The Collision Course Continues: Recent Developments in the Intersection Between Insolvency Law and Environmental Law May 9, 2014 Word Count: 2999

Transcription

1 The Collision Course Continues: Recent Developments in the Intersection Between Insolvency Law and Environmental Law May 9, 2014 Word Count: 2999 Tori Crawford

2 I. Introduction The idea that Canada s insolvency regime and environmental regulations are often in tension is hardly a novel one. 1 At the root of this conflict are a number of competing policy objectives: protecting the public s interest in a safe and clean environment, preventing companies from treating insolvency as a regulatory car wash, 2 and allowing debtors to obtain a fresh start by either restructuring or discharging their debts. Despite legislation and ongoing litigation aimed at balancing these concerns, the existing framework provides multiple avenues for environmental regulators to remain outside the insolvency regime and obtain priority over other creditors. This paper explores two of these possibilities: first, how the decisions in Newfoundland and Labrador v. AbitibiBowater Inc. ( AbitibiBowater ) 3, Nortel Networks Corp. (Re) ( Nortel ), 4 and Northstar Aerospace Inc. (Re) ( Northstar ) 5 allow regulators to manage the timing and content of their environmental orders to avoid having them classified as provable claims under the Companies Creditors Arrangement Act 6 ( CCAA ) and the Bankruptcy and Insolvency Act 7 ( BIA ); and second, how cases such as Canada (Superintendent of Bankruptcy) 1 The conflict between these two regimes has been the subject of recurring litigation and discussion in the recent past, and has been described using a variety of terms, from the elephant in the room (Luc Béliveau and Guillaume-Pierre Michaud, Insolvency and Environmental Law following the AbitibiBowater Case: Still a Murky Intersection (2012) Insolvency Institute of Canada Articles 2 (Westlaw at 1)), to the untidy intersection (Nortel (Re), 2012 ONSC 1213 at para 8 ( Nortel (Ont SC) )), to on a collision course (Sean F Dunphy, Guy P Martel and Joseph Reynaud, Unstoppable Force Meets Immovable Object: The Supposed Clash Between Environmental Law and Insolvency Law after Abitibibowater (2012) Insolvency Institute of Canada Articles 3 (Westlaw at 1)). 2 Dunphy, Martel, and Reynaud, supra note 1 at SCC 67 ( AbitibiBowater (SCC) ) ONCA 599 ( Nortel (Ont CA) ). Leave to appeal the decision to the Supreme Court of Canada was dismissed on April 17, See 2014 CarswellOnt ONCA 600 ( Northstar (Ont CA) ). 6 RSC 1985, c C-36 ( CCAA ). 7 RSC 1985, c B-3 ( BIA ). 1

3 v. 407 ETR Concession Company Limited 8 ( 407 ETR ) may permit regulators to make the transfer of a necessary license contingent on the debtor s performance of or payment for environmental obligations. Environmental protection is undoubtedly an important goal, however this paper demonstrates that the current law gives rise to a number of incentives that are contrary to the interests of debtors, creditors, regulators, and the public. II. Abitibi, Nortel, and Northstar Although insolvency legislation does not permit debtors to disregard rules and regulations, 9 where a regulator s actions involve enforcement of a payment, this will constitute a claim that can be stayed and compromised. 10 Determining when a regulatory order meets this requirement is difficult in the context of environmental orders, which are often monetary in intent or consequence 11 but not on their face. 12 In AbitibiBowater, the Supreme Court of Canada set out a three-part test for determining whether an environmental order is a claim provable under the BIA and the CCAA 13 : 1) there must be a debt, liability, or obligation to a creditor; 14 2) the debt, liability, or obligation must be incurred before bankruptcy; 15 and ONCA 769 ( 407 ETR ). 9 AbitibiBowater (SCC), supra note 3 at para See BIA s 69.6(2) and CCAA s 11.1(2), which provide that no stay affects a regulatory body s investigation in respect of an insolvent person or an action, suit or proceeding that is taken in respect of the insolvent person by or before the regulatory body, other than the enforcement of a payment ordered by the regulatory body or the court. 11 Janis Sarra, Of Paramount Importance: Interpreting the Landscape of Insolvency and Environmental Law (2013) Ann Rev Insolv L 20 (Westlaw at 19). 12 For background on how environmental orders were treated in insolvency prior to AbitibiBowater, see Béliveau and Michaud, supra note AbitibiBowater (SCC), supra note 3 at para The Supreme Court explained that this requirement will be satisfied anytime a regulator issues an order against a company. See ibid at para Note that CCAA s 11.8(9) and BIA s 14.06(8) create a more flexible time limit for environmental claims. These sections provide that a claim against a debtor for the costs of 2

