Canada: When Can Environmental Regulatory Orders Be Compromised Claims Under The Companies’ Creditors Arrangement Act? Supreme Court Of Canada Provides Clarification

Newfoundland and Labrador v. AbitibiBowater Inc., 2012 SCC 67

In its decision released on December 7, 2012, the Supreme Court of Canada held that claims in respect of provincial environmental clean-up orders can be compromised under the federal Companies Creditors' Arrangement Act (CCAA). While the Court disagreed on whether the particular facts warranted compromising the provincial remediation orders at issue, the majority concluded that claims in respect of the orders were compromised claims in the circumstances. The Court also held that where there is "sufficient certainty" that an order from an environmental regulator will result in a monetary obligation of a CCAA debtor, the order will be subject to the stay of proceedings under the CCAA.

Background

In 2008 AbitibiBowater Inc. (Abitibi) closed its operations in Newfoundland and Labrador (the Province). Two weeks after Abitibi announced its closure, the Province expropriated most of Abitibi's property by passing the Abitibi-Consolidated Rights and Assets Act. In April 2009, Abitibi filed for insolvency protection in the U.S. and Canada, and the Superior Court of Quebec granted Abitibi a stay of proceedings under the CCAA. In November 2009, the Province issued five orders under the Newfoundland and Labrador Environmental Protection Act requiring Abitibi to clean-up five sites located in the region, three of which had been expropriated (the Orders). On the same day, the Province brought a motion in the Quebec CCAA proceedings for a declaration that the Orders were not "claims" and were not subject to the stay of proceedings under the CCAA.

At first instance, the CCAA judge dismissed the Province's motion, finding that the Orders were monetary in nature because the Province had not expected Abitibi to perform the remediation work, would ultimately perform the work itself and would make claims against Abitibi for the expense of the work. This finding was based on factors such as Abitibi's lack of funds, the unrealistic timeline for compliance, and the practical inability for Abitibi to fulfil its obligations under the Orders given that it did not have possession of some of the sites.

The Quebec Court of Appeal denied the Province leave to appeal and the Province further sought and was granted leave to appeal to the Supreme Court of Canada.

The Majority Decision

The main question to be decided by the Supreme Court was whether orders issued by a regulatory body with respect to environmental remediation work can be treated as monetary claims under the CCAA. Both the majority and the two dissenting judgments ultimately agreed that in some circumstances such remediation orders can be treated as monetary claims subject to, and stayed by, the CCAA regime. The Court divided, however, on whether, in the particular circumstances, the remediation orders at issue should be treated as monetary claims and stayed. Ultimately, the majority deferred to the CCAA court's findings of fact, dismissing the Province's appeal with costs.

The differences in views between the majority and two dissenting judgments lies mainly in: (1) the applicable threshold test for including contingent claims in the CCAA claims process; and (2) their respective understanding of the CCAA judge's findings of fact. While the majority deferred to the CCAA judge's findings of fact, the minority judgements did not.

Characterizing Environmental Claims under the CCAA

The majority decision pointed to two scenarios where an environmental regulatory order may become subject to a CCAA arrangement: (1) where the environmental regulator makes an order that explicitly asserts a monetary claim; and (2) where an order does not immediately require the debtor to make a payment but 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. In other words, while not all orders issued by regulatory bodies are monetary in nature, some orders may be considered "monetary" (and thus provable claims in an insolvency proceeding) even if the amounts involved are not quantified at the outset. These types of orders would be contingent or future claims and would be caught by the CCAA net.

To decide whether a regulatory order falls into this second category of claims subject to a CCAA arrangement, the court must look the substance of the order. An order that is not famed in monetary terms can still be a "monetary" order for purposes of the CCAA if the facts warrant that characterization.

No Constitutional Issues

Before delving into this factual inquiry, the majority rejected the Province's constitutional (division of powers) argument. The majority confirmed that the Federal Government has constitutional jurisdiction to provide in the CCAA that a court has the jurisdiction to determine whether an environmental order that is not framed in monetary terms is, in fact, a monetary claim and, if it is such a claim, to stay the order. In short, federal legislation governing the characterization of a provincial regulatory order as a monetary claim in insolvency proceedings is a valid exercise of the federal government's constitutional authority.

Of note, the majority clearly stated it was not considering whether a CCAA court has jurisdiction to stay a provincial order that is clearly not a monetary claim because the stay of proceedings in Abitibi did not stay non-monetary orders. That issue has largely been dealt with by legislative amendments to the CCAA enacted in 2009 that exempt non-monetary regulatory orders from the scope of a CCAA stay.

