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Creditor or regulator? Nortel, the MOE and environment v insolvency

“Insolvency statutes such as the Canadian Creditors Arrangement Act and the Bankruptcy and Insolvency Act do not mesh very well with environmental legislation”. Across the country, courts are grappling with the messy conflicts between insolvency law and environmental statutes. Can provincial environmental ministries use their regulatory powers to force the funds of insolvent organizations to be spent on environmental cleanups, in priority to the claims of creditors, pensioners, employees, and others?

In Re Nortel, the Ontario Ministry of the Environment proposed to use Directors’ Orders to force Nortel to spend at least $18 million on investigating and remediating chlorinated solvent contamination on properties long since sold, and no longer used by Nortel. In at least one case, the contamination predated Nortel’s original acquisition of the property.

Nortel entered CCAA proceedings in 2009, which means that all financial claims against it are subject to a court-ordered Stay. This year, it successfully asked the Superior Court of Justice, Commercial List, to apply the Stay to protect it from these Ministry Orders. The ministry argued that it was merely exercising its regulatory functions, which are not subject to insolvency rules. The court disagreed.

Judge Morawetz ruled that, where the Ministry tries to force a company to spend money on past contamination, unrelated to the obligations of a going forward business, the ministry is making a financial “claim” like any other creditor, and must share in the available assets under insolvency laws, like any other creditor. “If there are continuing operations, there has to be ongoing compliance with environmental legislation.  But if there are no ongoing operations, the environmental regulator has to rely on its security, failing which it has unsecured status…Where the debtor does not own land on which an environmental condition or damage is present, any claim by the MOE in respect of that condition or damage is unsecured.”

When there is a frank conflict between federal insolvency laws and provincial environmental laws, federal laws are paramount and the provincial law must give way. There can be precisely such a conflict when provincial governments try to use their order powers to leapfrog other creditors in an insolvency.

Here are excerpts from Judge Morawetz’ persuasive, if somewhat technical, analysis:

“[104]      I do not take issue with the submission of counsel to the MOE that the Minister has the discretion under the legislation and, if the Minister is solely acting in its regulatory capacity, it can do so unimpeded by the Stay.  This is the effect of s. 11.1(2) of the CCAA.

[105]      However, it seems to me that, when the entity that is the subject of the MOE’s attention is insolvent and not carrying on operations at the property in question, it is necessary to consider the substance of the MOE’s actions.  If the result of the issuance of the MOE Orders is that Nortel is required to react in a certain way, it follows, in the present circumstances, that Nortel will be required to incur a financial obligation to comply.  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.  In my view, if the MOE moves from draft orders to issued orders, the result is clear.  The MOE would be, in reality, enforcing a payment obligation, which step is prohibited by the Stay.

[106]      ….  Regardless of whether the MOE’s activities result in a direct claim as against Nortel, or a claim against third parties who in turn will make a claim against Nortel, the result, for practical purposes, is the same.  It seems to me that the critical point to be determined is not the distinction between performance obligations and monetary obligations, but rather it is whether the actions of the MOE are such that Nortel is required to react or respond to a step taken by the MOE and in doing so, incur a financial obligation.  In my view, the effect of the MOE Orders, if issued, is to require Nortel to prepare an action plan, which results in Nortel having to incur a financial obligation.

[107]      I do not agree with the MOE’s contention that financial obligations incurred by Nortel for the purpose of complying with the MOE Orders are different from obligations incurred directly to the Crown.  For the purpose of Nortel’s CCAA proceedings, what matters is that Nortel is obligated to undertake remedial work which will result in Nortel expending money.  Any money expended by Nortel in respect of MOE obligations is money that is directed away from creditors participating in the insolvency proceedings.  The same insolvency considerations ought to apply regardless of who receives the money.  In my view, this view is consistent with the “single proceeding model” discussed by the Supreme Court in Century Services

[111]      Subsection 12(1) of the CCAA (as it existed in January, 2009, and which applies in the present case) defines “claim” as “any indebtedness, liability or obligation of any kind that, if unsecured, would be a debt provable in bankruptcy within the meaning of the Bankruptcy and Insolvency Act”.  The meaning of “indebtedness, liability or obligation” is to be determined by reference to whether a claim is a debt provable in bankruptcy.

[112]      The reference to “debt provable” in s. 12(1) of the CCAA, which references the BIA, has to be considered in the context of s. 2 of the BIA, which refers to “claim provable” and directs that “claim provable in bankruptcy”, “provable claim” and “claim provable” include any claim or liability provable by a creditor in proceedings under the BIA.

[113]      Subsection 121(1) of the BIA addresses what are claims provable.  It provides:

All debts and liabilities, present or future, to which the bankrupt is subject on the day on which the bankrupt becomes bankrupt or to which the bankrupt may become subject before the bankrupt’s discharge by reason of any obligation incurred before the day on which the bankrupt becomes bankrupt shall be deemed to be claims provable in proceedings under this Act.