4 3) it must be sufficiently certain that the regulator will perform the remediation required by the order. 16 Since the first two elements are flexible and relatively easy to establish, most cases will turn on the third criterion. 17 The possibility that the AbitibiBowater framework and the sufficiently certain element in particular could give rise to incentives that are inconsistent with the goals of insolvency and environmental law was first suggested soon after the decision s release. 18 These problematic incentives are highlighted by the Ontario Court of Appeal s application of the AbitibiBowater test in Nortel and Northstar. In Nortel, the Ministry of the Environment ( MOE ) issued remediation orders against the insolvent company in relation to damage caused by solvents used at a number of the company s former manufacturing sites, most of which were no longer owned by Nortel. 19 On appeal from Justice Morawetz s decision that the orders were claims subject to the CCAA stay, the Court of Appeal applied the AbitibiBowater framework to conclude it was not sufficiently certain that the MOE would perform the remediation, other than at the one property Nortel still owned. 20 This was based on the fact that the MOE could pursue the properties subsequent purchasers to fulfill remedying any environmental condition or environmental damage affecting real property or an immovable of the debtor shall be a provable claim, whether the condition arose or the damage occurred before or after the date of the filing. 16 AbitibiBowater (SCC), supra note 3 at para The Supreme Court set out a list of factors that can be considered in determining the sufficiently certain requirement is established: 1) whether the polluting activities are ongoing; 2) whether the debtor is in control of the property; 3) whether the debtor has the means to comply with the order; and 4) the effect that requiring the debtor to comply with the order would have on the insolvency process. See ibid at para Dianne Saxe, Annual review of insolvency law: Why Abitibi rule is backwards, Blog: Environmental Law and Litigation (18 February 2013), online: < 19 Nortel (Ont SC), supra note 1; Nortel (Ont CA), supra note 4 at paras Nortel (Ont CA), supra note 4 at paras 39, 45. 3

5 the orders. 21 The Court therefore held that these orders were not provable claims, and the MOE was permitted to continue enforcement. 22 Interestingly, the Court of Appeal reached the opposite conclusion in Northstar. In that case, trichloroethylene, a carcinogen, had seeped into the soil and groundwater near one of the company s now dormant facilities. 23 Due to concerns that the contamination posed a serious, imminent health risk to nearby residents, the MOE ordered Northstar to perform monitoring and cleanup activities. 24 Soon after the orders were issued Northstar filed for CCAA protection and obtained a stay of proceedings. Unlike in Nortel, in Northstar the Court of Appeal agreed with Justice Morawetz s finding that the orders were provable claims. Given that there was no subsequent purchaser, the trustee had abandoned the contaminated property, and the MOE had commenced remediation itself, the Court found it was sufficiently certain the regulator would fulfill the order. 25 While the MOE argued it had only performed remediation on a without prejudice basis, the Court gave no weight to this assertion. 26 These three cases suggest that by focusing on the regulator s subjective actions, the sufficiently certain element of the AbitibiBowater framework facilitates regulators ability to obtain priority over other creditors by remaining outside the insolvency claims process. 21 Ibid at paras Section 18 of the Ontario Environmental Protection Act (RSO 1990, c E.19) permitted the MOE to pursue these subsequent purchasers to remediate damage caused by Nortel. 22 This did not apply to the sole property subject to the order that Nortel still owned, which was located in London, Ontario. There was no subsequent purchaser for the London site, and therefore no one against whom the MOE could enforce its order. Further, Nortel was unlikely to emerge from insolvency as a going-concern entity, and the value of the London site was less than the cost of remediation. The Court thus found it was likely that Nortel would abandon the London site, making it sufficiently certain the MOE would carry out remediation at that property. See Nortel (Ont CA), supra note 4 at paras Northstar (Ont CA), supra note 4 at para Northstar Aerospace Inc (Re), 2012 ONSC 4423 at paras ( Northstar (Ont SC) ). 25 Northstar (Ont CA), supra note 5 at para Ibid at para 21. 4

