Abitibi Wins, Newfoundland Cleanup Order Unenforceable After Insolvency

As expected, Newfoundland has lost its attempt to enforce its environmental cleanup orders against AbitibiBowater after insolvency. Newfoundland issued the cleanup orders in an attempt to jump the queue of Abitibi's creditors. Crucially, Abitibi no longer owned or used the contaminated sites in its business, because the province had already expropriated them.

In an important and long awaited decision, the Supreme Court of Canada agreed that these orders were really financial claims, and were therefore barred by the insolvency. The province could have made its claims in the Companies Creditors Arrangement Act proceeding like any other creditor, but chose not to. Since little money was available for unsecured creditors, it would not have received much that way.

Provincial governments must therefore do more to ensure that cleanup costs are provided by financial assurance during the active life of a business, and not rely on getting innocent third parties to pay for cleanups after the fact.

Polluter pay is not the same as third party pay

The court said:

"[39] Having highlighted three requirements for finding a claim to be provable in a CCAA process that need to be considered in the case at bar, I must now discuss certain policy arguments raised by the Province and some of the interveners.

[40] These parties argue that treating a regulatory order as a claim in an insolvency proceeding extinguishes the debtor's environmental obligations, thereby undermining the polluter-pay principle ...This objection demonstrates a misunderstanding of the nature of insolvency proceedings. Subjecting an order to the claims process does not extinguish the debtor's environmental obligations any more than subjecting any creditor's claim to that process extinguishes the debtor's obligation to pay its debts. It merely ensures that the creditor's claim will be paid in accordance with insolvency legislation. Moreover, full compliance with orders that are found to be monetary in nature would shift the costs of remediation to third-party creditors, including involuntary creditors, such as those whose claims lie in tort or in the law of extra-contractual liability. In the insolvency context, the Province's position would result not only in a super-priority, but in the acceptance of a "third party-pay" principle in place of the polluter-pay principle.

[41] Nor does subjecting the orders to the insolvency process amount to issuing a licence to pollute, since insolvency proceedings do not concern the debtor's future conduct. A debtor that is reorganized must comply with all environmental regulations going forward in the same way as any other person. To quote the colourful analogy of two American scholars, "Debtors in bankruptcy have — and should have — no greater license to pollute in violation of a statute than they have to sell cocaine in violation of a statute" ....

[42] Furthermore, corporations may engage in activities that carry risks. No matter what risks are at issue, reorganization made necessary by insolvency is hardly ever a deliberate choice. When the risks materialize, the dire costs are borne by almost all stakeholders. To subject orders to the claims process is not to invite corporations to restructure in order to rid themselves of their environmental liabilities."

Two of the justices dissented, and would have allowed Abitibi to enforce some of the orders.

The text of the decision:

The judgment of Deschamps, Fish, Abella, Rothstein, Cromwell, Moldaver and Karakatsanis JJ. was delivered by

Deschamps J. —

[1] The question in this appeal is whether orders issued by a regulatory body with respect to environmental remediation work can be treated as monetary claims under the Companies' Creditors Arrangement Act, R.S.C. 1985, c. C-36 ("CCAA").

[2] Regulatory bodies may become involved in reorganization proceedings when they order the debtor to comply with statutory rules. As a matter of principle, reorganization does not amount to a licence to disregard rules. Yet there are circumstances in which valid and enforceable orders will be subject to an arrangement under the CCAA. One such circumstance is where a regulatory body makes an environmental order that explicitly asserts a monetary claim.

[3] In other circumstances, it is less clear whether an order can be treated as a monetary claim. The appellant and a number of interveners posit that an order issued by an environmental body is not a claim under the CCAA if the order does not require the debtor to make a payment. I agree that not all orders issued by regulatory bodies are monetary in nature and thus provable claims in an insolvency proceeding, but some may be, even if the amounts involved are not quantified at the outset of the proceeding. In the environmental context, the CCAA court must determine whether there are sufficient facts indicating the existence of an environmental duty that will ripen into a financial liability owed to the regulatory body that issued the order. In such a case, the relevant question is not simply whether the body has formally exercised its power to claim a debt. A CCAA court does not assess claims — or orders — on the basis of form alone. If the order is not framed in monetary terms, the court must determine, in light of the factual matrix and the applicable statutory framework, whether it is a claim that will be subject to the claims process.

