the
amount
of
USD$122,432,496.11 and its unsecured claims in the aggregate amounts of
USD$127,805.815.36 and CAD$1,847,169,934.04 be accepted as proven claims
pursuant to the Claims Process Order dated November 13, 2014 if granted. If
allowed, USS's claims will improperly and inequitably displace the Union's and
Beneficiaries' recovery on their legitimate claims.
3.
The Union's Objection is based on a number of grounds:
1
(a)
USS's secured claim is based on security interests effectively granted by
USS to itself, at a time when there was no independent board of directors
or advisors, for insufficient consideration, and in a manner which
amounted to an improper preference and/or fraudulent conveyance;
(b)
a significant portion of USS's "debt" is really in the nature of equity and
should be re-characterized as such. For instance:
(i)
much of the debt was incurred to acquire Stelco;
(ii)
USS completely controlled USSC;
(iii)
USS was the sole source of USSC's financing;
(iv)
USS provided commercially unreasonable interest and repayment
terms;
(v)
USS had no reasonable expectation of repayment on the purported
loans; and
(vi)
USSC was significantly undercapitalized throughout the years
following its acquisition by USS;
(c)
USS has acted in a manner that is oppressive, unfairly prejudicial to, and
unfairly disregards the interests of the Union's members in respect of all of
USSC's obligations. USS has failed to:
(i)
comply with its obligations to the federal and provincial government
to maintain and/or increase production levels;
2
(ii)
make good faith efforts to run USSC as a viable business,
managed in Canada;
(iii)
maintain the viability of the Pension Plans; and
(iv)
avoid incurring debts which would give USS repayment priority over
USSC's other creditors or which would seriously dilute any recovery
by them on their claims;
(d)
USS has engaged in business practices which breached legally binding
undertakings it provided to the Canadian government, and which
undermined USSC's ability to meet its obligations to the Beneficiaries.
USS's conduct in this regard is in breach of fiduciary duties that it owed to
the Beneficiaries by virtue of its role as administrator of the Pension Plans,
including:
(i)
failing to meet its undertakings to the Canadian government with
respect to production and employment levels;
(ii)
directing USSC's operations in a way which caused it to incur
significant debts;
(iii)
diverting production from Canadian facilities to its American
facilities; and
(iv)
locking out the Union's members in order to slow down Canadian
production rather than for genuine labour relations purposes.
3
4.
USS controlled USSC to further its own interests, to the detriment of USSC's
business, its employees, pensioners, and other stakeholders. This conduct
directly affects the validity of many or all of USS's claims. It would be inequitable
to allow USS's claims in these circumstances, at the expense of USSC's other
creditors, and in particular the Union and Beneficiaries. Its claims should be
disallowed in their entirety, reduced, or subordinated to the claims of the Union
and the Beneficiaries.
5.
Given these fundamental issues with USS's claims and their significant impact on
other stakeholders, it is crucial that these claims be tested through a robust
process, on a full evidentiary record, prior to a determination of this Court as to
their validity.
B.
PARTIES AND BACKGROUND TO THIS PROCEEDING
1.
6.
USS
USS is a publicly traded Delaware corporation. It is one of the largest integrated
steel manufacturers in the world, with facilities throughout North America, Europe
and South America. It operates integrated steel facilities, research and
development facilities, tubular operations, and it also produces coke.
7
USS and a number of its related companies have filed 14 distinct claims against
USSC (the "USS Claims") pursuant to an order of this court dated November 13,
2014 (the "General Claims Process Order)). The General Claims Process Order
established a claims process for USSC to identify, determine, and resolve certain
claims of its creditors. Paragraph 28 of that Order provides that the USS's claims
4
shall not be accepted or determined as Proven Claims without approval of this
Court.
8.
The Monitor is clear in its Seventh Report that it has merely checked the
documentation and registration of the USS Claims. It has not reviewed "any other
matters ....including without limitation the amount secured under the USS
Security or the Priority thereof," nor has it considered "the potential application of
equitable principles, doctrines or remedies that might be claimed to alter the
rights created by written agreements."
2.
9.
USSC
USSC is a wholly owned subsidiary of USS. USSC and its subsidiaries operate
and conduct most of their business from two large steel plants in Ontario:
10.
(a)
HW, located in Hamilton, Ontario, and
(b)
LEW, located in Nanticoke, Ontario.
LEW also has a separate finishing facility.
3.
11.
The Union
USW is a trade union with approximately 750,000 members. USW's head office
is in Pittsburgh, Pennsylvania. It is composed of 13 Districts, with three of those
Districts in Canada. District 6 covers Ontario and Atlantic Canada and has more
than 74,000 members and approximately 50,000 retirees.
12.
Local 1005 is the bargaining agent representing workers at HW as well as the
retirees and beneficiaries of USSC's HW defined benefit and defined contribution
5
pension plans. It currently represents approximately 8,250 active and retired
members.
13.
Local 8782 is the bargaining agent representing workers at LEW as well as the
retirees and beneficiaries of USSC's LEW defined benefit and defined
contribution pension plans. It currently represents approximately 785 active and
retired members.
14.