6 Regulators have significant control over the type and timing of orders they issue. 27 This flexibility allows regulators to tailor enforcement so it does not appear sufficiently certain that they will remediate. The decision in Northstar suggests regulators cannot perform any environmental work without guaranteeing that they will be subject to a stay and the insolvency claims process, regardless of whether or not they ostensibly took this action on a without prejudice basis. On the other hand, if the regulator refrains from fulfilling the order itself, as in Nortel, or where it does not issue an order at all, the third criterion of the AbitibiBowater framework will rarely be established. This approach is contrary to the interests of the public, other creditors, and the regulators themselves. For a company facing financial difficulties, environmental remediation may be one of the first expenses to fall by the wayside. 28 If regulators delay enforcement of environmental obligations against the company in the hope of avoiding a potential stay and insolvency claims process, this could increase the damage that ultimately occurs to the physical environment and human health. In addition to potentially exacerbating environmental harm, this approach also undermines regulators financial interests. Once the environmental damage becomes sufficiently severe that the regulator must act, the super-priority charge it can obtain under BIA s (7) and CCAA s. 11.8(8) will likely be worthless, as the cost of remediation will exceed the value of the contaminated property. 29 This excess cost, which may have been avoidable had the regulator intervened earlier, would ultimately be passed on to taxpayers. As involuntary creditors, 27 Dunphy, Martel, and Reynaud, supra note 1 at Sarra, supra note 11 at These sections provide that where the Crown has a claim against a debtor under the BIA or CCAA for the cost of remedying any environmental condition or environmental damage affecting real property, the Crown s claim is secured by a super-priority charge over the real property affected by the environmental damage and any of the debtor s real property contiguous to it. This charge does not extend to any of the debtor s other assets. 5

7 regulators also have an interest in monitoring the debtor s activities and any sale process closely in order to ensure the value of the debtor s assets is maximized. 30 Avoiding involvement in the debtor s affairs by delaying the issuance and enforcement of regulatory orders eliminates regulators ability to do so. Similarly, regulatory delay can threaten the entire restructuring process, as creditors must have access to as much information as possible from other potential creditors for a restructuring or plan of arrangement to be successful. In addition to regulators, AbitibiBowater, Nortel, and Northstar promote problematic incentives for creditors and debtors. In AbitibiBowater, the Supreme Court listed a number of considerations for determining whether the third criterion is satisfied, such as whether the debtor is in control of the property or whether it has sufficient funds to comply with the order. 31 These factors suggest that if remediation requirements are ongoing and the debtor continues to operate as a going-concern on the contaminated property, the order will not be a provable claim. In cases such as Northstar, where the environmental damage is extensive and remediation costly, compliance could exhaust the assets that are available to other creditors. The debtor or controlling creditors may therefore conclude that bankruptcy is a better option than restructuring, 32 as this would provide creditors with at least some recovery. Alternatively, the debtor or some creditors may determine that all of the debtor s assets aside from the contaminated property should be sold prior to CCAA filing or as a liquidation restructuring, then the contaminated properties should be abandoned. Creditors would push for this result as they would likely obtain higher recovery in a liquidation than in a going-concern 30 Stephanie Ben-Ishai and Stephen J Lubben, Involuntary Creditors and Corporate Bankruptcy (2012) 45 UBC L Rev 253 (Westlaw at 1). 31 AbitibiBowater (SCC), supra note 3 at para Alexander Clarkson, In The Red: Towards a Complete Regime for Cleaning up Environmental Messes in the Face of Bankruptcy (2011) 69 UT Fac L Rev 31 (Westlaw at 11). 6

