Canada: Ontario Court Of Appeal Applies Abitibibowater Test In Concurrent Decisions

On October 3, 2013, the Ontario Court of Appeal (OCA) released two concurrent decisions addressing issues arising "from the untidy intersection" of the Companies' Creditors Arrangement Act (CCAA) and the powers of the Ontario Ministry of the Environment (MOE) to require the remediation of contaminated real property. In both Re Northstar Aerospace Inc. (Re Northstar) and Re Nortel Networks Corporation (Re Nortel), the OCA applied the three-pronged test articulated by the Supreme Court of Canada (Supreme Court) in Newfoundland and Labrador v. AbitibiBowater Inc. (AbitibiBowater) to determine whether environmental remediation orders constitute regulatory orders or monetary claims that can be stayed and compromised under the CCAA. The determinative issue in both decisions was whether it was possible to attach a monetary value to the remediation obligations, which turned on the question of whether it was sufficiently certain that the MOE would perform the remediation itself.

RE NORTHSTAR – FACTS

Northstar Canada (Northstar) operated a manufacturing and processing facility in Cambridge, Ontario (the Cambridge Site), that produced waste containing heavy materials. Northstar ceased operations at the Cambridge Site in 2004 but continued to actively monitor contamination at the Cambridge Site and in the surrounding community, and started voluntary remediation activities. In 2012, the MOE, concerned that Northstar would be unable to continue its voluntary remediation activities because of severe financial problems, issued two remediation orders (Northstar Remediation Orders) against Northstar under the Ontario Environmental Protection Act (EPA). Northstar subsequently filed for protection from its creditors under the CCAA but continued to monitor the contamination during the CCAA proceedings. The MOE brought a motion for a declaration that the Northstar Remediation Orders were not subject to the stay of proceedings under the CCAA or, in the alternative, an order lifting the stay in respect of the Northstar Remediation Orders.

In July 2012, Justice Morawetz of the Ontario Superior Court of Justice (Commercial List) approved an agreement for the sale of substantially all of Northstar's assets, excluding the contaminated Cambridge Site, and dismissed the MOE's motion. The debtor-in-possession (DIP) lenders advised Northstar that they would not continue to fund the remediation efforts following the closing of the sale transaction. Northstar advised the MOE that if the sale of assets was approved, the trustee in bankruptcy would abandon the Cambridge Site and terminate the remediation work. The sale of assets closed on August 3, 2012 and the trustee in bankruptcy abandoned the Cambridge Site.

LOWER COURT DECISION

With respect to the MOE motion, Justice Morawetz held that where – as with Northstar – there is no going-forward business, a debtor has no option but to pay money to comply with environmental remediation orders. Accordingly, the "MOE would be, in reality, enforcing a payment obligation" which was prohibited by the stay of proceedings against Northstar. While the MOE was entitled to file a claim for any costs of remedying the environmental conditions at the Cambridge Site, it was not entitled to use the remediation order to obtain a payment priority that it would not otherwise have access to under the CCAA. The MOE appealed.

RE NORTEL – FACTS

Nortel Networks Corporation, N Networks Limited, Nortel Networks Global Corporation, Nortel Networks International Corporation and Nortel Networks Technology Corporation (collectively, Nortel) and their predecessors once conducted manufacturing operations that were largely disposed of in the 1990s. Nortel had identified environmental impacts that arose from its past operation at several sites (the Impacted Sites) and conducted remediation at those sites on a voluntary or contractual basis.

Nortel filed for CCAA protection from its creditors in January 2009 at which time Nortel maintained only a partial interest in one of the Impacted Sites (the London Site) and had disposed of its interests in the other Impacted Sites. After Nortel's CCAA filing, the MOE issued remediation orders (Nortel Remediation Orders) that Nortel estimated would require further expenditures of approximately C$18-million. Nortel sought an order that the relief requested by the MOE was financial and monetary in nature; that the Nortel Remediation Orders were stayed by the initial order in the CCAA proceedings (the Initial Order); and that all related proceedings before the Ontario Environmental Review Tribunal (the Tribunal) should be stayed.

LOWER COURT DECISION

Justice Morawetz held that the Nortel Remediation Orders were subject to the stay of proceedings granted pursuant to the Initial Order. He also declared that: (1) all proceedings against Nortel or its former directors and officers (the Former Directors and Officers) before the Tribunal in relation to the Nortel Remediation Orders were subject to the stay; (2) any claims in relation to current or future remediation requirements imposed by orders under the EPA against Nortel or the Former Directors and Officers were subject to the insolvency claims process; and (3) Nortel was authorized to repudiate all contractual obligations to carry out remediation at the Impacted Sites. The MOE appealed.