The USW appears on behalf of its members and retirees in all proceedings of
significance under the Companies' Creditors Arrangement Act ("CCAA") that
affect its members, and in similar proceedings in the United States. In certain
cases, some of the Locals also choose to be active participants.
15.
The USW, with its then Locals, was a key stakeholder and an instrumental
participant in the successful restructuring proceedings under the CCAA in 20042006 involving Stelco Inc. ("Stelco"), described below, which ultimately resulted
in USS's acquisition of the I-IW and LEW facilities in 2007. At that time, the Union
supported the steps which were taken by Stelco, the federal and provincial
governments, and ultimately USS, to fulfill USS's representations that the
Pension Plans were "safe" with USS.
4.
16.
The Pension Plans
USSC provides pension and retirement benefits pursuant to:
6
(a)
registered non-contributory defined benefit pension plans, which include
pension plans for Lake Erie Works employees (the "LEW Plans") and
Hamilton Works employees (the "HW Plans");
(b)
four group registered retirement savings plan arrangements; and
(c)
non-registered supplemental individual "retirement benefit contracts" and
other supplemental non-registered retirement payments known as "retiring
allowances".
17.
USSC also provides OPEBs to former employees and their dependents,
including drug and medical benefits. The total present value of future OPEB
contingent liabilities is close to $790 million at August 31, 2014.
5.
Stelco
18.
Stelco, in events described below, became USSC.
19.
Stelco was a publicly traded, Canadian-based steel producer, founded in 1910.
Stelco produced a variety of steel products for customers in the automotive, steel
service centre, appliance, energy, and construction industries within North
America. It was one of Canada's largest steel producers and a competitor of
USS.
20.
On January 29, 2004, Stelco sought and obtained an order from the courts
granting creditor protection under the CCAA. The CCAA restructuring process
continued for two years, until March 31, 2006.
7
21.
At the time, the USW represented in excess of 5,550 unionized employees
working with Stelco and their affiliated companies as follows:
22.
(a)
Stelco Hamilton: approximately 3500 employees (Local 1005);
(b)
Stelco Lake Erie: approximately 1000 employees (Local 8782);
(c)
CHT Steel Company Inc.(now sold) 24 employees (Local 7024);
(d)
Norambar Inc.(now sold): approximately 350 employees (Local 6951);
(e)
AltaSteel Ltd.(now sold): approximately 280 employees (Local 5220);
(f)
Stelwire Ltd.(now sold): approximately 315 employees (Local 5328); and
(g)
Stelfil Ltee.(now sold): approximately 235 employees (Local 3258).
The Union was actively engaged in the CCAA restructuring process. USW
retained legal, financial, and actuarial advisors to assist itself and all of its
affected Locals and their retirees.
23.
On March 31, 2006, Stelco emerged from CCAA protection. Tricap Management
Limited ("Tricap") acted as the USW financial advisor in the Stelco CCAA
proceedings. Following an introduction by the USW, Tricap purchased the HW
and LEW businesses.
6.
24.
The Pension Plans in the Stelco restructuring
At the time of the Stelco restructuring, Stelco's pension plans and OPEBs were
underfunded in an aggregate amount in excess of $2.5 billion. The Union's
8
portion of the claim, together with other claims of the USW and its members,
made the USW and its then locals the largest creditor of Stelco.
25.
As part of the CCAA plan of arrangement under which Stelco emerged from
bankruptcy protection on March 31, 2006, Stelco and the province of Ontario
entered into a pension funding agreement (the "Pension Agreement"). The
Pension Agreement was designed to transition Stelco from the provisions of the
Pension Benefits Act, R.S.O. 1990, c. P.8 ("PBA"), which had exempted Stelco
from the requirement to fund solvency deficiencies in the Pension Plans, to the
general regulatory requirements of the PBA by January 1, 2016. Regulation
99/06 of the PBA (the "Stelco Regulation") came into effect in 2006, and will
expire on December 31, 2015, following which the Pension Plans will be subject
to the normal PBA funding regime.
26.
The Stelco Regulation provides that USSC is required to contribute level monthly
contributions to the Pension Plans. Currently, USSC contributes $70 million per
year in the aggregate as required by the Stelco Regulation, in addition to the
funding of any benefit improvements under each of the Pension Plans in
accordance with the regular PBA funding regime.
27.
The Pension Agreement was intended to ensure the financial security of the
more than 12,500 retirees in the Stelco plans, as well as their spouses and
dependents.
28.
Pursuant to the Pension Agreement, Stelco made a special payment of $400
million on March 31, 2007. Stelco was permitted to fund the solvency deficit over
9
10 years, versus the usual requirement of 5 years. Payments of $65 million per
year were to be made from 2006 — 2010, and $70 million per year from 2011 —
2015, with payments ceasing should the plan be fully funded prior to 2015.
29.
The Ontario government also extended a $150 million loan to Stelco at a 1%
interest rate. The Ontario government agreed that 75% of the $150 million loan
would be forgiven if the Pension Plans were fully funded on a solvency basis by
December 31, 2015.
7.
30.
