CITATION: U.S. Steel Canada Inc. 2016 ONSC 569 COURT FILE NO.: DATE: 20160229 SUPERIOR COURT or JUSTICE ONTARIO IN THE MATTER OF THE CREDITORS ARRANGEMENTACT, R.S.C. 1985, c. C-36, as amended AND IN THE MATTER OF A PROPOSED PLAN OF COMPROMISE OR ARRANGENIENT WITH RESPECT TO U.S. STEEL CANADA INC. BEFORE: Mr. Justice H. Wilton?Siegel COUNSEL: Michael E. Barrack, Robert Thornton, Jeff Gaining), Kiran Patel and Max. Shapiro, for United States Steel Corporation Alan Mark, Peter Ruby, Tainin Jacobson, Logan Willis and Jesse-Ross Cohen, for the Province of Ontario Gordon Caper-n, Kris Borg-Olivier, Denis Cooney and Daniel Rosenblulh, for USW and Locals 1005 and 8782 Andrei-v Hamay, Barbara Walancik and Adrian Scotchmer, Representative Counsel for the non-unionized active employees and retirees Sharon Konr, for the Applicant U.S. Steel Canada Inc. Robert Staley, Jonathan Bell and William Bortolin, for the Monitor Ernst Young Inc. HEARD: January 14and 27, 2016 ENDORSEMENT In this proceeding, United States Steel Corporation seeks a determination of 14 Proofs of Claim (the Claims?) filed in these proceedings under the Companies? Creditors Arrangement Act, R.S.C. 1985, c. (the regarding U.S. Steel Canada Inc. Objections to the treatment of certain of these Claims as debt rather than as ?equity claims? for the purposes of the CCAA, and t0 the enforceability of the security asserted in respect of certain of these Claims, have been ?led by each of: (1) the United Steel, Paper and Forestry, Rubber, Manufacturing, Energy, Allied Industrial and Service Workers International Union (the on its own behalf and on behalf of USW Local 1005 and USW Local 8782 (collectively, the "Union"); (2) Her Majesty the Queen in Right of Ontario and the Superintendent of Financial Services (Ontario) in his capacity as administrator of the Pension - Page2 - Bene?ts Guarantee Fund (collectively, the ?Province?); and (3) Representative Counsel to all non-USW active employees and retirees of USSC (collectively, the ?Objecting Parties?). This motion principally addresses the objections ?led by the Objecting Parties (the ?Objections?). The following are the USS Claims in respect of which Objections have been made: 9 Unsecured Term Loan $1,847,169,934 10 Unsecured Revolver Loan U.S. $120,150,928 ll Secured Revolver Loan U.S. $72,938,390 11(a) Secured Cliffs LRD Transaction U.S. $14,538,463 1(b) Secured Credit Support Payments U.S. $3,742,479 1 1(e) . Secured lntercompany Trade U.S. $31,252,193 The Claim numbers above, and amounts re?ected in this table, are taken from the Third Supplementary Seventh Report of the Monitor dated July 29, 2015 (the ?Third Supplementary Monitor?s Report?) at para. 11. in these Reasons, Claims #9 and #10 are referred to as the Unsecured Claims? and Claims #10 and #11 are referred to collectively as the Debt Claims?. In addition, Claims #11, #11(b) and #11(c) are referred to as the Secured Claims?, and Claims #11(b) and #11(c) are referred to as the Remaining Secured Claims?. Background The following is a brief summary of the background to this proceeding. Further detail regarding the relationship between USS and USSC and the USS Claims that have given rise to the Objections is set out below. -- USSC USSC is an integrated steel manufacturer that conducts most of its business from two large steel plants located in Ontario: the Hamilton Works located in Hamilton, Ontario and the Lake Erie Works located in Nanticoke, Ontario. USSC is an indirect wholly?owned subsidiary of USS. Prior to its acquisition by USS in 2007, USSC was knotvn as Stelco Inc. (?Stelco?). As a result of its ?nancial difficulties, USSC applied for relief under the CCAA and was granted CCAA protection pursuant to an Initial Order dated September 16, 2014 (the ?Filing Date?) (as amended and restated from time to time, the ?initial Order?). ~Page 3 - The USS Parties USS is an integrated steel producer with major operations in North America and Central Europe. USS is a publicly?traded, Delaware corporation and its shares are listed for trading on the New York Stock Exchange. [10] 1344973 Alberta ULC was an Alberta corporation incorporated on August 22, 2007 to be the acquisition vehicle for the purposes of the USS acquisition of Stelco. [11] U.S. Steel Canada Limited Partnership (?Canada is a limited partnership formed under the laws of Alberta. Canada LP is an indirect wholly-owned subsidiary of USS. At the time of the USS acquisition of Stelco, Canada LP owned all the outstanding shares of ABULC and was, therefore, direct parent. As a result of the amalgamation of ABULC and USSC on December 31, 2007 described below, Canada LP has become the direct parent of USSC. [12] United States Steel Credit Corporation (?Credit Corp?) was a Delaware corporation that was a wholly-owned subsidiary of USS. Credit Corp was merged into another wholly-owned subsidiary of USS on December 20, 2013. [13] U.S. Steel Kosice s.r.o. Kosice?) is a Slovakian corporation that is an indirect wholly?owned subsidiary of USS. The USS Acquisition of Stelco Inc. in 2007 [14] On August 26, 2007, the USS board of directors approved the USS acquisition of Stelco, and USS, Stelco and ABULC entered into an arrangement agreement giving effect to the proposed transaction. The plan of arrangement by which the acquisition was implemented was subsequently approved by the Ontario Superior Court of Justice on October 30, 2007, and the acquisition transaction closed on October 31, 2007 (the ?Acquisition?). Financing the Acquisition and the Flow of Funds [15] The total amount spent by USS in connection with the Stelco acquisition was approximately $1.939 billion, or U.S. $2.056 billion at then prevailing exchange rates. The relevant corporate structure and the ?ow of funds are shown on the Funds Flow Chart attached as Schedule A to these Reasons. In these Reasons, all dollar amounts are denominated in Canadian dollars unless otherwise speci?cally indicated. [16] ABULC was the acquisition vehicle that directly acquired Stelco. ABULC was ?nanced by the following loans and capital Contributions: Canada LP loaned ABULC $700 million pursuant to a loan agreement dated October 29, 2007 described below (the ?Term Loan?); Canada LP provided ABULC with equity in the amount of $600 million; and Credit Corp loaned ABULC approximately U.S. $744 million pursuant to a loan . agreement dated October 29, 2007 described below (the ?Credit Corp Loan?). - Page 4 - [17] ABULC used the funds received from Canada LP and Credit Corp as follows: (1) ABULC used $1.046 billion to purchase the outstanding shares of Stelco; (2) ABULC loaned Stelco approximately $741 million, which Stelco used to pay out its third party debt (other than a loan from the Province of Ontario); (3) ABULC loaned Stelco approximately $59 million, which Stelco used to pay out its option holders; (4) ABULC loaned Stelco approximately $61 million, which Stelco used to pay out its warrant holders; (5) ABULC loaned Stelco $32.5 million, which Stelco used to make a payment to its four main pension plans; and (6) ABULC loaned Stelco $40 million to fund Stelco?s working capital. [18] The funds used to acquire Stelco were derived from multiple sources. First, USS obtained new debt financing in the principal amount of US. $900 million in the form of facilities provided by a banking syndicate led by JP. Morgan Chase Bank, NA. These facilities comprised an unsecured three-year term loan in the principal amount of US. $500 million and an unsecured one?year term loan in the amount of US. $400 million. The one-year term loan was subsequently refinanced by USS as part of a larger offering of ten-year bonds in the public market.? Second, USS obtained approximately US. $400 million by drawing on an existing receivables purchase facility. Third, USS utilized approximately US. $153 million of cash on hand at the USS level and ?434,415,519.56, or $597,860,287.50, of cash on hand in USS Kosice. [19] The source of the financing for the Acquisition, the structure of the Acquisition and the ?ow of funds to ABULC for such puiposes was developed by USS between the date of the Arrangement Agreement and the date of the Acquisition. The principal consideration in the development of this structure was tax-efficiency from the perspective of USS. With respect to ABULC, the amounts received by it as debt and equity were driven by the ?thin capitalization? rules under the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.) In addition, the amount of the funding re?ected a USS policy of avoiding any secured third party indebtedness at the level of any subsidiary. As a' result, it was necessary to fund Stelco with the amount necessary to repay all outstanding third party debt at the date of the Acquisition, other than a loan from the Province. Post-Acquisition Corporate Reorganization Refinancing [20] On November 1, 2007, immediately following the Acquisition, Stelco was renamed US. Steel Canada Inc. [21] Between October 31, 2007 and the year-end, the Credit Corp Loan was repaid in full. Certain of the repayments were made from additional advances under the Term Loan which are described in greater detail below. [22] Following such additional advances by Canada LP to ABULC under the Term Loan in '2007, the outstanding principal amount outstanding under the Term Loan on December 31, 2007 was The total amount outstanding on that date including acorued interest was $1,240,009,143. [23] ABULC and USSC amalgamated on December 31, 2007 to continue as USSC (the ?Amalgamation?). As a result of the Amalgamation, the obligations of ABULC under the Term Loan became obligations of the amalgamated entity, USSC. - Page 5 The History of the Credit Corp Loan [24] As described above, pursuant to the Credit Corp Loan, Credit Corp advanced U.S. $744,463,605 to ABULC on or about October 31, 2007. The funds provided by the Credit Corp Loan were notionally intended to fund Stelco?s third party debt at the date of acquisition that was . denominated in U.S. dollars. USS intended the facility to be a short?term facility that would be repaid within two months. Larry Brockway, the Senior Vice-President, Chief Financial Of?cer and Chief Risk Officer of USS (?Brockway?), testi?ed that the ?purpose of the agreement was to help stair-step the structure into a more permanent structure as part of the ultimate steps between the acquisition and year end?. [25] Consistent with this objective, the Credit Corp Loan was repaid by means of: (1) a repayment of approximately U.S. $26 million in November 2007; (2) a repayment of approximately U.S. $41 million on December 4, 2007, which was funded by an advance to ABULC under the Term Loan on the same day described below; (3) a U.S. $87 million repayment by ABULC on December 21, 2007, comprised of U.S. $10 million presumably funded out of a U.S. $20 million equity injection from Credit Corp to ABULC on the same day and application of U.S. $77 million out of the $470 Million Advance described below; and (4) a reduction in the amount of approximately U.S. $595 million pursuant to the SHC Transaction described below. he SH Transaction [26] The following summarizes the description of the SHC Transaction set out in the Third Supplementary Monitor?s Report. [27] At the time of the Acquisition, Stelco indirectly owned all of the outstanding shares of Stelco Holding Company a corporation incorporated under the laws of Delaware. principal assets were interests in two mining joint ventures Hibbing Taconite Company (?Hibbing?) and Tilden Mining Company (?Tilden?). [28] At the time of the Acquisition, SHC had a liability to Stelco in the amount of approximately U.S. $393 million. This amount principally represented the excess of the amount owing by Stelco to SHC for iron-ore pellets produced by Hibbing and Tilden and shipped to Stelco, representing pro ram share of such production, less the amount of annual cash calls on SHC in respect of Hibbing and Tilden, which were paid by Stelco on behalf of SHC. This liability was booked as an advance from SHC to Stelco, and had increased in each year prior to 2007. The liability also included legacy liabilities of Stelco to certain other subsidiaries of SHC that were dormant. Stelco had not repaid any amount on account of these advances, and had no intention of doing so prior to the Acquisition, due to the adverse tax consequences of dividending the amount of any such payment back to Canada. [29] The Acquisition presented an issue of tax inefficiency for USS, referred to as a ?tax sandwich?, that would result if distributions from SHC (as dividends or interest) were made to USSC in Canada and, in turn, distributed to USS in the United States. To address this issue, USS caused ABULC, USSC and SHC to enter into certain transactions which were effected by book entries in the financial accounts of the relevant corporations pursuant to a payment direction Page 6 - agreement dated December 21, 2007 (the ?Payment Direction?) (collectively, the Transaction?). [30] The SHC Transaction involved the following steps: (1) ABULC loaned USSC the amount of US. $393 million out of the $470 Million Advance (defmed below); . (2) USSC repaid the outstanding advance to SHC in the same amount; (3) USSC sold its equity interest in SHC to USS for consideration in the form of a promissory note dated December 31, 2007 in the principal amount of US. $595 million payable to the wholly?oWned subsidiary of USSC that owned the shares of SHC. The face amount of the promissory note of US. $595 million represented estimation of the fair market value of SHC at the time of the sale; and (4) The promissory note was distributed by such wholly-owned subsidiary to USSC on December 31, 2007 which, in turn, assigned the note to Credit Corp in reduction of the remaining principal amount outstanding under the Credit Corp Loan, which was less than US. $593 million. [31] The effect of the SHC Transaction was to transfer ownership of SHC from USSC to USS by way of satisfaction of the remaining amount outstanding under the Credit Corp Loan as of December 31, 2007. The Term Loan [32] The following summarizes the provisions of the Term Loan that are relevant for the issues in this proceeding and the history of draws and accrued interest under the Term Loan resulting in the USS claim in respect of the Term Loan. The Relevant Provisions of the Term Loan [33] The Term Loan is an unsecured loan facility having a term of 30 years repayable by USSC at any time without premium or penalty. The full amount of the outstanding principal is therefore due on October 31, 2037, to the extent it is not repaid before that date. USS says that it selected a 30-year term for the Term Loan because it viewed its investment in Stelco as a long? term one. The 30?year term was also the maximum term countenanced for US. tax purposes. [34] Interest on the Term Loan accrued daily and compounded semi-annually at an interest rate of 9.03% per annum. USS obtained and relied upon advice from an independent, third?party consultant regarding an acceptable interest rate for a company with a similarly rated risk for 30? year debt. Interest is payable on the last business day of the year on the second anniversary after the year in which it accrues. As a result, interest under the Term Loan was payable from 24 to 36 months after the date it began to accrue. [35] The Term Loan was denominated in Canadian dollars. The Term Loan originally allowed for a maximum borrowing of $1 billion. The maximum availability under the Term Loan was increased from $1 billion to $1.5 billion on December 21, 2007. As mentioned, the -Page7 amount of $700 million was initially advanced on October 31, 2007. The Term Loan provided that further advances could be obtained ?with prior written notice pursuant to a request for advance? set out in a form similar to a scheduled document to the Term Loan. [36] The loan agreement contains certain representations and covenants of and events of default. The events of default include an event of default if the borrower is ?unable to meet debts?. Upon the occurrence of an event. of default, the maturity date is accelerated and Canada LP has the right to demand repayment. History of Advances and Repayments under the Term Loan [37] As mentioned above, Canada LP advanced $700 million to ABULC on October 31, 2007 in connection with the Acquisition. This amount became a direct obligation of USSC after the Amalgamation. in addition, during the period from the Acquisition to the Amalgamation, ABULC recorded three additional advances. On December 4, 2007, ABULC recorded two advances totaling approximately U.S. $61 million, of which U.S. $41 million was applied to reduce the Credit Corp Loan and the balance was advanced to USSC for working capital purposes. On December 22, 2007, ABULC recorded an advance of U.S. $470 million under the Term Loan pursuant to the Payment Direction (the ?$470 Million Advance?). The foregoing advances under the Term Loan are collectively referred to as the ?initial advances?. [38] During 2008, USSC made interest payments to Canada LP under the Term Loan totalling approximately $113 million. Of this amount, $99,940,908 was paid in October and November 2008. Such payments were made in advance of their due date under the Term Loan Agreement, which provided that such interest was not payable until December 31, 2010. In addition, USSC made a principal repayment of $19 million in January 2008. The only additional funding provided to USSC by USS or any of its af?liates in 2008 was an equity injection of approximately $55 million in October 2008. [39] In 2009, USSC received additional advances from Canada LP under the Term Loan totalling $211.2 million. These advances were made during the months of February, June, September, November and December 2009. No interest or principal was paid during 2009. In addition, as set out in the table above, USS provided equity injections totalling $61 million during 2009. These capital contributions were made in February, July and October 2009. [40] There were no further advances under the Term Loan after 2009. At the end of 2010, USS decided to waive the remaining interest that was due under the Term Loan in respect of interest accrued during 2008. Since there had been substantial interest payments made in 2008, the accrued interest that was waived in December 2010 was only $10.5 million. USS says that, given other funding needs at the time, the interest payment could only have been made if USSC received additional funding. Further, due to taxation on interest payments, it did not make economic sense to fund USSC with additional debt or equity in order to enable USSC to repay interest on the Term Loan. USS says that this was the ?rst time that USS considered waiving interest due under the Term Loan. In other words, it asserts that it did not have such expectation at the time that it entered into the Term Loan. [41] USS continued the practice of waiving interest in each year after 2010. Accordingly, in each of the years 2010 to 2013, USS waived approximately one-half of the accrued and unpaid ?Page 8 interest due in that year. In total, USS has waived interest obligations of USSC totaling approximately $428 million and has accrued interest under the Term Loan in approximately the same amount. [42] As of the Filing Date, the total amount outstanding under the Term Loan, including accrued interest, was $1,847,169,934. The Revolver Loan [43] Pursuant to an agreement dated May 11, 2010 between USSC and Credit Corp (as amended from time to time, the ?Revolver Loan Agreement?), Credit Corp established a Revolver Loan to provide working capital to USSC to support its operating activities. The Revolver Loan Agreement was subsequently amended successively by an agreement dated July 31, 2012 (the "First Revolver Amendment?), an agreement dated January 28, 2013 (the "Second Revolver Amendment") and an agreement dated October 30, 2013 (the "Third Revolver Amendment") in the circumstances described below. In these Reasons, the loan outstanding under the Revolver Loan Agreement, as so amended from time to time, is herein referred to as the ?Revolver Loan? and the Term Loan and the Revolver Loan are collectively referred to as the ?Loans? and individually are referred to as a ?Loan?. [44] USS has filed two proofs of claim in respected of the Revolver Loan. The first claim is an unsecured claim (being Claim #10) in the amount of US. $120,150,928, representing the outstanding loan on October 30, 2013, together with accrued interest since that date. The second claim is a secured claim (being Claim #11) in the amount? of US. $72,938,390, representing the loan advances since October 30, 2013 plus accrued interest. The following sets out the principal - terms of the Revolver Loan, including the related security, and the history of advances and payments in respect of the Revolver Loan. Terms of the Revolver Loan [45] The Revolver Loan was originally an unsecured loan having a ?fteen?year term. Accordingly, all outstanding advances are due on May 11, 2025. As mentioned, the Revolver Loan originally provided for a maximum availability of US. $350 million. [46] Advances under the Revolver Loan accrued interest at the applicable federal interest rate for the month in which the advance was drawn and compounded interest semi-annually. The applicable interest rate as of the date of the Revolver Loan was 4.42% per annum. [47] The loan agreement contains certain representations and covenants of USSC, including originally, a solvency representation, and events of default. The events of default include an event of default in the event that the borrower is ?unable to meet debts?. Upon the occurrence of an event of default, the maturity date is accelerated and Credit Corp had the right to demand repayment. The loan agreement is governed by the laws of the Commonwealth of The History of Advances and Repayments Under the Revolver Loan [48] Credit Corp advanced a total of US. $120 million under the Revolver Loan from its establishment in May 2010 through the third quarter of 2011. Of this amount, US. $75 million Page 9 was advanced in May 2010, U.S. $25 million was provided in two advances in August 2010, and a further U.S. $20 million was advanced in June 2011. [49] In the period from November 2011 to April 2012, USSC had somewhat more stable cash flows. Credit Corp advanced approximately U.S. $136 million under the Revolver Loan during this period. During the same period, USSC made interest payments tOtaling almost U.S. $9 million and principal repayments of approximately U.S. $61.8 million under the Revolver Loan. Thereafter, the outstanding balance began to grow with additional advances in each month in 2012, other than October. - [50] By July 31, 2012, the outstanding principal balance of the Revolver Loan was, however, approaching the cap of U.S. $350 million. On that date, Credit Corp and USSC executed the First Revolver Amendment, which increased the maximum availability under the Revolver Loan to U.S. $500 million. Apart from removal of the solvency representation of USSC, the First Revolver Antendment did not otherwise amend the provisions of the Revolver Loan Agreement, including the events of default. The solvency representation of USSC was removed at the request of management, which had a concern about solvency given its recent losses and the level of its debt. The circumstances pertaining to this action are addressed further below. [51] By January 28, 2013, however, after additional advances to USSC under the Revolver Loan, the outstanding principal balance of the Revolver Loan had again reached the maximum availability. business plan for 2013 indicated that it would need substantial additional ?nancing during that year in order to ?nance its operations. Accordingly, on that date Credit Corp and USSC executed the Second Revolver Amendment, which increased the maximum availability under the Revolver Loan from U.S. $500 million to U.S. $600 million, on the condition that USSC grant a security interest in favour of USS in respect of its inventory of iron ore pellets sold to it by SHC. The Second Revolver Amendment did not otherwise amend the provisions of the Revolver Loan Agreement as it existed on January 28, 2013, including the events of default and consequences of a default. [52] In furtherance of the provisions of the Second Revolver Amendment, USSC. granted a security interest in favour of Credit Corp over all of its inventory of iron ore pellets sold to USSC by SHC, and related proceeds, pursuant to a security agreement dated January 28, 2013 executed by USSC and USS (the ?Security Agreement?). [53] In February 2013, USS determined that the foreign currency exchange ?uctuations on the Revolver Loan, which was a U.S. dollar?denominated loan, had become unacceptable as a result of the volatility of revenues, and accordingly of its quarterly earnings, due to ?uctuations in the Canadian dollar. Over a period of several months thereafter, Canada LP injected signi?cant amounts of equity into USSC to provide for working capital funding needs and to allow USSC to pay down the Revolver Loan. [54] Between February and September 2013, as set out above, equity injections provided to USSC totaled over $680 million. Payments of principal and interest on the Revolver Loan over the same period totaled over U.S. $390 million. As of October 30, 2013, the amount outstanding under the Revolver Loan had been reduced to $116,969,996. Page 10 [55] On October 30, 2013, Credit Corp and USSC executed the Third Revolver Amendment. The Third Revolver Amendment contains a recital to the effect that the parties wish to amend and restate the Revolver Loan ?in order to permit the Borrower to' access the remainder of the [Revolver] Loan.? The Third Revolver Amendment continued the availability under the Revolver Loan in the amount of U.S. $600 million. However, it divided borrowings under the facility into two tranches: (1) the ?First Tranche Indebtedness?, being the outstanding amount of $116,969,996, which was entitled to the security interest over iron-ore pellets constituted by the Security Agreement; and (2) the ?Second Tranche Indebtedness?, being any advances after October 30, 2013, which were entitled to the general security interest constituted by the October Security Agreement (as defined below). The Third Revolver Amendment did not otherwise amend the provisions of the Revolver Loan as it existed on October 30, 2013, including the events of default and consequences of a default. [56] Concurrently with the execution of the Third Revolver Amendment, USSC and Credit Corp executed an amendment and restatement of the Security Agreement pursuant to an agreement also dated October 30, 2013 (the ?October Amendment?). Pursuant to the October Amendment, USSC granted a general security interest over all of its personal property in favour of Credit Corp. The October Amendment contained a recital to the effect that Credit Corp ?is willing to continue to provide Loans pursuant to [the Revolver Loan], only if enters into this Amendment?. The General Security Agreement, as amended by the October Amendment, is herein referred to as the ?October Security Agreement?. Apart from broadening the security interest granted in favour of Credit Corp, the October Amendment did not otherwise amend the provisions of the Security Agreement as it existed as of October 30, 2013. [57] USS has acknowledged that, as of October 30, 2013, although USSC was meeting its obligations as they fell due, the total liabilities of USSC exceeded the market value of its assets and, accordingly, USSC was otherwise ?insolvent?, including for the purposes of section 95 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. B-3 (the [58] After the execution of the Third Revolver Amendment and the October Security Agreement, Credit Corp advanced loans to USSC under the Revolver Loan totaling U.S. $71 million. These loans were outstanding at the Filing Date. USSC did not make any payments of either principal or interest after October 30, 2013 in respect of the First Tranche Indebtedness under the Revolver Loan outstanding as of October 30, 2013. [59] Accordingly, at the Filing Date, the total amount outstanding under the Revolver Loan, including accrued interest, was U.S. $193,089,318. The portion of this balance attributable to advances made prior to October 30, 2013, to the First Tranche Indebtedness plus accrued and unpaid interest thereon since that date, was U.S. $120,150,928. This is the amount of the USS unsecured claim in respect of the Revolver Loan. The portion attributable to advances made after October 30, 2013, to the Second Tranche Indebtedness, was U.S. $72,938,390, representing U.S. $71 million of advances plus interest. This is the amount of the USS secured claim in respect of the Revolver Loan. Internal Procedure for Additional Draws and Equity Capital Contributions [60] In order to request funding under the Term Loan after December 31, 2007 and under the Revolver Loan, USSC would prepare and submit to USS a cash ?ow forecast setting out its -Pagell - anticipated cash requirements for the following 13-week period. The submission of these weekly cash ?ow forecasts, and the related correspondence and discussions between USS and USSC, constituted formal request for funding. [61] USS would review the forecast and determine whether funds would be advanced, and if so whether they would be advanced as debt under the Loans or as an equity injection. Typically the funds would be advanced as debt unless additional debt would cause USSC to go offside the ?thin capitalization? tax rules under the Income ax Act. [62] There is no dispute that all advances made under the Term Loan were documented and recorded by both Canada?LP and USSC as debt and that all advances made under the Revolver Loan were similarly documented and recorded by both Credit Corp and USSC as debt. It is also not disputed that all contributions to equity by Canada LP were recorded by both Canada LP and USSC as equity. In this regard, the Monitor has noted that books and records relating to these intercompany transactions are well organized and documented, including with respect to each specific advance of cash in the form of equity or debt. [63] The following table summarizes the equity capital injections by USS into USSC between October 31, 2007 and the Filing Date: Equity Conn?ibutieus (CAD Sh?llions) 2008 - 55 675 201Sept 15, 2014 - - 2,325 Tm,? 5?00 325 Source: USSC Share Consideration Registry The Remaining USS Secured Claims [64] USS has asserted the Claims, which it says are secured pursuant to the November Security Agreement (as defined below): Reference Secured Cliffs Transaction $4,538,462.95 i 1(a) Secured Credit Support Payments $3,742,478.78 1(b) Secured intercompany Goods Services $1,252,193.05 ll(c) -'Page 12 - a As mentioned, these Claims are collectively referred to as the Remaining Secured Claims?. It is my understanding that the Objecting Parties do not challenge the quantum of these Claims but assert that the security for these Claims is unenforceable on the grounds described later in these Reasons. Secured Cliffs Transaction (Claim [65] USS ?led a secured claim for U.S. $14,538,462.95 with respect to the amount of a payment made by USS to Cliffs Natural Resources and Cliffs Sales Company (collectively, ?Cliffs?) for certain iron ore delivered by Cliffs to USSC, which iron ore was, in turn, resold by USS to USSC under the following circumstances. [66] Cliffs and USS are parties to an agreement dated January 1, 2008 for the supply of iron ore (the ?Cliffs Agreement?). The iron ore delivered by Cliffs to USSC was sourced by the USS Procurement Department as part of the raw materials services arrangement between USS and USSC that was provided for in the ?Limited Risk Distributor Agreement? referred to below. [67] The Claim relates to four shipments of iron ore, and associated screening charges, totaling U.S. $14.1 million, which were delivered by Cliffs to USSC in August 2014, prior to the Filing Date and outstanding obligations in the amount of U.S. $0.4 million for screening'charges incurred in January and May 2014 for which Cliffs had not previously issued invoices. [68] On September 16, 2014, pursuant to an agreement between USS and USSC (the ?Iron Ore Agreement?), in order to avoid an interruption of the supply of a critical raw material under the Cliffs Agreement, USS agreed to make the payment to Cliffs and to transfer title of the iron ore pellets to USSC provided that USSC con?rmed the corresponding obligation of USSC to USS in payment of such iron ore would be secured under the November Security Agreement. [69] The Monitor has con?rmed that USSC received delivery of the iron ore prior to the Filing Date and that USS made the payment of $14.1 million to Cliffs on October 2014. The Monitor has also confirmed that, under the Cliffs Agreement, title to the iron ore did not pass to USS until USS paid for the iron ore after the Filing Date. At that time, USS effectively took title to the iron ore and re-sold it to USSC pursuant to the Limited Risk Distributor Agreement described below. - [70] Accordingly, this Claim is a claim of USS for the payment of goods sold by USS to USSC after the Filing Date pursuant to arrangements set out in the Iron Ore Agreement that were entered into prior to the commencement of these proceedings under the CCAA. Secured Credit Support Payments Claim #11(h) [71] USS filed a secured Claim for U.S. $3,703,450 for contribution and indemnity as guarantor of certain USSC obligations as follows: Page 13 - Independent Electricity System Operator Union Gas Limited (?Union Gas?) $669,109.87 Norfolk Southern Corporation (?Norfolk?) $4572 12 . 