US Steel opponents focus on who had control in final $2.2B hearing

28 January 2016

It boils down to who had control, opponents of U.S. Steel argued in the last of eight days of hearings into the company's claim that it is owed more than $2 billion in debt.

In the second day of closing arguments, tag-teaming attorneys for unionized steelworkers and the Ontario government argued the control the U.S. Steel parent had over the former Stelco operations it acquired in Hamilton and Nanticoke in 2007 meant the parent's claims that its $2.2 billion was debt, not equity, should not be granted.

The hearing is part of the ongoing bankruptcy protection case for U.S. Steel Canada.

Winning the claim would position U.S. Steel at the front of the line for creditors in the process under the Canada Creditors' Arrangement Act that began in the fall of 2014.

That's why a host of parties oppose the claim, including the province, unionized active and retired steelworkers and active and retired salaried steel employees. They fear granting U.S. Steel the position at the front of the line would leave little money for pensions and other obligations. They argue the money is equity.

Arguing on behalf of the United Steelworkers union, attorney Gordon Capern said the parent company had an "ease of manipulation" of the finances of a subsidiary.

The less the parent acted like a third-party, arms-length lender, the less its infusions of cash in the subsidiary's operations should be treated like debt now that the Canadian company is in bankruptcy protection, he argued.

That purpose won't be served, he says, if court was used to "merely rubber-stamp a parent company's unilateral" terms of funding subsidiary.

In this case, the parent stipulated very few conditions on the loan and sometimes even proactively waived interest on the loan payments from the subsidiary. 

"Certainly the soup need look a lot more like debt than this particular soup does," Capern said, in order for U.S. Steel's claim that the money was debt, not equity, to be granted.

'They control everything'

Attorney Peter Ruby, arguing for the province, underscored the parent company had "an extreme level of control."

After taking over Stelco, U.S. Steel fully integrated the Canadian operations into its company, Ruby said – moving to its headquarters in Pittsburgh all sales, production orders, personnel decisions, raw materials, services, IT and management.

"They control everything," Ruby said. "The whole investment was controlled. They were only going to get [their money] back if the parent arranged for them to get it back."

Essentially, the argument: Given the level of control that the parent company had, U.S. Steel controlled the profitability of U.S. Steel Canada and thus its ability to pay back the money it was sending.

Steelworkers in court

During his arguments, Capern revealed an explanation for something that had perplexed the steelworkers in attendance at the hearings.

Apparently the parties had all agreed to steer clear of "conduct-based evidence and argument" in this proceedings and focus strictly on the agreements signed about the financial transactions between the parent and the subsidiary. 

That means the hearings did not deal nearly at all with the fact that the American parent company had shifted business from the Canadian mills after the economic collapse of 2008 and 2009, as it confronted an extremely rocky time for the steel industry. Nor that it would later permanently shutter iron and steelmaking at Hamilton Works in 2013 after temporarily halting the work in 2010.

To the extent that the "labour disruptions" had been raised as a factor for financial distress in these proceedings, Capern said he needed to say on the record that "The union takes great exception that it was responsible" for the company's financial condition.

Though the stakes from this hearing are high, the dozen or so steelworkers who've made the trek from Hamilton and Lake Erie every day for the hearings weren't too worried outside of court.

Gary Howe, president of United Steelworkers Local 1005, said either side could appeal after the judge's decision.

"It could take absolutely years and years and years to resolve," Howe said.

He echoed the attorneys' focus on control.

"They had full control, and they chose to shut us down and not to operate Canada," Howe said. "So that's a real key here. That just meant that we had huge costs that we didn't have a chance of ever paying back."

Wilton-Siegel said he anticipated releasing a decision sometime in the next week or two.