Steel-making facilities in the wake of Stelco's restructuring
In 2007, HW was an integrated steel producer with a 445 hectare production
facility in Hamilton. It produced approximately 2 million tons of semi-finished steel
annually, and an extensive range of products, including world-class zinc coated
steel on its "Z line". It had a coke plant, a blast furnace, a sinter plant,
steelmaking furnaces, rolling mills, pickling machines, galvanizing lines, and cold
finishing mills.
31.
In 2007, LEW was an integrated steel producer located on a 640 hectare
production complex in Nanticoke. It had been built in 1980 and USS described it
at the time of its acquisition as the "newest and most cost-effective integrated
steel facility in North America," producing 2.25 million tonnes of slabs and 3
million tonnes of high quality rolled coil. A significant upgrade of the LEW hot
strip mill was substantially completed in 2006 that increased its steel-making
capacity and expanded its hot strip mill. It had a blast furnace, a coke plant,
steelmaking furnaces, a hot strip mill, and rolling and cold finishing mills.
10
32.
HW and LEW were complementary facilities, and operations were coordinated
between the two. LEW produced steel slabs and unfinished hot band steel, which
could either be sold directly to customers or sent to HW for finishing. HW
depended on LEW for steel slabs and unfinished hot band steel for its finishing,
coating, and galvanizing operations.
33.
HW and LEW were, and continue to be, major employers in their areas. Local
8782 and Local 1005 and their members are significant contributors to their local
communities and economies.
8.
USS acquisition of Stelco
(a)
34.
USS announces agreement to acquire Stelco
On August 26, 2007, USS and Stelco announced that they had entered into an
agreement pursuant to which USS, through a wholly owned subsidiary, 1344973
Alberta ULC ("134 Alberta"), acquired Stelco for approximately $1.1 billion.
35.
On August 27, 2007, John Surma, CEO of USS, met with members of the Union
at the Steelworkers Hall in Hamilton. Surma told the Union that USS had done its
due diligence and had no problems with the Union's collective agreements,
contracts, or pensions.
(b)
36.
USS's undertakings to the Government of Canada and
representations regarding the Pension Plans
USS's acquisition of Stelco was subject to the review and approval of the federal
Minister of Industry under part IV of the Investment Canada Act ("ICA"). That
11
review and approval is intended to ensure that a proposed investment from a
non-Canadian is likely to be of net benefit to Canada.
37.
Under the ICA, applications must contain certain information, including a detailed
description of the investor's "plans" for the Canadian business it proposes to
acquire.
38.
By letter dated October 10, 2007 (the "Undertaking Letter"), USS and 134 Alberta
confirmed to the Minister that in consideration for allowing the acquisition of
Stelco by USS, through its wholly owned subsidiary 134 Alberta, USS and 134
Alberta would perform the 31 undertakings which were set out in Schedule "B" to
the Undertaking Letter (the "Undertakings").
39.
The Undertakings are legally binding commitments which can be enforced under
s. 39(1)(e) of the ICA. Undertakings assure the Minister that the investor is
legally committed to carrying out the investment in a way that is beneficial for
Canada in light of the factors in the ICA and may relate to matters such as
continued operations in Canada, participation of Canadians in the business, and
employment in Canada.
40.
The Union was involved in the consultations leading up to the Investment
Canada application.
41.
The Undertakings were significant to the Union, particularly those undertakings
with respect to production and employment levels. Without those assurances, the
12
Union would not have been satisfied with, and would not have supported, USS's
acquisition of Stelco.
42.
USS and 134 Alberta undertook to increase annual steel production for a term of
three years from the date of the completion of USS's investment (the "Term"):
The Investor will increase the annual level of production at the facilities of
the Canadian Business by at least 10% over the Term (excluding periods
of interruption in production due to capital investment projects) relative to
the average of the last three completed calendar years. (the "Production
Undertaking").
43.
USS and 134 Alberta further undertook to maintain certain employment levels
over the Term:
Over the Term, the Investor will maintain an average aggregate
employment level at the Canadian Business of not less than 3,105
employees on a full time equivalent basis if the bar mill continues to be
operated or 2,790 employees on a full time equivalent basis if the bar mill
is sold or closed. (the "Employment Undertaking").
44.
USS also gave certain undertakings with respect to the degree of Canadian
control and management of the business in Canada (the "Canadian Control
Undertakings"), including that:
(a)
The head office of USSC would remain in Canada;
(b)
Operational management in Canada would continue to be responsible for
the day-to-day operations of the business, including:
(i)
Production;
(ii)
Staffing;
13
45.
(iii)
Safety and industrial hygiene;
(iv)
Facility planning & scheduling;
(v)
Human resources & employee relations; and
(vi)
Subsidiary & plant accounting and legal.
Moreover, Gretchen Haggerty, USS's CFO, represented publicly that the Stelco
pensions were "safe" with USS, in an article she wrote for the Hamilton
Spectator, published on October 5, 2007 (the "Pension Representation"). She
gave two reasons:
(a)
USS was unconditionally guaranteeing pension funding obligations at the
corporate (i.e., USS as opposed to USSC) level. Thus, instead of having
to rely solely upon Stelco's ability as a stand-alone enterprise to generate
the cash necessary to meet pension funding obligations, Stelco's
employees and pensioners could now look to the strength of the entire
company to do so; and
(b)
USS was making an "extraordinary" payment of $32.5 million into the
plans up front at closing, in addition to the pension payment schedule
agreed upon by Ontario and Stelco.