64 [72] USS received demands subsequent to the Filing Date from IESO, Union Gas and Norfolk pursuant to existing guarantee agreements between USS in favour of each of such parties in respect of goods and services supplied to USSC prior to the Filing Date. USS made payments to these vendors pursuant to these guarantees subsequent to the Filing Date. This Claim is therefore an aggregation of rights of subrogation which arose on payment of these three obligations of USSC after the Filing Date pursuant to the USS guarantees in favour of the third parties. Secured Intercompanv Goods Services - Claim #11(c1 [73] In the ordinary course of business, the USS Af?liates provided raw materials and other goods as well as various services to USSC both informally and under several intercompany agreements. Invoices relating to the irrtercompany goods and services received by USSC in a calendar month were typically paid on a gross basis on or about the 15th day of the following month as part of a normal reconciliation process between USSC and USS. [74] USS ?led a secured claim totaling U.S. $31,252,193.05 in respect of the sale of goods and the provision of services on an intercompany basis after the date of the November Security Agreement. [75] As stated above, the sale of goods and the provision of services by USS to USSC took place both informally and under several intercompany agreements. The relevant intercompany agreements include the following: (1) two Marketing, Distributorship and Supply Agreements, dated March 1, 2009 and December 1, 2008, which governed cross?border sales within the USS group, the sale of steel produced in the US. or Canada and sold to a customer in the other country; (2) a Limited Risk Distributor Agreement, dated February 1, 2008, between USS and USSC under which USSC purchased significant quantities of raw material on an as?needed basis from (3) an ERP Cost Sharing Agreement, amended January 1, 2011, that governed the costs of an enterprise-wide financial and operational software solution known as ?Oracle?; (4) a Corporate Services Agreement, dated November 1, 2007, pursuant to which USS provided, among other things, financial and accounting, corporate strategic planning, tax planning and audit services to and (5) a Business Services Agreement, dated January 1, 2014, among USS, USSC and USS Kosice that related to certain IT and ?nancial transaction processing services. - Page 14 - [76] The claims that are aggregated as Claim #11(c) are therefore contractual claims of USS for payment of the goods and services provided pursuant to these agreements prior to the Filing Date. - Procedural History of this Proceeding [77] Pursuant to a claims process order of the Court in these CCAA proceedings dated November 13, 2014 (the ?Claims Process Order?), creditors of USSC were required to ?le Proofs of Claim (as de?ned in the Claims Process Order) in respect of affected Claims with the Monitor by December 22, 2014. Actions of the Monitor under the Claims Process Order [78] With respect to any claims ?led by USS, US. Steel Holdings, 1310., Canada LP or any af?liates of USS (other than USSC or any of subsidiaries), paragraph 28 of the Claims Process Order ordered: the Monitor to prepare a report to be served on the Service List and ?led with the Court, detailing its review of all USS claims and recommendations it has, if any, with respect to the determination of such claims; the Monitor to seek a scheduling appointment before the Court, on notice to the Service List, to schedule a hearing of a motion to determine the USS claims; and that the USS claims shall not be accepted or determined as Proven Claims without approval of this Court. [79] USS and its subsidiaries and af?liates ?led 14 Proofs of Claim with the Monitor, being the Claims?. [80] On March 10, 2015, the Monitor issued its Seventh Report in these CCAA proceedings dated March 9, 2015 (the ?Monitor?s Seventh Report?). [81] As described at paragraph 8 of Monitor?s Seventh Report, the USS Claims may be summarized and aggregated into the following three categories: non-contingent Secured Claims (as de?ned in the Claims Process Order), which total US. $122,432,496.11 (being the Secured Claims?); unsecured Claims, which total US. $127,805,815.36 (being Claims #1 to 8, #10 and an unsecured portion of Claim #11) (being Claim and contingent Secured Claims, which total $78,761,395.00 (which are not addressed in these Reasons). [82] The review process undertaken by the Monitor (and in certain cases by the Monitor?s counsel) of the USS Claims is described at paragraphs 36-40 of the Monitor?s Seventh Report. Based on its review of the USS Claims, the Monitor recommended to the Court that: - Page 15 - USS bring a motion to approve the USS Secured Claims and the USS Unsecured Claims; and the USS Secured Claims and the USS Unsecured Claims be found to be Proven Claims in their entirety as ?led by USS. [83] Based on the Monitor?s recommendations to the Court, USS commenced this proceeding by a notice of motion dated March 13, 2015. Pursuant to this motion, USS seeks to have the USS Secured Claims and the USS Unsecured Claims approved by the Court as Proven Claims pursuant to the Claims Process Order. The Obieetions of the Province. the Union and Representative Counsel [84] The following brie?y summarizes the claims set out in the Objections of the Objecting Parties that have given rise to this trial. In addition, an objection was ?led by Robert and Sharon Milbourne (collectively, the ?Milbournes?). However, the Milbournes chose not to participate in the hearing of this motion. The Court has therefore treated their objection as withdrawn. he Objection of the Province of Ontario [85] On April 14, 2015, an Objection was filed on behalf of the Province. [86] The Province submitted that the facts of this case raise signi?cant issues with respect to the validity and enforceability of the security interests underlying the secured portions of the USS Claims as well as the proper characterization of the USS Claims. It argued that, in light of these issues, there was an insuf?cient basis on which to accept the USS Claims'as Proven Claims. It. argued that a hearing was required to evaluate these issues, which evaluation should include a consideration of whether the security claimed by USS was valid and enforceable given, among other matters, that the adequacy of consideration received by USSC in exchange for the grant of security has not been established. The Province also submitted that the Court should consider whether the USS Claims constitute bona?de indebtedness, or whether they are properly characterized as equity contributions from a controlling parent company. [87] The Objection of the Province was supplemented by a clarification dated August 21, 2015, which set out in greater detail the bases upon which the Province asserts that the Term Loan and the Revolver Loan should be re-characterized as ?equity claims? and that the security for the USS Secured Claims should be declared to be a fraudulent preference or otherwise unenforceable. As these arguments are addressed below in the Court?s analysis, I do not propose to repeat them in this section. The Objection of the Union [88] On April 14, 2015, an Objection was ?led by the Union. By way of overview, the Union submitted that USS, as the shareholder of USSC, directed the operations of USSC in a manner that has caused USSC to significantly underperform, thereby incurring substantial losses and requiring it to incur significant debt. In addition, the Union submitted that such actions undermined the ability of USSC to meet its on-going funding obligations to the USW pension plans of USSC. The Union argued that, as a result, USS has diluted the potential recoveries of the Union members and the USW pension plan bene?ciaries in this CCAA proceeding. - Page 16 - [89] The Union broadly categorized its objections as follows: an objection to the granting of security interests on the assets of an objection to the characterization of most of the USS Claims as debt when they are properly characterized as equity; and an objection grounded in conduct in relation to its Canadian plants, unionized pensioners, pension plan members and bene?ciaries, which gives rise to claims of oppression and breaches of ?duciary duty. [90] With respect to the objection in the Union submitted that secured claim is based on security interests efiectively granted by USS to itself, at a time when there was no independent board of directors 01' advisors, for insuf?cient consideration, and in a manner which amounted to an improper preference and/or fraudulent conveyance. With respect to the objection in the Union submitted that a signi?cant portion of debt is really in the nature of equity and should be re-characterized as such based on, among other factors, the fact that much of the debt was incurred to acquire Stelco; (ii) USS completely controlled USS was the sole source of USSC's ?nancing; (iv) USS provided commercially unreasonable interest and repayment terms; USS had no reasonable expectation of repayment on the purported loans; and (vi) USSC was signi?cantly undercapitalized throughout the years following its acquisition by USS. [91] The ?rst two claims of the Union overlap signi?cantly, if not completely, with the arguments raised by the Province in its Objection. The remaining claims are not being addressed on this motion. The process for addressing such claims was the subject of an earlier hearing and the Court?s endorsement that was released as US. Steel Canada Inc. 2015 ONSC 5103. The Objection of Representative Counsel [92] On April 14, 2015, an Objection was ?led also ?led by Representative Counsel for all non-USW active employees and retirees of USSC. In its Objection and at the trial in this proceeding, Representative Counsel adopted the particulars of the Objections ?led by the Province and the Union as applicable to the non?USW active employees and retirees of USSC. The Disputed USS Claims [93] For completeness, the Objections that were made in respect of Claims #1?5 in the Monitor?s Seventh Report, which are unsecured claims in the aggregate amount of US. $3,085,746, have now been withdrawn by the Objecting Parties. Further, no Objections have been made in respect of Claims #6-8 in such Report, which are unsecured claims in the aggregate amount of US. $338,169. Therefore, based on the Monitor?s Seventh Report, Claims #1?8 inclusive should be confirmed as Proven Claims. The USS Claims which are the subject of this motion, and in respect. of which the Objections are maintained, are the following: Page 17 .- - .- 9 Unsecured Term Loan $1,847,169,934 10 Unsecured Revolver Loan U.S. $120,150,928 ll Secured Revolver Loan U.S. $72,93 8,390 1 1(a) Secured Cliffs LRD Transaction U.S. $14,538,463 11(b) Secured Credit Support Payments U.S. $3,742,479 1 1(0) Secured Intercompany Trade U.S. $31,252,193 [94] For clarity, none of the parties object to the quantum of the USS Claims which are the subject of the present motion. [95] The USS motion and the Objections were addressed collectively at a trial conducted over eight days. The evidence adduced at the trial consisted of af?davit evidence and oral testimony, the relevant portions of which are described below. Applicable Statutory? Law [96] [The following provisions of the CCAA are relevant for the Objections that the USS Claims should be re-characterized as ?Equity Claims? for the purposes of these CCAA proceedings: 2. In this Act, ?Claim? means any indebtedness, liability or obligation of any kind that would be a claim provable within the meaning of section 2 of the Banknqafcy and Insolvency Act; ?Equity Claim? means a claim that is in respect of an equity interest, including a claim for, among others, a dividend or similar payment, a return of capital, a redemption or retraction obligation, a monetary loss resulting from the ownership, purchase or sale of an equity interest or from the resCission, or, in Quebec, the annulment, of a purchase or sale of an equity interest, or [97] Page 18 - contribution or indemnity in respect of a claim referred to in any of paragraphs to ?Equity Interest? means in the case of a corporation other than an income trust, a share in the corporation -- or a warrant or option or another right to acquire a share in the corporation -- other than one that is derived from a convertible debt, and in the case of an income trust, a unit in the income trust -- or a warrant or option or another right to acquire a unit in the income trust -- other than one that is derived from a convertible debt; 6. (8) No compromise or arrangement that provides for the payment of an equity claim is to be sanctioned by the court unless it provides that all claims that are'not equity claims are to be paid in full before the equity claim is to be paid. 11. Despite anything in the Bankruptcy and Insolvency Act or the Wading?up and Restructuring Act, if an application is made under this Act in respect of a debtor company, the court, on the application of any person interested in the matter, may, subject to the restrictions set out in this Act, on notice to any other person or without notice as it may see fit, make any order that it considers appropriate in the circumstances. The following provisions of the CCAA are relevant to the Objections that the security for the secured USS Claims, being the general security interest granted by USSC in favour of Credit Corp in the October Security Agreement and in favour of USS, United States Steel International, Inc. and SHC in the November Security Agreement, should be invalidated on the grounds of a fraudulent preference: [98] 36.1 (1) Sections 38 and 95 to 101 of the Bankruptcy and Insolvency Act apply, with any modifications that the circumstances require, in respect of a compromise or arrangement unless the compromise or arrangement provides otherwise. (2) For the purposes of subsection (1), a reference in sections 38 and 95 to 101 of the Bankruptcy and Insolvency Act to ?date of the bankruptcy? is to be read as a reference to ?day on which proceedings commence under this Act?; to ?n'usree is to be read as a reference to ?monitor?; and to ?insoivenr person or ?debtor? is to be read as a reference to ?debtor company Section 95 of the Bankruptcy and Insolvency Act, R.S.C. 1985, c. 13?3 (the provides as follows: - Page 19 - transfer of property made, a provision of services made, a charge on property made, a payment made, an obligation incurred or a judicial proceeding taken or suffered by an insolvent person in favour of a creditor who is dealing at arm?s length with the insolvent person, or a person in trust for that creditor, with a view to giving that creditor a preference over another creditor is void as against or, in Quebec, may not be set up against the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is three months before the date of the initial bankruptcy event and ending on the date of the bankruptcy; and I in favour of a creditor who is not dealing at arm?s length with the insolvent person, or a person in trust for that creditor, that has the effect of giving that creditor a preference over another creditor is void as against or, in Quebec, may not be set up against the trustee if it is made, incurred, taken or suffered, as the case may be, during the period beginning on the day that is 12 months before the date of the initial bankruptcy event and ending on the date of the bankruptcy. (2) If the transfer, charge, payment, obligation or judicial proceeding referred to in paragraph has the effect of giving the creditor a preference, it is, in the absence of evidence to the contrary, presumed to have been made, incurred, taken or suffered with a view to giving the creditor the preference even if it was made, incurred, taken or suffered, as the case may be, under pressure and evidence of pressure is not admissible to support the transaction. The Issues for Determination in This Proceeding [99] There are two principal categories of Objections addressed in this proceeding: (1) that the USS Debt Claims are, in substance, ?equity claims? for the purposes of the and (2) that the security for the USS Secured Claims is either unenforceable for lack of consideration or void as a fraudulent preference under section 95 of the BIA, as incorporated into these proceedings by virtue of section 36.1 of the CCAA. These two issues will be addressed in order after first describing certain expert evidence adduced at trial by the parties. Expert Financial Evidence [100] The Province and USS introduced expert evidence from three financial experts who testified at trial. The following brie?y summarizes the principal issues addressed in the reports and testimony of these experts. Tire significance of such evidence is considered below in the Court?s analysis of the characterization of the Term Loan and the Revolver Loan. Page 20 - The innertv Report [101] The Province introduced into evidence a report dated August 21, 2015 of Dr. John Finnerty (the ?Finnerty Report?). Dr. Finnerty was quali?ed as an expert in ?nancial economics. Among other things, the Finnerty Report analyzed the Term Loan and the Revolver Loan against ?fteen factors, described later in these Reasons and referred to as the factors?, that are used in American courts in debt re-characterization cases. It was Dr. Finnerty?s opinion that, from the perspective of ?nancial economics, the terms of the Term Loan and the Revolver Loan, and the manner in which they were implemented, are suggestive of equity rather than debt. [102] The Finnerty Report concluded that, in respect of the Term Loan, eight of the AmoSiyie factors are more consistent, from a financial economics perspective, with a characterization of equity, one, being the maturity date provisions and the schedule of debt service payments, is more consistent with a characterization of debt, and the remaining six factors are ?indeterminate? from a financial economics perspective. [103] The eight factors identified in the Finnerty Report as being more consistent with an equity characterization of the Term Loan are the following: (1) the interest rate provisions and the history of interest payments; (2) the inadequacy of capitalization of ABULC at the date of the acquisition; (3) the absence of security for the advances; (4) the inability of USSC to obtain similar ?nancing from outside institutions, based upon the Hall Report described below; (5) the extent to which advances under the Term Loan were effectively subordinated to claims of outside creditors; (6) the absence of a sinking fund to provide debt repayments; (7) the ?hollow? right of USS to enforce principal and interest obligations; and (8) the failure of USSC to repay the Term Loan on the due date or to seek a postponement thereof. [104] The Finnerty Report reached a similar opinion in respect of the Revolver Loan. The Finnerty Report concludes that ten of the Plastics factors are more consistent with equity. These are the eight factors enumerated above as being more consistent with equity in respect of the Term Loan, plus: (9) the source of the debt repayments; and (10) the fixed maturity date and the schedule of debt service payments. The Finnerty Report concludes that the extent to which the advances under the Revolver Loan were used for working capital, rather than to acquire capital assets, is more consistent with a debt characterization and the remaining two factors are ?indeterminate?. The Hall Report [105] The Province also introduced into evidence a report dated August 21, 2014 of Brad Hall (the ?Hall Report?), a director of Alix Partners LLC, who was qualified as an expert in institutional lending. [106] The Hall Report concludes that a third-party lender in an arm?s length transaction would not have provided financing to in the amounts and on the terms provided by USS pursuant to the Term Loan and pursuant to the Revolver Loan. The Hall Report was incorporated into, and relied upon, by Dr. Finnerty in the preparation of the Finnerty Report. [107] These conclusions in the Hall Report are based on an assessment of the terms of the Term Loan and the Revolver Loan against the standard of a bank or other institutional lender - Page 21- offering unsecured term loans and unsecured revolving loans (herein referred to as a ?third-party lender?). [108] In the opinion of Mr. Hall, a third-party lender would have based any term loan granted to USSC in 2007 on the historical ?nancial performance of Stelco, rather than on the projections relied upon by USS for the purposes of the Acquisition, and would have disregarded any of the synergies projected by USS. In addition, a third-party lender would not have granted a term loan on an unsecured basis, nor would it have been prepared to accept the provisions of the Term Loan in respect of the maturity date, principal repayments or interest payments. [109] Similarly, Mr. Hall was of the view that a third-party lender would not have granted an unsecured loan in the amount of the Revolver Loan in 2010 nor would it have accepted the provisions of the Revolver Loan respecting the maturity date or interest payments. In addition, the Hall Report addresses the ?nancial performance covenants that a third-party lender would typically require, principally debt/equity, and EBITDA/interest tests, and observed that, given ?nancial performance after 2008, USSC would not have complied with the latter two tests as typically applied at the time of advances under the Revolver Loan. [110] The Hall Report also concluded that the terms of the Term Loan were not comparable with the loans provided by the prior arm?s length lenders to Stelco or by the arm?s length lenders that provided ?nancing at or about the same time to USS. I do not ?nd these opinions of assistance with respect to the issues in this proceeding. The Austin Smith Report [111] USS introduced into evidence a report dated September 4, 2015 of Yvette R. Austin Smith (the ?Austin Smith Report?), a principal of the Brattle Group, which addressed certain features of the Finnerty Report and the Hall Report. For present purposes, the Austin Smith Report reached three principal conclusions, aspects of which are relevant for the determinations below in these Reasons. [112] First, the Austin Smith Report. says that the conclusions in the innerty Report that, from a ?nancial economics perspective, the terms of the Term Loan and the Revolver Loan, and the manner of their administration, are strongly suggestive of an equity investment relies too heavily on hindsight to be credible. The Report suggests that, as a result, the application of the factors does not assist in establishing the substance of these transactions or the intent of the parties at the time of the establishment of the Loans. [113] Second, the Austin Smith Report concludes that the opinion in the Hall Report that US SC could not have financed the Term Loan and the Revolver Loan ?in the amounts and on the terms as provided by relies on a ?awed credit analysis of USSC that, therefore, does not address debt capacity after the Acquisition. [114] Third, the Austin Smith Report suggests that the opinions in the Hall Report, and therefore in the Finnerty Report, ignore the reality of diverse corporate debt markets in their concentration on the third?party lender market. - Page 22 - Observations Regarding the Expert Financial Evidence [115] i do not propose to make any ?nding regarding the differences of opinion expressed in the Finnerty Report and in the Austin Smith Report on the particular issues raised in the latter as it is not necessary to do so for the purposes of the determinations herein. However, the following three observations regarding the matters addressed in the expert evidence relied upon by the Objecting Parties are relevant to the approach set out below in these Reasons. [116] First, in respect of most of the AutoSlyZe factors to which Dr. Finnerty refers as suggestive of equity rather than debt, Dr. Finnerty expressly or implicitly measures the Term Loan and the Revolver Loan against the standard of a bank or other institutional lender offering unsecured term loans and unsecured revolving loans, that is, against the standard of a third-party lender offering such loans. [117] At the risk of some oversimpli?cation, Dr. Finnerty?s logic is as follows. The Term Loan and the Revolver Loan purport on their face to be an unsecured term loan and an unsecured revolver loan. The market for such loans is the third-party lender market. However, the terms and conditions of the Term Loan and the Revolver Loan are not terms and conditions that would be acceptable to a third-party lender nor were the Loans administered in certain respects in the manner that would be expected of a third?party lender. Therefore, from the perspective of ?nancial economics, the Loans must be equity. It is the validity of the last proposition in this chain that is at issue in this proceeding. The conclusions of Dr. Finnerty are more or less relevant in this proceeding depending upon whether a third-party lender standard is appropriate in addressing ?nancial arrangements between a parent corporation and its wholly-owned subsidiary. This issue is addressed below. [118] Second, as Dr. Fiinierty testi?ed, of the ?fteen factors, tln?ee principal factors inform his conclusions that the Loans are more suggestive of equity rather than debt. These factors are: (1) the absence of available ?nancing from third~party lenders on the terms and in the amount of the Term Loan and the Revolver Loan; (2) the waiver of interest payments under the Term Loan in 2010 and thereafter; and (3) the ?fungibility of debt and equity?, which refers to the payment of interest and repayment of principal by USSC out of equity injections received from USS, principally in respect of the Revolver Loan. It is therefore appropriate to focus on the evidentiary value of these three considerations, rather than on the larger list which effectively repeats the same considerations. [119] Lastly, I would observe that, while Dr. Finneity was quali?ed as an expert in ?nancial economics, substantially all of his expert evidence related to his view of third-party lender behaviour in various circumstances, rather than to any more formal analysis that was informed by the analytical framework of ?nancial analysis. Expert Legal Evidence [120] USS and the Province also introduced expert legal evidence from two lawyers who testi?ed at trial regarding a speci?c issue of law. The following brie?y summarizes the issue of law and the testimony of these experts. The issue is signi?cant for the analysis of the validity of the security for the USS Secured Claims. Page 23 - The Issue [121] The Revolver Loan Agreement contained an event of default in section 11c as follows: ?Borrower consents to the appointment of a receiver, trustee or liquidator of all or substantially all of its assets, is unable to meet debts, or ?les bankruptcy?. The same event of default was continued after each of the First Revolver Amendment, which removed the solvency representation, the Second Revolver Amendment and the Third Revolver Amendment. [122] The expert testimony addressed the meaning of the phrase ?unable to meet debts? as a matter of contractual interpretation under the laws of Both experts testi?ed that the principles of contractual interpretation under law are substantially similar to the principles under Ontario law with, based on expert, a tendency toward somewhat greater emphasis on the strict construction of contracts. [123] I would observe that, while the expert testimony was tendered in respect of this provision in the Revolver Loan Agreement, the same event of default appears in section 13(c) of the Term Loan Agreement which is governed by the laws of Alberta. The McMichael Report [124] USS introduced into evidence a report dated August 21, 2015 of Lawrence McMichael (the ?McMichael Report?). It was Mr. McMichael?s opinion that the phrase ?unable to meet debts? connoted a balance sheet solvency test which, under law, would be performed on a market value basis. Accordingly, Mr. McMichael was of the opinion that the contractual interpretation of clause 11c of the Revolver Loan Agreement resulted in an event of default in the circumstances in which the aggregate liabilities of USSC exceeded the fair market value of its assets. The Di Massa Report [125] The Province introduced into evidence a report dated September 4, 2014 of Rudolf Di Massa, Jr. (the ?Di Massa Report?). It was Mr. Di Massa?s opinion that the phrase ?unable to meet debts? did not connote an insolvency test as such, whether on a balance sheet basis or on a going concern basis. Mr. Di Massa was of the view that the correct statutory interpretation of this phrase meant ?unable to satisfy or manage its obligations relating to operating activities on an on-going basis given its ?nancial resources from all available sources?. He described this event of default as essentially a direction from USS to USSC to manage its financial obligations by obtaining credit from all available sources, including from trade creditors through an extension of payment terms and from USS itself by drawing up to the maximum availability under the Revolver Loan Agreement. [126] An important feature of Mr. Di Massa?s interpretation is his view of the operation of the Revolver Loan Agreement, which is significant in three respects. Mr. Di Massa?s opinion implies that an event of default would not arise unless and until USSC had drawn the maximum availability under the Revolver Loan Agreement and was unable to foresee obtaining credit from any other possible sources on a prospective basis. It also implies that, under the Revolver Loan Agreement, USS was obligated tocontinue to advance funds until such maximum availability was reached, subject to the occurrence of one of the other events of default in the Agreement. - Page 24 - Lastly, as the phrase ?unable to meet debts? is the only event of default that appears to address the state of insolvency, and, as Mr. Di Massa is of the view that this phrase does not serve as an insolvency event of default, his interpretation has the result that the Revolver Loan Agreement lacks an express insolvency event of default. The Findings of the Court [127] The Court finds that, under the laws of the words ?unable to meet debts? in the Revolver Loan Agreement mean that the fair market value of the assets of USSC are less than the total of its liabilities, that is, that the words connote a balance sheet solvency test. I reach this conclusion for the following four reasons. [128] First, this interpretation is more consistent with the plain meaning of the words ?unable to meet debts? than the interpretation proposed by Mr. Di Massa. In particular, it recognizes the absence of the additional words ?when due?, or words to a similar effect. Such words appear in the events of default in sections lla and 1 1b of the Revolver Loan Agreement. If they had been incorporated into the ?unable to meet debts? event of default, I think it is clear that they would have indicated an intention to apply an event of default in the event of an inability to meet obligations as they fell due, Le. a going concern event of default. Their absence indicates an intention that the event of default would relate to the alternative de?nition of insolvency under the laws of being the extent of assets relative to liabilities. For this reason, while it is true that the parties could have used more speci?c language if they had intended a balance sheet insolvency event of default, instead of the rather archaic phrase that appears, I do not think that such words connote a going concern event of default or the approach proposed in the Di Massa Report. [129] Second, as a related matter, the interpretation proposed in the Di Massa Report requires reading in language that is neither present nor customary. Such an interpretation should be rejected in favour of an interpretation that gives effect to the plain meaning of the language of the event of default. [130] Third, even assuming an ambiguity in the language of the event of default, the Di Massa Report relies heavily on an inference based on the removal of the solvency representation from the Revolver Loan agreement by the First Revolver Agreement. The solvency representation spoke to both balance sheet solvency and solvency on a going concern basis. It is suggested that it would have been illogical for USS and USSC to have removed the solvency representation and maintained a balance sheet event of default. It is also suggested that interpretation of the event of default as a balance sheet solvency event of default would have resulted in a continuing state of default under the Revolver Loan Agreement, with automatic acceleration of the Revolver Loan, which could not have been intended. [131] As discussed later in these Reasons, I do not think that any conclusion can be drawn regarding the intention of the parties in