Canada: Ontario Superior Court Rules On Priorities In Insolvency Proceedings Of Environmental Orders For Historical Contamination

The Ontario Superior Court of Justice (Commercial List) has confirmed that historical environmental remediation obligations will not automatically take priority over the claims of other creditors in an insolvency, even where those obligations are framed in the form of regulatory orders.

The issue arose in the ongoing CCAA¹ proceedings of Nortel Networks Limited and certain related affiliates. At the time of Nortel's insolvency, it had been conducting cleanup or monitoring operations of old manufacturing contamination on lands it had, with one exception, previously owned. In September 2011, Nortel (represented by Norton Rose Canada LLP) sought the direction of the court on whether to cease such activities. The Ontario Ministry of the Environment (MOE) responded by issuing Director's Orders over a number of the affected properties, requiring continued expenditures.

On March 9, 2012, Justice Morawetz of Ontario's Superior Court of Justice ruled that the MOE's orders were subject to the court's stay under the CCAA, and of no force or effect.

The dispute

The central issue was whether the true character of the MOE's Orders was monetary or regulatory.

Nortel argued that the MOE's Orders were, in substance and effect, requirements for it to pay money to remedy historical environmental contamination. The Orders were framed in the terminology of ordering investigations or the drafting and implementation of work plans. However, the inevitable consequence of the work plans and investigations was to cause Nortel to spend substantial amounts of money on lands it largely no longer owned. The result was a conflict with the CCAA's priority structure, since any funds Nortel expended for the Orders would necessarily take priority over the valid claims of other creditors.

The MOE responded that obligations for historic contamination only become "claims provable," and therefore subject to the CCAA priority scheme, when the minister exercised his discretion to require direct payment and therefore transform a performance obligation into a monetary obligation. Until that time, the MOE argued, the minister's directions were injunctive and regulatory in nature rather than monetary.

Decision

Justice Morawetz held that the single proceeding model of insolvencies, recently endorsed by the Supreme Court, required that the multiple interests engaged by the dispute had to be resolved in the insolvency proceeding. In so doing, he observed that the single interest position being advanced by the MOE did not fit well with this framework:

It is a simplistic statement that is necessary to emphasize: insolvency statutes such as the CCAA and the BIA do not mesh very well with environmental legislation. The environmental legislation and its regulatory framework functions more effectively when insolvency is not present. Unfortunately, that is not the situation that faces parties affected by the Nortel restructuring.

He then analyzed the underlying character of the Director's Orders to find that they were in substance financial:

It is not a question of altering its operational activities in order to comply with the EPA on a going forward basis. There is no going forward business. Nortel is in a position where it has no real option but to pay money to comply with any environmental issue.

Notably, there was no relevant distinction between financial obligations owed directly to the Crown and those incurred by Nortel in complying with the MOE's Orders. Consistent with the "single proceeding" approach to insolvency endorsed by the Supreme Court in Century Services,² Justice Morawetz held that a unified set of insolvency considerations ought to apply regardless of who would receive the money.

Finally, Nortel's circumstances were to be contrasted with those of an insolvent company with ongoing physical operations on affected properties. In the absence of ongoing operations, though, the normal priority structure of the CCAA prevailed. The MOE could look to any security it might have available, including the form of security specifically contemplated by insolvency and bankruptcy legislation in the case of environmental claims, failing which it would have unsecured status.

Conclusion

This decision confirms the applicability of the single proceeding model to claims that are notionally regulatory in nature. In ways similar to the court's analysis in the AbitibiBowater proceedings³ (currently under reserve at the Supreme Court), Justice Morawetz's decision also highlights the ongoing willingness of the insolvency courts to examine the substance of a dispute, rather than the form, to determine whether it is properly governed by the insolvency proceedings.

Footnotes

^{1 R.S.C. 1985, c. C-36, as amended.}

^{2 Century Services Inc. v Canada (Attorney General), 2010 SCC 60.}

^{3 AbitibiBowater inc. (Arrangement relatif à ), 2010 QCCS 1261, leave to appeal to QCCA refused, 2010 QCCA 965, leave to appeal to SCC granted (2010), 413 NR 397.}

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