[114]      Section 14.06(8) of the BIA, entitled “Claim for clean-up costs,” contains an exception to s. 121(1):

Despite subsection 121(1), a claim against a debtor in a bankruptcy or proposal for the costs of 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 of the proposal or the date of the bankruptcy.

[115]      The impact of these statutory provisions requires a full consideration of the position of the MOE.  In my view, it is necessary to take into account the defining event for a claim.  In this case, the defining event is the point at which the condition arose or the damage occurred.

[116]      It is also important to note that s. 14.06(8), unlike other subsections of s. 14.06, is not restricted in its application to a trustee.  On the contrary, the focus of s. 14.06(8) is related to s. 121(1) – provable claims.  As such, it seems to me that Parliament clearly directed its mind to the issue of creating an exception to s. 121(1) of the BIA and in doing so addressed the issue as to how environmental conditions and damage were to be addressed by an insolvent debtor.  The BIA and CCAA have to take into account the reality that a debtor may not have continuing operations.  If there are continuing operations, there has to be ongoing compliance with environmental legislation.  But if there are no ongoing operations, the environmental regulator has to rely on its security, failing which it has unsecured status.

[117]      Further, while it is apparent that s. 11.8(8) of the CCAA does not apply in the current circumstances as Nortel no longer owns any real property at the Impacted Sites, with the exception of the Retained Lands at the London site, s.11.8(9) does apply and is conspicuous in its similarities to s. 14.06(8) of the BIA. Subsection 11.8(9) of the CCAA, entitled “Claim for clean-up costs”, directs that:

A claim against a debtor company for costs of remedying any environmental condition or environmental damage affecting real property of the company shall be a claim under this Act, whether the condition arose or the damage occurred before or after the date on which proceedings under this Act were commenced.

[118]      A priority scheme has also been enacted and is contained in s. 11.8(8).  In this case, the priority scheme is of limited effect as Nortel does not own the property in question, save for the Retained Lands at the London site.  The result, in my view, is straightforward.  The MOE can look to whatever security may be available, failing which it has unsecured status. 

…[121]      The event that gives rise to a CCAA claim against Nortel has already occurred, as the events giving rise to the “environmental condition or environmental damage” have taken place.  The only step that has yet to take place is the quantification of the claim, but the absence of that quantification does not impact on the analysis of the position of the MOE.  The MOE has the option of not filing a claim.  If it chooses this route, there will eventually be a distribution to creditors without participation by the MOE.  If the MOE attempts to crystallize its claim at some future time, it may have to accept the consequences of its failure to act in a more timely basis.  Section 14.06(8) of the BIA makes it clear that any claim of the MOE is a provable claim in a CCAA proceeding. 

[122]      The preceding statutory analysis echoes the observations of the court in AbitibiBowater, at paragraphs 118 to 120.  In my view, given the Supreme Court’s guidance with respect to the convergence of the two insolvency statutes, the proper interpretation of the above provisions is they direct that once steps are taken by the MOE to require Nortel to take actions in respect of a factual matrix that arose prior to the filing date, if those actions require a monetary expenditure they must, for the purposes of the CCAA, be considered to be part of a claims process and must also, by necessity, be stayed.

[123]      In my view, the distinction drawn by the MOE is blurred.  In an insolvency context, the distinction should not be based on whether the order is characterized as a “regulatory” order or a “financial” order.  Rather, it should be based on the real effect of the actions taken by the regulator.  The MOE’s position regarding where on its continuum it ceases to act as a regulator and commences acting as a creditor is not the determining factor in the analysis of this issue.

[124]      It seems to me that it is not open to the MOE to take the position that the fact situation is too speculative or too remote, such that they cannot formulate a claim.  This argument is addressed by s. 14.06(8) of the BIA.

[125]      In my view, it is necessary to comment on the Strathcona case, relied upon by the MOE.  I note that in this case the court applied what it referred to as the “Panamericana principle.”  Abiding by this principle, the court characterized a debtor’s obligation to complete drainage work as an obligation owed to the public, not to the regulator per se.  The regulator is just the vehicle that protects the public’s interest, and where the Panamericana principle applies, the debtor must pay to fulfill the obligation to the public in priority to all secured creditors.  The court interpreted s. 14.06(8) narrowly, stating, at para. 42, that it is intended “only to overcome what would otherwise be the effect of s. 121(1).”  The court reasoned that but for s. 14.06(8), s. 121(1) would direct that an environmental claim arising after the date of bankruptcy but before discharge might not be a provable claim.  The court’s view was that s. 14.06(8) is designed only to deal with that timing issue.

[126]      In my view, the Panamericana principle, as articulated above, does not reflect the clear intention of Parliament as evidenced in the BIA.  Section 11.8(8) of the BIA delineates, and thus limits, the scope of the MOE’s security in this context.  It states that the “costs of remedying any environmental condition or environmental damage affecting real property of the company is secured by a charge on the real property and on any other real property of the company that is contiguous thereto.”  If the MOE’s claim was characterized as an obligation Nortel owed to the public, and the Panamericana principle were applied, the MOE Orders would be granted priority over all secured creditors, placing the MOE in a better position than that which is directed by s. 11.8(8).