respect of the removal of the solvency representation. In particular, I do not think that there is any evidence regarding the surrounding circumstances in which the First Revolver Amendment was negotiated and executed that bears on the interpretation of the event of default. - Page 25 [132] Fourth, an important principle of contractual interpretation is that, in the case of ambiguity, a court should prefer the more commercially reasonable interpretation. In my view, for the following reasons, the interpretation proposed by Mr. Di Massa results in an unreasonable result from a commercial perspective. [133] In this case, while the interpretation in the McMichael Report may have had the result that USSC was in default as of the execution of the Third Revolver Amendment, if not before, I do not see a particular difficulty in this. Unlike a third?party lender, there is no evidence that USS had a particular concern with the occurrence of a balance sheet event of default under the Revolver Loan. It could always choose to waive any event of default and advance further funds notwithstanding the occurrence of an event of default. In this respect, the evidence of Mr. Di Massa that a commercial lender would not engage in such behaviour is not a relevant consideration. [134] On the other hand, USS would have had a significant concern with any renunciation of its ability to control the extent, if any, of future advances of funds. As Mr. McMichael testi?ed, lenders, including parents of wholly?owned subsidiaries, do not intend to be bound to lend money that they do not believe will be repaid. This is particularly important with respect to the operation of the Revolver Loan Agreement in October 2013 given the amount of the undrawn facility being approximately US. $383 million and the cash burn of USSC in 2013, including the anticipated cash burn for the rest of the year. In addition, USS would not have intended the availability under the Revolver Loan to extend beyond what was absolutely necessary, having just completed a significant de-leveraging exercise for other reasons. [135] Further, as noted above, the interpretation in the Di Massa Report has the result that there is no balance sheet event of default in the Revolver Loan Agreement. As a parent corporation controls the advance of funds to a subsidiary, and thereby its ability to meets its obligations on an on-going basis, a parent corporation would not necessarily need an event of default for a failure to meet on?going obligations. It would, however, require a balance sheet event of default for protection against third parties in the event of an insolvency of its subsidiary. [136] Given the foregoing considerations, I consider that the interpretation proposed by Mr. Di Massa produces a commercial um?easonable result while the interpretation of Mr. McMichael results in a commercially viable loan arrangement. The Debt Re-Characterization Claims I propose to address the debt re?characterization claims of the Objecting Parties in the following order. First, I will deal with two threshold issues. Next, I will address the test to be applied by the Court in the analysis of the characterization of both the Term Loan and the Revolver Loan. I will then address the debt characterization claims of the Objecting Parties in two parts. The ?rst part addresses certain general considerations raised by the Objecting Parties that are common to both the Term Loan and the Revolver Loan. The second part sets out my analysis of each of the Term Loan and the Revolver Loan in turn in light of the Court?s determinations regarding these general considerations. - Page 26 - Threshold Issues [138] The two threshold questions to be addressed are: (1) the onus of proof; and (2) the test to be applied in the evaluation of the debt re?characterization claims respecting the USS Debt Claims. Iwill address each issue in turn. The Omts of Proof [139] As would be expected, USS argues that the burden of proof lies with the Objecting Parties and the Objecting Parties argue that it lies with USS. I will deal separately with the burden of proof pertaining to the debt re-characterization claims of the Objecting Parties and the claims that the security for the USS Secured Claims is invalid or otherwise unenforceable. [140] The issue of the burden of proof in respect of the debt re?characterization claims appears to be a matter of first impression as the parties have been unable to ?nd any case law on this issue. I conclude that the Objecting Parties have the burden of proof that the USS Debt Claims are properly characterized as ?equity claims? under the CCAA for the following three reasons. [141] First, in a claims process under the CCAA, a creditor bears the onus of proving the validity and amount of its debt claim. It is not required to go further and prove the negative. In other words, it does not have to demonstrate that a claim is not an ?equity claim?. If another creditor chooses to assert such an argument, I think it must bear the onus of proving that an otherwise proven debt claim is more properly characteiized in substance as an ?equity claim?. [142] Second, put in procedural terms, the motion of the creditor, in this case USS, is limited to a determination of the validity and amount of its debt claim in order to establish a ?Proven Claim? under the Claims Process Order. The objection of any other creditor, in this case the Objecting Parties, is in substance a cross?motion for a declaration that the debt claim, if accepted, constitutes in substance an ?equity claim? for the purposes of the CCAA. I do not agree with the Objecting Parties that the motion of the objecting creditor should be regarded as the substantive equivalent of a statement of defence which must be addressed to establish the validity and amount of a moving party?s debt claim. [143] Lastly, an important consideration is that the debt re?characterization claims of the Objecting Parties are based on the underlying substantive reality of the Term Loan and the Revolver Loan. These are factual matters, rather than matters based on allegations of inequitable behavior on the part of USS. I accept that there may be an argument for a reversal of the onus of proof in the circumstances of a bona ?de allegation of bad faith or inequitable conduct on the part of an insider or a controlling shareholder of a debtor company that could engage an equitable remedy in favour of the injured party or an analogous statutory remedy. However, as mentioned, that is not the basis of the claims of the Objecting Parties on this motion. [144] The Objecting Parties? argument that the security for the USS Secured Claims is invalid or, in the alternative, unenforceable raises two issues, although I conclude that the Objecting Parties bear the onus of proof in either case. - Page 27 - [145] With respect to the claim that the October Security Agreement and the November Security Agreement are unenforceable for lack of consideration, I think the same principles govern the issue of onus as apply with respect to the issue of onus regarding the treatment of the USS Debt Claims as ?equity claims?. A creditor asserting a Secured Claim must move for a determination that the security is valid. To such end, the creditor must establish that the security ,was delivered by the debtor company, that the security is expressed to cover the creditor?s claim, and that any necessary registrations were effected under applicable legislation. An objection of any other creditor that such security is invalid or otherwise unenforceable on any other basis would involve a cross?motion by such objecting creditor seeking a declaration to such effect. [146] With respect to the claim that the October Security Agreement and the November Security Agreement constitute fraudulent preferences for purposes of section 95 of the BIA, the Objecting Parties acknowledge that the case law establishes that they bear the onus of proof. The est to Be Applied [147] The more dif?cult threshold issue is identification of the test to be applied to determine whether the USS Debt Claims are debt obligations or ?equity claims?. [148] The Term Loan and the Revolver Loan are, on their own terms, loans rather than equity contributions. The terms and conditions of the Term Loan Agreement and the Revolver Loan Agreement unequivocally evidence loan agreements. The Term Loan and Revolver Loan are both documented as loans in contracts entitled ?Loan Agreement? in which the parties are described as lender and borrower. Each loan agreement prescribes a term and an interest rate, requires repayment, and has no terms expressly tying any payments to the ?nancial performance of USSC. USS and USSC also had very different processes for approval and transmission of loan advances and equity contributions. The ?nancial accounts of Canada LP or Credit. Corp, as applicable, and USSC accurately recorded the loan advances separately from equity contributions. [149] The form of the documentation for the Loans, and the foregoing actions, are the point of departure. USS says it intended the outstanding advances under the Term Loan and the Revolver Loan to be loans rather than capital contributions. Accordingly, USS says that the USS Debt Claims are in respect of loans and are not ?equity claims?. The issue for the Court on this motion is, therefore, whether the foregoing actions and documentation are determinative. USS argues that there is no further issue for the Court for two alternative reasons based, respectively, in the language of the CCAA and in the pre-2009 Canadian case law. I will address these two arguments in turn. The Provisions of the CCAA [150] USS argues that the most recent amendments to the CCAA, which introduced the de?nition of ?equity claims?, comprehensively codi?ed the treatment of ?equity claims? with the result that the issue of whether a particular claim is to be treated as debt or equity is solely a matter of statutory interpretation. It relies on Re Sim-Forest Corp, 2012 ONCA 816, 114 OR. (3d) 304, at paras. 30 and 36, for this proposition. - Page 28 [151] In the circumstances of this case, USS argues that the USS Debt Claims are not claims in respect ofa share of USSC, or a warrant or option or another right to acquire a share of USSC. It submits that, accordingly, the USS Debt Claims are not claims in respect of an ?equity interest? and, therefore, are not ?equity claims?. USS says that, as a result, the USS Debt Claims are claims in respect of loans. [152] 1 agree that the issue of whether a particular claim is to be treated as debt or equity is a matter of statutory interpretation. 1 also agree that the USS Debt Claims do not fall within paragraph of the definition of ?equity claim? which refers to ?a monetary loss resulting from the ownership, purchase or sale of an equity interest?. This provision addresses the circumstances of shareholders pursuing securities misrepresentation or oppression actions against a debtor company. It prevents recovery of claims by such shareholders for the value paid for their shares prior to the satisfaction of claims of debt-holders of the debtor company: see Re Sine?Forest Corp, 2012 ONSC 4377 (Commercial List), at paras. 71, 80, 96, aff?d 2012 ONCA 816, 114 OR. (3d) 304. [153] I-iowever, 1 do not read the definitions of ?equity claim? and ?equity interest? as narrowly as USS. The USS argument relies implicitly on the need for the demonstration of the issuance of shares as a requirement of an ?equity claim?. In doing so, USS ignores the reality of a sole shareholder situation and reaches an unreasonable conclusion. [154] In the circumstances of a sole shareholder, there is no practical difference for present purposes between a shareholding of a single share and a shareholding of multiple shares. Accordingly, for the purposes of the de?nition of an ?equity claim?, there should be no difference between a payment to a debtor company on account of the issuance of new shares and a payment to a debtor company by way of a contribution to capital in respect of the existing shares. [155] On this basis, I conclude that, as a matter of statutory interpretation, the de?nition of an ?equity claim? must extend to a contribution to capital by a sole shareholder unaccompanied by a further issue of shares. Put another way, I conclude that a payment by a sole shareholder of a debtor company on account of a capital contribution constitutes a payment in respect of a share of the debtor company. Such a payment would therefore constitute an ?equity interest? and a claim in respect of such payment in a CCAA proceeding would be a claim for a return of such capital and therefore an ?equity claim?. [156] Further, I conclude that there is no reason why the reference to ?a return of capital? in paragraph of the definition of ?equity claim? should be limited a claim in respect of an express contribution to capital by a shareholder. A transaction can be a contribution to capital in substance even if it expressed to be otherwise. [157] Accordingly, I conclude that the issue for the Court in this proceeding is whether the USS Debt Clairns constitute claims for a return of capital in respect of the shares in USSC owned by USS. In order to decide that issue, the Court must decide whether the advances made under the Term Loan and the Revolver Loan constituted loans to USSC or contributions to the capital of USSC in respect of the outstanding shares of USSC owned by USS. To the extent any of such advances constituted a contribution to capital, any claim for such amounts as Proven Claims in Page 29 these CCAA proceedings would constitute a claim for a return of capital and, therefore, an ?equity claim?. Canadian Case Law [158] USS makes an alternative submission in the event the Court ?nds that the definition of ?equity claim? does not preclude a determination of whether the USS Debt Claims are be treated as debt or equity. USS says that the applicable Canadian case law regarding debt re- characterization issues, which pre?dates the recent amendments to the CCAA, requires that a court have regard solely to the intention of the parties as a matter of the contractual interpretation of the relevant documentation in determining whether any transaction gave rise to an ?equity interest?. [159] in this case, as mentioned above, USS says that the relevant documentation consists of the Term Loan Agreement, the Revolver Loan Agreement and the documentation pertaining to the advances and payments thereunder. USS submits that the intention of both parties at the time of execution of the Term Loan Agreement and the Revolver Loan Agreement, and at the time of all advances thereunder, is manifest on the face of such documents. It submits that, as a matter of contractual interpretation, it is clear that USS and USSC intended that such transactions would constitute debt obligations of USSC rather than capital contributions by USS to USSC. USS says that Canadian case law provides no basis for going beyond the exercise of contractual interpretation to evaluate whether the USS Debt Claims should be characterized as ?equity claims? on some other basis. [160] In making this argument, USS relies, in particular, on the decision of the Supreme Court in Canada Deposit Insurance Corp. v. Canadian Corianercial Bank, [1992] 3 S.C.R. 558. In that decision, the issue was whether certain monies provided to the Canadian Commercial Bank (the had been provided by way of a loan or a capital investment. At paragraph 51, the Court approached the issue before it as a matter of contractual interpretation as follows:- As in any case involving contractual interpretation, the characterization issue facing this Court must be decided by determining the intention of the parties to the support agreements. This task, perplexing as it sometimes proves to be, depends primarily on the meaning of the words chosen by the parties to re?ect their intention. When the words alone are insufficient to reach a conclusion as to the true nature of the agreement, or when outside support for a particular characterization is required, a consideration of admissible surrounding circumstances may be appropriate. [161] The Supreme Court concluded that the transaction in that case was a loan, noting that: (1) there was nothing in the express terms of the agreements in question which supported a conclusion that the money was advanced as an investment; and (2) there were express provisions supporting a characterization of the advance as a loan, including provisions for repayment, for an indemnity should full repayment not be made from the sources contemplated, and for equal ranking with the ordinary creditors of CCB: see Canada Conmtercial Bank, supra at para. 63. Page 30 - [162] In (Re) Bad River Minerai Corporation, 2014 BCSC 1732, 16 C.B.R. (6th) 173, Fitzpatrick J. summarized the principles in Canadian Commerciai Bank in the following manner, which I ?nd helpful in the present case: the fact that a transaction contains both debt and equity features does not, in itself, determine its characterization as either debt or equity; the characterization of a transaction under review requires the determination of the intention of the parties; it does?not follow that each and every aspect of a "hybrid" debt and equity transaction must be given the exact same weight when addressing a characterization issue; and a court should not too easily be distracted by aspects of a transaction which are, in reality, only incidental or secondary in nature to the main tlnust of the agreement. This summary demonstrates that the issue before the court in Canadian Con-anemia! Bank was the characterization of an instrument that had characteristics of both debt and equity. [163] I do not ?nd the decision of Canadian Commerciai Bank helpful in the present circumstances for the reason that the present circumstances differ in two important respects. [164] First, the subject-matter in Canadian Commercial Bank was, as mentioned, a hybrid security, a security having characteristics of both debt and equity. Therefore the issue was whether the security in question should be characterized as a debt obligation or a capital investment. The present proceeding does not involve a hybrid security. As mentioned above, the relevant documentation unequivocally evidences loan transactions on their face. [165] Second, the parties to the transaction in Canadian Commerciai Bank were at arm?s length and the transaction documentation represented the outcome of arm?s length negotiations between the parties. The parties to the Term Loan Agreement and the Revolver Loan Agreement were not at arm?s length. As a result, the form of the documentation, including the characterization of the transaction as debt rather than equity, was determined by USS in its sole discretion, subject only to satisfaction of any applicable Canadian legal considerations raised by USSC. [166] in such circumstances, the task of a court is qualitatively different from that in Canadian Commercial Bank. In that decision, given the hybrid nature of the security under consideration, the issue was whether the parties intended that the institutions providing financial support to the CCB were making a capital investment in the bank or were making a loan to it. In other words, the intentions of the parties were unclear without a contractual analysis to determine the substance of the transaction that had been agreed upon. At the same time, given the arm?s length relationship between the parties, the language of the agreements could be relied upon as an accurate re?ection of the intentions of the parties regarding the substantive reality of the transaction. [167] Where, however, as in the present circumstances, the parties are not at arm?s length, the issue is not what the parties say they intended regarding the substance of the transaction as a Page 31 matter of contractual interpretation. The expressed intention of the parties is clear. However, given the absence of any arm?s length relationship, there can be no certainty that the language of the agreements re?ects the underlying substantive reality of the transaction. Accordingly, the issue for a court is whether, as actually implemented, the substance of the transaction is, in fact, different from what the parties expressed it be in the transaction documentation. [168] In other words, the task of a court is to determine whether the transaction in substance constituted a contribution to capital notwithstanding the expressed intentions of the parties that the transaction be treated as a loan. It is therefore not apprOpriate to limit the inquiry into the intentions of the parties to a review of the form of the transaction documentation. Such an exercise reduces to a ?rubber stamping? of the determination of a single party to the transaction, the sole shareholder, and it does not address the substance of the transaction as it was actually implemented. In such circumstances, the determination of whether a particular claim is to be treated as debt or equity must. address not just the expressed intentions of the parties as re?ected in the transaction documentation but also the manner in which the transaction was implemented and the economic reality of the surrounding circumstances. [169] USS also refers to the decision of the Court of Appeal in Metropolitan Toronto Police Widows and Orphans Fund v. Telus Con-untmicafions Inc, [2005] No. 2309 (C.A.), leave to appeal to S.C.C. denied, [2005] S.C.C.A. No. 379, at paras. 38?40. In these paragraphs, the Court of Appeal stated that: (1) the determination of the legal character of a transaction is not a simple mechanical exercise of assessing and tallying up a list of factors and then deciding whether they net out to one or the other; and (2) that a court must give legal effect to the intention of the parties as expressed in the language of an agreement. In that case, the Court of Appeal also recognized that the respective needs of the parties to an agreement are an indication of their intention and that parties are entitled to structure their contractual relationships as they see absent a sham or public policy considerations dictating otherwise. [170] I do not ?nd this decision to be helpful in the present circumstances for the same reasons as the decision in Canadian Commercial Bank does not address the issues in the present proceeding. Metropolitan Toronto Police Widows and Orphans and involved the characterization of a securitization transaction as either a sale or a loan. In that context, the issue before the Court of Appeal was a matter of contractual interpretation. The transaction was an arm?s length commercial transaction. Accordingly, the documentation before the court in that case could be relied upon to accurately re?ect the intentions of the parties regarding the underlying economic reality of the transaction. I do agree, however, with the statement of the Court of Appeal in that decision that determination of the substantive nature of a transaction is not conducted by means of a simple ?scorecard? of factors. [171] I would observe, however, that in large measure the difference between the parties in this proceeding which appears to reduce to the signi?cance to be attached to the manner in which the Loans were administered is perhaps more semantic than real. The Objecting Parties proposed, and USS accepted, that a useful summary of the appropriate approach to be taken in the present proceeding was set out in a non-binding, American decision, In re Fedders North America, 1116., 405 BR. 527 (2009), US. Bankruptcy Court, D. Delaware, at para. 59, as follows: The law regarding recharacterization is well-settled in this jurisdiction. The Third Circuit has held that the overarching inquiry with respect to recharaeterizing debt Page 32 - as equity is whether the parties to the transaction in question intended the loan to be a disguised equity contribution. In re Sztb?/Iicron Systems Corp, 432 F.3d 448, 455-56 (3d Cir.2006). This intent may be inferred from what the parties say in a contract, from what they do through their actions, and from the economic reality of the surrounding circumstances. Id. at 456. Recharacterization has nothing to do with inequitable conduct, however. See In re PIastics, Inc., 269 F.3d 726 at 748-49 (6th Cir. 2001) (discussing the differences between equitable subordination and recharacterization) [172] On this basis, the parties do not dispute the process so much as the result. They have fundamentally different views on the intentions of USS and USSC regarding the substance of the transaction which I think can be summarized as follows. [173] The Objecting Parties say that the Term Loan Agreement and the Revolving Loan Agreement reflect arrangements under which USS intended, at all times, on the one hand, to return excess cash to USS when it became available, and, on the other hand, to write off the principal or interest to the extent that payments of either were due and suf?cient cash was not available. [174] USS acknowledges that the Term Loan and subsequently the Revolver Loan were established with the intention of constituting the principal vehicles by which cash would be advanced to USSC, initially for the purposes of the Acquisition and subsequently for working capital purposes, and by which excess cash in USSC from any source would be repatriated to USS. USS says, however, that, at all times, it extended advances and made payments under the Term Loan and the Revolver Loan in accordance with their terms. USS argues that nothing in the manner in which it established or operated the Term Loan and the Revolver Loan re?ected, in substance, a contribution to the capital of USSC, and that the only contributions to capital were made outside the loan arrangements in the form of the equity injections set out in Exhibit to the Monitor?s Seventh Report. [175] These two competing views of the'substance of the Term Loan and the Revolver Loan frame the debt re-characterization issues addressed in these Reasons. be American Mum-F actor Analysis [176] Given these competing views of the Term Loan and the Revolver Loan, it is necessary to determine an appropriate test for the determination of whether the USS Debt Claims are in substance claims in respect of loans or are ?equity claims?. The Objecting Parties urge the Court to adopt the Inulti-factor analysis prevailing in American courts under which courts evaluate a long list of factors drawing conclusions about what factors are most determinative in any given fact scenario. [177] As referenced above, a leading case in this area is In re AnroSter Plastics, Inc., 269 F.3d at 749-50 (6th Cir., 2001), in which the court articulated the following eleven factors: (1) the names given to the instruments, if any, evidencing the indebtedness; (2) the presence or absence of a ?xed maturity date and schedule of payments; (3) the presence or absence of a ?xed rate of interest and interest payments; (4) the Page 33 source of repayments; (5) the adequacy or inadequacy of capitalization; (6) the identity of interest between the creditor and the stockholder; (7) the security, if any, for the advances; (8) the corporation's ability to obtain ?nancing from outside lending institutions; (9) the extent to which the advances were subordinated to the claims of outside creditors; (10) the extent to which the advances were used to acquire capital assets; and (11) the presence or absence of a sinking fund to provide repayments. In addition, courts in other American circuits have considered the following additional factors: (1) the right to enforce payment of principal and interest; (2) participation in management ?owing as a result; (3) the failure of the debtor to repay on the due date or to seek a repayment postponement; and (4) the intent of the parties: see In re Submicron Systems Corporation, 432 F.3d (3rd Cir., 2006), at 455-456. In the interest of simplicity, in these Reasons I refer to the ?fteen factors enumerated in this paragraph as the ?AutoSine factors?, although I acknowledge this is technically inaccurate. [118] The Objecting Parties refer to the following description of the Inulti-factor analysis from In re Systems Corporation, at 455-456, which appears to restate the approach set out above in Re Fedders: In de?ning the re?characterization inquiry, courts have adopted a variety of multi- factor tests borrowed from non-bankruptcy case law. While these tests undoubtedly include pertinent factors, they devolve to an overarching inquiry: the characterization as debt or equity is a court's attempt to discern whether the parties called an instrument one thing when in fact they intended it as something else. That intent may be inferred from what the parties say in their contracts, from what they do through their actions, and from the economic reality of the surrounding circumstances. Answers lie in facts that confer context case?by-case. [179] There does not appear to be any reported Canadian or Commonwealth cases in which courts have purported to apply the multi-factor, re?characterization tests relied upon by the Objecting Parties prevailing in American courts. The Objecting Parties urge the Court to formally adopt the foregoing eleven or ?fteen factors in making a determination in this proceeding. [180] American courts find authority for this approach in the general equitable powers granted to a bankruptcy court under the provisions of section 105(a) of the United States Code, 11 U.S.C 1982, which is the equivalent of section 11 of the CCAA. USS says the Court lacks similar authority under the CCAA on the basis that the recent amendments to the CCAA in this area have limited the scope of a court?s authority under section 11. USS relies on the earlier decision of the Court in US. Steel Canada Inc. 2015 ONSC 5103, at para. 51, as follows: I consider that the language of the de?nition of an cEquity Claim? and of the provisions of section 36.1 operates as a ?restriction set out in the Act? for the purposes of section 11 of the CCAA which has the effect of limiting the authority of the Court in any determination regarding an ?Equity Claim? or in any proceedings brought under section 36.1. - Page 34 However, that decision does not address the extent of the Court?s authority under the CCAA in the evaluation of whether a security 01' a transaction expressed to be a debt claim is, in substance, an ?equity interest?. At a minimum, any such evaluation requires consideration of a number of the factors considered by American courts in the rnulti-factor analysis and by Canadian courts in evaluating the underlying substance of a transaction. [181] The more and more important, issue for the Court is aframework for identi?cation of the speci?c considerations or factors to be applied in the context of the present proceeding. The American cases evidence the obvious reality that, in any given situation, different factors or considerations will be more or less persuasive. Insofar as the American cases suggest a ?scorecard? approach, however, 1 have rejected such an approach in favour of an evaluation of the substantive reality of the USS Debt Claims. In the end, in this proceeding, the AuroSlyZe factors constituted no more than the starting point, in the form of a list of factors upon which the parties drew to support their characterization of the Claims. In short, it is not necessary to adopt the American, multi?factor analysis as a formal matter in the determination of the issues before the Court, and 1 therefore decline to do so. The Approach ofthe Court [182] As a ?rst step in the identi?cation of the speci?c considerations that should inform the determination of the substance of the USS Debt Claims, I propose to start with a conceptual understanding of the dividing line between debt and equity. [183] An appropriate starting point is the definition of debt and equity for ?nancial purposes set out in paragraphs?32 and 34 of the Finnerty Report: At its heart, the difference between equity and debt lies in the fundamental nature of their respective claims on the assets and cash ?ow of the company. Debt involves borrowing funds subject to a legal commitment to repay the borrowed money with interest at an agreed rate by a stated maturity date. This commitment is embodied in a contract, and this contract is implemented by the borrower. Lenders receive a contractually agreed set of cash ?ows, typically through periodic interest payments and one or more principal repayments, the last of which occur on the maturity date. In contrast to debt, an equity claim entitles the holder to a share of the company?s pro?ts and residual cash ?ows-after the company has made all the contractually required debt service payments. That is, the debt ranks senior to the equity with respect to the company?s cash ?ows. Similarly, the debt ranks senior to the equity in the event the company must be liquidated and its assets sold to repay its debt obligations. The equityholders get what is left after the holders of the debt have been paid in full; if the debtholders can?t get paid in full, then the equityholders get nothing. [184] With this de?nition in mind, the Province suggests that the Court should address the substance of the Term Loan and the Revolver Loan from the perspective of whether the evidence is more consistent with an intention and a practice of repayment of principal plus