8 restructuring. They would also want to access any potential return before the regulator could dilute the company s asset base. 33 This is precisely what occurred in Northstar: the debtor sold its assets aside from the contaminated site and the trustee abandoned the property. 34 By focusing on the fact that the debtor was unable to find a subsequent purchaser in the analysis of the third AbitibiBowater criterion, the decision in Northstar reinforced that debtors and creditors can strategically avoid compliance with environmental orders. The possibility that companies will be pushed towards bankruptcy or liquidation gives rise to a number of concerns. The Supreme Court has noted the devastating social and economic effects of bankruptcy and that a successful CCAA restructuring serves the public interest. 35 The majority of restructurings now involve liquidations, 36 however the purpose of the CCAA nonetheless remains to help the debtor emerge from the process as a going-concern. 37 Since the devastating effects of bankruptcy can affect regulators as well, in many cases it will be in their interests to support the debtors efforts to restructure. If the debtor company winds up, any recovery the regulator can obtain from the bankrupt s estate is unlikely to cover the full cost of remediation. Had the company successfully restructured, the regulator may have been able to obtain greater contributions towards the cost of the environmental work at a later date. Further, s (4) of the BIA allows a trustee to abandon properties that are subject to an environmental order, with no requirement to pay out. Since contaminated property is typically worthless, in 33 Dunphy, Martel, and Reynaud, supra note 1 at Richard Butler, Wreckage Still Litters the Intersection: Comment on the Ontario Court of Appeal's Decisions in Nortel Networks and Northstar Aerospace and Beyond 2013 Ann Rev Insolv L 21 (Westlaw at 6). 35 Century Services Inc v Canada (Attorney General), 2010 SCC 60 at paras 15, Michael McNaughton, Scope of the Regulator Carve-out in the CCAA 2013 Ann Rev Insolv L 1 (Westlaw at 17). 37 Stelco Inc (Re) (2005), 253 DLR (4th) (Ont CA) at para 18. 7

9 most cases the trustee will take this route rather than dip into the asset pool to pay the cleanup cost. 38 In this type of situation the regulator would be left to bear the full cost. The incentives engendered by AbitibiBowater, Nortel, and Northstar have the potential to create an arms race between various stakeholders: regulators will delay issuing orders and avoid performing any environmental work themselves, while in response debtors will liquidate their assets and abandon contaminated properties in order to demonstrate that they do not have the financial means to comply with environmental obligations. This situation undermines the various policy objectives at stake in the intersection between insolvency and environmental law. III. Restricting license transfers: 407 ETR, Caporale, and Hoover Aside from tailoring the timing and form of environmental orders, some regulators have recently begun adopting another practice that effectively excludes them from the insolvency claims process: restricting transfers of regulatory licenses. In May 2013 the Alberta Energy Regulator (AER) 39 implemented Directive 006, regarding the Licensee Liability Rating (LLR) Program and Licence Transfer Process. 40 This directive permits the AER to make the transfer of an oil and gas license contingent on either the license-holder or the purchaser posting sufficient security for the performance of environmental remediation and reclamation on the licensed properties. 41 While the scope of Directive 006 may appear narrow, licenses are necessary in many provinces for companies to operate in the energy and resource extraction sectors. 42 These 38 Clarkson, supra note 32 at The AER is the provincial government body responsible for regulating the energy and resource extraction sectors, including oil, gas, and coal companies. See 40 Available at: < ( Directive 006 ). 41 Ibid at For example, see the Ontario Ministry of Natural Resources ( 8

