Canada: Wearing The Mantle Of Environmental Obligations: Implications For Secured Lenders In Canada

INTRODUCTION

In a recent case involving Mantle Materials Group, Ltd. (2023 ABKB 488, "Mantle")¹, the intersection of environmental obligations and insolvency law in Canada has again come into sharp focus. It is the latest iteration of Alberta cases where the Court of King's Bench of Alberta has ruled that equipment assets of an insolvent company – Mantle Materials Group – are part of the debtor's assets for purposes of fulfilling provincial environmental obligations (in this case gravel operations over which there are environmental protection orders) in priority to secured lender recovery. This case raised unique arguments about the category of assets involved and how assets with no environmental obligations should be treated in the evolving priority debate of secured lenders and provincial environmental obligations. For further commentary on this topic, please see our previous article relating to an ongoing appeal in Qualex-Landmark Towers Inc v 12-10 Capital Corp. (2023 ABKB 109, "Qualex").²

ENVIRONMENTAL OBLIGATIONS TAKE CENTER STAGE

In 2021, Mantle acquired various gravel pits through a reverse vesting order in the Companies' Creditors Arrangement Act (Canada) proceedings for JMB Crushing Systems Inc. ("JMB"). The wrinkle was that the properties remained subject to Environmental Protection Orders ("EPOs") issued by Alberta Environment and Protected Areas ("AEPA") (formerly Alberta Environment and Parks). Due to the financial burden and the significant reclamation obligations under the EPOs, Mantle filed a notice of intention to make a proposal under s 50.4 of the Bankruptcy and Insolvency Act (Canada) on July 14, 2023 (the "Proposal Proceedings").

Mantle's proposal aimed to prioritize the satisfaction of its end-of-life environmental obligations, stemming from the EPOs issued by AEPA. The company argued that complying with these obligations, as mandated by the landmark Orphan Well Association v Grant Thornton Ltd (2019 SCC 5, "Redwater")³ case, must precede any realizations by secured creditors. AEPA supported this stance.

Travelers Capital Corp. ("Travelers") – a secured lender – contested this priority arrangement, offering an alternative interpretation of Redwater. Travelers argued that Redwater allows for the satisfaction of environmental obligations, using only assets directly tied to those obligations, without affecting unrelated assets. Travelers argued that a creditor holding security over assets that are unburdened by environmental remedial obligations – such as equipment assets – should be free to enforce its security without waiting for the environmental obligations to be completed. This disagreement underscores the central issue of whether a creditor with security over unrelated assets can realize on its security before the completion of environmental obligations.

COURT'S DECISION

The Court's decision hinged on the interpretation of Redwater, Manitok Energy Inc (Re) (2022 ABCA 117, "Manitok")⁴, and Orphan Well Association v Trident Exploration Corp. (2022 ABKB 839, "Trident")⁵. Mantle and AEPA argued that these decisions compel the use of all of the debtor's assets to satisfy environmental obligations before creditor claims, leaving no room for exceptions.

Travelers, on the other hand, contended that these cases do not provide a clear precedent and that Trident, in particular, is inconsistent with Redwater and Manitok. It argued that Redwater and Manitok indicate that there is an exception for assets unrelated to the environmental condition or damage.

The Court, adhering to the principle of stare decisis, found that the equipment that is the subject of Travelers' security interest was integral to Mantle's gravel production business, akin to the assets considered in Trident. Therefore, the Alberta Court ruled that Travelers could not realize on its security until the environmental reclamation work is concluded. It also held that Travelers' security interest in the equipment must be subordinated to Restructuring Charges granted under the Proposal Proceedings (because the charges are essential to the completion of the environmental reclamation work which is an important part of a pending proposal).

The Court was also mindful of the fact that Travelers had provided Mantle with a loan for equipment used in its gravel production operations, securing it with a purchase-money security interest and had information about environmental obligations at the time it contracted to advance the loan.

CONCLUSION

The Mantle case highlights the intricate interplay between environmental obligations and insolvency law in Canada, particularly concerning secured lenders. While this case reflects the existing legal framework, it will be interesting to see where Canadian courts land on the question of treatment of unrelated assets in satisfying environmental obligations. It is the authors' understanding that this decision is being appealed. Although the environmental obligations in this case had priority over the creditor's security interest on the basis that the equipment formed part of Mantle's gravel business, the Court left for "another day" the question of how the "line should be drawn between related and unrelated assets or even if a line should be drawn." The fact that the environmental orders predated both the acquisition of the properties and the granting of security could be a distinguishing factor in future cases. For lenders and lawyers advising lenders in Canada, understanding these complex dynamics is essential to making informed lending decisions and navigating potential insolvency scenarios. Ultimately, the outcome underscores the importance of thorough due diligence when entering financing arrangements, especially in industries with environmental compliance obligations.

Footnotes

1. Re Mantle Materials Group, Ltd., 2023 ABKB 488 (CanLII)

2. Qualex-Landmark Towers Inc v 12-10 Capital Corp., 2023 ABKB 109 (CanLII)

3. Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5 (CanLII)

4. Manitok Energy Inc (Re), 2022 ABCA 117 (CanLII)

5. Orphan Well Association v Trident Exploration Corp, 2022 ABKB 839 (CanLII)

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.