interest under these Loans, or the payment of the residual cash flow and assets of USSC. I think this is a helpful approach, even if at a general level. Page 35 [185] Therefore, in the context of a parent-subsidiary relationship, the fundamental consideration in assessing whether a transaction is a loan is whether a holder of the instrument expects at the outset to be repaid the principal amount of the loan with interest out of cash ?ows of the company. The de?nition above implies a belief on the part of a lender that its debtor has the financial capacity to generate cash ?ow suf?cient to pay interest and repay principal over the term of the loan, regardless of the profitability of the debtor from time to time in the course of that term. [186] This approach suggests that the issue of whether the Term Loan and the Revolver Loan should be characterized as debt or equity can best be addressed by considering two issues: (1) the expectation of USS regarding repayment of principal with interest of the Term Loan and the Revolver Loan out of cash ?ows of USSC over the term of these Loans; and (2) the reasonableness of such expectation. [187] The first of these questions addresses a subjective issue the expectations of USS. Obviously, if, at the time of making advances under a Loan, USS had no expectation that USSC would honour any payment obligation under the Loan when due in the absence of available cash at such time and, for example, intended from the outset to waive all interest as it became payable and to forgive the principal indebtedness when it became due, the Court would disregard the form of the documentation as, in effect, a sham. [188] The second question addresses a more objective issue assuming the existence of an expectation of repayment with interest of the Loan - the reasonableness of such expectation. This question engages, among other issues, the adequacy of capitalization of a wholly-owned subsidiary and the debt capacity of the subsidiary. If USSC were only nominally capitalized, this might be relatively easy to disprove. In this proceeding, as in most cases, however, this issue will involve, among other things, expert evidence regarding the availability of ?nancing in capital markets generally. [189] It is important for present purposes to note that, given that the burden of proof rests with the party asserting that a purported loan is, in substance, a capital contribution, the onus lies on the Objecting Parties, as the parties seeking to re?characterize the Loans as equity, to demonstrate that there was no reasonable basis for expectations. There are good policy reasons for such a standard. [190] Any determination of the reasonableness of a lender?s expectations at the time of the making of a loan, or an advance under a loan, is prospective in nature and therefore highly speculative. It necessarily involves consideration of a borrower?s financial capacity under a variety of possible future economic scenarios. A court should be cautious in reaching a conclusion that there was no reasonable expectation in the absence of a detailed consideration of such scenarios and compelling evidence that there was no basis for the lender?s expectations under any of such scenarios. In addition, a determination that a lender acting in good faith nevertheless had no reasonable basis for believing that its subsidiary had the ?nancial capacity to generate cash flow sufficient to pay interest and repay principal over the term of the loan will inevitably rely heavily on the opinion of ?nancial experts. Any expert opinion on such an issue, however, is at least as much a matter of judgment as it is of fact, except perhaps in exceptional circumstances. Accordingly, a court must have a very high degree of con?dence in any such expert ?nancial evidence before it ?nds that a lender acting in good faith nevertheless had no Page 36 - reasonable basis for believing that its subsidiary had the ?nancial capacity to generate cash ?ow suf?cient to pay interest and repay principal over the term of the loan. [191] Given the foregoing considerations, I conclude that, in order to ?nd that the USS Debt Claims are ?equity claims?, the Court must be satis?ed that either: (1) at the time of making an advance under the Term Loan or the Revolver Loan, USS did not believe that USSC would be able to repay such advance with interest out of cash ?ows over the term of the Term Loan or the Revolver Loan, as applicable; or (2) that, at the time of such advance, there was no reasonable basis on which USS could have expected USSC to generate cash ?ow suf?cient to pay interest on, and repay the principal of, such advance over the term of the Term Loan and the Revolver Loan, as the case may be. [192] Three related principles are also important for the analysis of the character of the USS Debt Claims. [193] First, while the Term Loan and later the Revolver Loan constituted a signi?cant part of investment in USSC, the Loans do not represent all of that investment. As described above, USS has also made a signi?cant investment that has been expressly treated as equity. This distinction is important. In this proceeding, the issue is limited to the characterization of the debt component. of that investment. Clearly, the return on the equity portion of investment will be dependent on the residual cash ?ow from USSC after payment of trade creditors as well as repayment with interest of the Term Loan and the Revolver Loan. However, the fact that. these Loans form part of total investment in USSC does not automatically mean that expectation of repayment of these Loans is the same as its expectation of receiving a return on its equity investment. [194] A parent corporation is able to divide its investment in an acquired corporation between debt and equity as it chooses. Such allocation of its investment is not determinative for the reasons discussed above. However, equally, such allocation must be respected unless it is demonstrated that the parent corporation did not have a reasonable expectation of repayment with interest of the portion of the investment which has been treated as debt when the loan was advanced. There is no basis in the CCAA for an automatic re-characterization into equity of a portion of an investment that has been structured as debt merely because the entire investment is, in a general sense, dependth for a return on the success of the investment. Put another way, a parent corporation can loan money to a wholly?owned subsidiary without that loan being treated automatically as part of the parent corporation?s equity investment in the subsidiary. [195] Second, the characterization of the USS Debt Claims must be analysed as of the date of the advances under each of the Term Loan and the Revolver Loan. Subsequent behaviour of either or both of the parties to the Term Loan Agreement or the Revolver Loan Agreement may be relevant, but only to the extent that such behaviour illuminates the intentions of the parties regarding the Tenn Loan or the Revolver Loan as of the date of the advances thereunder. Behaviour subsequent to any advance cannot, on its own, justify a re-characterization of such advance. [196] Third, the characterization of the advances under each of the Term Loan and the Revolver Loan cannot be viewed in isolation from the economic circumstances in which the advances were made. Page 37 [197] In this respect, the economic backdrop to the advances under the Term Loan and the Revolver Loan during the period 2008 to 2013 can be summarized as follows. The advances under the Term Loan between October 31, 2007 and December 31, 2007 were made in the context of a buoyant steel market. Economic conditions changed dramatically in the autumn of 2008 after the collapse of Lehman Brothers and the onset of the ?nancial crisis in that year. Worsening conditions prevailed throughout 2009 and into early 2010. Thereafter, in each of 2010, 2011 and 2012, USS and USSC experienced mini?cycles consisting of one or two encouraging quarters succeeded by a weak performance for the remainder of these years. In 2013, USS and USSC experienced a weak market throughout the year with the result that matters reached a critical stage. Under a new chief executive officer and a new chief ?nancial officer, who assumed their of?ces effective September 1, 2013, USS commenced a review of its operations which revealed, among other dif?culties, that while USSC represented 10% of revenues, it contributed 50% of its operating losses. General Considerations Regarding Determination of the Debt Re?eharacterization Issues [198] Although the exercise of evaluation of the character of the Term Loan and the Revolver Loan ultimately requires a consideration of each of the advances individually, the issue is best addressed initially on a collective basis. As the Objecting Parties suggested, consideration of the characterization of the Term Loan and the Revolver Loan together recognizes, or perhaps more appropriately starts, ?'om the position that the Term Loan and the Revolver Loan were used and administered by USS in the same manner and that the difference in their terms principally re?ected tax and accounting considerations rather than any signi?cant substantive difference in function. In this section, 1 propose to consider the probative value of the factors upon which the Objecting Parties principally rely as evidence that the Term Loan and the Revolver Loan were, in substance, equity contributions by USS to USSC. [199] The Objecting Parties identi?ed the following principal considerations or factors which, in their view, demonstrated that advances under the Term Loan and the Revolver Loan were equity contributions rather than loans for USSC: the absence of any arm?s length negotiation regarding the terms and conditions of the Loans; (2) the deferred interest payment dates and the long maturity dates of both the Term Loan and the Revolver Loan; (3) the history of interest payments and waivers under the Term Loan; (4) the absence of any security; (5) the extent of control over the business, operations and ?nancial performance of (6) the fact, as acknowledged by USS, that USSC would not have been able to obtain ?nancing from a third- party bank or institutional lender in the amount and on the terms and conditions of either of the Term Loan or the Revolver Loan; and (7) their view that payments on account of the Term Loan and the Revolver Loan Were effectively subordinated to payment of trade creditors. [200] The Objecting Parties argue that, collectively, these considerations establish that USS had no expectation of repayment with interest of the advances under the Term Loan and the Revolver Loan out of cash ?ow from USSC. They say these factors demonstrate that, in substance, the Term Loan and the Revolver Loan were ?nancial instruments under which USS was intended to receive the residual cash ?ow and assets of USSC as, and to the extent, available without an expectation of repayment with interest of either Loan, and were therefore capital contributions. Page 38 - [201] Signi?cantly, the Objectng Parties argue that each of the foregoing factors has probative value when measured against the standard of behavior that would be expected of a third-party lender. As mentioned above, this position re?ects the approach in the Finnerty Report. USS argues that such a standard is inappropriate and, accordingly, that the factors upon which the Objecting Parties rely are not indicative of ?equity interests?. [202] I propose to assess the submissions of the Objecting Parties respecting these general considerations in the following order. First, I will address in greater detail my understanding of the purposes and the administration of the Term Loan and the Revolver Loan. Then, I propose to address the issue of the signi?cance of third?party lender behaviour in the context of a wholly- owned subsidiary relationship. Lastly, I will consider the probative value of the principal considerations relied upon by the Objecting Parties in light of the conclusions regarding the third?party lender standard. The Purposes and Administration of the Term Loan and the Revolver Loan and the Differing Perspectives of the Parties [203] As mentioned, USS established the Tenn Loan, and subsequently the Revolver Loan, with the intention that they would be the principal vehicles by which cash ?ows could be moved between USS and USSC and, in particular, surplus cash in USSC could be repatriated to USS. Additional equity injections were also made from time to time by USS, but only to the extent that USSC required additional capital to stay onside the ?thin capitalization? rules under the Income Tax Act and for the purposes of the ?dc-leveraging? exercise described above. [204] The initial advances of the Term Loan were directed to ABULC for the purpose of the Acquisition. Subsequent advances prior to and including December 31, 2007 were used by USS to repay the Credit Corp Loan, repay liabilities to SHC and, in a lesser amount, for working capital purposes. The advances in 2009 totaling $211.2 million were also used for working capital purposes. A substantial portion of the interest under the Term Loan in 2008 was paid in that year, two years before its due date. Such interest was paid out of surplus cash on hand as a result of the strong financial performance of USSC in 2008 prior to the slowdown that began in the fourth quarter of that year. [205] USS then established the Revolver Loan in 2010 as a more tax?ef?cient means of moving cash between USS and USSC after withholding tax was eliminated on interest payments from USSC to USS, permitting tax?free interest payments from USSC to Credit Corp, which was an American corporation. For that reason, the Revolver Loan was denominated in US. dollars. Prior to the ?dc?leveraging? exercise in 2013, the outstanding balance under the Revolver Loan exceeded the maximum availability of US. $500 million. In 2013, payments of principal and interest totaling approximately US. $390 million, that were funded out of equity injections aggregating over US. $680 million, reduced the outstanding balance to the amount of the First Tranche Indebtedness. [206] in order to maximize its ?exibility for such cash management purposes, USS structured both the Term Loan and the Revolver Loan to provide for the most generous maturity dates and interest payment dates possible given constraints imposed by tax legislation. Further, both the Term Loan Agreement and the Revolver Loan Agreement contained minimal representations and warranties and very basic events of default. in addition, until the Second Revolver Amendment, - Page 39 - both the Term Loan and the Revolver Loan were unsecured facilities. The Second Revolver Amendment in January 2013 provided for security on iron?ore pellets pursuant to the Security Agreement for the principal, if not the sole, purpose of maintaining the intended tax treatment for payments in respect of the Revolver Loan, given the interest waivers granted under the Term Loan in 2010, 2011 and 2012. As mentioned, with the arrival of a new chief ?nancial of?cer effective as of September 1, 2013, USS began to evaluate its investment in USSC more closely. As of the end of October 2013, USS determined that it would only advance funds to USSC that. it believed USSC would be able to repay. As a result, all subsequent advances were secured under the October Security Agreement and the November Security Agreement. [207] There is, however, no suggestion that USS and USSC disregarded the debt character of the Term Loan and the Revolver Loan in moving cash between USSC and USS. Accordingly, all advances under the Term Loan and the Revolver Loan were documented as such and were distinguished, both in terms of documentation and accounting, from equity injections. All interest payments on the Loans were similarly documented by both parties and treated accordingly for tax and accounting purposes. Principal payments were similarly documented by both parties. There is no evidence that the payments made in respect of the Term Loan or the Revolver Loan failed to satisfy the requirements under Canadian and American tax legislation for treatment as debt and, in particular, that any payments were deemed to be dividends. [208] On the other hand, there is no doubt that the Term Loan and the Revolver Loan were provided by USS to USSC on terms and conditions that USSC could not have obtained from third party banks and other non-bank institutional providers of term ?nancing and operating credit facilities. in particular, the payment provisions respecting interest and principal, and the absence of security, would not have been available to USSC. [209] USS says that both the documentation and the manner of administration of the Loans re?ect debt obligations. USS says that there is nothing in the cash management arrangements described above between a parent and a wholly?owned subsidiary that can justify re- characterization of the Loans as capital contributions for the purposes of the CCAA. In particular, USS argues that nothing in these ?nancing arrangements suggests that it did not expect to receive repayment with interest of the funds advanced under the Loans; It also says that the fact that the Term Loan and the Revolver Loan were provided to USSC on terms that were not available to USSC from third parties is irrelevant. [210] The Objecting Parties argue that USS established and administered the Term Loan and the Revolver Loan in the manner of, and using its rights as, a shareholder rather than a lender. They say that actions are collectively more consistent with an intention to receive the residual cash ?ow and assets of USSC, as and when available, without any expectation of repayment with interest of the advances under the Loans. A more precise expression of their position is that the Term Loan Agreement and the Revolving Loan Agreement reflect arrangements under which USS intended at all times to return excess cash to USS when available and to write off the principal or interest in respect of the Loans to the extent that payments were due and suf?cient cash was not available. I have excerpted below certain passages from the written submissions of the Union and the Province that I think capture the essential approach of these parties and which also assist in clarifying the positions of these parties. - Page 40 - The Relevance of the I: it'd-Party Lender Standard [211] Clearly, a signi?cant fact in this proceeding is that, at all relevant times, ABULC and USSC, as applicable, were wholly?owned subsidiaries of USS. In addition, unlike many parent: subsidiary relationships in which the subsidiary carries on a business independently of the parent, USSC was very closely integrated into the business of USS. After the Acquisition, all management and operational functions previously conducted by Stelco were effectively centralized within USS. USSC became a part of the North American ?at?rolled steel division of USS. This relationship is signi?cant in two related respects. [212] The Objecting Parties argue that the USS control of USSC is an important factor in assessing whether, in substance, the Term Loan and the Revolver Loan were debt instruments or contributions to capital. They say that USS had a signi?cant ability?t0 in?uence the pro?tability of USSC through such control. They say that such control is, in some way, an indication of an equity contribution. I will address this below in the next section. [213] The issue of control is also significant for present purposes as a gateway to the related issue of the relevance of a third?party lender standard as a basis for evaluation of the terms and conditions, as well as the administration, of the Term Loan and the Revolver Loan. As mentioned, USS provided ?nancing to USSC that would not have been available to USSC from banks and other institutional lenders. The Objecting Parties place great weight on this factor as demonstrating that the Tenn Loan and the Revolver Loan were not real loan transactions, but rather were disguised equity contributions. Equally important, most, if not all, of the Am?oSIyle factors identified above upon which the Objecting Parties rely are informed, in whole, or in part, by a comparison of USS?actions against a standard of a typical third-party lender. [214] The Objecting Parties suggest the Court should look to a third-party lender standard in two principal respects in order to assess the terms and conditions of the Term Loan and the Revolver Loan and in order to assess the actions of USS and USSC in the administration of these Loans including payments thereunder. As these are significant factors in the analysis proposed by the Objecting Parties, I propose to address these two issues in some detail. [215] It is important to recognize at the outset that there is no necessary reason why a parent corporation would act in the same manner as a third?party lender in the provision of financing facilities to its wholly-owned subsidiary. In particular, the terms and conditions of lending an'angements between a wholly-owned subsidiary and its parent will, in many if not most cases, depart from typical lending arrangements between a third-party lender and a borrower. [216] As a practical matter, compliance with tax regulations in order to ensure favourable tax treatment will be a signi?cant, if not the main, driver regarding these matters. In this case, USS determined the relative amounts of loans and equity injections based principally on tax considerations to the USS group of companies considered as a whole. Generally, these considerations dictated maximization of debt to obtain interest deductibility under the United States Internal Revenue Code, 26 U.S.C., subject to compliance with the ?thin capitalization? rules under the Income Tax Act, which established a maximum debt/equity structure. [217] In addition, in a wholly-owned subsidiary relationship, there is no need for extensive documentation, nor is there a need for the types of contractual protections typically found in - Page 41 commercial loan agreements. Given the parent?s ability to control the subsidiary?s actions as its sole shareholder, there is also no need for a strict schedule of repayment of principal. Further, there is no reason why a parent corporation would enforce any rights of default that may arise in the course of a loan so long as the parent corporation believes that the subsidiary has value. Such rights are asserted only as required toprotect the parent corporation in the event that a third party asserts its rights as a creditor against the subsidiary or to terminate the parent. corporation?s support of the subsidiary. Similarly, it is not realistic to expect that a wholly-owned subsidiary will conduct its affairs pursuant to a corporate governance structure that includes independent directors until such time as the interests of the parent corporation and the subsidiary diverge. [218] There is nothing improper in any of the foregoing arrangements. To be clear, the Objecting Parties do not suggest that there is. They submit that a parent corporation can choose to structure its arrangements however it chooses for tax and other purposes. However, they say that such arrangements should not govern the determination of whether such loans give rise to ?equity claims? for the purposes of the CCAA. On their approach, the determination of the treatment of such claims under the CCAA should be made on the basis of a different test than that which satis?ed tax and other regulatory rules and regulations prior to an insolvency. [219] The dispute between the parties, and a principal issue on this motion, is therefore whether there are any consequences, in the context of CCAA proceedings, to a parent corporation that has structured its investment in a wholly?owned subsidiary in the manner of the Loans, that is, in a manner that complies with all applicable tax and other regulations but is not consistent with how a third-party lender would have structured any loan facilities in favour of USSC and how any such lender would have acted in the circumstances of subsequent financial performance. [220] A comparison of the relationship between USS and USSC against a notional relationship between USSC and a third-party lender provides a helpful clari?cation of certain factors that are relevant for present purposes, as is discussed below. However, i ?nd that a comparison between the behavior of USS and the behavior of a notional third-party lender is not an appropriate test in the evaluation of whether the advances under the Term Loan and the Revolver Loan were capital contributions to USSC. I reach this conclusion for the following reasons. [221] First, the Loans were structured, and excess cash was moved between USSC and USS, in the manner described above for legitimate business reasons and in accordance with all applicable legal requirements. There is no express authority in the CCAA for disregarding these arrangements in such an evaluation apart from the very general language in the de?nition of ?equity claim? referring to a return of capital. In particular, there is no express authority for disregarding the business purpose of financing arrangements in the evaluation of whether loan instruments are, in substance, ?equity interests? giving rise to ?equity claims?. [222] Second, the Objecting Parties assert that the USS Debt Claims constitute claims for a return of capital. In the absence of any statutory de?nition of capital, or guidance regarding the determination of capital, for the purposes of the de?nition of an ?equity claim?, considerable weight should be given to the accounting and tax determination of capital of the debtor company in any CCAA proceedings. In this case, there is no suggestion that the Term Loan or the Revolver Loan were treated as capital for such purposes. - Page 42 - [223] Third, the Objecting Parties submit, as an operating principle, that the less the Term Loan and the Revolver Loan resembled ?nancing available from a third?party lender, and the less the actions of USS in the administration of the Loans resembled those that would have been expected of a third?party lender, the more the advances under the Loans resemble equity contributions. I do not accept this principle for the reason that I do not see a necessary connection between a failure to adhere to the third-party lender standard and an absence of an expectation of repayment with interest of a loan in the circumstances where the departure from the third?party lender standard re?ects a valid business purpose. [224] I accept that there may be circumstances where the departure from a third-party lender standard may not serve any valid business purpose related to a parent?subsidiary relationship. In such circumstances, it may well be that such actions would suggest an equity contribution, that is, that the only explanation for the parent corporation?s actions is that the loan transaction was in fact a capital contribution. However, that is not the case in the present circumstances. As mentioned above, the interest payment terms, the maturity dates of the Loans and the absence of a schedule for principal repayments provided USS and USSC with a certain amount of ?exibility to align the payment of interest and the repayment of principal with the economic performance of USSC against the backdrop of a highly cyclical industry. In particular, it provided USSC with the ability to defer payments of interest and principal for a period of time in the event of adverse economic performance without triggering default provisions or a reversal of income expense for tax purposes. [225] Fourth, as a related matter, the third-party lender standard ignores the very real business purposes that a parent corporation could have for departing from a third?party lender standard in the administration of financing established in favour of a wholly-owned subsidiary. [226] The Objecting Parties submit that the less a parent corporation acts to enforce its rights in an insolvent situation in the manner that would be expected of a third-party lender, the more it demonstrates that the ?nancing arrangements between the parent corporation and the subsidiary are in fact equity contributions rather than loans. This submission ignores the reality that a parent corporation which believes that there is value remaining in a subsidiary, even if the subsidiary is technically insolvent, will not act to enforce its security in the manner that would be expected of a third-party lender whose objective is necessarily limited to maximizing the prospects for the immediate recovery of its principal and interest. Nor would a parent corporation seek to negotiate some further benefit such as fees or additional equity in such circumstances. The subsidiary has no additional bene?t to give when the parent already owns 100% of the benefit of its enterprise. Given such considerations, the actions of a parent corporation in departing from a third?party lender standard do not evidence the absence of an expectation of repayment with interest of a loan to its subsidiary when the loan was made. Moreover, in this respect, the position of the ObjectingParties contradicts the purposes of the CCAA, which should encourage efforts that seek to continue the operations of a distressed subsidiary. [227] Fifth, more generally, the premise underlying the position of the Objecting Parties, as is demonstrated by the foregoing discussion, is that a parent corporation is acting as a shareholder to the extent that it fails to act in a manner that would be expected of a third?party lender. They express this argument by saying that, to the extent a parent corporation is not looking at a loan to its subsidiary through the lens of a third?party lender, it must be looking at the loan from the Page 43 perspective of a shareholder and, as such, in reality, the loan must be equity. in short, a parent corporation cannot wear two hats at the same time. [228] I do not think this is correct. A parent corporation lending to its wholly?owned subsidiary can have regard to the existence of its rights as a shareholder in structuring and administering a loan to its subsidiary without ceasing to be a lender. The issue to be considered is whether the actions of the parent corporation demonstrate that it had no expectation of repayment with interest of the loan. There is no necessary connection between a parent corporation lending to a subsidiary on a basis that departs from a third?party lender standard and the absence of such an expectation. [229] Sixth, there is also a signi?cant issue with the de?nition of a third-party lender proposed as the standard by the Objecting Parties. The Objecting Parties propose the standard of a bank or an institutional lender providing unsecured term or operating facilities on the basis of their expert ?nancial evidence regarding an appropriate proxy for the Term Loan and the Revolver Loan. This is an unduly restrictive standard given the purpose of the test for an ?equity claim?, which is to assist in determining whether USS had a reasonable expectation of repayment with interest at the time it extended advances under the Term Loan and the Revolver Loans. While the willingness of a third-party to lend on the terms provided by a parent corporation could support such a conclusion, the absence of third-party lender financing is not sufficient to establish that no other ?nancing would have been available to the subsidiary on a viable basis. Where a party seeks to disprove the alleged reasonableness of an expectation of repayment of a loan with interest, or the absence of any debt capacity of a borrower, it is necessary to canvas the availability of viable ?nancing across capital markets more broadly. [230] Lastly, the Objecting Parties acknowledge that the standard that they propose would apply solely for purposes of proceedings under the CCAA and, perhaps, the BIA. There are three difficulties with this result. [231] First, as mentioned, a court should give considerable weight to the characterization of payments to the extent that third parties, such as the Canadian and American tax authorities, have accepted the treatment of such payments in the past in the absence of any express authority in the CCAA to do otherwise. In this case, there is a history of characterization of payments consistent with loan transactions that includes not only the loan documentation but also interest payments, principal repayments and interest waivers under the Term Loan. There is no evidence that either the Canadian or the American tax authorities have raised any issue with the treatment of any such payments for tax purposes. [232] Second, while tax treatment cannot be determinative, these tax regimes represent another third?party standard that has some independent validity in evaluating the substantive reality of loan instruments. [233] Third, as a policy matter, 1 see no policy bene?t in having separate rules in the tax and accounting domain, on the one hand, and in the CCAA domain on the other. It is important for stakeholders in a corporation to have rules that yield reasonable certainty for planning purposes. A consequence of the approach proposed by the Objecting Parties would be that a parent corporation seeking such certainty in respect of the treatment of a loan to its subsidiary would