Canada: Secured Creditor v. Minister Of Environment v. Pension Fund Administrator

Last Updated: May 23 2007
Article by David W. Mann and David LeGeyt

In Harbert Distressed Investment Fund, LP v. General Chemical Canada Ltd. (2006) CarswellOnt. 4675 (Ont. Superior Court) an interim receiver applied to the Court for permission to distribute $3.7 million to the plaintiff secured creditor Harbert Distressed Investment Fund, LP ("Plaintiff"). The interim receiver’s application was opposed by the Minister of the Environment ("Minister") and by a pension fund administrator, ("Administrator") each of whom claimed to have priority to the funds over the secured creditor under different provincial statutes.

General Chemical Canada Ltd. ("Defendant") was in the business of producing calcium chloride. In doing so harmful chemical by-products were created, which in turn created environmental issues in and around the Defendant’s facilities. Certain by-products created in the manufacture of calcium chloride were sent by the Defendant to a large depression called the Soda Ash Settling Basin ("SASB"). The SASB was a contaminated site with the estimated cost to remedy the contamination ranging from $3.5 million to $64 million.

It should be noted that the Plaintiff’s security specifically did not extend to the SASB and therefore the interim receiver was not in possession of the SASB.

The Defendant also maintained two separate pension plans for its employees. At the time of the Defendant’s bankruptcy the Defendant had failed to contribute approximately $4.2 million to the two pension plans. The Administrator calculated that the aggregate net deficiency of the two pension funds was approximately $62 million.

The receiver had collected $6.5 million from the Defendant’s operations. None of these funds were generated by any of the Defendant’s real estate holdings, but rather were generated through realization upon the Defendant’s personal property. As the Plaintiff was the only person with security on the Defendant’s personal property, the interim receiver proposed to make an interim distribution to the Plaintiff of $3.75 million.

In determining these issues the Court observed that the BIA, as federal legislation, occupies the field of bankruptcy and insolvency, and has paramountcy over any provincial statutes, including the provincial statutes relied upon by the Minister and the Administrator in asserting their priority.

The Minister’s Objection

In opposing this application, the Minister argued that the Defendant and its receiver had an obligation to take care of the cost of the environmental clean up before funds could be paid out to any creditor. The Minister argued that if the Court allowed the money to be paid out before the environmental issues were resolved, the effect would be to saddle the taxpayers with the costs of remedying the environmental condition.

The Court observed that the Crown’s claim "for costs of remedying any environmental condition or environmental damage affecting real property" is given priority under section 14.06(7) of the BIA, and is a statutory exception to the general scheme under the BIA. The section gives any claim by the federal or provincial Crown for the costs of remedying any environmental condition or damage affecting real property security "by a charge on the real property and on any other real property of the debtor that is contiguous" to the real property and "is related to the activity that caused the environmental damage or charge". The subsection also makes the Crown’s charge enforceable in the same way as a mortgage or charge on real property, and the subsection gives the Crown’s charge the highest priority, ranking above any other claims against the real property.

In dealing with the objection of the Minister, the Court observed that, apart from its security, the Minister is an unsecured creditor like any other, and must prove its claim in the Defendant’s bankruptcy. To allow the Minister, as an unsecured creditor, to delay the legitimate interests of secured creditors would be contrary to the principals of the BIA. Furthermore, because the assets which generated the funds proposed to be paid out were not derived from any real property that the Defendant owned, the Minister had no lien or priority whatsoever in relation to the funds to be distributed.

The Minister also argued that both the Defendant and the interim receiver had an additional obligation to meet the unsecured liability for environmental clean up. The Court rejected this argument, and stated that it was contrary to both the Order appointing the interim receiver, and the provisions of the BIA (section 14.06(2)) which state that a trustee is not personally liable for any environmental damage that arose prior to the trustee’s appointment, or after the trustee’s appointment unless the condition arose because of the trustee’s gross negligence or wilful misconduct.

The Court concluded that none of the Defendant, the interim receiver or the trustee had any personal obligation to pay the costs of the environmental clean-up, and that beyond the specific charge against the contaminated property, and any contiguous land, the Minister was nothing more than an unsecured creditor in the Defendant’s bankruptcy in respect of those clean up costs.

In reaching this conclusion the Court considered the Alberta Court of Appeal decision in Panameriana De Bienes y Servicios S.A. v. Northern Badger Oil and Gas Ltd. [citation omitted] which held that a bankrupt company had an inchoate liability for the ultimate abandonment of certain oil wells which passed to a receiver/manager who had been appointed pursuant to section 47 of the BIA. The Alberta Court of Appeal had held that the Alberta statutory requirements concerning abandonment did not directly conflict with the scheme of distribution under the BIA, and thus the doctrine of paramountcy had no application, even though the result meant less money for distribution to the secured creditor.

In deciding not to follow the reasoning in Panamericana, the Court observed that the Panamericana decision was rendered by the Alberta Court of Appeal before section 14.06(7) of the BIA was enacted. Since section 14.06(7) of the BIA specifically legislates concerning the issue of priority of any environmental cleanup costs, those provisions must take precedence over any provincial legislation, such as the provincial statute relied upon by the Minister. Furthermore, since the field has now been occupied by Parliament, any provincial effort to further extend rights to the Crown in respect of environmental contamination must be viewed as being in conflict with the provisions of the federal statute, and therefore inoperative.

The Administrator’s Objection

The Administrator on the other hand relied upon provincial legislation which created a "deemed trust" against any employer’s assets in amount equal to the unpaid remittances, and which went further, and created a lien in favour of the Administrator on all of the employer’s assets, in an amount equal to the amounts deemed to be held in trust by the deemed trust provisions.

Relying on the Supreme Court of Canada’s decision in British Columbia v. Henfrey Samson Blair Ltd. [citation omitted] the Court found that the deemed trust created by the provincial legislation in this case did not create the type of trust property which is excluded from the property of the bankrupt by section 67 of the BIA. Therefore the Administrator’s argument that the funds in question were held on trust for the Administrator failed.

The Court then went on to consider the validity of separate provisions in the provincial legislation which created a lien in favour of the Administrator for the amounts owing by the Defendant in respect of the two pensions. On this issue, the Plaintiff argued that the lien provisions of the provincial statute were merely an attempt to do indirectly that which the deemed trust provisions could not do directly: elevate the unpaid pension remittances to secured claims in a bankruptcy. Ultimately, the Court agreed, and concluded that the lien provisions within the provincial statute were enacted in an attempt to enforce the deemed trust provisions upon the bankruptcy of an employer, and thereby circumvent the difficulties surrounding the deemed trust provisions as a result of the Henfrey Samson Blair decision referred to above.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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