(c)
46.
USSC is formed
On October 31, 2007, USS announced that it had completed the Stelco
acquisition.
14
47.
On acquisition, Stelco changed its name to U.S. Steel Canada Inc.
48.
Given USS's undertakings and representations, including that it would maintain
employment, increase production levels, make capital investments in LEW and
HW, and that the pensions would be "safe", as described above, the Union
supported USS's acquisition of Stelco.' Without such representations, the Union
would not have supported the acquisition.
49.
As part of the Stelco acquisition, USSC became an indirect, wholly owned
subsidiary of USS.
(d)
50.
The Beneficiaries'and the Union's reasonable expectations
At the time of the Stelco acquisition, USS guaranteed Stelco's pension funding
obligations with the province of Ontario, and agreed to make a voluntary
contribution of $32.5 million to Stelco's Pension Plans at the closing of the
investment (the "Pension Undertaking").
51.
The Beneficiaries and the Union had reasonable expectations, based on the
Undertakings and USSC's fiduciary obligations pursuant to the Pension Plans,
USS's other public commitments, and its public comments, that USS would
cause USSC to:
(a)
comply with the Undertakings;
(b)
comply with the Pension Representation;
While Local 1005 did not oppose the acquisition transaction as a whole, Local 1005 was concerned over
amendments to the 2006 Plan of Arrangement that removed certain safeguards for pension funding.
Local 1005 did not support the 2007 Plan of Arrangement.
15
(c)
maintain and/or increase production levels at HW and LEW;
(d)
maintain and/or increase employment levels at HW and LEW;
(e)
make good faith efforts to run USSC as a viable business;
(f)
maintain the ongoing health and viability of the Pension Plans; and
(g)
not incur or place security on debts which would give USS repayment
priority over or dilute repayment to USSC's other creditors.
52.
The Union made significant efforts during the Stelco restructuring to ensure the
future health of the Pension Plans. It expected that the Pension Plans would be
protected based on Stelco's, and later USS's, assurances that the Pension
Agreement would bring the plans to fully funded status by December 31, 2015,
based on best estimate assumptions.
C.
USS FIDUCIARY DUTY TO PLAN MEMBERS
1.
53.
USS's role as administrator of the Pension Plans
USSC and USS are each administrators of the Pension Plans. As such, both
entities owe fiduciary duties to the Beneficiaries.
54.
USS has delegated administration and investment of certain of its pension and
retirement plans to the United States Steel and Carnegie Pension Fund ("UCF")
pursuant to a Board of Directors resolution and a Retirement Plan Administration
Services Agreement between UCF and USS dated August 5, 2008.
16
55.
UCF, a Pennsylvania corporation operating out of New York City, operates as an
investment arm of USS. It is controlled by USS.
56.
USS, through UCF and otherwise, administers pension, retirement, medical care,
and other benefit plans for employees, both current and retired, of USS and
USSC, including the Beneficiaries.
2.
57.
USS owes the pension beneficiaries fiduciary duties by virtue of its
administrator role
USS and USSC, as joint pension plan administrators, owe the Beneficiaries
statutory duties as set out in the PBA and other relevant legislation.
58.
In addition to these statutory duties, USS, having assumed the role of
administrator of the Pension Plans, owed the Beneficiaries fiduciary duties to:
(a)
act in the Beneficiaries' best interests;
(b)
avoid situations which created a risk that the USS and USSC could prefer
their own financial interests over their duties to the Beneficiaries as
administrator of the Pension Plans;
(c)
ensure that USSC, as plan sponsor, would be able to and did continue to
ensure that pension payments were made when due;
(d)
advise the Beneficiaries should USSC become insolvent and no longer be
able to meet its obligations as sponsor of the Pension Plans;
(e)
advise the Beneficiaries if any situation arose which put at risk the duties
they owed to Beneficiaries, and resign as administrator; and
17
(f)
avoid taking steps which would imperil the long-term viability of the
Canadian business and, by extension, of the Pension Plans.
D.
USS HAS BREACHED ITS FIDUCIARY DUTIES
59.
In breach of the duties it owed to the Beneficiaries, USS directed USSC in a way
that has been ruinous to the USSC business and has undermined its ability to
meet its funding obligations to the Pension Plans. USS, by virtue of its control of
USSC, has prevented USSC from becoming a profitable business.
60.
As described below, USS has diverted production away from USSC and towards
its American plants, and instituted lockouts which resulted in the slowing down of
production in Canadian plants, all in breach of the Undertakings, the Pension
Representation, and its fiduciary duties to the Beneficiaries.
61.
It is clear from these, and many other, decisions and activities, that USSC was
not being run by its management and board, but at the direction of USS in
Pittsburgh. These decisions and activities were directed by USS and were not in
the best interests of USSC, the employees represented by the Union, or the
Beneficiaries.
62.
By effectively undermining USSC's business, USS has increased the amount of
USSC's debt, diluting the Union's and Beneficiaries' claims against USSC. USS
now attempts to recover the alleged debts owed by USSC in this proceeding, to
the detriment of USSC's other creditors, including the Beneficiaries, and in
further breach of the fiduciary duties it owes to the Beneficiaries.