have to limit its financing arrangements to those which an independent consultant considers to be - Page 44 comparable to ?nancing facilities that would be provided by a notional third?party lender. There are a number of difficulties with this approach from a policy perspective for which there is no obvious corresponding benefit. The principal dif?culty is the overriding of valid business purposes by the imposition of a restrictive standard for the purposes of any future CCAA proceedings. In addition, there would be additional costs associated with such a policy, a need for updates as advances are made over time in changing market conditions, and a potentially inefficient limitation of ?nancing options from a financial perspective. [234] Based on the foregoing considerations, I am not persuaded that the third?party lender standard proposed by the Objecting Parties, and which underlies many of the speci?c factors upon which the Objecting Parties rely, is appropriate in the present context for determining whether the Loans were, in substance, capital contributions. This conclusion has the following implications in respect of the manner in which the factors identified above are to be applied in the evaluation of the Term Loan and the Revolver Loan as debt obligations or capital contributions. [235] First, with respect to factors (1) to (4), such factors are relevant to the issue of the expectations of USS at the time of advances under the Loans. However, these considerations must be evaluated in terms of what they indicate about the expectations of USS without regard to any comparison with any notional third?party lender. In other words, it is not a relevant consideration in determining whether USS had an expectation of repayment with interest that a notional third?party lender would not have provided ?nancing arrangements to USSC having these features. [236] Second, the fact that a notional third?party lender would not have extended financing facilities to USSC on the terms and conditions of the Term Loan and the Revolver Loan is also not determinative of whether USSC had the debt capacity to service the advances under the Term Loan and under the Revolver Loan when they were made. It is therefore not determinative of the reasonableness of expectation of repayment with interest of the Loan. [237] The foregoing conclusion does not, however, foreclose entirely the. relevance of the availability of ?nancing from independent sources. As discussed above, I accept that a test based on the availability of ?nancing from an external source of financing, not limited to a third-party lender, could be a means of evaluating the debt capacity of a wholly-owned subsidiary. Framed in such terms, such a test would bear on the reasonableness of a parent corporation?s expectations of repayment of the principal with interest of a particular loan or advance based on the debt?capacity of the subsidiary. However, there is no reason to narrow consideration of such debt capacity to the availability of third-party lender financing, unless the evidence clearly establishes that no other financing facilities would have been available to the subsidiary had it sought external financing. [23 8] Third, in the analysis below, I do not accord any signi?cant weight to the test suggested by the Objecting Parties that the less the Term Loan and the Revolver Loan re?ect the characteristics of a third party loan from a bank or other institutional lender, the more such Loans resemble equity. In my Opinion, to the extent that such Loans depart from the third-party lender standard for reasons that have a legitimate business purpose that is related to the wholly-owned subsidiary relationship or its business, the Court cannot disregard the legitimacy of such arrangements in its analysis. Given a legitimate business purpose for departing ?'om the Page 45 standard of behavior of a third-party lender, there is no necessary reason why a parent corporation could not also have had an expectation of repayment with interest of any loan advance at the time of such advance notwithstanding that it did not act in the same manner as a third?party lender. As discussed above, there is no necessary reason why a parent corporation cannot be both a lender and a shareholder even if, as a lender, it does not conform in all respects to the standard of a third-party lender. Analysis of the Principal Considerations Relied Upon by the Objecting Parties [239] I tum then to a consideration of the probative value of the general factors relied upon by the Objecting Parties in the analyses below of the Term Loan and the Revolver Loan. As set out above, the Objecting Parties say that the Term Loan Agreement and the Revolver Loan Agreement re?ect arrangements under which USS intended at all times to return excess cash to USS when available and to write off the principal or interest in respect of the Loans to the extent that payments of either were due and sufficient cash was not available. [240] In this section, I will address, in order, the extent to which the seven principal factors relied upon by the Objecting Parties are of assistance in the analysis of the Term Loan and the Revolver Loan in light of the conclusions reached above. The seven principal factors are the following: (1) the absence of any arm?s length negotiation regarding the terms and conditions of the Term Loan or the Revolver Loan; (2) the deferred interest payment dates and the long maturity dates of both the Term Loan and the Revolver Loan; (3) the history of interest payments and waivers under the Term Loan; (4) the absence of any security; (5) the extent of control over the business operations and financial performance of (6) the fact, as acknowledged by USS, that USSC would not have been able to obtain financing from a third?party bank or institutional lender in the amount and on the terms and conditions of either the Term Loan or the Revolver Loan; and (7) the view of the Objecting Parties that payments on account of the Term Loan and the Revolver Loan were effectively subordinated to payment of trade creditors. [241] First, the Objecting Parties suggest that the lack of any negotiation between USS and ABULC regarding the Term Loan, and the absence of any substantive negotiations between USS and USSC regarding the Revolver Loan, suggest that the advances under the Loans were in the nature of equity injections rather than bona?de debt. I do not consider these circumstances to be of any value in addressing the issues on this motion. The limited negotiations between these parties is a re?ection of the wholly-owned subsidiary relationship that is the starting point for such issues, but it is a neutral fact that does not. bear in any way on the reasonableness of the expectations of USS regarding repayment with interest of the advances under the Term Loan and the Revolver Loan. [242] Second, the Objecting Parties submit that the two-year interest payment provision in the Term Loan and the Revolver Loan, and the maturity dates for the Loans, suggest these arrangements were capital contributions. However, the terms and conditions of the Term Loan and the Revolver Loan make express provision for the payment of interest on ?xed dates and the repayment of principal by a ?xed maturity date. While these terms were acknowledged to be generous, the fact remains that. each Loan fixed the maximum amount payable thereunder as interest and principal and provided fixed dates for the payment of accruing interest and the repayment of the principal amount of the Loans. In particular, the interest payment. dates were time?limited. Setting aside any comparison with the terms expected in third-party lender Page 46 - arrangements for the reasons set out above, there is nothing in the terms of the Loans, on their own, that would support. an inference that USS did not expect to receive repayment with interest of all advances made under the Loans. In particular, the existence of a long maturity date and the absence of a schedule of repayments is not a basis for inferring that USS did not expect USSC to repay the Term Loan. The Term Loan did not prevent earlier repayment of principal. In addition, USS was in a position to require USSC to repay principal without a contractual schedule of repayments. [243] Accordingly, on their face, neither the Term Loan nor the Revolver Loan is more consistent with receipt of the residual cash ?ow and assets of USSC as the Objecting Parties suggest. Any such inference must be based on the actions of USS and USSC in the administration of the Loans. [244] Third, accordingly, the Objecting Parties argue that the Court should infer from the manner in which interest payments were treated under the Term Loan that the Loans were intended to be capital contributions rather than debt, that there was never any expectation of repayment with interest of the Loans. There are two aspects of the interest payment history in respect of the Term Loan that will be addressed separately the accelerated payment of interest in 2008 and the interest waivers commencing in 2010. [245] The Objecting Parties argue that the acceleration of the interest payments under the Term Loan in 2008 evidences an intention to treat the Term Loan as a capital contribution. In making this argument, the Objecting Parties rely on the testimony of Dr. Finnerty who suggested that the payment of interest under the Term Loan in 2008 ahead of the due date in 2010 exhibited behavior that was more characteristic of the payment of dividends rather than interest. [246] I accept that it is possible that the payment of interest could resemble a dividend in circumstances in which there is no reasonable explanation for the timing or amount of payments made outside the provisions of a loan agreement, for example, a payment in excess of accrued interest by way of an alleged pie-payment of interest. However, where the timing of interest payments is consistent with a legitimate business purpose and in accordance with the provisions of a loan agreement, the Court cannot disregard such circumstances in assessing the expectations of the parent corporation regarding the loan. [247] I11 this case, the Term Loan permitted, but did not require, a deferral of interest payments for a period of time. The argument based on Dr. Finnerty?s evidence proceeds on the unrealistic premise that, given such a provision in a loan agreement, a subsidiary would not pay interest to its parent corporation until the end of the permitted interest deferral period even if an earlier payment would be more efficient financially. In other words, the argument relies on a third-party lender standard which is rejected for the reasons discussed above. More generally, where there is a legitimate business reason for the ?exibility provided in the loan agreement, I do not see any necessary connection between the availment of that ?exibility and either the characterization of the payment as a dividend or the expectation of the parent corporation regarding repayment. of the loan with interest. [248] In the present circumstances, the accelerated interest payments re?ected very favourable financial results of USSC during the first three quarters of 2008. There was no legitimate reason for USSC to defer payment of interest, which was compounding while outstanding, to the Page 47 - interest payment date if it. had cash available for such purpose. The Term Loan Agreement permitted a deferral of interest payments for a period of time to accommodate an adverse ?nancial performance from time to time. However, it did not require such a deferral in the event of a favourable economic performance. The presence of this provision does not evidence an intention of USS and USSC that USSC would hold on to excess cash at its own cost in such circumstances. [249] Accordingly, I am not persuaded that the acceleration of interest payments in 2008 is indicative of an intention on the part of USS to treat the Tenn Loan as a capital contribution rather than as a debt obligation. [250] The Objecting Parties also argue that the interest payment waivers granted in favour of USSC commencing in 2010 evidence the absence of any expectation of repayment with interest of the Term Loan. Insofar as the Objecting Parties urge the Court to draw such an inference front the existence of the interest waivers without having regard to a third?party lender standard, this issue is addressed later in these Reasons. [251] I note, however, that Dr. Finnerty?s opinion was based on a somewhat different approach. He suggested that, from the perspective of ?nancial economics, actions in respect of the interest waivers re?ected the behavior of a shareholder rather than a lender. The position of Dr. Finnerty and the Objecting Parties is that, in the circumstances of non?payment of interest, third-party lenders will obtain some value in negotiations with borrowers as a condition of granting such waivers. As evidence of an equity interest, they point to the absence of any enforcement proceedings on the part of USS to protect its interest as a lender, and of any negotiations to obtain a quidpro quo for, in particular, the grant of such waivers of interest. [252] Given the finding above regarding the appropriateness of the third-party lender standard, the Court does not draw any inference from the absence of any enforcement proceedings or other actionson the part of USS in respect of the interest waivers. In this case, the application of such a standard also re?ects an unrealistic premise upon which the argument for equity treatment is based. As mentioned above, in wholly?owned situations, enforcement proceedings are counter-productive so long as the parent corporation believes the subsidiary still has value. It is also axiomatic that the subsidiary cannot give the parent any additional value as a qtridpro quo for obtaining a waiver of its interest obligations since the parent already owns all of the subsidiary?s equity value. The probative value of the interest waivers is discussed further below. [253] Fourth, the Objecting Parties submit that the absence of security for the Term Loan or the First Tranche Indebtedness is probative of the expectations of USS at the time it extended advances under the Loans. This argument also relies implicitly on a comparison with a third- party lender standard. If such a comparison is disregarded, I conclude that the absence of security is not indicative of a capital contribution for the following reasons. [254] As discussed above, and as the history of the Revolver Loan demonstrates, as the sole shareholder of USSC, USS had no need to require security for its loans to USSC until it became concerned about the ability of USSC to repay any funds advanced to it. As such, the fact that USS required security for advances made after October 2013 is more signi?cant as evidence of the expectations of USS in October 2013 than the absence of any security for advances made - Page 48 prior to that date. In short, the Objecting Parties have not demonstrated a necessary connection between an absence of security for the Term Loan or the First Tranche Indebtedness and an absence of any expectation of repayment with interest of the Term Loan or the First Tranche Indebtedness. [255] Moreover, the implication of the position of the Objecting Parties is that, to protect itself in possible insolvency proceedings, a sole shareholder must lend on an asset-backed basis, take security on the assets of the enterprise, to avoid characterization of its loan as equity. This cannot have been the intention of the de?nition of ?equity claims? under the CCAA insofar as such an implication would, among other things, encourage a parent corporation to take a priority over claims of trade creditors and thereby make a restructuring of an enterprise in an insolvency situation more difficult. [256] Fifth, for the following reasons, I am not persuaded that the extent of control of USSC is a factor to-be taken into account in assessing whether the Term Loan and the Revolver Loan were, in substance, equity contributions by USS. [257] As a polar case, I accept that there may be circumstances in which a parent corporation?s expectation from the outset is that it will sacrifice a subsidiary?s profitability over the long?term for the bene?t of the consolidated enterprise. In such circumstances, a court could find that the parent corporation had no intention of causing the subsidiary to repay with interest any ?nancing extended to the subsidiary or, more precisely, no expectation that the subsidiary would generate suf?cient cash flow to enable it to make such payments based on the parent?s anticipated business plan for it. In such circumstances, a court could also find that the entire amount of the ?nancing extended by the parent corporation to the subsidiary was, in reality, an equity contribution. [258] However, the Objecting Parties have expressly advised the Court that they do not take that position in this proceeding. In any event, the evidence is not sufficient to justify such a conclusion in the present circumstances. In particular, among other considerations, the history of the Term Loan and the Revolver Loan is too short, and the impact on the entire USS business of the recessionary environment after late 2008 was too significant, to enable the Court to draw such a conclusion. [259] This leaves the question of whether control of a wholly-owned subsidiary that does not go so far as to render the profitability of the subsidiary a matter entirely in the sole discretion of the parent corporation can constitute a consideration to be taken into account in the analysis of whether loans made by the parent corporation are debt or are, instead, equity contributions. I accept that such control requires a court to take a ?good hard look? at the substantive reality of any such loans, in this case being the advances under the Term Loan and the Revolver Loan. Beyond that, however, in this case, I think that control is the point of departure, rather than an independent factor, for the following reasons. [260] First, and foremost, as mentioned, there is no overriding authority in the CCAA to disregard entirely the manner in which parties, including related parties, have structured their affairs. As set out above, I think a court must give effect to such structure unless and until, in the case of a loan ?'orn a parent corporation to a subsidiary, there is other evidence establishing that the parent did not reasonably expect to receive repayment of the loan with interest at the time of - Page 49 - the making of the loan. In other words, the existence of control is not a basis for such an inference on its own. [261] Second, the submission of the Objecting Parties that control is an independent factor demonstrating an equity contribution proceeds on the basis of a distinction between a lender?s rights and a shareholder?s rights that is untenable in the present circumstances. The Objecting Parties argue, in effect, that USS acted in its capacity as a shareholder, rather than as a lender, in causing USSC to repay monies to it and, therefore, such payments should be treated as dividends. [262] This argument is based on a false dichotomy. No lender has a right to compel the repayment of principal or the payment of interest. The lender?s rights are restricted to enforcement in the event of non-payment. The debtor alone decides whether to pay principal or interest. The implication of this argument is that a parent corporation must. renounce its rights as a shareholder to cause payments under a loan agreement. This is not only unrealistic but also counter to the conclusion that a parent corporation can have regard to its rights as a shareholder while acting as a lender. Accordingly, the fact that USS instructed USSC with respect to the payments to be made cannot on that account result in a characterization of such payments as dividends, or of the Loans as capital contributions. [263] Sixth, for the reasons set out above, I conclude that the fact that USSC could not have obtained ?nancing from a third-party lender on the terms and in the amounts of the Loans is not an independent factor that assists in evaluating expectations regarding repayment with interest of the advances under these Loans at the time that they were made. [264] Seventh, the remaining consideration is the view of the Objecting Parties that USS effectively subordinated its position to the other creditors of USS by paying interest on the Term Loan and the Revolver Loan only after such other creditors were satis?ed on an on-going basis. In doing so, the Objecting Parties say USS acted like a shareholder rather than a lender, thereby evidencing the absence of any expectation of repayment with interest of the Loans. [265] As a factual matter, it is correct that USSC paid interest on the Term Loan and the Revolver Loan only after its arm?s length creditors were satisfied on an ongoing basis. From 2007 until shortly prior to the Filing Date, USS funded USSC with debt or equity in order to permit USSC to pay its trade creditors on an ongoing basis. Moreover, as mentioned, USS waived a signi?cant amount of interest that accrued and became due under the Term Loan and made no interest payments on the remaining accrued interest. [266] This raises the question of whether such evidence demonstrates that USS intended that the Term Loan and the Revolver Loan would be subordinated to payment of other obligations and, if so, whether such arrangements demonstrate that USS did not expect to receive repayment with interest of the Loans. There are a number of issues bound up in this argument that need to be separated. [267] First, it is important to note that there is no suggestion that USS intended a legal subordination of its claims in respect of either the Term Loan or the Revolver Loan to claims of third party creditors of USSC. Indeed, after October 2013, all fresh advances under the Revolver Loan were secured and, therefore, ranked ahead of the trade creditors of USSC. - Page 50 [268] Second, in any event, subordinated debt is not synonymous with a capital contribution. For present purposes, subordinated debt remains debt, subject to demonstration that a borrower could not have obtained subordinated debt on any basis from external sources, that is, did not have the debt capacity to obtain external financing in the amount of the Term Loan or the amount of the First Tranche Indebtedness. In such event, such evidence would cast serious doubt on a parent corporation?s expectation with respect to repayment with interest of the alleged subordinated debt. As discussed below, however, there is no such evidence in the present case. [269] Third, I am not persuaded that the actions of USS and USSC described above are properly characterized as subordination for present purposes. In the face of a signi?cantly changed economic and financial environment described above, USS chose to defer rather than subordinate the repayment of the principal of the Loans and the payment of interest, except to the extent of the waived interest. However, USS left its options open regarding the treatment of amounts outstanding under the Tenn Loan in the future. [270] Fourth, and most important, there is no evidentiary connection between the factual circumstances which the Objecting Parties describe as effective subordination of the Term Loan and the Revolver Loan and the expectation of USS regarding repayment with interest of the Loans at the time the advances were made thereunder. As described elsewhere in these Reasons, the economic circumstances commencing in 2008 established a reason for the actions that USS and USSC took subsequently which the Objecting Parties say constituted effective subordination of the Loans. There is, however, no evidence of an intention to implement such actions or, more generally, to implement a principle of effective subordination, at the time of the advances under the Loans. [271] Accordingly, I am not persuaded that the argument of alleged effective subordination of the Term Loan and the Revolver Loan supports the position of the Objecting Parties that USS did not expect to receive repayment with interest of advances under the Term Loan 01' the Revolver Loan. Analysis and Conclusions Regarding the Re-characterization Claim in Respect of the Term Loan - [272] I propose to set out my analysis of the debt re-characterization claim of the Objecting Parties with respect to the Term Loan after ?rst setting out the position of the Objecting Parties in their written submissions. I would note that, at the trial, the Objecting Parties concentrated on a subset of these considerations which are addressed in theseReasons. Positions of the Parties The Union [273] The essence of the position of the Union with respect to both the Term Loan and the Revolver Loan is captured by the two paragraphs below which are taken from the supplementary written submissions of the Union: Critically, USS always expected and intended that repayment of amounts owing under both the Term Loan and the Revolver Loan was contingent on performance. - Page 51 - The evidence is clear that USS only expected to receive payments on account of interest and principal if and when USSC was able to make them, and not in accordance with the terms of the agreements. 0n discovery, Mr. Brockway?s evidence was that USS ?anticipated that the ability to repay that portion of the debt would be dependent on the success of Stelco?s business going forward.? [274] The Objecting Parties do not merely assert that USS expected to disregard the timing requirements of the Term Loan Agreement and the Revolver Loan Agreement with respect to the movement of available cash from USSC to USS. Rather, they say that, from the outset of each of the Term Loan and the Revolver Loan, USS did not expect USSC to be able to repay the advances under such Loans, and the interest on such advances, and therefore expected to write off a signi?cant portion of such obligations as they fell due. [275] In its factum, the Union argues that the Term Loan should be re?characterized as equity based principally on the following seven AutoStyZe factors: (1) the ability of USSC to obtain similar ?nancing from outside lending institutions; (2) the source of repayments of the Term Loan; (3) the presence or absence of a ?xed maturity date and schedule of payments; (4) the absence of security for advances under the Term Loan; (5) the absence of a sinking fund to provide for repayments; (6) the extent to which the advances under the Term Loan were effectively subordinated to the claims of outside creditors; and (7) the inadequacy of capitalization of ABULC at the date of the initial advance under the Term Loan. [276] The Union also says that the lack of negotiation between USS and USSC regarding the Term Loan and the fact. that the principal purpose of the initial advances under the Term Loan was the acquisition by USS of capital assets also support a ?nding of a contribution to capital rather than debt. The Province [277] The general approach of the Province with respect to both the Tenn Loan and the Revolver Loan is set out in the following excerpts from its factum: The context of the Term Loan is crucial for the characterization exercise. Essentially, USSC operated as a division of the USS organization. This same context. also applies to the Revolver. . .. attitude to the ?nancing of USSC re?ected what its attitude would be in funding one of its operating divisions the money went where and when needed. There was no consideration or expectation that the funds would be treated other than equity the investment would yield returns if, and only if, the business prospered. Advances were motivated by whether the global business would bene?t from the allocation of resources to the facility, and not based upon any analysis of the pro?tability or credit?worthiness of the business unit. . .. loose approach to interest from USSC is understandable in the context of the complete control of USSC by USS discussed above. Whether USSC had the ?wherewithal at any point in time to pay interest was utterly dependent on the production USS assigned to it, the intercompany allocation of raw materials (and - Page 52 - their cost) and personnel all controlled by USS. Presumably, USS believed sending the money to USSC on a non-interest bearing basis allowed USS to earn a better return elsewhere in the global business. [278] In its facturn, the Province argues that the Term Loan should be re-characterized as equity based principally on the following three allegations: there was no expectation that USSC would pay interest on the Term Loan advances; (ii) there was no expectation that USSC would repay the principal of the Term Loan advances; and the Term Loan was not provided by, nor available from, a third-party lender on commercial terms. I note that the first two considerations are not actually referred to in AutoSlyle, although, as discussed above, I think that they are fundamental issues in respect of the re?characterization issue. [279] The Province also suggested that the following four attributes of the Term Loan, which re?ect factors referred to in and are included in the considerations upon which the Union relies, also demonstrate that it is, in substance, equity rather than debt: (1) the initial advances under the Term Loan were used to acquire a capital asset, being the outstanding shares of Stelco; (2) capital structure was thinly or inadequately capitalised at the date of the Acquisition when the initial advances were made under the Term Loan, especially in light of Stelco?s historical operating performance; (3) the failure to provide for security for the Term Loan; and (4) the failure to establish a sinking fund for repayment, particularly in view of the 30? year term of the Term Loan. USS [280] USS submits that a number of the AuroSfer factors considered by American courts refute, rather than support, the Objecting Parties? re-characterization argument, including: (1) the documents entered into between USS and USSC regarding the Term Loan on their face purport to evidence indebtedness and are titled ?Loan Agreements?; (2) the parties intended to enter into a loan transaction; (3) the Term Loan has a fixed maturity date; (4) the Term Loan provides for a speci?ed applicable interest rate; (5) under the Term Loan, USS has the right to enforce payment of interest and principal; (6) USS did not acquire any management control rights in exchange for the funds advanced under the Term Loan; (7) USS did not subordinate any amounts owing under the Term Loan to other creditors as a matter of law; and (8) a substantial portion of the funds advanced under the Term Loan were used to finance ongoing operations. In addition, USS relies on statements in a recent American decision, In re Alternate gels Inc., 789 F.3d 1139 (10th Cir. 2015), to the effect that the identity of interest between USS and USSC and any undercapitalization of ABULC should not be material considerations in the context of a loan from a parent to a wholly-owned subsidiary. Analysis and Conclusions [281] As set out above, the claim of the Objecting Parties that the Term Loan should be characterized as an ?equity claim? requires addressing two matters: (1) the expectation of USS regarding repayment of principal and interest on the Term Loan out of cash ?ows of US SC over the term of the Term Loan; and (2) the reasonableness of such expectations. I note that, while these are discrete issues, the evidence referred to below that is relevant to the expectation of USS at the time of any particular advance can also be relevant to the reasonableness of such expectation. Page 53 [282] As described above, most of the Term Loan advances were advanced to ABULC between October 31, 2007 and December 31, 2007. However, further advances in the aggregate principal amount of $211.2 million were made in 2009. It is therefore necessary to address the characterization of the Term Loan advances in these two periods of time separately. In each case, I will address the application of the general considerations discussed above to the USS expectation regarding repayment of the Term Loan with interest and will then consider certain additional arguments of the Objecting Parties speci?c to the Term Loan that have not already been addressed above. Term Loan Advances at the Time Offhe Acquisition [283] The advances made to USSC in respect of the Acquisition between October 31, 2007 and December 31, 2007 have been set out above. USS says that it expected to be repaid the principal of the Term Loan outstanding at December 31, 2007 with interest over the course of the Loan, even if it could not anticipate the timing of such payments given the cyclical nature of the steel industry. [284] USS relies principally on the evidence of Brockway with respect to the facts pertaining to its expectations at the time of the Acquisition and the initial advances under the Term Loan. Brockway testi?ed that USS based its decision to acquire Stelco on a ?nancial model which was created by USS internally, but was reviewed by its ?nancial adviser in the transaction and was relied upon by the USS board of directors in connection with their decision to make the Acquisition. [285] The ?nancial model contemplated stable sales of ?at?rolled steel that would rise