ABITIBIBOWATER DECISION

While the MOE's appeals in Re Northstar and Re Nortel were pending, the Supreme Court released its landmark decision in AbitibiBowater. In that case, the Supreme Court articulated a three-pronged test to determine whether a regulatory order constitutes a monetary claim that may be compromised under the CCAA: (1) there must be a debt, liability or obligation to a creditor; (2) such debt, liability or obligation must have arisen prior to the time limit for inclusion in the CCAA claims process; and (3) it must be possible to attach a monetary value to the debt, liability or obligation. With respect to the third prong of the test, the Supreme Court held that environmental remediation obligations may be reduced to compromisable monetary claims (a) where the province has performed the remediation work and advances a claim for reimbursement or (b) where the obligation may be considered a contingent or future claim because it is "sufficiently certain" that the province will perform the remediation work and seek reimbursement. After the AbitibiBowater decision, the parties to the Re Northstar and Re Nortel appeals were given leave to file fresh factums and evidence.

ONTARIO COURT OF APPEAL DECISIONS

Writing for a unanimous OCA, Justice Juriansz applied the AbitibiBowater test to the remediation orders in Re Northstar and Re Nortel. In both cases, the first two prongs of the test were easily satisfied and the outcome turned on whether it was possible to attach a monetary value to the remediation obligations at issue.

In Re Northstar, the OCA held that – although the lower court decision was rendered prior to the Supreme Court's decision in AbitibiBowater – Justice Morawetz had implicitly found that it was "sufficiently certain" that the MOE would remediate the contaminated property, because the MOE had no realistic alternative. A review of the fresh evidence confirmed Justice Juriansz's conclusion. The Cambridge Site was owned by Northstar, had been contaminated during Northstar's operations, and there was no subsequent purchaser to whom the MOE could turn to order the remediation. The actual commencement of remediation work by the MOE further established that the Northstar Remediation Orders were, in substance, claims provable in bankruptcy.

With respect to Re Nortel, the OCA found that, without the benefit of the AbitibiBowater decision, Justice Morawetz did not (explicitly or implicitly) address whether it was sufficiently certain that the MOE would perform the required remediation work. Instead, Justice Morawetz's reasoning focused on whether Nortel would be required to incur a financial obligation as a result of the Nortel Remediation Orders, without determining to whom such financial obligations would be owed. Accordingly, Justice Morawetz's analysis stood in contrast to that of Justice Deschamps in the Supreme Court, who made it clear that the critical question is "whether there are sufficient facts indicating the existence of an environmental duty that will ripen into a financial liability owed to the regulatory body that issued the order." (emphasis added)

The OCA noted that – unlike in AbitibiBowater or Re Northstar – the MOE had realistic alternatives to performing the remediation work itself on the Impacted Sites. Specifically, Nortel no longer owned most of the Impacted Sites and the OCA determined that the Nortel Remediation Orders could be directed at other current (and former) owners of the properties. Thus, in light of the AbitibiBowater decision, the OCA held that it was not sufficiently certain that the MOE would perform the remediation ordered at the Impacted Sites, with one exception. Nortel retained a partial interest in the contaminated London Site, which interest was likely worth less than the cost of remediation. Accordingly, since neither Nortel nor any other party would carry out remediation activities under the Nortel Remediation Order, the OCA held that it was sufficiently certain that the MOE would ultimately undertake Nortel's obligations with respect to the London Site. Accordingly, this portion of the Nortel Remediation Orders was a claim that could be compromised under the CCAA, and the MOE could seek to claim security over the contaminated property under the CCAA.

IMPLICATIONS

The Supreme Court's framework for considering environmental remediation claims – adopted in full by a unanimous OCA – provides a template to lower courts to assess whether such claims are regulatory orders or monetary claims. As was the case in Re Northstar and Re Nortel, the determining factor appears to be whether it is possible to attach a monetary value to the claim or obligation and, more specifically, whether the regulatory agency has performed the remediation work or is "sufficiently certain" to perform the work. Notably, if a regulatory agency issues a remediation order to a debtor who obtains CCAA protection, and the regulatory agency has no realistic alternative to performing the remediation work itself, the order will almost certainly constitute a provable claim that is subject to the CCAA stay of proceedings and can be compromised in the debtor's claims process.

In addition, in Re Nortel, Justice Juriansz reiterated that Parliament has intentionally struck a balance between the public's interest in remediating environmental contamination and the interests of third-party creditors through the CCAA. Indeed, in section 11.8(8) of the CCAA, Parliament granted environmental regulators a super-priority claim for remediation costs that is secured by a charge on the contaminated (and contiguous) real property that is "related to" the activity that caused the contamination. Accordingly, while the regulatory body's super-priority claims have security over the contaminated property, such super-priority specifically does not extend to the totality of the debtor's assets. Parliament has also – in section 11.1 of the CCAA – provided that orders that are truly regulatory in nature are not generally subject to a CCAA stay of proceedings, but that a CCAA court has the discretion to stay regulatory orders if (1) a viable compromise or arrangement cannot otherwise be made and (2) it is not contrary to the public interest for the regulatory order to be subject to the stay.

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