18
1.
63.
USS's control of Canadian operations from Pittsburgh
Following USS's acquisition of Stelco, USS assumed control of USSC's
enterprise.
64.
In so doing, USS breached the Canadian Control Undertakings made to Industry
Canada.
65.
Though USSC's head office nominally remained in Canada, USSC effectively
became a branch plant controlled by USS in Pittsburgh from that point forward.
66.
USS controlled the members of USSC's Board of Directors. Between November,
2007 and December, 2013, a majority of USSC's Board of Directors was
controlled by USS.
67.
USS controls all senior management at USSC. All senior managers are located
in Pittsburgh, not in Canada. Any managers located in Canada are required to
obtain approval from USS prior to taking any material action or decision, and
sometimes even minor actions and decisions.
68.
USS controls USSC's human resources, including:
(a)
payroll;
(b)
hiring employees;
(c)
firing employees;
(d)
discipline;
19
69.
(e)
promotion; and
(f)
health and safety.
All human resources policies, including health and safety policies, came out of
Pittsburgh, regardless of whether they were appropriate in the Canadian context
and under Ontario law.
70.
When Locals 1005 and 8782 were engaged in collective bargaining with USSC,
senior executives and managers from USS represented USSC.
71.
Other key functions of the company are performed by USS in Pittsburgh,
including control over:
(a)
(b)
Customers, including:
(i)
sales teams;
(ii)
recruitment;
(iii)
retention;
Products, including:
(i)
order books;
(ii)
purchasing;
(iii)
where particular work was done;
(iv)
order of manufacture;
20
72.
(v)
final destination;
(vi)
pricing;
(c)
Capital projects (new projects and repairs); and
(d)
Day to day matters, including:
(i)
approval for reimbursement of even small amounts; and
(ii)
IT support.
USS has had virtually complete control over USSC's operations and was and is
able to run it entirely for the benefit of USS, without regard to other stakeholders'
interests or to the fiduciary duties it owed and continues to owe the Beneficiaries.
At all relevant times, USS has been USSC's alter ego.
2.
73.
2008: USS begins to decrease production in Canada
At the time USS acquired control of USSC, HW's and LEW's operations were
integrated. LEW was originally built to be a facility which would complement
production at HW and which in turn would be complemented by operations at
HW.
74.
In November and December 2007, at the time USS took control, USS's Canadian
operations produced 490,000 tons of steel.
75.
Beginning in 2008, USS caused USSC to begin to decrease production and
redirected work to its U.S.-based plants.
21
76.
In November 2008, USS shut down the blast furnace at HW and cut almost 700
of its 1,700 hourly workers.
77.
USS failed to meet its obligations under the Production Undertaking for 2008. In
2008, USSC produced approximately 3.9 million tons of steel, which was roughly
equal to the previous benchmark level of 3.95 million. Under the Production
Undertaking, USS had agreed to increase annual production to 10% above the
benchmark level.
3.
78.
2009: Work is shifted to U.S. plants / "Buy American"
On March 3, 2009, USS announced it was putting 1,500 USSC employees out of
work by idling:
79.
(a)
the finishing and coking operations at HW; and
(b)
the steelmaking and finishing operations at LEW.
USS provided no justification for idling the LEW. USS had described the LEW
facility as the "most modern integrated steel plant in North America" in its press
release at the time of the Stelco acquisition.
80.
As a consequence of idling production, USS failed to comply with the
Employment Undertaking.
81.
With production idled at HW and LEW, USS began shifting production to its
American plants, and sending products to the United States for manufacturing. It
began transferring USSC-produced coke from HW to its American facilities for
conversion into steel products. Although USS claimed that the shutdowns were
22
temporary, it gave no indication as to when or if the plants would resume
production.
82.
During the period the HW and the LEW were closed, USS served its Canadian
customers with steel from its American plants, virtually all of which could have
been produced by USSC.
83.
At that time, USS continued to produce steel at the Mon Valley Works near
Pittsburgh, the Gary Works in Gary, Indiana, and the Fairfield Works near
Birmingham, Alabama. It sold that steel to customers in, among other places,
Canada.
84.
USS announced that it was "restarting" HW in July 2009 and recalled about 850
Local 1005 members. Despite this announcement, steelmaking and finishing
operations remained idled, and only the coke facility continued to operate.
Employees who would normally be producing steel were not producing steel:
they were told to clean, pick weeds, paint, and engage in other activities
unrelated to the production and refinement of steel. USS recalled the Local 1005
workers for the sole purpose of avoiding its obligations under the Employment
Standards Act regarding severance pay.
85.
USS's decision to shift production from its Canadian plants to its American plants
from 2009 forward was influenced by the company's desire to take advantage of
"Buy American" provisions in the American Recovery and Reinvestment Act
("ARRA"), which was signed into law in the United States in February 2009.
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86.
Section 1605 of the ARRA provided that for any ARRA-funded project requiring
the construction, alteration, maintenance, or repair of a public building or public
work, 100% of the iron, steel, and manufactured goods used in the project had to
be produced in the United States.