10 sectors comprise a significant portion of the Canadian economy, and are subject to extensive environmental regulation. 43 Since resource extraction companies are heavily reliant on debt financing, the potential for default and insolvency is significant. 44 Other industries that involve licensing regimes and are subject to environmental regulations include agriculture and fishing. 45 Although other provinces and sectors may not have a standardized program monitoring companies capacity to perform environmental remediation like Alberta s LLR, it is plausible that other regulators could nonetheless adopt a similar approach of making license transfers contingent on payment for environmental obligations. By restricting license transfers in this manner, regulators will likely be able to avoid the AbitibiBowater test entirely. For example, under the LLR Program there would be no need for the AER to issue an environmental order; it could simply refuse to transfer the license until sufficient security was posted. Absent a formal program like the LLR, a regulator could abstain from issuing an order, or could issue a vaguely worded order and cautiously ensure its actions do not give rise to any suggestion it will perform the remediation, then refuse to transfer the license to the purchaser until payment is made or cleanup is completed. This would effectively provide the regulator with priority over all other creditors. The proposition that a debt associated with a license restriction is not a potential claim subject to the AbitibiBowater framework is supported by the Ontario Court of Appeal s decision in 407 ETR. In that case, the Court considered whether the Ministry of Transportation could and the British Columbia Ministry of Energy and Mines ( 43 Clarkson, supra note 32 at Ibid. 45 For example, see the Ontario Farm Products Marketing Act, RSO 1990, ch F.9, and the Newfoundland and Labrador Fishery Regulations, SOR/

11 refuse to grant a driver s license to a discharged bankrupt as a result of outstanding toll debts for driving on the 407, pursuant to section 22(4) of the Highway 407 Act. 46 Justice Newbould of the Ontario Superior Court of Justice set aside the Registrar in Bankruptcy s order that the debt had been discharged on the basis that a motor vehicle license is a privilege granted by the government and not an asset. 47 On appeal, his decision was unanimously overturned. The Court of Appeal did not address the AbitibiBowater framework. Instead, it held that s. 22(4) of the Highway 407 Act was unconstitutional as it frustrated the BIA s purpose of permitting debtors to obtain a fresh start. 48 Since the BIA is a federal statute and the Highway 407 Act is provincial, the doctrine of paramountcy required that the BIA prevail. 49 At first glance, the Court of Appeal s reasoning in 407 ETR suggests that making regulatory license transfers contingent on payment for environmental liabilities that have not been subject to the insolvency claims process, such as Directive 006, is unconstitutional. However, the Court of Appeal s distinction in 407 ETR between the case at bar and two others suggests this assumption may be incorrect. In Hoover (Re), 50 a dentist s license was suspended when he did not pay fines for professional misconduct. The Alberta Court of Appeal found that the fines could not be discharged in bankruptcy, and that the Dental Profession Act did not give rise to an operational conflict with or frustrate the purpose of the BIA. In the second case, Caporale (Re), 51 the Ontario Superior Court held that the MTO could refuse to grant the bankrupt party a driver s license following discharge pending his payment of outstanding 46 The debtor had accumulated approximately $35,000 in unpaid tolls. Section 22(4) of the Highway 407 Act (SO 1998, c 28) permitted the MTO to refuse to issue a license to anyone who owed this type of debt. 47 Moore, Re, 2011 ONSC 6310 at para ETR, supra note 8 at para Ibid at para ABCA [1970] 1 OR 37 (Ont SC). 10