annually, which would generate earnings before interest, taxes and depreciation estimated to be US. $368 million in 2008 and projected to gradually rise over the next seven years. Brockway testi?ed that, based on this ?nancial model, USS anticipated that the Acquisition would generate suf?cient free cash flow in USSC to pay the interest provided for under the Term Loan and to repay the principal over the 30?year term of the Term Loan. The ?nancial model also included a discounted cash ?ow analysis. The extent to which this analysis is also supportive of the USS expectation is unclear. However, there is no evidence regarding this ?nancial model that contradicts expectation of repayment of the Term Loan with interest. [286] The Objecting Parties do not dispute that USS made its decision to acquire USSC based on the ?nancial model described above. However, the Objecting Paities argue that the constellation of factors described above pertaining to the terms of the Term Loan Agreement, and the manner in which USS administered the Tenn Loan, demonstrate that USS did not expect to be repaid the principal with interest of the initial advances under the Term Loan. Did USS Expect to be Repaid the Term Loan With Interest? [287] I do not propose to revisit the considerations that have been excluded for the reasons set out in the preceding section, including, in particular, the considerations that rely on a comparison with a third?party lender standard. Setting those considerations aside, the position of the Objecting Pa1ties is based primarily 011 the following remaining factors which will be evaluated without regard to a third-party lender standard: (1) the terms of the Term Loan Agreement, in - Page 54 - particular the deferred interest payment dates and the length of the term of the Tenn Loan; (2) the acceleration of interest payments in 2008; (3) the waivers of interest commencing in 2010; and (4) the view of the Objecting Parties that USS effectively subordinated payments on the Term Loan to payment of trade creditors. The Objecting Parties argue that, even considered without regard to the third?party lender standard, these factors, particularly the actions of USS after the advances were made, evidence the fact that USS did not expect to receive repayment of the principal with interest of the Term Loan. I will address each of these factors in turn and will then address the probative value of these factors considered collectively. [288] First, as mentioned, the Term Loan Agreement provided USSC and USS with considerable latitude regarding the timing of both the payment of interest and the repayment of principal. There was a legitimate business reason for these terms of the Loans. They provided USS with some, but not complete, ?exibility to align the payment of interest with the receipt of excess cash ?ow in a highly cyclical industry. They also provided a period of time over which to repay the Loans for the same reason. These terms were permissible under applicable tax legislation without losing the tax treatment for debt. For the reasons set. out above, I do not think that the terms of the Term Loan Agreement, by themselves, are more consistent with a re- characterization of the Term Loan as a capital contribution. The mere existence of provisions providing ?exibility in the timing of payment of interest and repayment of principal is not a basis for inferring that. USS did not expect to receive repayment with interest of the Term Loan without further evidence at the time of the initial advances. There is no such evidence in this case. In particular, as noted above, there is no evidence regarding the financial model that establishes, on a balance of probabilities, that repayment of the Term Loan was not a realistic possibility over the life of the Loan. [289] Second, the Objecting Parties suggest that the acceleration of interest payments in 2008 supports a ?nding that the payments were, in substance, dividend payments. For the reasons set out in the preceding section, I do not think that the two interest payments made in late 2008 are more properly characterized as dividends based on a third-party lender standard. I also do not think that the action of causing such payments in advance of their respective payment dates is, on its own, indicative of treatment of the Term Loan as a capital contribution. More generally, in the absence of any documentary or other evidence at the time of the payments suggesting otherwise, the fact that the payments were characterized as interest payments, that the payments did not exceed the amount of the accrued interest at the time, that the payments were permitted under the Term Loan Agreement, and that there was a legitimate business purpose for making interest payments in advance of their due date should be determinative. [290] Third, the Objectng Parties? reliance on the interest waivers and failure to repay any interest in the seven years between the initial advances under the Term Loan and the Filing Date is understandable. It raises a legitimate question of whether USS ever intended USSC to pay principal or interest on the Term Loan, that is, whether it ever expected to be paid interest and/or repaid principal. [291] There is some force to this argument in one respect. Insofar as USS waived, rather than continued to accrue, unpaid interest, it appears to have acted as a shareholder rather than a lender. The evidence before the Court established that it was not economic for USS to ?round? trip? the payment of intereSt by USSC under the Term Loan. This explains why USS did not fund USSC to enable it to pay the accrued interest. However, it does not explain why it was Page 55 - appropriate to write off the interest that was waived in each of the relevant years, much less why only a portion of the interest was written off. Moreover, based on an internal email dated March 29, 2011 of USS, it is possible that, in or about late 2010 or early 2011, USS decided on a policy of waiving at least some interest at the end of each year to the extent USS was not in a position to pay the accrued interest payable in such year. [292] However, the Objecting Parties suggest that the Court should infer from the interest waivers that USS did not expect to receive repayment with interest of the Term Loan at the time of the initial advances under the Term Loan. In the preceding section, 1 addressed the argument of Dr. Finnerty that the Court should draw such an inference from failure to assert its rights as a lender in respect of the interest payment defaults that gave rise to the interest waivers. In this section, I address the alternative argument of the Objecting Parties that the granting of the interest waivers by themselves is suf?cient to support the inference that USS never expected to receive repayment of the Term Loan with interest at the time that the initial advances were extended thereunder. [293] 1 do not think a court can reasonably draw such inferences for a number of reasons. First, and most important, there is no other evidence supporting such an expectation at the time of the establishment of the Term Loan and the making of the initial advances under the Loan. Second, the payment of interest under the Term Loan in 2008 is inconsistent with an absence of any expectation of payment of interest from the outset of the Term Loan. Third, the intervening economic events are suf?cient to establish radically different economic conditions which support the USS position of altered expectations. There is no evidence that USS contemplated the possibility of a recession of the depth and length experienced in the steel market since 2008 even though it put in place ?exibility regarding interest payments and a long maturity date as discussed above. Fourth, notwithstanding the waivers in 2011, 2012 and 2013, there is no evidence that such repeated waivers of interest re?ected a long?term policy of USS that existed from the outset of the Ternr Loan. [294] Accordingly, the signi?cant facts for this purpose are the period after the initial advances before the initial decision was made to waive interest coupled with the intervening occurrence of signi?cantly adverse market conditions. These factors, together with the absence of any documentation or other evidence to the contrary at the time of the initial advances under the Term Loan, exclude an intention at the time of such advances to waive interest as and when it became payable under the terms of the Term Loan Agreement. [295] Lastly, with respect to the argument of subordination, I have concluded for the reasons set out above that the evidence regarding the alleged effective subordination of the Loan does not evidence the absence of an expectation of USS of repayment with interest of the Term Loan or the Revolver Loan, except to the extent of the waived interest which has been addressed above. I would add that I do not consider that the evidence of Brockway, discussed below, constitutes evidence that USS implemented a policy of subordination of the Term Loan to trade creditors from the time of the initial advances as the Objecting Parties suggest. [296] The Objecting Parties have raised one further argument that should be addressed pertaining to the use of the initial advances under the Term Loan. They suggest that both the use of the advances under the Tenn Loan to acquire capital assets, being the Stelco shares and other Stelco securities, and the circumstances surrounding the SEC Transaction, argue for a finding - Page 56 that the Term Loan constituted, in substance, a contribution to capital. I do not accept either submission for the following reasons. [297] With respect to the signi?cance of the acquisition of the Stelco shares and other securities, the Objecting Parties say that such use of the initial advances under the Term Loan demonstrates that the primary intention of USS was the acquisition of Stelco rather than the establishment of a debtor?creditor relationship between Canada LP and ABULC. [298] This argument presumes that the purpose of debt is the provision of working capital and that the purpose of equity is the acquisition of capital assets. That is too narrow an approach. Term loans are regularly used to acquire capital assets and, indeed, are often secured on such capital assets in the case of third-party lenders. There is no necessary reason why the fact that advances under a term loan were used for the purpose of acquiring assets should be a consideration that demonstrates a capital contribution. In addition, as discussed above, there is no general principle that prevented USS from structuring a portion of its investment in USSC as a loan. Moreover, as described below, the portion of the Term Loan that reduced the Credit Corp Loan was effectively used to retire the third party debt of Stelco at the time of the Acquisition. [299] With respect to the SHC Transaction, the Union argues that the fact that advances under the Term Loan were used to satisfy the Credit Corp Loan, which was incurred to refinance the Stelco debt at the USS level, is indicative of a view of the Term Loan as an equity contribution. I do not see the connection suggested by the Union. [300] The SHC Transaction has been described above. The principal effect of the SHC Transaction was to effect a sale of SHC at its apparent fair market value by USSC and a reduction of the Credit Corp Loan in a like amount. If the SHC Transaction had not occun'ed, the Credit Corp Loan would have remained outstanding as of the Filing Date in the amount of such reduction and the amount of the Term Loan would have been correspondingly lower. From the point of view of the aggregate amount of outstanding debt of USSC, the SHC Transaction was therefore neutral. Moreover, the Credit Corp Loan was made for the purpose of repaying third-party debt of Stelco. To the extent that advances under the Term Loan in connection with the SHC Transaction were applied to reduce the Credit Corp Loan, such advances were therefore indirectly used to repay such third-party debt. I do not see any further significance to the SHC Transaction. [301] It is therefore necessary to address the argument of the Objecting Parties that, while none of the foregoing factors or considerations may be sufficient on its own to support a conclusion that the Term Loan was, in substance, a capital contribution, the combination of factors should support such a conclusion. This argument effectively brings together all of the factors set out and discussed above and asserts that collectively they establish that it is more probable that USS did not expect to receive repayment with interest of the Term Loan than that USS had such an expectation. [302] in considering this argument, I have looked more generally at which of the two scenarios proposed by the parties is more probable the USS position that it expected to be repaid the principal with interest of the Term Loan at the time of the advances in 2007 or the Objecting Parties? position that, at the time of such advances, USS expected to receive only such cash ?ow and assets as were available after satisfaction of the obligations to third party creditors - Page 57 - and to write off the principal or interest in respect of the erm Loan when cash was not available and such obligations fell due. [303] In addition to the factors described above, the Objecting Parties rely on the evidence of Brockway referred to above and the evidence more particularly described in certain excerpts of Brockway?s discovery in these proceedings set out at pages 8 and 9 of the Union?s Compendium of Key Read-in Evidence. The Union submits that these excerpts establish that expectation of repayment was ?contingent on performance? or was ?dependent on the success of Stelco?s business going forward? and that only expected to receive interest payments if USSC was successful.? I note that this argument is similar to, but separate from, the argument that USS effectively subordinated repayment of the Term Loan, and payment of interest thereon, to the payment of third party creditors. [304] I do not think that this submission accurately captures the evidence of Brockway and, accordingly, I think that the Objecting Parties rely on an interpretation of his evidence which it was not intended to carry. [305] There is a difference between the investment risks of investment in Stelco, considered as a whole, and the risk of repayment of the portion of the investment that was structured as debt of USSC. Reading the entirety of Brockway?s evidence, I am satis?ed that Brockway?s statement was intended to acknowledge no more than that there could be no certainty that the aggregate investment in Stelco would be pro?table. Brockway acknowledged no more than that the Acquisition entailed normal investment risks and that, to the extent that USS made a bad investment, there was a risk that it had made such a bad investment that USSC would be unable to repay not only its equity investment but also the Term Loan with interest. His evidence does not, however, constitute an acknowledgement that USS believed it had made an unprofitable investment in acquiring Stelco, much less an acknowledgement that USS therefore expected that USSC would be unable to repay the Term Loan with interest. [306] The foregoing discussion highlights the fact that, at times, the position of the Objecting Parties approaches the issue of repayment. of the Term Loan as part of the larger issue of the profitability of the entire investment of USS in USSC. This is reflected in the position of the Union, as excerpted above, which proceeds on the basis that USS treated both the Loans and the equity component as a single investment. In so doing, the Objecting Parties disregard the reality that the Term Loan was expressly structured and documented separately from the equity injections in order to function in the manner described above. I do not think that the separate existence of the Term Loan can be simply ignored in the absence of an explanation or reason for treating the USS investment on an aggregate basis. In doing so, this approach con?ates the issues of repayment of the Term Loan and the profitability of acquisition of Stelco, which are very different. The Court is only concerned with expectation of repayment with interest of the Term Loan. Even an unsuccessful investment may nevertheless repay with interest the portion of the investment structured as a loan. [307] Further, to the extent that Brockway was also acknowledging the existence of lending risks with respect to repayment of the Term Loan, the mere existence of lending risks is not a basis for an inference that there was no expectation of repayment of the debt portion of the investment in US SC. The statement that US SC would not be able to repay the Term Loan with interest unless it was profitable is, on its own, a neutral statement. There is a considerable Page 58 distance between an acknowledgement of the existence of normal lending risks and an acknowledgement that USS did not expect USSC to be able to repay the Term Loan with interest. I do not read Brockways? testimony as going to the latter statement. [308] It is also necessary to address the position of the Province as excerpted above. The Province argues, in effect, that, having made the decision to acquire Stelco and to integrate it into the USS business as an operating division, USS paid no attention to the ability of USSC to repay the Term Loan over the thirty-year life of the Loan. It says that. such action demonstrates that the Term Loan was, in effect, equity. By way of explanation for this approach, the Province suggests that USS considered the investment from a business?wide perspective. The Province suggests that USS was not concerned speci?cally with the pro?tability of USSC, and its ability to repay the Term Loan, given that USS considered that an increased pro?tability of other companies within the USS group would more than compensate for any losses in USSC. [309] At the time of the initial advances under the Term Loan, USS undoubtedly intended to integrate Stelco into its business as an operating division. That fact alone, however, does not support the conclusion that USS had no expectation that USSC would be unable to repay with interest the portion of the acquisition cost that was provided to it in the form of the Term Loan. More importantly, the evidence does not support the conclusion that USS paid no attention to the ability of USSC to repay the Term Loan in the manner suggested by the Province for the following reasons. [310] First, as Brockway noted, it is incorrect to suggest that USS made no credit analysis of USSC in connection with the initial advances under the Term Loan. The ?nancial model, upon which the decision to acquire Stelco was based, served the function of a credit analysis even if the principal purpose of the model was to address the ?nancial impact of the entire investment. In its projections of cash ?ows of the post?acquisition Stelco, the ?nancial model provided the basis for a conclusion regarding ability to service the Term Loan. As set out below, the evidence before the Court with respect to this ?nancial model does not demonstrate that USS did not expect to receive repayment with interest of the initial advances under the Term Loan over the life of the Loan. [311] Second, while the financial model did anticipate the realization of substantial synergies outside of USSC, it is not suggested that the quantum of such synergies was such that they would compensate for anticipated losses in USSC. More generally, there is no evidence that USS did not anticipate recovery of the majority of its investment in the form of profits from USSC, including the portion represented by the initial advances under the Term Loan which for this purpose is notionally senior to equity investment. [312] The Brockway evidence therefore does not constitute an acknowledgement or admission of USS that it had no expectation of repayment with interest of the initial advances under the Term Loan when they were made. For the reasons set out above, I am also not persuaded by the Province?s argument that USS allocated its investment in Stelco between debt and equity with no regard to ability to repay the initial advances under the Term Loan. The probative value of the other considerations upon which the Objecting Parties rely has been discussed above. The element of actions which most strongly raises a doubt regarding its expectation regarding repayment of the Term Loan is the experience of the interest waivers. The Objecting Parties also rely, among other considerations, on the long maturity date, the absence of Page 59 - a schedule of repayments, and the alleged effective subordination. For the reasons set out above, however, none of this evidence is suf?cient on its own to support a characterization of the Term Loan advances as equity. 1 am also not persuaded, for the reasons discussed above, that the experience of the interest waivers, together with the other considerations upon which the Objecting Parties rely, collectively demonstrate that USS did not expect to be repaid the initial advances under the Term Loan with interest as of the time such advances were made in 2007. [313] Accordingly, I ?nd, on a balance of probabilities, that, at the time of the advances under the Term Loan in 2007, USS expected that USSC would repay interest on the Term Loan in accordance with the terms of the Term Loan Agreement and would repay principal on or prior to the maturity date of the Term Loan. Was the USS Expectation Reasonable? [314] This raises the issue of the reasonableness of the USS expectation. [315] The Objecting Parties rely heavily on two factors which might suggest that such an expectation was unreasonable: (1) third party ?nancing was not available to USSC on terms substantially similar to the terms of the ?nancing provided by and (2) the view of the Objecting Parties that ABULC was inadequately capitalized. I will address these issues in turn. [316] As mentioned, the Province introduced the Hall Report as expert evidence demonstrating that a third party lender would not have provided with ?nancing in the amount and on the terms of the Term Loan provided by USS. [317] There is no actual dispute regarding this opinion in the Hall Report. However, for the reasons set out above, the standard addressed in the Hall Report whether USSC could have obtained ?nancing on the terms and in the amount of the Tenn Loan from a bank or other institutional lender is too limited to establish that the USS expectation of repayment of the Term Loan was unreasonable. In this regard, it is noteworthy that both Mr. Hall and Dr. Finnerty, who relied on the Hall Report for the purpose of the opinion in the Finnerty Report on this issue, acknowledged that they were not expressing any opinion on the ability of USSC to have obtained ?nancing other than from a third-party lender. [318] The question remains whether the evidence regarding the ability of USSC to raise debt on a viable basis as of December 31, 2007 contradicts the reasonableness of the USS expectation. If the Objecting Parties were able to demonstrate, on a balance of probabilities, that USSC could not. have obtained external ?nancing in the amount of the Term Loan on any viable basis, I think a court could conclude that at least the excess of the Term Loan over the amount of ?nancing that was obtainable from external sources represented an equity contribution. [319] However, in the present circumstances, the evidence is not suf?cient to establish that USSC lacked the. capacity to raise an amount of debt equal to the outstanding amount of the Term Loan as of December 31, 2007, that is, that external ?nancing would not have been available to USSC on a viable basis, although admittedly on a fully secured basis. Accordingly, the Objecting Parties cannot establish that the USS expectation in 2007'of repayment with interest of the Term Loan was unreasonable. In this regard, the following considerations are relevant. Page 60 - [320] First, Stelco had total debt approximating $1.16 billion at the time of the Acquisition. As the Austin Smith Report suggests and Mr. Hall acknowledged, this would appear to put a ?oor on the debt capacity of USSC at the time of the Acquisition. [321] Second, the historical ?nancial results for Stelco (EBITDA and EBIT) prior to the Acquisition, when adjusted to remove non-recurring items, re?ected an improving trend from 2006 to 2007 on a quarter-over-quarter comparison by year. [322] Third, the outstanding balance of the Term Loan at December 31, 2007, being approximately $1.4 million including the outstanding loan from the Province, was not signi?cantly higher than the amount of the Stelco debt prior to the Acquisition. This level of debt represented approximately 70% of the total acquisition cost to USS of Stelco. It is not inconsistent with Brockway?s testimony that USS believed that the Term Loan could be repaid over the 30?year life of the Loan as Brockway suggested. It istrue that the investment failed to generate the results contemplated by the USS ?nancial model. By any estimation, in hindsight, the investment was a signi?cant failure. However, there is no basis for retrospectively ?xing USS with such knowledge at the time of the initial advances under the Term Loan. [323] Fourth, the Hall Report bases its conclusions entirely on the historical performance of Stelco rather than on an analysis of the projected cash flow of USSC at the time of the Acquisition. However, as the Province?s financial adviser in respect of the Acquisition, Ernst Young Inc., recognized in a report dated August 22, 2007 to the Province, the Acquisition was likely to improve the ?nancial strength of USSC relative to Stelco. The report identi?ed a' number of factors for consideration by the Province regarding the Acquisition. Purely from a cash-?ow perspective, these factors would have been expected to result in an increased and more stable cash ?ow, other economic factors being equal. There is, therefore, a reasonable basis for concluding that the Acquisition increased debt capacity relative to Stelco?s pre? Acquisition debt capacity. The fact that a third?party lender might not have been prepared to rely on cash flow projections is not determinative of whether lenders in other capital markets were prepared to do so. [324] Fifth, the limited metrics in evidence do not suggest that USSC lacked the ability to incur such external ?nancing. As noted by Brockway, in 2007, Stelco incurred less than $60 million in interest expense for the nine months ended September 30, 2007, or less than $80 million on an annualized basis. The Term Loan interest for 2008 approximated $100 million, which was well within the estimated EBITDA for that year. [325] Sixth, while the Acquisition was not a leveraged buyout transaction as that term is generally understood, USS, as a strategic purchaser, approached the purchase of Stelco with a similar philosophy and approach to capitalization, as the Austin Smith Report notes. in this regard, the financial metrics pertaining to aggregate debt and interest coverage, on a prospective basis, are consistent with leveraged buyout financing transactions in 2007 and are, therefore, suggestive of the availability of ?nancing in the high?yield market. [326] Given these factors, the evidence suggests a reasonable possibility of obtaining third- party ?nancing in other capital markets, beyond the third?party lender market addressed in the Hall Report and the Finnerty Report, in particular, in the high-yield market. For the reasons ~Page 61 discussed above, it is not relevant for present purposes that. any such financing would have been on different terms and conditions from the Tenn Loan. [327] The second issue raised by the Union in its Factum is the allegedly inadequate capitalization of at the time of the initial advances under the Term Loan. [328] Insofar as the Union says that ABULC was inadequately capitalized, I think the issue is misdirected. While it is correct that ABULC had no prior operating performance and no revenues or profits of its own, that is irrelevant. At all times, ABULC was the direct parent corporation of USSC. Its ?nancial performance on a consolidated basis was that of USSC. Accordingly, the extent to which ABULC was or was not undercapitalized was directly dependent on the extent to which USSC was or was not undercapitalized. [329] Insofar as the Objecting Parties say that post-Acquisition USSC was inadequately capitalized, I think this issue engages the same issue as the preceding discussion of the availability of external ?nancing. To the extent that the evidence fails to establish that USSC could not have obtained external ?nancing on a viable basis in the amount of the Term Loan, it. cannot reasonably be argued that USSC was inadequately capitalized. [330] Based on the foregoing, I find that. the Objecting Parties have not satis?ed the onus of demonstrating that the USS expectation of repayment with interest of the principal of the Term Loan as of December 31, 2007 was unreasonable. Term Loan Advances in 2009 [331] As mentioned, in 2009, USSC received additional advances totalling $211.2 million under the Term Loan from Canada LP. No interest or principal was paid during 2009. In addition, as set out in the table above, USS provided equity injections in the amount of $61 million during 2009. [332] The Objecting Parties do not raise any arguments regarding these advances under the Term Loan in addition to those addressed above. The relevant facts are essentially the circumstances as of December 31, 2007 carried forward, subject to the interest payments in 2008 and the occurrence of the recession in 2009. Given the history of the steel market in the period 2004 to 2008, USS had a reasonable expectation that markets would improve that justified supporting USSC in 2009 with additional working capital advances. I note as well that the first interest waiver under the Term Loan occurred subsequent to the advances in 2009. [333] Accordingly, I see no basis for reaching a different conclusion respecting the expectation of USS regarding repayment of these advances from the conclusion reached above regarding repayment of the initial advances under the Term Loan. The evidence before the Court establishes that USS expected that USSC would repay these advances with interest for the reasons set out above. Hindsight is always 20/20. There is, however, no evidence that, as of 2009 when such advances were made, USS or USSC anticipated the negative ?nancial performance of USSC in the period 2009 to 2013 and therefore expected that USSC would be unable to repay these advances with interest. There is also no evidence before the Court that would demonstrate that the expectation of repayment with interest of these advances under the Term Loan was unreasonable. - Page 62 Conclusion Regarding Characterization of the Term Loan [334] Based on the foregoing, I conclude that the outstanding Term Loan, being Claim constitutes a debt claim rather than an ?equity claim? for the purposes of this CCAA proceeding. Analysis and Conclusions Regarding the Re?characterization Claim in Respect of the Revolver Loan [335] I propose to set out my analysis of the debt re?characterization claim of the Objecting Parties with respect to the Revolver Loan after first setting out the position of the Objecting Parties in their written submissions. As in the case of the Term Loan, the Objecting Parties concentrated on a subset of these considerations at the trial, which are addressed in these Reasons. Positions of the Parties The Union [336] The approach of the Union, as excerpted above from its written submissions, applies equally to the Term Loan and the Revolver Loan and therefore will not be repeated here. in its factunr, the Union argues that the Revolver Loan should be re-characterized as equity based principally on the following seven AutoS/yie factors: (1) the inability of USSC to obtain similar ?nancing from outside lending institutions; (2) the source of repayments of the Revolver Loan; (3) the presence or absence of a ?xed maturity date and schedule of payments; (4) the absence of security for advances under the Revolver Loan; (5) the absence of a sinking fund to provide for repayments; (6) the extent to which the advances under the Revolver Loan were effectively subordinated to the claims of outside creditors; and (7) the ?nancial position of USSC, including an inadequate capitalization, at the date that the Revolver Loan was first put in place. The Province [337] The Province?s approach, as excerpted above from its factum, also applies equally to the Term Loan and the Revolver Loan and therefore will not be repeated here. In its written submissions, the Province argues that the Revolver Loan should be re-characterized as equity based principally on two assertions also made in respect of the Term Loan, namely: there was no expectation that USSC would repay the principal of the Revolver Loan advances; and (ii) the Revolver Loan was not provided by, nor available from, a third?party lender on commercial terms. The Province also suggests that the following three attributes of the Revolver Loan further demonstrate that it is, in substance, equity rather than debt: (1) the arrangements pertaining to interest