87.
Through the conduct described in this Objection, USS undermined the
complementary and profitable operations at LEW and HW, contrary to the best
interests of USSC and its Canadian stakeholders. USS undermined the
integrated nature of USSC's operations, resulting in a loss of the business
advantages USSC enjoyed, and loss of the related profits. Its conduct distorted
and diminished the value and profitability of USSC.
88.
USS knew, or should have known, that preferring the interests of its United
States operations over its Canadian operations would result in continued
breaches of the Undertakings, would have a devastating financial impact on
USSC and on the Pension Plan and the Beneficiaries, and would frustrate the
expectations of the Union and the Beneficiaries.
4.
89.
2009 LEW Lockout
Local 8782 had never been locked out or shut down until USS locked out unit
members in August, 2009.
90.
Local 8782's contract with USS expired on July 31, 2009. Bargaining between
Local 8782 and USS had begun in May 2009. USS had assured the Union and
Local 8782 that it was not seeking "deep cuts".
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91.
Then, 30 hours prior to the lockout deadline, and contrary to its representations,
USS demanded
extensive, deep, across the
board
concessions. The
concessions sought by USS were unnecessary and out of proportion to the
economic circumstances facing the company. USS's proposed reductions were
at direct odds with an intention to remain in the Canadian steel industry in the
long term, and reflected a lack of interest in complying with the Undertakings and
its fiduciary duties, or in acting in a manner consistent with the Union's and
Beneficiaries' reasonable expectations.
92.
On August 3, 2009, USS locked out the 150 workers who remained at LEW
throughout the layoffs, in addition to the approximately 850 members of Local
8782 who were already laid off when USS locked its gates.
93.
USS locked out its workers in order to slow down production at Canadian plants
and divert production to its American plants, rather than for genuine labour
relations reasons.
94.
Indeed, USS restarted slab production at HW in August 2009, at the same time
as USS locked out unit members at LEW.
95.
With the lockout of LEW bargaining unit members, the slabs that HW produced at
HW were either sold as slabs or sent to various USS plants in the United States
for finishing. Further, HW did not receive coils from the LEW hot strip mill for
processing. Whatever coils HW processed during this period were from other
USS plants. Very rarely did the finishing end of the HW operation run at capacity
or even close to capacity.
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96.
It was evident that USS had no intention of operating HW at full capacity. Indeed,
since 2009, it has never operated HW at full capacity.
97.
USS's lockout of Local 8782 lasted for 8 months, until April 2010.
5.
98.
2010 Hamilton Works lockout
The HW collective agreement expired on July 31, 2010. On October 1, 2010,
while contract negotiations were underway, USS announced that it was shutting
down all steel making operations at HW.
99.
On November 2, 2010, USS dictated its terms to renew the collective agreement
with Local 1005. It insisted that Local 1005 agree to end indexing for its 9,000
pensioners and beneficiaries and close the pension plan to new hires in favour of
a defined contribution scheme. USS refused to negotiate unless those conditions
were met. Local 1005 refused to hold a vote on these unacceptable demands,
and on November 8, 2010, USS locked out 900 workers at HW. The USS lockout
of Local 1005 lasted for 11 months. The workers were not allowed back in the
facility until October 2011.
100.
During this 11 month lockout at HW, LEW could not run at full capacity as hot
band coil produced at LEW could not be finished at HW.
101. After the lockout ended at HW in October of 2011, the blast furnace at HW was
not put back into service.
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6.
2011-2013: Further shifts in production to American plants
102. On March 24, 2011, USS started shipping thousands of tons of metallurgical
coke from HW for use in its US plants. At the time, there were about 200,000
tons of coke at HW which had been produced by Stelco. Although the coke
would normally have been used for steelmaking at LEW, USS had shut down
steelmaking at HW and shifted production of steel to its plants in the United
States. Coke production is the most environmentally challenging aspect of blast
furnace steelmaking.
103.
USS's actions resulted in Hamilton bearing the burden of the coke production
activities, while at the same time, USS took the coke to the United States where
the value added through steelmaking took place.
104.
USS also continued to service Canadian customers with steel products from its
American factories.
105. Since the return to work of Local 1005 members in October 2011, the HW has
produced coke and has operated the cold mill which includes finishing operations
on its #3 galvanize line and the Z-line. Only the coke ovens and Z-line have
occasionally been operated at full capacity on a 21-turn schedule (24 hours a
day, seven days a week). Most of the coils that HW now finishes come from the
LEW.
7.
106.
2013 LEW lockout
On April 28, 2013, USS locked out nearly 1,000 workers at LEW. It imposed the
lockout — the second at LEW in three years — after members of Local 8782
27
rejected its demands for a wage freeze, the elimination of cost of living increases,
cuts to vacation, drug and other benefits, and the gutting of work rules so as to
permit USS to redeploy skilled workers to other jobs at lower wages.
107. Prior to the lockout, USS demanded that Local 8782 members train managers
and other non-union employees on the operation of LEW. The lockout lasted until
September 1, 2013. The lockout ended when Local 8782 voted in favour of a 5year collective agreement in which they would receive, among other things,
virtually no pay increases, a loss of vacation bonuses, reduction in vacation
entitlement, a loss of out of country medical coverage, and a weakened cost of
living formula.