[4] The case at bar concerns contamination that occurred, prior to the CCAA proceedings, on property that is largely no longer under the debtor's possession and control. The CCAA court found on the facts of this case that the orders issued by Her Majesty the Queen in right of the Province of Newfoundland and Labrador ("Province") were simply a first step towards remediating the contaminated property and asserting a claim for the resulting costs. In the words of the CCAA court, "the intended, practical and realistic effect of the EPA Orders was to establish a basis for the Province to recover amounts of money to be eventually used for the remediation of the properties in question" (2010 QCCS 1261, 68 C.B.R. (5th) 1, at para. 211). As a result, the CCAA court found that the orders were clearly monetary in nature. I see no error of law and no reason to interfere with this finding of fact. I would dismiss the appeal with costs.

1. Facts and Procedural History

   [5] For over 100 years, AbitibiBowater Inc. and its affiliated or predecessor companies (together, "Abitibi") were involved in industrial activity in Newfoundland and Labrador. In 2008, Abitibi announced the closure of a mill that was its last operation in that province.

   [6] Within two weeks of the announcement, the Province passed the Abitibi-Consolidated Rights and Assets Act, S.N.L. 2008, c. A-1.01 ("Abitibi Act"), which immediately transferred most of Abitibi's property in Newfoundland and Labrador to the Province and denied Abitibi any legal remedy for this expropriation.

   [7] The closure of its mill in Newfoundland and Labrador was one of many decisions Abitibi made in a period of general financial distress affecting its activities both in the United States and in Canada.It filed for insolvency protection in the United States on April 16, 2009. It also sought a stay of proceedings under the CCAA in the Superior Court of Quebec, as its Canadian head office was located in Montreal. The CCAA stay was ordered on April 17, 2009.

   [8] In the same month, Abitibi also filed a notice of intent to submit a claim to arbitration under NAFTA (the North American Free Trade Agreement Between the Government of the United Mexican States and the Government of the United States of America, Can. T.S. 1994 No. 2) for losses resulting from the Abitibi Act, which, according to Abitibi, exceeded $300 million.

   [9] On November 12, 2009, the Province's Minister of Environment and Conservation ("Minister") issued five orders ("EPA Orders") under s. 99 of the Environmental Protection Act, S.N.L. 2002, c. E-14.2 ("EPA"). The EPA Orders required Abitibi to submit remediation action plans to the Minister for five industrial sites, three of which had been expropriated, and to complete the approved remediation actions. The CCAA judge estimated the cost of implementing these plans to be from "the mid-to-high eight figures" to "several times higher" (para. 81).

   [10] On the day it issued the EPA Orders, the Province brought a motion for a declaration that a claims procedure order issued under the CCAA in relation to Abitibi's proposed reorganization did not bar the Province from enforcing the EPA Orders. The Province argued — and still argues — that non-monetary statutory obligations are not "claims" under the CCAA and hence cannot be stayed and be subject to a claims procedure order. It further submits that Parliament lacks the constitutional competence under its power to make laws in relation to bankruptcy and insolvency to stay orders that are validly made in the exercise of a provincial power.

   [11] Abitibi contested the motion and sought a declaration that the EPA Orders were stayed and that they were subject to the claims procedure order. It argued that the EPA Orders were monetary in nature and hence fell within the definition of the word "claim" in the claims procedure order.

   [12] Gascon J. of the Quebec Superior Court, sitting as a CCAA court, dismissed the Province's motion. He found that he had the authority to characterize the orders as "claims" if the underlying regulatory obligations "remain[ed], in a particular fact pattern, truly financial and monetary in nature" (para. 148). He declared that the EPA Orders were stayed by the initial stay order and were not subject to the exception found in that order. He also declared that the filing by the Province of any claim based on the EPA Orders was subject to the claims procedure order, and reserved to the Province the right to request an extension of time to assert a claim under the claims procedure order and to Abitibi...