including, in particular, determination of the interest rate based on tax requirements, the timing of interest payments in the loan agreements, and the reliance on equity injections to make interest payments under the Revolver Loan; (2) thin or inadequate capitalization of USSC at the date of the Revolver Loan Agreement and operating performance at the time; and (3) the failure to establish a sinking fund for repayment. - Page 63 USS [338] USS submits that the same AutoSryle factors upon which it relies in respect of the Term Loan also refute the Objecting Parties? re-characterization claim in respect of the Revolver Loan. Accordingly, I will not repeat them here. Analysis and Conclusions [339] The claim of the Objecting Parties that the Revolver Loan should be characterized as an ?equity claim? also requires addressing the two matters discussed above: (1) the expectation of USS regarding repayment of principal with interest on the Revolver Loan out of cash ?ows of USS over the term of the Revolver Loan; and (2) the reasonableness of such expectation. In the case of the Revolver Loan, it is necessary to address these issues separately in respect of each of the First Tranche Indebtedness and the Second Tranche Indebtedness. Accordingly, I will deal with each Tranche in order. he ?rst Tranche Indebtedness Background [340] As set out above, the amount of the First Tranche Indebtedness outstanding as of October 31, 2013 was U.S. $116,969,996. It is understood that no payments of either principal or interest were made in respect of the First Tranche Indebtedness after October 30, 2013. The history of advances and payments under the Revolver Loan to this date is important for the determinations herein. The Monitor?s Seventh Report sets out all such advances and repayments in Exhibit thereto, which is brie?y summarized as follows. [341] During 2010, USSC drew a total of U.S. $100,000,000 under the Revolver Loan and made no interest payments. In 2011, USSC drew U.S. $20,000,000 in June, repaid U.S. $18,339,563 in November and drew U.S. $25,223,983 in December. In the same year, USSC paid U.S. $6,660,437 of interest in November and U.S. $223,983 of interest in December. As of December 31, 2011, the amount outstanding under the Revolver Loan was U.S. $127,155,598. [342] In 2012, USSC obtained advances totaling U.S. $307,366,090. Advances were made in each month, other than March and April when it repaid U.S. $33,866,386 and U.S. $9,568,279, respectively, and October when there was no activity. In addition, small amounts of interest were paid in each of January, March and April, being U.S. $366,090, U.S. $1,133,614 and U.S. $431,721, respectively. At the end of December 2012, the outstanding balance of the Revolver Loan was U.S. $496,702,434, which amount was increased by a draw of U.S. $10,000,000 in early January 2013 to bring the outstanding amount to U.S. $507,750,128. [343] As Dr. Finnerty observed, with the quali?cation that money is fungible, it can be argued that the payments on account of principal and interest in the aggregate amount of U.S. $25,000,000 in November 2011, and a further interest payment of U.S. $223,983 in December 2011, were funded by an equity injection in October 2011. It can also be argued that the payments on account of principal and interest in March and April 2012 were funded by an advance under the Revolver Loan in February 2012. Page 64 - [344] In 2013, as described above, USS implemented a decision to ?de?lever? USSC by reducing the Revolver Loan. Accordingly, principal and interest payments totaling $383,845,848 and $11,154,152, respectively, were made in each of the months of February to July 2013 inclusive. By this means, the balance outstanding at October 31, 2013, prior to the execution of the Third; Revolver Amendment and the October Security Agreement, had been reduced to the level set out above, being the amount of the First Tranche Indebtedness. Applying advances and repayments on a ?rst?in, ?rst?out basis, the advances outstanding under the First Tranche Indebtedness at the Filing Date were advances made in the course of 2012. [345] It is necessary to overlay the economic performance of USS and USSC during these years. As described above, the evidence establishes that market conditions improved in the second quarter of 2010 and then weakened again in the second half of 2010. Similarly, market conditions improved in the second quarter and third quarter of each of 2011 and 2012 before weakening again in the fourth quarter of each year. Essentially, the evidence is that USS thought that the improvement in the markets in the ?rst half of 2010 signalled the start of an improving market whereas, in retrospect, it heralded the beginning of several years of ?mini?cycles? in each of 2010, 2011 and 2012. The evidence also indicates that a similar improvement did not occur in the ?rst half of 2013. [346] Exhibit to the Monitor?s Seventh Report sets out the equity injections made by USS during the period 2010 to October 2013 on a basis, which is brie?y summarized as follows. In 2010, USS made equity injections in each of June, July, September, October and December totaling $611,754,000. In 2011, USS made equity contributions in each of January, February, July, August, September and October totaling approximately US. $213 million. There were no equity injections in 2012. In 2013, as described above, in connection with its ?de? leveraging? decision, USS contributed a total of $682,758,200 through equity injections in each month from February to and including September. It is not disputed that a signi?cant portion of these equity injections in 2013 was used to pay interest owing, and to repay principal outstanding, on the Revolver Loan in connection with the ?dc?leveraging? exercise. A further $57,040,500 was injected in October 2013 prior to execution of the Third Revolver Amendment prompting a moratorium on further cash payments to USSC imposed by the new chief ?nancial of?cer until security was provided. Analysis and Conclusions [347] The evidence indicates that USS established the Revolver Loan in May 2010 during a period of improvement in market conditions after the signi?cant slowdown in business activity during the second half of 2008 and 2009. The funding under the Revolver Loan provided additional working capital required to respond to the recovery of the steel market that was anticipated at that time. As mentioned, the advances comprising the First Tranche Indebtedness were made in 2012 based on a ?rst-in, ?rst-out approach to advances and repayments under the Revolver Loan. Accordingly, such advances must be considered in the context of the economic environment in which they were made in 2012. [348] USS says that it expected to be repaid all advances, with interest, when they were made under the Revolver Loan over the course of the Loan. As set out above, the principal argument of the Objecting Parties is that the terms of the Revolver Loan, as well as the manner in which the Loan was administered by USS, are more consistent with receipt of the residual cash ?ow and - Page 65 - assets of the USSC, without any expectation of repayment with interest of the advances under the Revolver Loan. [349] The Objecting Parties rely largely on the genera] considerations that were addressed in respect of characterization of the Term Loan. This is consistent with the fact that the Revolver Loan performed the same cash management function as the Term Loan. They also rely on certain other considerations that are speci?c to the circumstances in which the First Tranche Indebtedness was advanced. These include the following matters: (1) the losses of USSC since 2009; (2) the failure of USSC to pay any interest on the Term Loan after 2009; (3) the negative equity of USSC in 2012; (4) the removal of the solvency representation from the Revolver Loan; and (5) the use of equity injections to fund repayment of the Revolver Loan pursuant to the ?de? leveraging? exercise described above in 2013. [350] I will first address the application of the general considerations that the Objecting Parties suggest demonstrate the equity character of both the Term Loan and the Revolver Loan and then the additional considerations which they raise that are speci?c to the Revolver Loan. [351] As mentioned, in the period from 2010 to 2012, that is, prior to the ?dc?leveraging? exercise discussed below, USS administered the Revolver Loan in the same manner as it had administered the Term Loan with the exception that: in each of 2011 and 2012, USSC repaid some principal and paid some accruing interest out of available cash; and (2) USSC did not waive any interest that became payable during this period. There are no additional facts in respect of the administration of the Revolver Loan that render the combined effect of the general considerations upon which the Objecting Parties rely more compelling in the context of the Revolver Loan than the Term Loan. [352] I therefore do not think that the terms of the Revolver Loan Agreement and the manner in which USS administered the Revolver Loan are sufficient to constitute the Revolver Loan, in substance, an equity contribution. There is nothing in these circumstances, considered on their own or collectively, that casts any doubt 011 the evidence that USS expected USSC to repay the principal with interest of the First Tranche Indebtedness over the life of the Loan. [353] The next issue is therefore whether the ?nancial status of USSC in 2012, when the advances comprising the First Tranche Indebtedness were made, affects this conclusion. The Objecting Parties say that the Court should infer from the four considerations set out above, which pertain to the ?nancial state of USSC in the latter half of 2012, that USS did not expect to receive repayment with interest of the Revolver Loan. These factors raise a legitimate issue regarding both the expectation of USS and the reasonableness of that expectation at that time. I propose to address the issue of the removal of the solvency representation first and then the remaining considerations pertaining to ?nancial state. [354] The Objecting Parties place considerable reliance on the agreement of USS to remove the solvency representation from the Revolver Loan Agreement in 2012 as evidence that USS could not have expected USSC to be able to repay any advances under the Revolver Loan. The solvency representation was removed by the First Revolver Amendment in July 2012 at the request of Michael McQuade, the chief ?nancial officer of USSC at the time (?McQuade?). - Page 66 - [355] McQuade states in his af?davit sworn September 4, 2014 that, at the time of the execution of the First Revolver Amendment, he had a concern about solvency given its losses since 2009 and its reliance on USS for ongoing liquidity and solvency. He testi?ed at the hearing of this motion that he had a concern that USSC might become insolvent at some point over the remaining thirteen?year term of the Revolver Loan. [356] The Objecting Parties suggest the Court should draw the inference that USS was aware that USSC was insolvent in July 2012 and, from that inference, ?nd that USS had no expectation of repayment with interest of the advances made in 2012 under the Revolver Loan. I do not think the evidence justi?es such an inference or ?nding for the following reasons. [357] . First, there is no evidence regarding the intentions of either USS or USSC in removing the insolvency representation that supports such a ?nding. McQuade requested its removal. I-Iis evidence at the trial was that he approached the solvency representation as a continuing representation. McQuade?s concern was prospective rather than immediate. He was concerned that USSC might breach the representation at some point in the future rather than that USSC was insolvent in July 2012. In addition, McQuade also testi?ed that he believed that USSC had a continuing right under the Revolver Loan Agreement to draw funds as needed up to the maximum availability. It is not clear how he integrated these two apparently contradictory considerations. McQuade?s view of the operation of the Revolver Loan Agreement does, however, reinforce the prospective nature of concern. In addition, there is no evidence regarding why USS agreed to remove the solvency representation at the time. [358] Second, it is not. possible to draw any conclusion regarding the knowledge of USS and USSC from the terms of the Revolver Loan Agreement for the following reasons. As described elsewhere in these Reasons, I consider that the proper interpretation of the Revolver Loan Agreement is that a balance sheet solvency test remained in the form of the ?unable to meet debts? event of default. In addition, a similar event of default remained in the Term Loan Agreement. I do not see any inconsistency in the removal of the solvency representation and the retention of a balance sheet event of default. Moreover, it is not clear whether the solvency representation was a Continuing representation given at the time of each advance. Even if it was, which may be more likely, the net effect of the amendment was to remove the solvency test based on meeting liabilities as they fell due. As discussed above, there was no need for such an event of default in the context of a wholly-owned subsidiary relationship. It is therefore questionable whether the removal of the insolvency representation had any real practical signi?cance from which it would be possible to draw an inference. [359] Third, while USSC may not have been solvent on a book value basis in July 2012, there is no evidence to suggest that USS considered that USSC was insolvent on a market value basis at that time, which is the relevant issue both as a practical matter as well as a legal matter. [360] I tum then to the remaining ?nancial performance considerations upon which the Objecting Patties say that the Court should infer an absence of an expectation of repayment of the Revolver Loan on the part of USS in 2012. With hindsight, these considerations point in the direction of continuing ?nancial problems of USSC which were identi?ed in the autumn of 2013. With the bene?t of that hindsight, it is also clear that USS had very lax controls over the provision of additional cash to USSC from 2010 until late October 2013 and perhaps poor planning processes. In practice, requests, as set out in its rolling thirteen?week cash Page 67 forecasts, appear to have been satisfied on a regular basis without close scrutiny by the USS treasury department. However, such evidence, considered collectively with the other considerations relied upon by the Objecting Parties, is not suf?cient to establish that USS actually expected that USSC would be unable to repay with interest the advances in 2012. The evidence is more consistent with a USS expectation that funding additional working capital in 2012 was appropriate given an anticipated improvement in the steel market, with a concomitant ability of USSC to repay such advances under the Revolver Loan as USSC returned to pro?tability. [362] The advances under the Revolver Loan funded USSC with a view to increasing its working capital to take advantage of more favourable steel markets that were expected at the time. As described above, there were mini-cycles in each of 2010, 2011 and 2012. In each case, USS misread these mini-cycles as the start of a more broad-based improvement that did not occur. In the case of these advances, the evidence indicates a misplaced belief that the performance of USSC would improve in 2012 and 2013. There is, however, no evidence before the Court which suggests that USS did not hold these views. Nor is there any evidence that such views were unreasonable at the time. [363] The Objecting Parties also raise the issue that the outstanding principal amount of the Revolver Loan was reduced from in excess of US. $500,000,000 to the amount of US. $116,969,996 during 2013 pursuant to the ?dc-leveraging? exercise that was funded by equity injections from USS. They suggest that the source of funds is a factor indicating that the Revolver Loan was, in fact, an equity injection. There are three dif?culties with this argument. [364] First, USS had a legitimate business purpose in reducing the outstanding amount of the Revolver Loan that was not connected in any way to its expectation regarding the ability of USSC to repay the Revolver Loan. The ?dc-leveraging? exercise was undertaken to remove foreign currency ?uctuations from the USSC financial statements and, thereby, to address an unnecessary complication in the USS consolidated financial statements. [365] Second, in any event, I do not see any necessary connection between the use of the equity injections to reduce the outstanding balance of the Revolver Loan and the characterization of the remaining outstanding balance of the Loan. It may be that the use of equity injections re?ected the fact that, in the course of 2013, USS concluded that USSC was no longer likely to be able to repay an amount of the Revolver Loan equal to the amount repaid by the equity injections. However, any determination to that effect would require evidence regarding the options available to USS to address the currency fluctuation issue, including the feasibility of conversion of such advances into another debt instrument rather than equity. Such evidence was not before the Court. In addition and in any event, the issue for the Court is whether USS expected repayment of an amount of the Revolver Loan equal to the remaining balance, being the First Tranche Indebtedness. The ?dc?leveraging? exercise does not demonstrate that USS also concluded that USSC would not be able to repay the amount of the Revolver Loan that it determined to leave outstanding. [366] Third, there is a signi?cant of hindsight to this particular argument. Tire advances comprising the First Tranche Indebtedness were fully advanced before a decision to undertake the ?dc?leveraging? exercise was taken. In the absence of any documentary evidence - Page 68 - of decision?making in 2012, it is not possible to establish that the USS decision to convert a portion of the Revolver Loan to equity in 2013 re?ected a determination made earlier in 2012 at the time of the advances under the Loan regarding the ability of USSC to repay such advances. More generally, there is no evidence that demonstrates that the use of equity injections to repay a portion or all of the Revolver Loan was contemplated at any time prior to late January 2013. [367] Accordingly, I do not see any demonstrable connection between the use of the equity injections to pay down the Revolver Loan and the expectation of USS regarding repayment with interest of the Loan when the Revolver Loan was established or when the advances comprising the First Tranche Indebtedness were made in 2012. [368] Lastly, as mentioned, the Province argues that, in respect of the Revolver Loan, USS advanced monies to USSC as an operating division based on anticipated bene?ts to the overall USS business and without any expectation of the payment of interest or the repayment of principal of the advances. On this view, USS provided monies to USSC that would not earn interest or be repaid because it would earn sufficient additional pro?ts elsewhere in the organization to justify the increased equity investment in US SC. [369] While such a possibility cannot be wholly discounted, the evidence for such a conclusion is lacking, apart from the absence of any credit analysis by USS before establishing the Revolver Loan in 2010, upon which the Province relies. There is no evidence that the losses that USSC generated were compensated for by profits elsewhere within the USS companies between 2010 and 2012. Moreover, there also is no evidence that, by 2010, the synergies envisaged at the time of the Acquisition outside of USSC were being realized within the USS business. As discussed above, the evidence only goes as far as demonstrating lax controls and perhaps a poor planning process. Such evidence is insuf?cient to demonstrate an absence of an expectation of repayment with interest of the advances under the Term Loan. [370] Based on the foregoing, I therefore ?nd that the evidence demonstrates, on a balance of probabilities, that USS had an expectation of repayment with interest of the advances comprising the First Tranche Indebtedness at the time such advances were made. [371] I turn then to the evidence regarding the reasonableness of such expectation. [372] In this regard, the principal argument of the Objecting Parties is that USSC could not have obtained an operating loan from a third?party lender on the terms and conditions of the Revolver Loan. They argue that this fact demonstrates that the First Tranche Indebtedness was in substance an equity injection. [373] There is no doubt that a third-party lender would not have made an operating line of credit available on the terms and conditions of the Revolver Loan. The Hall Report opines that a third~party lender would not have granted an unsecured credit facility in 2010 given the circumstances that. USSC was unprofitable, was experiencing negative EBITDA, had a net worth deficit on a book value basis, and had an outstanding balance under the Term Loan of approximately $1.6 billion. On the other hand, there is no evidence before the Court that would support a conclusion that secured financing would not have been available on viable terms from an external source other than a third-party lender. Neither Mr. Hall nor Mr. Finnerty expressed any opinion on this matter. Page 69 [374] The more difficult question is whether any external ?nancing would have been available given the amount outstanding under the Tenn Loan in 2012, that is, whether the total debt capacity of USSC would have been exceeded by the addition of a secured operating line. If it could be demonstrated that such ?nancing would not have been available, a court could find that it was unreasonable to expect repayment of the advances of the First Tranche Indebtedness, being Claim #10, when they were made. [-375] I However, there is no capital markets evidence before the Court that addresses this issue directly. [376] The limited ?nancial evidence referred to above is not suf?cient to support any inference regarding the debt capacity of USSC at. such time as it is limited to the availability of an unsecured revolver loan from a third-party lender. As the Objecting Parties bear the onus of proof, there is, therefore, no basis for a conclusion that expectation of repayment was unreasonable on the basis that USSC lacked the aggregate debt capacity in 2012 to establish a revolving loan facility in the amount of the Revolver Loan. [377] Based on the foregoing, I conclude that USS had a reasonable expectation of repayment with interest of the advances constituting the First Tranche Indebtedness at the time such advances were made. I therefore also conclude that the unsecured Claim in respect of the Term Loan, being Claim #10, constitutes a debt claim rather than an ?equity claim? for the purpose of this CCAA proceeding. The Second Tranche Indebtedness [378] As set out above, Credit Corp advanced loans to USSC under the Revolver Loan totaling US. $71 million after the execution of the Third Revolver Amendment and the October Security Agreement on 01' about October 30, 2013. These advances were outstanding at the Filing Date. USS did not. make any equity injection after October 30, 2013. As noted above, USSC acknowledges that USSC was insolvent on a balance sheet. basis as of October 31, 2013, by which it is understood that liabilities exceeded the fair market value of its assets as of that date. The Objecting Parties argue that the Second Tranche Indebtedness was also an equity contribution. [379] For clarity, I have approached the issue of characterization of the Second Tranche Indebtedness on the basis that such Indebtedness is secured by the security constituted by the October Security Agreement. Because USS required such security before advancing the Second Tranche Indebtedness, it is not realistic to address the characterization of such Indebtedness independently of such security. Accordingly, no conclusion is reached in these Reasons on the characterization of such Indebtedness to the extent that such security may be held to be void or unenforceable. [380] i I ?nd the evidence supports the conclusion that USS expected to be repaid the Second Tranche Indebtedness as advanced under the Revolver Loan for the following reasons. [381] First, there can be little doubt that USS expected to be repaid the advances made after October 30, 2013 with interest given the security over all the assets of USSC provided by the October Security Agreement. The existence of security for the Second Tranche Indebtedness Page 70 overwhelms any argument that could be made for an absence of any expectation of repayment with interest based on the general considerations relied upon to seek to characterize the Term Loan and the First Tranche Indebtedness as capital contributions. The existence of security also precludes an argument based on the ?nancial status of USSC at the time the advances comprising the Second Tranche Indebtedness were made. [382] Second, the principal argument of the Objecting Parties is that USS was legally and practically obligated to continue funding USSC. The Objecting Parties say that, if USS had not funded through the Revolver Loan, it would have had to fund the same amounts by equity injections. They argue that therefore the Revolver Loan was effectively an equity contribution. There are two difficulties with this argument. [383] First, I find that USS was not legally obligated to continue funding USSC under the Revolver Loan Agreement for the following reasons. [384] The Objecting Parties submit that, as of October 31, 2013, USS was legally obligated to continue to make all advances requested by USSC up to the limit of the availability under the Revolver Loan Agreement, being US. $600 million. This position is based on the contractual interpretation set out in the Di Massa Report of the ?unable to meet debts? event of default in section 110 of the Revolver Loan Agreement as of October 30, 2007. [385] However, I have concluded above that the ?unable to meet debts? event of default constituted a balance sheet insolvency event of default in the Revolver Loan Agreement. There is no dispute that USSC was insolvent on a balance sheet basis in October 2013. Accordingly, on this interpretation of the Revolver Loan Agreement, an event of default had occurred under the ?unable to meet debts? event of default in the Agreement entitling USS to refuse to advance further funds to US SC thereunder. [386] In addition, even assuming that USS was obligated practically to ensure ?nancing for USSC, I do not think it is correct to say that USS was obligated to provide that financing by equity injections. This argument assumes that secured financing was not available from external sources 011 a viable basis in the amount of the Second Tranche Indebtedness. However, there is no reason to think that a revolving loan on a secured basis in the amount advanced during the remainder of 2013, being approximately $71 million, would not have been available to USS, although admittedly on terms and conditions which would have differed from those of the Revolver Loan. [387] I note that the Objecting Parties acknowledged at the trial that, but for the foregoing argument, they would have no coinpelling argument for characterization of the Second Tranche Indebtedness as a capital contribution. In particular, they do not raise any argument to the effect that any expectation of USS of repayment of the Second Tranche Indebtedness as secured debt 'was unreasonable. The principal issue raised by the Objecting Parties in respect of the Second Tranche Indebtedness is the validity or enforceability of the security for such Indebtedness constituted by the October Security Agreement, which is discussed below. [388] Based on the foregoing, I conclude that USS had a reasonable expectation of repayment with interest of the advances comprising the Second Tranche Indebtedness at the time such advances were made. Page 71 - The Validity of the Security for the Second mnehe Indebtedness [389] The Objecting Parties submit that the security for the USS Secured Claims (being, collectively, Claims 11, 11(a), 11(b), and 11(0)) should be invalidated. They make two principal arguments: (1) that the October Security Agreement and the November Security Agreement are unenforceable for lack of consideration at the time that they were executed and delivered by and (2) that the October Security Agreement. and the November Security Agreement are void as constituting a fraudulent preference for the purposes of section 95(1)(b) of the BIA. [390] In this section, I will address these issues in respect of the security for the Second Tranche Indebtedness, being the October Security Agreement. The security for the Remaining USS Secured Claims will be addressed in the last. section of these Reasons. Alleged of the October Security Agreement [391] The Province and the Union argue that the October Security Agreement is unenforceable due to a lack of consideration at the time that it was executed and delivered by USSC and submit that, accordingly, the security constituted by such Agreement is invalid. On this basis, they argue that USS Claim #11, being the Second Tranche Indebtedness, should be declared to be an unsecured claim. [392] USS says consideration was given for the October Security Agreement. in the form of further advances under the Revolver Loan which would not have been granted without the provision of security for such advances, as referenced in the recital in the October Security Agreement cited above. [393] The position of the Objecting Parties raises the following issues pertaining to the validity of security: 1. Is consideration for the October Security Agreement necessary for an enforceable security interest? 