8.
2013: Shut down of productions at HW
108. On October 29, 2013, USS announced that it would permanently cease steel
production at HW. This meant that 2 million tons of steel-making capacity were
eliminated at a time when as many as 8 million tons were being imported to
Canada annually. HW still retained its coke making operations, a cold mill, the
galvanized line, and the Z line which finishes steel for uses such as body panels
on cars.
109. Employees at LEW continued to make steel and finish it in the hot strip mill and
pickling line. However, the hot strip mill at LEW has not run at full capacity since
USS closed steel production at HW. That closure created a 1 million ton shortage
in slab at LEW.
28
110. As a result of the shifting of steel production to the United States, USS lost a
number of customers because there was no guarantee their orders would be
filled with Lake Erie steel.
9.
111.
Impact on the Union and the Beneficiaries
USSC's solvency and financial performance directly impact the Pension Plans
and the Beneficiaries. USSC is sponsor of the Pension Plans, and as such, is
responsible for making contributions to the Pension Plans. USSC's ability to
make required pension and OPEB payments is directly affected by its solvency
and financial performance.
112.
USS, by virtue of its control of USSC, has directed USSC's operations in a way
which has caused it to significantly underperform, requiring it to incur significant
debts, and diluted the Beneficiaries' and the Union's recoveries in this
proceeding.
113.
USS's conduct has completely undermined its own and USSC's obligations to
the Union's members and Beneficiaries in respect of pensions and OPEBs,
among other things.
E.
THE UNSECURED CLAIM IS MISCHARACTERIZED AS DEBT
114. The purported loans from USS to USSC underpinning both the Secured Claim
and the Unsecured Claims were characterized as intercompany "debt" but are, in
whole or in part, really in the nature of equity.
29
115. $1,847,169,934.04 of the Unsecured Claim arises pursuant to a term loan
agreement made between U.S. Steel Canada Limited Partnership, a subsidiary
of USS (and currently the direct 100% owner of USSC), and 134 Alberta,
October 29, 2007 (the "Term Loan").
116. Immediately prior to applying for CCAA protection, USS deconsolidated the
USSC balances from its consolidated balance sheet. Prior to the deconsolidation
date, USS's loans, associated interest, and net trade accounts receivable from
USSC were considered intercompany transactions and were eliminated in
consolidation, but are only now being treated as third party transactions and have
been recognized in the financial statements based upon the recoverability of their
carrying amounts and whether or not the amounts are secured or unsecured.
117. The USS's characterization of the Term Loan as debt should carry little weight.
This was in large part the cost of USS's acquisition of Stelco.
118. The court should have regard to the pertinent features of the various "loan"
transactions, which bear the hallmarks of equity contributions. In particular:
(a)
there was a complete identity of interest between the recipient of the funds
and the provider of the funds. USS, as the sole owner and shareholder of
USSC, exercised complete control over USSC and its board of directors at
all material times;
30
(b)
USS was the sole source of financing for USSC, and no reasonable armslength lender would have provided loan funds on similar terms in the
circumstances;
(c)
the repayment terms of some or all of the loans was unrealistically
lengthy, and commercially unreasonable;
(d)
the interest provisions of some or all of the loans, including provisions
calling for payment of interest years after the interest was incurred, were
commercially unreasonable;
(e)
USS waived significant amounts of interest otherwise due and payable by
USSC;
(f)
only a portion of the Term Loan funds provided in connection with USS's
acquisition of Stelco was used to refinance existing indebtedness of
Stelco;
(g)
there was no internal source of funding available to repay the Revolving
Loan; instead, repayments were funded by equity contributions into USSC
by USS, with USS essentially swapping indebtedness for equity
contributions as needed for tax planning purposes;
(h)
all advances made by USS were unsecured until 2013;
31
(i)
USS continued to fund USSC throughout a period when USSC was
incurring substantial operating losses such that USS could not have had
any reasonable expectation of repayment on the purported loans;
(j)
USSC was significantly undercapitalized throughout the years following its
acquisition by USS.
119.
Under the circumstances, including as described in this Objection, it would be
equitable for the purported loan transactions to be re-characterized in whole or in
part as equity contributions from USS to USSC, or otherwise subordinated in
whole or in part to the claims of the Beneficiaries and the Union.
F.
THE SECURITY ON THE SECURED CLAIM SHOULD BE DISALLOWED
120.
USS's security on the Secured Claim is improper and should be disallowed.
121.
USS was the sole shareholder of USSC, and exercised complete control over it
at the time when the security interests were granted to USS. USSC did not have
an independent Board of Directors or independent legal or financial advisors at
the time of the Security Agreement (January 2013), the First Amended Security
Agreement (October 2013), or the Second Amended Security Agreement
(November 2013).
122. USS failed to provide adequate or any consideration, to USSC in exchange for
the grant of the security interests.
123. At the time that the security interests were granted, USS was well aware of
USSC's precarious financial position.
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124. The security interests were granted to USS with the intention of preferring USS's
interests and defeating or hindering the interests of other creditors of USSC,
including the Beneficiaries.
