ENVIRONMENTAL OBLIGATIONS IN INSOLVENCY PROCEEDINGS: APPEAL SUCCEEDS IN ALBERTA’S TOP COURT

FOLLOWING OUR PREVIOUS ARTICLES ON THE QUALEX-LANDMARK TOWERS INC V 12-10 CAPITAL CORP CASE BEING HEARD IN THE ALBERTA COURTS, 12-10 CAPITAL CORP HAS NOW BEEN APPEALED SUCCESSFULLY IN THE COURT OF APPEAL OF ALBERTA, WHICH RELEASED IT’S DECISION EARLIER LAST MONTH. BEALE & CO PROVIDES AN UPDATE AND FURTHER COMMENTARY ON THE LATEST DEVELOPMENT OF THIS ENVIRONMENTAL CASE.

The case originally garnered significant attention when the court of first instance, the Court of King’s Bench of Alberta which, citing the Supreme Court of Canada (“SCC”) case of Orphan Well Association, Alberta Energy Regulator v Grant Thornton Limited and ATB Financial, 2019 SCC 5 (“Redwater”), granted an attachment order for the estimated costs to carry out environmental remediation on a parcel of land owned by Qualex-Landmark Towers Inc (“Qualex”), and elevated the priority of that attachment order so that it would be paid from the proceeds of the sale of 12-10 Capital Corp’s (“12-10 Capital”)  land ahead of previously registered mortgages. The court of first instance’s decision effectively extended the super priority given to the environmental claims of public regulators over secured creditors under Redwater to private individuals alleging environmental costs.

The first instance decision created significant concern for Canada’s lending market, as it potentially allowed environmental claims by private individuals to undermine the well-established lending market in Canda. It also would have created uncertainty for Canadian insolvency practitioners trying to manage land assets with creditors in a time where environmental remediation and protection is at the forefront of the social and commercial conscience. It was inevitable that the initial decision would be appealed and, as we previously reported here, there was sufficient interest in the case for the Attorney General of Alberta and the Canadian Bankers Association to successfully apply for intervenor status.

The Appeal Decision

The Alberta Supreme Court distinguished Qualex’s case from Redwater and allowed 12-10 Capital’s appeal, concluding that the decision in the SCC concerned obligations which were public duties owed to fellow citizens, rather than to any specific creditor, thereby falling out of the considerations made by the Bankruptcy and Insolvency Act. The court further considered that where Qualex could not establish the argument above, they would be unable to avoid the otherwise applicable statutory priority schemes under the Personal Property Security Act (Alberta) and the Land Titles Act (Alberta).

While the ruling in Redwater had, in effect, given the provincial environmental regulator, Alberta Environment and Parks, super priority over secured creditors in a formal bankruptcy proceeding, it did not create a common law priority entitlement precedent that would be “untethered from the applicable legislation and its objectives”.

Significantly, the court acknowledged that the decision in court of first instance’s decision would have required a “change in the law where the potential consequences are multifaceted and far reaching”, which we have no doubt would have included threatening lenders’ confidence in the Canadian market. Adopting the arguments set forth by the Canadian Bankers’ Association, the Court of Appeal of Alberta’s decision stated that:

“…secured lending and the availability of “super priority” rights both inside and outside the insolvency context are governed by a complex web of federal and provincial legislation. The legislation underpins millions of mortgage loans in Canada and provides certainty for both lenders and borrowers. Even in the limited circumstances where development of the common law can occur to clarify a legal principle, resolve an inconsistency, or to keep the law aligned with the evolution of society…, courts must proceed with great caution where the revision is major and its ramifications complex…”

This is not the End

The Court of Appeal of Alberta’s decision will now provide a binding precedent for all lower courts in the province of Alberta, and lenders in the Alberta market will no doubt be grateful. However, it is unlikely that this issue is exhausted in the Canadian courts. If a case with similar facts from a different province or territory finds its way to the SCC, this appeal will most likely be cited. Further, there is also a chance that Qualex may themselves seek leave to appeal to the SCC.

In any event, this will be far from the last jousting match between environmental claims and commercial interests, whether in the halls of government or the steps of a courthouse. Identifying environmental considerations and implementing possible resolutions are increasingly becoming daily objectives across the board in many industries. Offering protection on the one hand while ensuring the viability of commercial objectives on the other. Further, the unease and uncertainty of managing these potential conflicting interests will most likely be passed back and forth between legislators and the judiciary, as perhaps already indicated  by the appellate court’s closing note in the decision:

“If a change in the law regarding priority entitlements is required to achieve environmental policy objectives in this context, that change must be addressed by the legislature and/or parliament within their respective spheres of constitutional authority. Unless and until such a change is made, a “super priority” claim like the one Qualex seeks cannot succeed.”

Canada’s lenders and insolvency practitioners, and ourselves, will be keeping an eye on any further Canadian legal precedent and/or legislative updates relating to environmental claims and their impact on secured lenders.