Canada: Northstar Aerospace Settles With The Ministry Of The Environment For $4.75 million

On October 28th, 2013 the Ministry of the Environment ("MOE") and the former directors and officers of Northstar Aerospace Canada ("Northstar") reached a $4.75 million settlement for the remediation of a property owned by Northstar in Cambridge, Ontario.

These settlement negotiations arose from a $15 million clean-up order against the former directors and officers made in 2012. This order signifies the high watermark of a trend by the MOE to use its statutory power to try to recover clean-up costs from those it perceives to be responsible for contamination, including shareholders, directors and investors.

Northstar's Financial Difficulties

In 2004, Northstar discovered contamination on its property in Cambridge, Ontario, and began voluntarily monitoring and remediating the site.

Concerned with Northstar's increasing financial difficulties, in 2012 the MOE issued two Director's Orders to Northstar: one requiring a formalized remediation plan, and the other requiring Northstar to post financial assurance. Shortly after, Northstar stopped its remediation efforts and applied for creditor protection under the Companies' Creditors Arrangement Act ("CCAA"). The CCAA court ordered a sale of virtually all of the companies' assets (except the contaminated site), and distributed the sale proceeds to the company's creditors.

Directors held Responsible

Not surprisingly, the MOE did not receive any funds arising from the sale of the assets, nor was any money set aside to address the clean-up of the contaminated property or the long-term monitoring obligations required to ensure that harmful vapours had not entered the basements neighbouring residences. As a result, in November, 2012 the MOE issued an order against Northstar's directors under sections 17 and 18 of the Environmental Protection Act ("EPA"), which grants the Director the authority to make orders against persons "responsible" for contamination. Section 18 specifically permits the MOE to issue orders to current and former owners, as well as those currently and formerly in management and control of the property or undertaking. In this case, the MOE took the position that the former directors and officers were in management and control of the undertaking because they were directors and officers during the period in which a mitigation strategy was developed with respect to the contamination. The MOE justified such an order because the directors and officers had failed to make provisions for continuing monitoring, investigation, and remediation, and such a failure was likely to endanger the health and safety of nearby residents. The Order required the directors to assume financial responsibility for the remediation at a total cost of around $15 million.

Northstar's directors appealed the Director's Order to the Environmental Review Tribunal ("ERT") and brought a motion to have the Ontario Superior Court of Justice assume jurisdiction over the appeal. The directors also sought a motion seeking a stay of the Director's Order pending the hearing of their appeal. The ERT dismissed the directors' motion and refused to grant the stay, despite the fact that any money the directors were to spend on remediation would likely not be recoverable if the ERT appeal was successful. The stay was refused on the basis of section 143 of the EPA, which provides that the ERT cannot grant a stay of an order to "monitor, record and report". This decision was upheld by Justice Sachs in the Divisional Court.

Over the following few months the directors paid out approximately $150,000 per month to comply with the orders. These payments were out-of-pocket as insurance coverage was denied on the basis that the order was for historical contamination. The day before the ERT appeal was to begin, the MOE and the directors reached a settlement agreement totalling $4.75 million - a $10 million discount from the original Director's Order. More details regarding the settlement are not yet available.

Lessons from Northstar

The orders against Northstar and its directors are significant for a couple of reasons. First, the orders came right on the heels of a recent Supreme Court of Canada decision in Newfoundland and Labrador v AbitibiBowater ("Abitibi"), which dealt with priority claims under the CCAA. In Abitibi, the SCC held that MOE clean-up orders will not be given priority status in bankruptcy and insolvency proceedings, leaving the MOE with little recourse for holding bankrupt companies responsible for contamination. In light of that decision, it is unsurprising that the MOE has begun exploring other avenues for recovering some of the clean-up costs arising from contaminated sites of bankrupt companies.

Secondly, it is significant that many of Northstar's directors had joined the company after the events leading to the contamination took place and remediation had begun. These apparently innocent directors are therefore being held liable for environmental contamination over which they had no control. However, one might argue that they exercised control in the timeframe leading up to the insolvency and could have taken steps to ensure Northstar's environmental obligations were met. The lack of concern over the fault of parties subject to MOE orders, however, is not limited to the Northstar situation. A recent decision by the Ontario Court of Appeal in Kawartha Lakes (City) v Environment, upheld an MOE order issued against an innocent landowner for contamination it did not cause on the basis that the EPA gave the MOE jurisdiction to issue an order against an innocent property owner when it is in the best interests of the environment.

The Northstar situation has on one hand, raised concerns about a possible chilling effect on business in Ontario, and on the other hand, generated discussions about the positive impact it may have on environmental protection efforts in the province. Either way, directors should ensure they have a full understanding of the potential liabilities of the companies with which they may be involved, and current directors should ensure contamination is carefully monitored and the necessary funds are set aside to look after future liabilities.

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