'Unable to meet debts': Lawyers dissect phrase in US Steel hearings

It was a battle over four simple-seeming words: "Unable to meet debts." 

Lawyers for U.S. Steel and the province spent more than three hours Friday questioning two expert witnesses, who were brought in for specific-to-Pennsylvania interpretations of contract law.

Why Pennsylvania? Because the parent company is based in Pittsburgh, all contracts and agreements were signed there.

At issue Friday was primarily one phrase in a loan agreement signed between U.S. Steel the parent and U.S. Steel Canada in 2010 and amended in the years following. That was the phrase "unable to meet debts."

• DAY 1: U.S. Steel was optimistic when it bought Stelco, but now it wants billions back
• DAY 2: U.S. Steel CFO says Canadian arm was 'bleeding cash' in 2013
• DAY 3: Expert testimony: What passes for fireworks in $2.2 billion U.S. Steel trial
• DAY 4: 'If they had turned off the tap it would've been ugly for everyone'

That loan was a revolver loan, essentially a line of credit extended to U.S. Steel Canada. In 2010, its ceiling was $350 million, but it was subsequently amended to allow the Canadian operations to withdraw up to $500 million, and then $600 million.

Each time, the agreement stated that the loan would be in default if the borrower (U.S. Steel Canada) was "unable to meet debts."

The experts were at odds over how that should be read.

Larry McMichael, an expert hired by the USSteel, opined that the Pennsylvanian reading of that would be that if the company's assets were not enough to cover its liabilities, it would be "balance sheet insolvent" and therefore breach that term.

In U.S. Steel Canada's case, it was in that underwater situation for most of its life as a U.S. Steel subsidiary. It was only able to make its ongoing bill payments because of the access to the loan from the parent company, as the court has heard this week and last.

'Including to fund its losses'

But Rudolph Di Massa, hired by the opponents of U.S. Steel, said that U.S. Steel was not speciic in the contract on what role the line of credit played in solvency calculations.

He read the "unable to meet its debts" phrase as the Canadian company actually failing to make payments to bills like its pension fund, payroll and vendors.

That would mean the parent — the lender in this case — couldn't have just shut off the spigot after it had agreed to raise the limit on how much could be borrowed.

"It was pretty clear that the particular loan was to allow U.S. Steel Canada to pay its ongoing debts, including to fund its losses," Di Massa said.

The whole trial is about whether U.S. Steel has claim to $2.2 billion that it injected into the company. If the hearing judge, Justice Herman Wilton-Siegel, decides it was debt, then U.S. Steel would have the biggest claim in the Canadian operations' bankruptcy restructuring process, which would push pensions and other obligations back in line.

Court is expected to resume Monday, with closing arguments to be wrapped up Wednesday.