Liable in contract

Trustee in bankruptcy not entitled to disallow claims made by former employees

Prior to the bankruptcy of the T. Eaton Company, various attempts were made to restructure and save the company in the 1990s. Included in these attempts was an arrangement between the company and some of its employees to share in a surplus distribution of an employees’ pension fund.

The result was a partial wind-up of an existing fund, a sharing of some of the surplus and a transfer of the balance to a new pension fund. Payments made to eligible employees at that time ranged from a few hundred dollars to as much as $100,000.

During one of its attempts to restructure and avoid bankruptcy, the T. Eaton Company closed three stores and terminated a group of employees between March 1 and June 30, 1998.

A newsletter dated Jan. 29, 1998, was sent to all employees informing of the store closures and the reduction of non-selling employment positions in stores and head offices. The letter also contained a statement indicating that those affected by the reorganization measures would receive a minimum of 12 weeks’ notice and severance pay.

The affected employees were notified of their termination shortly thereafter. During the termination interviews, each employee was provided with four documents: a letter of termination; a letter outlining termination benefits to which the employee was entitled; a letter advising of a proposed wind-up of the employees’ pension plan and an acceptance; and release form to be signed by the terminated employee.

The letter relating to the proposed wind-up stated that members who participated in the partial wind-up would receive a surplus share, which would be equal to approximately 80 per cent of the surplus share received on the earlier plan wind-up. The 80 per cent estimate was based on information provided by actuaries who estimated a surplus of $20 million based on a valuation done in November 1997.

The proposed restructuring was unsuccessful and Eaton’s filed for bankruptcy in August 1999. The proposed partial wind-up did not occur and, on the bankruptcy, it was discovered that there was no significant surplus available for distribution to the plan members. The earlier estimation of a $20 million surplus had failed to properly consider a number of matters.

The terminated employees filed a claim under the bankruptcy for the share surplus that had been promised upon termination which was disallowed by the liquidator. A hearing before a bankruptcy officer was subsequently held.

During the hearing, evidence was given by a former employee that the surplus payment was relied on when agreeing to sign the acceptance and release of the termination package offered. The employee had not sought legal advice prior to signing the release because, “This is Eaton’s. They don’t lie, they never had before.”

In order to establish negligent misrepresentation, the former employees had to establish that five elements had been met. These elements were:

(1) a duty of care existed based on a special relationship between the parties;

(2) the representation must be untrue, inaccurate or misleading;

(3) the representor must have acted negligently in making the representation;

(4) the representee must have relied, in a reasonable manner, on the negligent misrepresentation; and

(5) there must be detrimental reliance on the part of the representee in the sense that damages resulted.

The bankruptcy court held that two of these elements were missing. First, it held that there was insufficient evidence to establish that Eaton’s had acted negligently. The estimated payout of the surplus was based on an actuarial valuation. Eaton’s was not negligent in relying on the actuarial valuations, nor was it negligent in accepting that valuation.

Second, the only evidence of detrimental reliance was that of the former employee who testified that he believed it was an Eaton’s tradition to treat its employees fairly and that tradition would continue during downsizing. This evidence was not sufficient to establish detrimental reliance.

Although the Court did not accept the claim based on negligent misrepresentation, it did accept that Eaton’s was liable in contract to the former employees. The letter from Eaton’s made a clear promise of an additional surplus payment and the only “anticipation” referred to was the actual money value of each employee’s share. In exchange for this promise, the employees signed a release. Therefore, their claims were held to be valid.

For more information:

Re T. Eaton Co., Ontario Superior Court of Justice [Commercial List], Docket No. Toronto 99-CL-3516, Feb. 23/01.

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