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Perverse Abitibi test produces perverse results in Nortel, Northstar appeals

The Ontario Court of Appeal has released its decisions in the Ministry of the Environment’s appeals from Justice Geoffrey Morawetz in Re Nortel and Re Northstar. In both cases, Justice Morawetz rejected MOE attempts to claim priority over secured creditors by ordering insolvent companies to cleanup historic contamination. In both cases, Justice Morawetz decided that the orders amounted to unsecured financial claims, and were therefore to be funded only after the secured creditors were paid. The Court of Appeal upheld Justice Morawetz in Northstar (i.e. rejected the MOE claim), because the province took over the cleanup after Northstar Canada’s bankruptcy, but allowed the MOE claim in Nortel, because the province had not taken over the cleanup. The utterly predictable, if perverse, result: the MOE gets to claim priority over secured creditors for less serious contamination, which could be ignored during the court proceedings, but loses that priority if it has stepped in to protect public health pending appeal, something it does only in extreme cases. This is not a rational way to reconcile the interests of insolvency law with those of environmental law. Hopefully, both cases will go back to the Supreme Court, which will abandon the flawed reasoning in its AbitibiBowater decision last year, and adopt Justice Morawetz’ reasoning instead. If the court cannot fix this itself, Parliament will need to.

And both senior levels of government badly need to develop a principled policy for how, when and who should pay for the cleanup of historic contamination. The current mess is creating a lot of collateral damage to the economy.

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