G.
USS HAS ACTED IN A MANNER OPPRESSIVE TO THE BENEFICIARIES
125. The Beneficiaries are creditors of USSC.
126.
USS has caused USSC to act in a manner that is oppressive, unfairly prejudicial
to, and which disregards the interests of the Beneficiaries and the Union. It has:
(a)
failed to comply with the Undertakings;
(b)
failed to comply with the Pension Representation;
(c)
diverted production from HW and LEW to its American plants;
(d)
locked out workers at HW and LEW on three occasions;
(e)
laid off workers at HW and LEW; and
(f)
caused USSC to incur significant debt, including debts which improperly
gave USS repayment priority.
127.
USS's conduct is unfair and has had prejudicial consequences for the
Beneficiaries and the Union. It has destroyed USSC's financial viability, and thus
its ability to meet its obligations to its creditors.
128. In these circumstances, it would be wholly inequitable for USS to be treated as a
creditor at the direct expense of the Beneficiaries and the Union.
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129. The Union relies on the provisions of the PBA and CBCA, and such other
statutes as counsel may advise.
H.
OTHER ISSUES
1.
Labour Relations Board proceedings
130. As described above, USS assumed comprehensive control over virtually all
aspects of the activities of USSC. The relationships among USSC, USS, and the
Union are governed by the Ontario Labour Relations Act. The Union is party to
collective agreements with USSC.
131.
However, it is clear that USS has assumed control over USSC's business, and
by extension, the terms and conditions of employment of all the Union's
members, and including USSC's collective agreements. The Labour Relations
Act does not permit employers to avoid their legal responsibilities and
obligations, and frustrate the terms of collective agreements by shifting control to
an associated employer, purportedly beyond the reach of the collective
ag reement.
132. Sections 1(4) and 69 of the Labour Relations Act are explicitly designed to target
the types of economic manoeuvering engaged in by USS in this matter.
Consequently, the Union intends to bring a motion to lift the stay against USSC,
and commence a related employer/sale of business application before the
Ontario Labour Relations Board ("OLRB") under sections 1(4) and 69 of the
Labour Relations Act.
34
133. There is little doubt that the arrangement USS has entered into, and specifically
its assumption of the responsibilities and obligations of USSC in regard to the
Union, is captured by the provisions of the Labour Relations Act. Moreover, it is
exactly the type of arrangement that is prohibited by the Labour Relations Act,
where whether by design or effect, it undermines the collective agreement rights
of the affected Union and its members.
134. The outcome of the anticipated proceedings before the OLRB can reasonably be
expected to impact the Union's pursuit of the objections raised herein, as well as
USS' willingness to bid on the assets of USSC.
2.
PBA deemed trust issues
135. The deemed trust provisions of the PBA and section 30(7) of the Personal
Property Security Act, R.S.O. 1990, c.P.10 further affect USS's claims.
136. These provisions entitle the Union's members to first priority recovery for all
amounts owing to the Pension Plans ahead of the claims of all other creditors,
including secured creditors, over "an account or inventory and its proceeds" of
USSC.
137. The PBA deemed trust is valid in a CCAA proceeding (subject only to
paramountcy) and applies to pension plans that are ongoing and to those that
are wound up.
35
138. These provisions can reasonably be expected to impact the Union's pursuit of
the objections raised herein, as well as USS' involvement in making any bid on
the assets of USSC.
ALL OF WHICH IS RESPECTFULLY SUBMITTED THIS 14TH DAY OF APRIL, 2015
Ken Rosenberg
Paliare Roland Rosenberg Rothstein LLP
Lawyers for the USW
Sharon White
Inch Hammond Professional Corporation
Lawyers for Local 1005
Local 8782
By their agent Paliare Roland
Rothstein LLP
Rosenberg
36
Court File No. CV-14-10695-00CL
IN THE MATTER OF THE COMPANIES'CREDITORS ARRANGEMENT ACT, R.S.C. 1985, c. C-36, AS AMENDED
AND IN THE MATTER OF A PROPOSED PLAN OF COMPROMISE OR ARRANGEMENT WITH RESPECT TO U.S. STEEL CANADA INC.
ONTARIO
SUPERIOR COURT OF JUSTICE
(COMMERCIAL LIST)
NOTICE OF OBJECTION
PALIARE ROLAND ROSENBERG ROTHSTEIN LLP
155 Wellington Street West, 35th Floor
Toronto, ON M5V 3H1
Ken Rosenberg (LSUC #21102H)
Email: [email protected]
Lily Harmer(LSUC #31880T)
Email: [email protected]
Gordon Capern (LSUC #32169H)
Email: [email protected]
Tel: 416-646-4300/Fax: 416-646-4301
Lawyers for United Steel, Paper
and Forestry, Rubber, Manufacturing, Energy,
Allied Industrial and Service Workers International
Union(USW)
INCH HAMMOND Professional Corporation
500 — One King Street West
Hamilton, ON L8P 4X8
Sharon L.C. White
Email: [email protected]
Tel: 905-525-4481
Fax: 905-525-0031
Lawyer for Local 1005
Local 8782
Attn: Bill Ferguson, President