12 damages related to a motor vehicle accident. The Court in 407 ETR distinguished these two cases by holding that in the former the provincial legislation aimed to enforce standards of professional conduct, while in the latter the goal was to promote safe and responsible driving. 52 By focusing on the protection of the public interest, this distinction suggests that regulators could be successful in arguing that the goal of environmental protection is analogous to those in Hoover and Caporale, and therefore no constitutional conflict exists between the BIA and the relevant licensing scheme. If a court accepted this argument, this would effectively revive the Panamericana principle 53, which governed the distinction between provable and non-provable environmental claims prior to AbitibiBowater. The Panamericana principle provided that environmental orders were not provable claims in insolvency if they were owed to the general public rather than to the regulator in its capacity as creditor. 54 However, this distinction was not easy to draw and led to significant uncertainty and inconsistent application. 55 The AbitibiBowater decision appeared to overrule the Panamericana principle, 56 and the Ontario Court of Appeal did not address Panamericana in either Nortel or Northstar. However, by incentivizing regulators to modify their orders and licensing schemes in an effort to avoid insolvency legislation, the ETR, supra note 8 at paras The principle took its name from the Alberta Court of Appeal decision in Panamericana de Bienes y Servicios v. Northern Badger Oil & Gas Ltd. (1991), 81 Alta LR (2d) Dunphy, Martel, and Reynaud, supra note 1 at See Béliveau and Michaud, supra note The Supreme Court s statement at paragraph 47 of AbitibiBowater that [t]he 2007 amendments made it clear that a CCAA court has the power to determine that a regulatory order may be a claim and also provided criteria for staying regulatory orders indicates that outstanding environmental duties are not by default public duties that are exempt from the claims process, as suggested in Panamericana Further, the three-part framework set out by the Court makes no mention of discerning to whom the duty is owed. The Court s comment that the first element of the AbitibiBowater test will be satisfied and a regulator will constitute a creditor whenever it issues an order against a company also demonstrates that Panamericana s central question of whether the regulatory obligations are owed to the regulator or the public is no longer important. See Robin Schwill, Re AbitibiBowater Inc: Insolvency v. Environmental Legislation Still a Lot of Clean Up to do (April 2013) 29:3 OBA Insolvency News. 11

13 problems with the AbitibiBowater framework and the Court of Appeal s analysis in 407 ETR have likely reintroduced the relevance of Panamericana s public purpose analysis for many cases. If a court accepted that restricting license transfers pending fulfilment of environmental conditions is consistent with insolvency legislation, this would give rise to problematic incentives similar to those discussed above. If a debtor must post security prior to transferring the licenses, this will divert possible recovery for creditors, who may in turn push a restructuring debtor towards bankruptcy. Similarly, the debtor may decide or be influenced to sell its assets that are not subject to the licenses, then abandon the licensed properties and wind up. Admittedly, in some cases a potential purchaser may determine the value of the license and associated assets is worth providing the security or performing the remediation itself. However, where the cost of security or remediation is higher than the value of the license, this contingency could drive away potential buyers. The end result of these incentives would be to increase the number of bankruptcies and decrease the potential for going-concern restructurings, as well as increase regulators and taxpayers liability to pay for environmental remediation on abandoned properties. This is not to say that regulators licensing discretion should be eliminated whenever an insolvent company seeks to transfer a license. However, focusing on the public purpose of the transfer restriction revives the uncertainty created by Panamericana and permits regulators to hide their intentions. Instead, courts should consider the substance of the licensing body s action rather than the form of the transfer restriction in determining whether or not the action is in effect an attempt to obtain payment for environmental remediation, and therefore a provable claim. IV. Conclusion 12

14 The position of involuntary creditors, such as judgment debtors and government regulators, in insolvency often invokes a difficult balancing between competing policy objectives. This conflict is amplified in the context of environmental orders, where the consequences of enforcement or lack of enforcement can extend beyond the regulator and the debtor to the physical environment and public health. However, as Nortel and Northstar demonstrate, by focusing on the subjective actions of the regulator under the sufficiently certain criterion, the AbitibiBowater framework permits regulators to adjust their actions in a manner that manipulates this careful balancing of objectives. Similarly, making license transfers contingent on payment for environmental remediation on the basis of the public purpose distinction from 407 ETR provides another potential avenue for regulators to avoid claiming under the insolvency regime. While regulators efforts to protect the environment and public health are important, the end result of these actions will often be avoidable environmental damage and increased expense for the government and taxpayers. 13