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We have written several times about the Supreme Court of Canada’s decision in AbitibiBowater v. Newfoundland, in which insolvency law trumped environmental orders. Today, we want to tell you more about the rule the court laid down, and why it is likely to have perverse consequences. In short, the Supreme Court ruled that environmental orders can jump the insolvency queue, and take priority over other creditors, but only when the province is NOT likely to pay for the work itself.

As mentioned last time, the facts were extreme. When Abitibi Bowater announced their intention to close their last paper mill, Newfoundland expropriated virtually all of their assets in the province, without compensation.

Abitibi Bowater sought protection under the federal companies’ creditors’ arrangement. The CCAA judge issued a claims bar order, to collect all financial claims against the company, and began the complex process of allocating the remaining assets among the many claimants.

Meanwhile, Abitibi filed a NAFTA (North American Free Trade Agreement) claim against Canada for the expropriation. Newfoundland’s Toronto lawyers commissioned studies to show that the expropriated assets were contaminated, thus creating a cleanup cost claim to offset the NAFTA claim. Not all of the contamination had been caused by Abitibi.

Newfoundland then ordered Abitibi, by unrealistic dates, to remediate all the contamination. The trial judge ruled that the orders were a cash grab, and were not intended to ensure Abitibi’s compliance with applicable environmental laws in ongoing operations. On one property, the province did some emergency work and put other work out to tender. However, the trial judge found no evidence that the province would implement the rest of the Orders, should Abitibi fail to do so.

The question that came to the Supreme Court was whether Newfoundland should be able to use these cleanup orders to jump ahead of other creditors as against Abitibi’s other assets: those not affected by or adjacent to the contamination AND not already expropriated by the province.

Unfortunately, in my view, the Supreme Court did not give a useful answer to this question. According to all three judgements (the majority and 2 dissents), the pivotal factor is the likelihood that the province will pay for the cleanup itself, if the insolvent entity does not do so. Justice Deschamps ruled that it had to be “likely”; the chief justice said that it had to be a virtual certainty. Justice LeBel agreed with Justice Deschamps on the legal test, but held that the province might not itself spend the money that it was attempting to extract from Abitibi. In this, he was almost certainly correct.

The Supreme Court’s focus on whether the province will pay for the cleanup, is, in my view, unhelpful. First, it will rarely apply: the court seemed to be unaware that provincial governments almost never cleanup abandoned private contamination. Rather than spend their own money, the provinces often ignore contaminated sites (especially the thousands that have escheated to the Crown) or impose liability on increasingly innocent parties, like the City of Kawartha Lakes.

Second, the rule is perverse, because it discourages the provinces from intervening, at public expense, in those extreme cases where we most need them to intervene. Equally, it encourages the secured creditors to refuse to make funds available, in the hope that the provincial taxpayer will pick up the bill.

Third, this rule pays no attention to Parliament’s actual language, especially its decision to provide provinces with a super priority over the contaminated site and adjacent lands, to secure these very expenses, and NOT over other corporate assets.

Fourth, the Abitibi example will make the test puzzlingly hard to apply.

We agree with Justice LeBel: we can’t understand why, under the test articulated by Justice Deschamps, Newfoundland couldn’t enforce most of its orders against the post- restructuring Abitibi. It is a sad irony that Justice Deschamps held these orders to be provable claims, on the ground that Newfoundland will pay for the work itself, when the evidence was largely to the contrary, and Newfoundland has not actually done so.

Fifth, nothing in the “will the province pay?” test answers the central question: why, and to what extent, should this particular environmental action take priority over the legitimate financial rights and expectations of the other creditors, on top of the super priority created by Parliament? Nor does it recognize that not all environmental requirements are the same.

This post was written for Hazardous Materials Management Magazine.

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