Determining Contingent Environmental Claims

The majority identified three relevant requirements in the CCAA (and the analogous provisions of the Bankruptcy and Insolvency Act) to assist in determining whether an environmental regulatory order is a claim that may be subject to a stay of proceedings under the CCAA:

Under the first requirement, the majority held that environmental regulatory bodies can be "creditors" in respect of monetary or non-monetary obligations imposed by environmental statutes because these regulatory bodies are statutorily empowered to enforce environmental obligations. The majority emphasized that the only determination that a CCAA judge must make at this stage is whether or not the regulatory body has exercised its enforcement powers against a debtor. When it does so, the regulatory body identifies itself as a creditor and this stage of the analysis is complete. By issuing the Orders, the Province's enforcement powers were exercised in this case and this requirement was satisfied.

The second requirement imposes a time limit on claims against the debtor. However, the majority recognized that the CCAA is flexible with respect to environmental claims, allowing an environmental claim to be brought against a debtor in certain circumstances whether the environmental harm occurs before or after CCAA proceedings are commenced. As a result, if environmental damage continues to be sustained after the reorganization has been completed and the debtor attracts liability for the damage at that time, a claim could be exempt from the stay. Given that the contamination with respect to which the Orders were directed occurred before the CCAA proceedings had commenced, this requirement was satisfied.

The third requirement examines whether a monetary value can properly be attached to the environmental regulatory order even if the order is not explicitly stated in monetary terms. A court must determine whether there are "sufficient indications" that the regulatory body will ultimately perform the remediation work itself and assert a monetary claim to have its remediation costs reimbursed. If there is "sufficient certainty" that the regulator will pay for and perform the remediation itself, the order may be a monetary order. This analysis is a factual inquiry. Factors taken into consideration include whether the debtor is in control of the property or has the resources to comply with the order. The majority noted that a court may even consider the effect of compliance with an environmental regulatory order on the insolvency process as a whole.

Applying the "Sufficiently Certain" Test to Abitibi

The majority noted that, while the CCAA judge did not elaborate on whether it was "sufficiently certain" that the Minister would perform remediation work and, therefore, make a monetary claim, most of the judge's findings "clearly rest on a positive answer to this question." Ultimately, the majority deferred to the CCAA court's findings of fact, concluding it was sufficiently certain that the Province would perform the remediation work and that the Orders would become a monetary claim against Abitibi.

Some factors that assisted the majority in coming to this conclusion included: (1) the targeted sites were, for the most part, no longer in Abitibi's possession, such that Abitibi had no means to perform the remediation work during the reorganization process; (2) Abitibi's operations were funded through debtor-in-possession financing and its access to funds was limited to ongoing operations; (3) the timetable set by the Province in the Orders suggested that the Province never truly intended Abitibi to perform the remediation work; and (4) the facts suggested that Abitibi was intentionally targeted by the Province.

No Super-Priority for Environmental Remediation Costs

The majority also emphasized that the CCAA already creates a (limited) priority for a regulator's claim for remediation costs: a regulator's claim is secured by way of a charge on the contaminated real property and certain other related property and benefits (s. 11.8(8) of the CCAA). If Parliament had intended that a debtor always satisfy all remediation costs, it would have granted the Crown a priority with respect to the totality of the debtor's assets.

The majority concluded that this statutory priority reflected Parliament's intention to balance the public's interest in enforcing environmental regulations with the interest of third-party creditors in being treated equitably. As such, the majority reasoned that exempting monetary environmental regulatory orders from the insolvency regime would be inconsistent with the limited and specific priority specified by Parliament in the CCAA and would otherwise create a super-priority for environmental regulatory orders.

Implications of the Decision

From an environmental perspective, this decision is significant. Since the Province's claims against Abitibi have been stayed through the CCAA restructuring process, Abitibi will emerge from restructuring free of the obligation to remediate the contaminated sites in issue. The cost of any remediation will fall on the public. If the Province's claims had not been stayed, Abitibi would still have had the legal obligation to clean up the sites following its emergence from restructuring.

The Province argued that treating an environmental regulatory order as a claim in an insolvency proceeding extinguished the debtor's environmental obligations which, in turn, undermined the polluter-pays principle. However, in rejecting this argument, the majority concluded that subjecting an order to an insolvency claims process merely ensures that the debtor's obligation is paid in accordance with the insolvency regime; it does not extinguish the obligation to environmentally remediate the property. Moreover, granting an environmental regulatory order a "super-priority" would shift the costs of remediation onto other third-party creditors, creating an unacceptable "third party pays" regime.

The decision is also significant from an insolvency perspective as it provides guidance on how to analyze regulatory orders to determine whether they are subject to a stay of proceedings.  

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