2. If so, did USS give consideration for the October Security Agreement. in the form of an agreement to advance further funds under the Revolver Loan? 3. Alternatively, did USS give consideration for the October Security Agreement in the form of a forbearance or a waiver in respect of rights to declare a default or take enforcement proceedings pursuant to the Revolver Loan Agreement or otherwise? [394] i do not accept the position of the Objecting- Parties that the October Security Agreement is unenforceable for want of consideration for the following reasons, which address each of these questions in turn. [395] First, I do not think consideration is required for a grant of a security interest to be effective, although it will not be enforceable until such time as an obligation arises in favour of the grantee that is secured by the security interest. This result is a consequence of the fact that security is essentially a proprietary right. Consideration is not required to effect a pledge, or a - Page 72 charge on property. While a security interest is a statutory creation, I see nothing in the Persona! Property Security Act, R.S.O. 1990, c. P.10 (the that imposes a requirement for consideration as a condition of the effectiveness of a grant of a security interest. [396] The Objecting Parties say that a requirement for consideration is found in the statutory provisions of the PPSA that require a security agreement between the parties. Given that any agreement requires consideration in favour of a party to the agreement to be enforceable against such party, the Objecting Parties say it necessarily follows that consideration is required for a party to enforce the grant of a security interest. in its favour in a security agreement. I . acknowledge that, in the absence of consideration, the other covenants in favour of a grantee of a security interest in a security agreement may not be enforceable. That is, however, a different issue. In such event, the rights of the grantee would be limited to its statutory rights under the PPSA, but the grant of the security interest would still be effective. Consistent with this approach, the PPSA expressly distinguishes between a security agreement and a security interest. A ?security agreement? is de?ned in section 1(1) of the PPSA as ?an agreement that creates or provides for a security interest and includes a document evidencing a security interest?. I see no reason why a ?document evidencing a security interest? cannot include a document or instrument containing a unilateral grant of a security interest by a grantor in favour of a grantee. Such a grant would be effective as between the parties regardless of whether consideration was given, provided the grantee could demonstrate that the grantor intended it. to be delivered. It would also be effective in reSpect of the rights of third parties, subject to the other requirements of the PPSA regarding rights in the collateral and attachment. It is the extension of credit, and thereby the creation of an obligation in favour of the grantee that is secured by the security interest, that makes the security interest enforceable. [398] Second, if consideration is required for the security interest granted in the October Security Agreement to be effective, Ithink this requirement was satisfied in three separate ways. [399] First, the October Security Agreement recites that consideration was given, the receipt and suf?ciency of which is acknowledged by both parties to the Agreement. It is an elementary principle that courts will not enter into an inquiry as to the adequacy of consideration: see John D. McCamus, The of Contracts, (Toronto: Irwin Law, 2005), at p. 222. [400] Second, as a related matter, as stated above, the third recital to the October Security Agreement recites, in effect, that Credit Corp required the provision of security as a condition of continued advances under the Revolver Loan Agreement. This recital is consistent with the Court?s conclusion above that an event of default had occurred under the Revolver Loan Agreement entitling Credit Corp to refuse to advance further monies under the Revolver Loan. On this basis, USS was therefore in a position to provide consideratiOn in the form of a commitment to advance further funds under the Revolver Loan Agreement. Accordingly, the commitment to advance further funds on the part of Credit Corp referred to in the third recital accurately re?ected the existence of consideration for the purposes of the October Security Agreement. [401] Third, I am also of the opinion that any lack of consideration for the October Security Agreement was cured by the actual advances of monies underthe Revolver Loan Agreement comprising the Second Tranche Indebtedness. If the execution of the October Security Page 73 - Agreement and the advance of monies had occurred concurrently, there would have been no issue regarding a lack of consideration. The advance of monies itself would have satis?ed any requirement for consideration under the October Security Agreement. In other words, under such circumstances, it would have been unreasonable, and unnecessary, to require demonstration of an intermediate commitment to advance further funds. The result should not change merely because there was a period of time between the execution of the October Security Agreement and the subsequent advance of monies under the Revolver Loan. The significance of the lapse of time is that the security interest was not enforceable, in the sense that the security interest did not secure any outstanding obligation and therefore could be enforced, until such time as an advance occurred under the Revolver Loan. It did not, however, render the October Security Agreement void for lack of consideration. [402] The Objecting Parties raise three arguments to the effect that USS did not give any consideration, even if an event of default had arisen under the Revolver Loan Agreement which would otherwise have permitted USS to refuse to advance further funds under the Revolver Loan Agreement. [403] First, the Objecting Parties say that, notwithstanding the occurrence of an event of default, USS had waived its right to assert such an event of default by advancing funds prior to January 2013. They say this course of conduct constituted a waiver of right to assert such an event of default in October 2013 or of right to use the event of default to deny further advances under the Revolver Loan at that time. [404] This argument is rejected for three reasons. First, as a practical matter, the last advance which could have given rise to such a waiver took place in early January 2013. There is no evidence that USS knew that USSC was insolvent, and therefore that an event of default had occurred, at or prior to the time of any such advances. Second, as a legal matter, the language of the Revolver Loan Agreement excluded the operation of a waiver in October 2013 based on previous conduct on two grounds. The provisions of section 7 of the Revolver Loan Agreement require that, to be effective, any waiver must be in writing, which would exclude entirely the possibility of an unwritten waiver based on a course of conduct. In addition, section 7 expressly negates the operation of a waiver based on the granting of a previous waiver. Third, in any event, as a practical matter, there can be no doubt that, as between USS and USSC, USSC would have understood that no course of conduct by USS could have given rise to a waiver of rights to determine the availability of funding under the Revolver Loan Agreement, as described above. [405] Second, the Objecting Parties submit that USSC did not, in fact, provide consideration in the form of a commitment to advance further funds under the Revolver Loan. They base this argument on the fact that McQuade testified that he was never expressly advised by any USS representative that USS would refrain from advancing funds unless the October Security Agreement was signed. They also rely upon the fact that USS did not declare an event of default in October 2013. [406] I do not accept this argument for the following reasons. By acceding to position with full knowledge that USS was taking the position that it was entitled to withhold future advances, USSC must be taken to have accepted legal position. In this regard, it is clear that McQuade understood that execution of the October Security Agreement was a condition of the further advance of funds to USSC at the time he signed the Third Revolver Amendment and - Page 74 the October Security Agreement, notwithstanding the absence of any direct conversation on the matter with any USS representative. Further, McQuade?s determination that execution of the October Security Agreement was in the best interests of USSC was expressly made on the basis of his understanding that USSC needed the advances to continue to meet its obligations and that USSC would only receive the further advances if it. consented to the security. [407] Accordingly, while McQuade says he believed that USS was obligated to fund under the Revolver Loan Agreement up to the limit of availability, he also knew that USS was taking the position that it was entitled to withhold funding under the Agreement until it received security for any further advances. McQuade did not challenge this legal position on behalf of USSC. Instead, USSC agreed to provide the security. In these circumstances, it was not necessary for USS to declare an event of default as a formal matter to assert its legal position. More importantly, in the absence of a determination at the time regarding the right of USS to withhold further advances, the decision of USSC to provide security must constitute acceptance of such legal right of USS. [408] Lastly, the Objecting Parties say that, as a practical matter, USS was never going to stop advancing funds in October 2013 for reasons relating to the operational impact on USS and USSC as well as the potential triggering of cross-default provisions on the USS public debt. Whether or not this is true, I do not think it demonstrates an absence of legal consideration for the following reasons. First, the absence of a legal obligation to advance further funds is by itself sufficient to give rise to consideration. Second, the grant of security by USSC forecloses this argument as it become entirely speculative. The position of the Objecting Parties requires the Court to make a determination that, in the hypothetical situation in which USSC refused to provide the required security, USS would necessarily have advanced the monies comprising the Second Tranche Indebtedness. I do not think the Court could make such a determination on the limited evidence before it. Among other things, in order to make such a determination, the Court would need to address the other options that would have been available to USS in such circumstances, including a ?ling under the CCAA and DIP ?nancing, which was raised at. the time by the ?nancial advisors to USS. [409] Based on the foregoing, I do not accept the position of the Objecting Parties that the security constituted by the October Security Agreement is unenforceable for lack of consideration. [410] For completeness, USS also argues that it gave consideration in the form of a forbearance from declaring a default, accelerating the Revolver Loan or instituting insolvency proceedings. These arguments also turn, at least in part, on the Court?s acceptance of the contractual inteipretation of the ?unable to meet debts? event of default proposed in the Di Massa Report. Given the determination herein regarding consideration for the October Security Agreement, it is not necessary to address these potential additional sources of consideration, and I therefore decline to make a ?nding on these issues. Alleged Fraudulent Preference [411] In the alternative, if the October Security Agreement is held to be enforceable, the Objecting Parties submit that the Agreement constituted a fraudulent preference for the purpose of section 95(1)(b) of the BIA, as incorporated into the CCAA by the provisions of section 36.1 Page 75 thereof. It is not disputed that the Objecting Parties bear the onus of proof in respect of this Objection. [412] The provisions of section 95 of the BIA have been set out above. To succeed in this proceeding, the Objecting Parties must demonstrate: (1) a non?arm?s length relationship between USSC and USS at the time of entering into the October Security Agreement; (2) that USSC was insolvent at the time of entering into the October Security Agreement; (3) that the October Security Agreement was entered into within twelve months of the Filing Date; and (4) that the October Security Agreement had the effect of giving USS, or more particularly Credit Corp as the lender under the Revolver Loan, a preference over other unsecured creditors at the date of delivery of October Security Agreement. There is no dispute that Credit Corp was not dealing at arm?s length with USSC, that USSC was insolvent on and after October 30, 2013, and that the grant of security in favour of Credit Corp occurred less than one year prior to the Filing Date. [413] USS argues, however, that the granting of security in the October Security Agreement did not give rise to a preference over another creditor entitling the Objectng Parties to relief under section 95 of the BIA. It bases this argument on the fact that the security in favour of Credit Corp is only being asserted in respect of advances made under the Revolver Loan after October 30, 2013, that is, in respect of the Second Tranche Indebtedness. USS bases its argument on the principle that there is no preference under section 95 if, and to the extent that, security is granted by a debtor company in respect of fresh advances which are used in the ongoing operations of the debtor company: see McAsphaulf Industries Ltd. v. Six Paws Investments Ltd, [1995] OJ. No. 2450 (C.A.), at para. 19. [414] The Objectng Parties make two submissions. [415] The principal submission of the Objecting Parties is that the October Security Agreement constituted a fraudulent preference because Credit Corp obtained security in circumstances in which it was obligated to advance monies under the Revolver Loan Agreement. They say that, if Credit Corp had an unquali?ed obligation to advance monies under the Revolver Loan as and when requested by USSC up to such limit, delivery of the October Security Agreement would have constituted a fraudulent preference on the basis that delivery of security in such circumstances would be similar to providing security for past debts. This argument turns on the question of the extent to which Credit Corp was legally obligated to advance funds to USSC up to the limit of availability under the Revolver Loan Agreement as and when requested by USSC. It is a novel argument that could only arise, as a practical matter, in a non?arm?s length situation. [416] I have reservations regarding the merits of this argument as a matter of law. However, it is not necessary to determine the issue the alleged fraudulent preference on this basis. I have concluded above, in the context of the determination that USS provided consideration for the grant of the October Security Agreement, that Credit Corp was not obligated to advance further funds under the Revolver Loan Agreement. On this basis, this argument of the Objectng Parties cannot succeed. [417] The alternative argument of the Objecting Parties is that the security in favour of Credit. Corp under the October Security Agreement must fail in its entirety to the extent that the October - Page 76 - Security Agreement purports to secure a pre?existing debt. They rely on Re Fulton (No. 2), [1926] OJ. No. 115 (C.A.), at para. 7, for this proposition. [418] I accept that the granting of security for existing or past indebtedness constitutes a preference for the purpose of section 95 of the BIA. However, USS is not asserting a secured claim in respect of any such obligations in this proceeding, notwithstanding that the de?nition of ?Secured Obligations? in the October Security Agreement extends to pre-existing indebtedness. [419] In such circumstances, the Court of Appeal made it clear in at para. 19, that ?a security may be bad in respect to some advances, but enforceable in respect to others, thus protecting payments made by an insolvent company which would otherwise be preferential.? In that case, the evidence indicated that the fresh advances at issue were used in the on?going operations of the company. On that basis, the Court. of Appeal held that the repayment of the advances did not constitute a fraudulent preference. [420] In my opinion, the same principle operates in the present circumstances. There is no dispute that. the advances comprising the Second Tranche Indebtedness were used in the on? going operations of business. The advances under the Revolver Loan after October 30, 2013 therefore bene?tted the unsecured creditors as of the date of such advances. This factual context is sufficient under the case law to exclude a ?nding of a fraudulent preference under section 36.1 of the CCAA and section 95 of the BIA. [421] The decision in nllon does not assist the Objecting Parties for the reason that the circumstances in Fulton were qualitatively different from the present circumstances. nlfon involved advances under a chattel mortgage totaling $3,800, of which $2,200 represented a new advance after the date of the chattel mortgage. The mortgage purported to secure the existing obligation as well as the new advance. The security was declared invalid in respect of both advances. However, there was a significant. issue with the new advance that explains the result in that decision. The Court of Appeal expressly held that there was ?no doubt that the $2,200 did not in fact increase the assets of the estate in any tangible way.? In fact, the court concluded that there was no evidence regarding what became of the $2,200. Accordingly, the security failed in its entirety because the new advance could not be demonstrated to have been used in the operations of the debtor, not because the mortgage also purported to secure a past advance. [422] Based on the foregoing, I conclude that there is no basis for a fmding that the delivery of the October Security Agreement constituted the grant of a fraudulent preference by USSC in favour of Credit Corp insofar as the security constituted thereby secured the Second Tranche Indebtedness. Conclusion Regarding the Second Tranche Indebtedness [423] Based 011 the foregoing, I conclude that Claim #11, being the claim in respect of the Second Tranche Indebtedness under the Revolver Loan, constitutes a debt claim, rather than an ?equity claim?, which is a Secured Claim for the purpose of this CCAA proceeding. Remaining USS Secured Claims [424] As mentioned, the Objecting Parties also submit that the security for the Remaining USS Claims (being Claims 11(b) and should be invalidated on the grounds that Page 77 the security for such Claims, being the November Security Agreement, is either unenforceable as a matter of contract law for lack of consideration at the time it was executed and delivered by USSC or void as constituting a fraudulent preference for the purposes of section 95(1)(b) of the BIA. The Objecting Parties do not dispute the quantum of any of these three Claims nor do they suggest that these Claims are ?equity claims?. For completeness, the Objecting Parties also submitted that the November Security Agreement cannot be an enforceable obligation to the extent that the Court were to find that the October Security Agreement was unenforceable. Given the determination above, it is not necessary to address this submission. [425] I propose to address the issues pertaining to the Remaining USS Secured Claims in the following order. First, I will describe the nature of the November Security Agreement. Then I will address the issues pertaining to Claim #11(c) (Intercompany Goods Services), which relates to the provision of goods and services by USS to USSC prior to the Initial Order. Lastly, I will address the issues pertaining to Claim #11(a) (the Cliffs Transaction) and Claim #11(b) (Credit Support Payments), which involve different considerations, as these claims arose after the Filing Date. The November Security Agreement [426] On November 12, 2013, Credit Corp, USSC, USS, United States Steel International, Inc. and SHC executed a further amendment and restatement of the October Security Agreement that provided security to each of USS, United States Steel International, Inc. and SHC (collectively, the Affiliates?) in respect of the provision of intercompany goods and services on credit by any of them to USSC (as so amended, the ?November Security Agreement?) in addition to, and alongside, the security already provided to Credit Corp in respect of advances under the Revolver Loan pursuant to the October Security Agreement. [427] The November Security Agreement contains recitals to the effect that each USS Affiliate sells ?Goods? to USSC pursuant to arrangements and agreements, defined for such purposes as the ?Sales Agreements?, as between the USS Affiliates and USSC, that the USS Affiliates have determined that, in light of ?nancial position and credit worthiness, they ?no longer wish to sell Goods to the Debtor on terms other than cash in advance or cash on delivery, unless the Debtor provides acceptable ?nancial accommodations? and that, ?upon the Debtor?s request, the Af?liates] are willing to continue to sell Goods to the Debtor on that the Debtor secures its obligations to pay for such Goods pursuant to the terms of the [November Security Agreement]?. I would note that the de?nition of ?Goods? for purposes of the November Security Agreement is ?materials, goods and other products (including inventory and raw materials)?. [428] The extension of security to the USS Affiliates was implemented by adding the USS Affiliates as parties to the October Security Agreement, providing that such parties were ?Secured Parties? for purposes of such Agreement, and amending the definition of ?Secured Obligations? to read as follows: obligations, duties, indebtedness and liabilities of the Debtor from time to time owing by the Debtor to any Secured Party including, without limitation, obligations, duties, indebtedness and liabilities arising under, or in cormection with: the Loan Agreement; (ii) any amendment or restatement of the Loan Page 78 - Agreement, including any such amendment 01' restatement which increases or decreases the maximum amount of Loans and other obligations that may be made by Secured Party to Debtor thereunder; this Agreement; (iv) all obligations arising out of, in connection with or relating to the Sales Agreements or the sale of Goods by any USS Seller to the Debtor at any time and from time to time; and any other document made, delivered or given in connection with any of the foregoing; in each case whether now existing or hereafter arising, whether evidenced by a note 01' other writing, whether allowed in any bankruptcy, insolvency, receivership or other similar proceedings, whether arising from an extension of credit, issuance of a letter of credit, acceptance, loan, guarantee, indemni?cation or otherwise, and whether direct or indirect, absolute or contingent, due or to become due, primary or secondary, or joint or several. [429] By virtue of the de?nition of ?Secured Obligations?, therefore, all obligations owing by USSC to Credit Corp under the Revolver Loan Agreement, or to any of the USS Affiliates in respect of the sale of Goods, were entitled to the bene?t of the general security interest granted by USSC in the Security Agreement, as amended and restated by the October Agreement and the November Security Agreement. [430] I would also note that the ?rst advance comprising the Second Tranche Indebtedness was made at the time that the October Security Agreement was in force and that the two later advances were apparently made after the November Security Agreement came into force. However, it is not disputed that the same security interest was continued under the November Security Agreement. I would also note that the parties addressed the validity of the security for the Second Tranche Indebtedness, and the existence of a fraudulent preference in respect of the granting of security for the Second Tranche Indebtedness, in the context of the October Security Agreement rather than the November Security Agreement. As the Objecting Parties have not raised any additional issues in respect of the Second Tranche Indebtedness pertaining to the November Security Agreement, I have proceeded on the basis that such Indebtedness is secured thereunder the extent that the security for the Second Tranche Indebtedness under the October Security Agreement is not invalidated for one of the reasons discussed above. The Intercomnanv Trade Claim - Claim #11 [431] As mentioned, the Objecting Parties argue that the security for this Claim is either unenforceable for want of consideration from the USS Affiliates with respect to the November Security Agreement or void .011 the basis that the grant of the November Security Agreement constituted a fraudulent preference. I will address each issue in turn. I note that there is no issue regarding the fair market value of the goods and services relating to this Claim. Alleged Uneqforceribility of the November SecurigtAgreemenf [432] The principles regarding the requirement for consideration in respect of the grant of a security interest in a security agreement have been addressed above in respect of the October Security Agreement. I do not propose to repeat that discussion in this section. As applied to the November Security Agreement, I reach the following conclusions. [433] First, for the reasons set out. above, I do not think that consideration is requiredfor the grant of the security interest in the November Security Agreement. Page 79 [434] Further, to the extent that consideration is required to enforce the security constituted by the November Security Agreement, I ?nd that consideration was given for the November Security Agreement, as veri?ed in the recitals in the Agreement and acknowledged by all the parties. In particular, the recitals to the November Security Agreement reflect the grant of consideration from the USS Af?liates in the form of a commitment to continue to provide the goods and services that are the subject of this Claim. The position of the USS Af?liates was made clear to McQuade before he executed the November Security Agreement. on behalf of USSC. There is no evidence before the Court that would indicate that the USS Af?liates lacked the legal right to refuse to provide such goods and services if USSC had refused to provide the security. Insofar as the Objecting Parties suggest that the USS Af?liates were not going to stop providing these services, as a practical matter, I consider that the reasoning and conclusions reached in respect of the comparable argument. made regarding the security for the Second Tranche Indebtedness is equally applicable in this context. [435] In addition, any lack of consideration was cured by the delivery and provision by the USS Af?liates of the goods and services in respect of Claim #1 I note that such delivery is the substantive equivalent of an advance of funds to be used in the operations of USSC to acquire such goods and services. If USS had advanced the purchase price of such goods and services to USSC under the Revolver Loan for the purpose of payment of such obligations, such advances would have been secured pursuant to the October Security Agreement based on the conclusion reached above. There is no principled reason why the result would differ because the USS Af?liates provided goods and services rather than advanced funds for such purposes. [436] Accordingly, I conclude that the November Security Agreement is not unenforceable in respect of the amounts constituting Claim #1 1(0) for lack of consideration from the USS Af?liates t0 USSC. Alleged Fraudulent Preference [437] The principles regarding the operation of section 95(1)(b) of the BIA have also been set out above. As discussed above, there is no evidence before the Court that the USS Af?liates were legally obligated to continue to provide the goods and services that are the basis for this Claim. The security constituted by the November Security Agreement Was given in respect of a the provision of additional goods and services that would not otherwise have been provided to USSC. Accordingly, for the reasons set out above, I conclude that the grant of the security under by the November Security Agreement in favour of the USS Af?liates did not constitute a fraudulent preference in their favour for the purposes of section 95. [438] Further, as stated above, the delivery and provision of the goods and services in respect of Claim #1 1(0) represents the substantive equivalent of a fresh advance of funds to USSC to be used in the operation of its business. On this basis, the grant of security in respect of the delivery and provision of such goods and services did not prejudice the unsecured creditors of USSC as of the date of delivery of the November Security Agreement or the date of the delivery or provision of such goods and services and does not constitute a fraudulent preference. [439] Based on the foregoing, I conclude there is no basis for a ?nding that the delivery of the November Security Agreement by the USS Af?liates in respect of Claim #1 1(c) constituted the grant of a fraudulent preference by US SC in favour of such parties. - Page 80 - The Cliffs Transaction Claim and the Credit Support Payments Claim Claims #llgat and tight [440] The claims for the Cliffs transaction and the credit support payments each arose after the Filing Date in the following circumstances. [441] USSC took delivery from Cliffs of the iron ore that is the subject of the Cliffs transaction prior to the Filing Date..However, USS was not in a position to sell the iron ore to USSC until it had paid Cliffs. Because USS did not pay for the iron ore until after the Filing Date, its claim against USSC for payment of the iron ore arose after the Filing Date. [442] USSC incurred the third?party obligations that are the basis of the credit support payments clainr prior to the Filing Date but had not paid them as of that date. Because USS paid such claims pursuant to its guarantees in favour of such third parties after the Filing Date, its claim against USSC in respect of these payments also arose after the Filing Date. [443] I will address each of these claims in turn. The Cliffs Transaction Claim #11(a) [444] Tire Objecting Parties argue that the security for this Claim constituted by the November Security Agreement is either unenforceable or void as a fraudulent preference on the same grounds upon which they rely in respect of Claim hr addition, they argue that this claim is a pre?frling claim that is no different from all other trade creditor claims outstanding on the Filing Date. They argue that the effect of the November Security Agreement is to elevate improperly an unsecured pre?frling claim into a secured claim. [445] This Claim involves the sale of goods by USS to USSC and is therefore similar as a factual matter to the circumstances in Claim I conclude that the principles that governed the determinations with respect to Claim #ll(c) regarding the issues of. consideration for the November Security Agreement and the alleged fraudulent preference are equally applicable in the present situatidn, with the following additional consideration which reinforces the conclusions therein. [446] In the case of this Claim, the Iron Ore Agreement specifically evidences fresh consideration for the grant of security pursuant to the November Security Agreement. While it is correct that USS was obligated to pay Cliffs under its agreement with Cliffs, as the Objecting Parties say, there is no evidence that USS was legally obligated to sell the iron ore to USSC once it acquired title to the ore. USS could have required that USSC deliver up possession of the iron ore to it. instead, USS and USSC entered into a fresh agreement regarding the purchase by USSC of the iron ore at a time when USSC was independently represented. The h?on Ore Agreement provided that obligation to pay for such iron ore, when it arose, would be a ?Secured Obligation? for purposes of the November Security Agreement, in return for agreement effectively to sell USSC its interest in the iron ore and to pay Cliffs the purchase price of the ore on behalf of USSC. - Page 81 - [447] Such circumstances are suf?cient to satisfy any requirement for the demonstration of consideration for the grant of security pursuant to the November Security Agreement in-respect of the purchase price obligation of USSC and to negate any fraudulent preference upon the grant of such security for such obligation. [448] I would add that, in the case of this claim, USSC expressly agreed to the secured treatment of the purchase price obligation prior to such obligation coming into existence. As such, the circumstances do not involve the transformation of a pre-filing unsecured claim into a post??ling secured claim. The Credit Support Payments Claim Claim #11 [449] As discussed above, USS paid these obligations pursuant. to guarantees established in favour of the third-party creditors. It asserts Claim #11(b) against USSC pursuant to its rights of srtbi?ogation. USS submits that such rights of subrogation constitute ?Secured Obligations? for the purposes of the November Security Agreement and, accordingly, rank ahead of all other trade creditors. If these credit support payments are secured, a consequence would be that the unsecured, pre-filing claims of the third party-creditors have become secured, post-filing claims of USS without any involvement of the Monitor or the Court pursuant to the provisions of section 10 of the Initial Order, which would otherwise govern the payment of pro?filing obligations. [450] The Objecting Parties argue that the security for this Claim constituted by the November Security Agreement is either unenforceable or void as a fraudulent preference on the same grounds upon which they rely in respect of Claims #11(a) and #1 [45l] After a review of the documentation pertaining to this Claim, 1 think there is a threshold issue of whether the USS subrogation rights at. issue qualify as ?Secured Obligations? under the November Security Agreement. This issue was not, however, raised directly in the submissions of the parties. The parties should therefore be given an opportunity to make submissions regarding this threshold issue to the extent they wish to do so. [452] Accordingly, I do not propose to address the determination of the issues-pertaining to this Claim at this time. If the parties are unable to agree on a schedule for submissions on the threshold issue, they should contact the Court. to arrange a telephone case conference at their convenience. - Page 82 - Conclusions [453] he USS Claims referenced as Claims #1?8 inclusive in the Monitor?s Third Report are not disputed in this proceeding and are therefore con?rmed as unsecured Claims under the Claims Process Order. Based on the foregoing, the USS Claims referenced in such Report as Claims #9 and #10 are also con?rmed as unsecured Claims under the Claims Process Order and Claims #11, #11(a) and #11(c) are con?rmed as Secured Claims. The USS Claim referenced in the Report as Claim #1 1(b) remains to be determined. {mme Wilton-Siegel I. Date: February 29, 2016 Stelco Acquisition Structure $1,453,027,025.27 [?331,331 Equity (Delaware) Debt $900,000,000 Facility $400,000,000 Cash 315302102127 US. Steel Snitcle States Steel LP Holdings. Inc. (Delaware) Forward EXChanae I U.S. Ste-:1 3 011mm) 130,,th Agreement Summary (I) malax?wc) i Pay USD 744.6 million 10,, Rec CAD 710.4 million 90" a . 0" mi $727,499,48036 Loan in USD CV $744,643,60587 Loan in USD CAD 700,000,000 1; Loan in CAD EUR 93115653502 Equity 0:0 (CAD 1231000000) GER, EUR 43431559156 Dividend I. Holdings 1. I I 3. /fs. 5: i Rosie: 3.0. (USSR) 31 m?nkin 1 i 1 Elm] Git . Holding:- {Nadia-Ima- (ET-1 is Pa}! CAD 710.4 million Rec USD 744.6 million Sn:ch ?Iolding: 1L BX. (Netherlands) EUR 9445.024} - 13,000,000: . (EV-M1 EUR 9446,0241 1 Equity (CAD 13,000,000) Pay USD 744.6 million \cmda Rec CAD 710.6 million CAD 700,000,000 Loan in CAD CAD 600,000,000 Equity ?5.30 Hawk? ACQUISITION con-mm Pay CAD 710.6 million Rec USD 744.6 million CAD 933.108.466.41 Loan in CAD CAD 1,046,216-864 Equity (1) Forward Exchange Agreements expire on STELCO December 31, 2007; Settlement made on net 1 basis SCHEDULE