[127]      The MOE clearly does have options.  It can maintain its position that it is not a creditor.  However, if this position is maintained, the MOE must recognize that it will not be in a position to effect any remedy against Nortel arising out of any draft order that has been posted on the EBR Registry or any subsequent order.  These draft orders “require” Nortel and other responsible parties to submit and implement workplans for certain investigations.  The moment that Nortel is “required” to undertake such activity it is “required” to expend monies in response to actions being taken by the MOE.  In my view, any such financial activity that Nortel is required to undertake is stayed by the provisions of the Initial Order.

[128]      The assets of Nortel have been sold and substantial proceeds are being held pending a determination of the allocation of assets as between various Nortel entities and the quantification of claims as against various Nortel entities.  At this point, a distribution to unsecured creditors seems likely.

[129]      It is open to the MOE to maintain its position that it does not have a claim as a creditor.  If so, the consequences of taking such a position are obvious.  Distributions will eventually be made to creditors of Nortel and, if the MOE chooses not to participate as a creditor, it will not receive a distribution.  On the other hand, if the MOE decides to file a claim, it could very well be that its claim will be valued and a distribution provided to the MOE.  Section 14.06(8) of the BIA makes it clear that any claim of the MOE arising from environmental conditions on properties which are or have been owned by Nortel are claims in Nortel’s CCAA proceedings…

CONCLUSION

[133]      I agree with the court’s analysis in AbitibiBowater, and, in my view, it applies to the present case.  As the court in that case recognized, the relevant case law directs that CCAA courts ought to take a substance over form approach.  In my view, the MOE Orders, if issued, are, in substance, financial obligations for Nortel.

[134]      Further, through s. 11.8(8), the CCAA recognizes that claims for the costs of remedying environmental conditions and environmental damage can arise in an insolvency context.  When this occurs, the CCAA stipulates the extent of the security accorded to the claimants: “a charge on the real property and on any other real property of the company that is contiguous thereto and that is related to the activity that caused the environmental condition or environmental damage” [emphasis added].  Where the security stipulated in s. 11.8(8) is absent, the claimant is unsecured.

[135]      In Nortel Networks Corp. (Re) 2009 CanLII 39492 (ON SC), (2009) 55 C.B.R. (5th) 229, I recognized that the CCAA can be applied in a liquidating insolvency.  In such circumstances, the CCAA directs that where the debtor does not own land on which an environmental condition or damage is present, any claim by the MOE in respect of that condition or damage is unsecured.

[136]      Given my conclusion that the MOE Orders are, in these circumstances, financial obligations, an operational conflict between the EPA and the CCAA exists.  I accept counsel to Nortel’s submission that, given that conflict, otherwise valid provincial legislation is superseded. See Canadian Western Bank v. Alberta 2007 SCC 22 (CanLII), 2007 SCC 22; Nortel Networks Corporation (Re) 2009 ONCA 833 (CanLII), 2009 ONCA 833 at paras. 36-38; Harbert Distressed Investment Fund, LP v. General Chemical Canada Ltd. 2007 ONCA 600 (CanLII), 2007 ONCA 600, leave to appeal to the Supreme Court dismissed 2008 CarswellOnt 879; AbitibiBowater, supra, at para. 270.

DISPOSITION

[137]      In the result, the Nortel Motion is granted.  I have concluded that the MOE’s posting of a draft Director’s Order on the EBR Registry for public comment is the first step on the road to the enforcement of a financial and monetary claim.  Because the MOE Orders are draft orders, they are not yet in breach of the Stay.  However, if issued they would require Nortel to respond, causing Nortel to incur a liability which would be stayed by the Stay.  It is not open for the MOE to take any steps to confirm the draft MOE Orders.  It is open, however, for the MOE to take a step to withdraw the draft Director’s Order.

[138]      However, it is recognized that the MOE may have secured status under s. 11.8(8) with respect to the Retained Lands at the London site.

[139]      A declaration is also to be issued that all proceedings before the Ontario Environmental Review Tribunal in relation to the MOE Orders are stayed.

[140]      Authorization is also provided to the Nortel Applicants to cease performing any remediation at or in relation to the Impacted Sites and a declaration shall issue that any claims in relation to such current or future remediation requirements by the MOE against any of the Nortel Applicants or their current or former directors or officers in relation to the Impacted Sites, whether statutory, contractual, or otherwise, are subject to resolution and determination in accordance with the terms of the Amended and Restated Claims Procedure Order dated July 30, 2009 and the Claims Resolution Order dated September 16, 2010.

[141]      The Nortel Applicants are also released from all contractual obligations to carry out remediation requirements at the Impacted Sites.”

Reportedly, the MOE has not yet decided whether it will appeal.

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