Supreme Court holds that Environmental Clean-Up Orders may be Compromised under the CCAA, Depending on the Facts

After reserving judgment for more than a year, the Supreme Court of Canada (“SCC”) has released its decision in the matter of Her Majesty the Queen in Right of the Province of Newfoundland and Labrador v. AbitibiBowater Inc., et al [1]. The appeal addressed the issue of whether provincial environmental clean-up orders could constitute “claims” under the Companies’ Creditors Arrangement Act [2] (the “CCAA”) and thus be compromised in CCAA proceedings.  The majority of the SCC held that clean-up orders may constitute claims, depending on the facts, bringing some clarity to what has been called an “untidy intersection” [3]. of environmental and insolvency law.

Background

For more than 100 years, pulp and paper giant AbitibiBowater Inc., and a number of its affiliates (collectively “Abitibi”), operated industrial sites in the province of Newfoundland and Labrador.  In 2008, however, Abitibi announced the closure of its last operating facility in the province.  In the years preceding the closure, Abitibi and Newfoundland and Labrador (the “Province”) had many public disagreements.  Within two weeks of the announcement, the Province passed the Abitibi-Consolidated Rights and Assets Act [4]. The “Abitibi Act”, as it was known, immediately transferred most of Abitibi’s property in Newfoundland and Labrador to the Province, without compensation to Abitibi. 

In April 2009, Abitibi filed for protection under the CCAA.  The Abitibi group of companies also commenced bankruptcy proceedings in the United States.  In the same month, Abitibi commenced proceedings against the Province under NAFTA [5]. for losses of more than $300 million resulting from the Abitibi Act.

In November 2009, the Province’s Minister of the Environment issued five environmental clean-up orders (the “EPA Orders”) under the Province’s Environmental Protection Act [6]. These orders related to five former Abitibi industrial sites, three of which had been expropriated pursuant to the Abitibi Act.  No quantum was ever attributed to the potential clean-up costs, but the CCAA court estimated costs to run from the mid-to-high eight figures to several times higher.  The Province sought a declaration from the CCAA court that the CCAA claims procedure did not bar the Province from enforcing the EPA Orders.

The issue before the CCAA court was whether the EPA Orders were “claims” that could be compromised in the CCAA proceedings or whether the EPA Orders were ongoing public duties for which the restructured company would continue to be liable when it emerged from restructuring [7]. The Province had not participated in the CCAA claims process.  Instead, it elected to seek a judicial determination that the EPA Orders were not “claims” captured by the CCAA.  The CCAA judge and the Quebec Court of Appeal rejected this argument [8]. The Province appealed to the SCC.

Against the backdrop of the appeal, Abitibi’s restructuring efforts continued.  Restructuring plans were approved in late 2010 and implemented in Canada and in the United States.  Abitibi emerged from the proceedings, eventually changing its name to Resolute Forest Products Inc., and posted billions in revenue the following year.

Appeal to the SCC

On appeal to the SCC, the entire court agreed that the critical issue was whether or not the Province (by its regulator) had taken such steps as to give rise to a financial liability owing from Abitibi to the Province.  However, the SCC was divided as to (a) the test for determining the same; and, (b) the result.

Under the Province’s Environmental Protection Act, the provincial regulator is entitled to issue orders requiring a polluter to take remedial steps.  If the polluter fails to take remedial action, the regulator has the discretion to undertake the work itself and claim against the polluter for the recovery of the costs.  In the context of the Abitibi proceedings, the Province had only issued clean-up orders; it had not formally elected to undertake any remediation work itself or incurred any clean-up costs [9].

SCC Decision

The majority of the SCC, led by Deschamps S.C.J., held that the CCAA court is fully within its jurisdiction to assess the substance of a regulatory order, not just the form, and to determine whether any such order amounted to the regulator seeking to enforce a monetary order against a debtor company [10]. The majority held that, in the context of environmental clean-up orders, the test for determining the nature of the regulator’s actions is whether “it is sufficiently certain that the regulatory body will perform the remediation work and, as a result, have a monetary claim [11].

Applying that test to the case at bar, the majority of the SCC concluded that the CCAA judge had found as a fact that the Province’s intended, practical and realistic goal was that the EPA Orders would establish a basis for a claim against Abitibi [12]. The SCC noted that the CCAA judge had also found as a fact that the Province had taken some steps to enforce the EPA Orders.  Accordingly, the majority held – on such findings of fact – that the test had been satisfied and the Province was acting as a creditor – i.e., a financial liability had arisen.  The appeal was dismissed.

Chief Justice McLachlin dissented.  She noted that regulatory duties owed to the public are not “claims” under the BIA [13]. , which definition is incorporated by reference into the CCAA.  She stated:

Regulatory obligations are, as a general proposition, not compromisable claims.  Only financial and monetary claims provable by a “creditor” fail within the definition of “claim” under the CCAA [14].

Accordingly, the Chief Justice concurred with the majority that the crux of the case turned on whether the Province, by virtue of the EPA Orders, was a “creditor” within the meaning of the CCAA.  Where the Chief Justice dissented was in respect of the test.  Chief Justice McLachlin characterised the test as: whether there was a “likelihood approaching certainty” that the Province would undertake remediation efforts, thereby creating a compromisable claim.  In her view, the record was “devoid of any evidence” to support such a conclusion.  She would have allowed the appeal [15].

Justice LeBel also dissented.  In his opinion, the test enunciated by the majority was correct but the evidentiary record did not support a finding of “sufficient certainty” that the Province would remediate the contamination.  On such basis, he would have allowed the appeal [16].

Effect of the Decision

The result of the decision is that the EPA Orders in case of Nfld. v. Abitibi amount to claims provable by the Province in the CCAA proceedings.  However, as the claims bar deadline has passed and the CCAA plan has been implemented, the Province is left without the ability to file a claim and thereby receive a pro rata payment out of the CCAA plan. And, of course, neither can the Province look to Resolute Forest Products Inc. to remediate the lands on a go-forward basis.  Regardless of the characterization, the practical effect is that the costs of the environmental clean-up are not Abitibi’s problem (or its stakeholders’ problem, for that matter).  The costs will fall to the taxpayers or the sites will not be remediated at all, thereby creating environmental “dead zones”, unsuitable for recreational or economic use.

The Future Intersection of Environmental and Insolvency Law

Not a Quick-Fix for Environmental Liability

This decision of the SCC should not be taken to mean that insolvent companies are capable of eliminating environmental obligations simply by commencing proceedings under the CCAA – the majority refutes this position, stating “to subject orders to the claims process is not to invite corporations to restructure in order to rid themselves of their environmental liabilities” [17]. Nor should the decision be taken to mean that regulatory orders that necessitate an expenditure of funds are, by default, “claims” capable of being compromised under the CCAA.  Indeed, the decision of the majority of the SCC and dissenting reasons of Chief Justice McLachlin each emphasize that the critical part of the analysis is determining whether the regulator has taken such steps as to qualify as creditor [18].

In fact, it may be argued that public environmental obligations are never truly compromised by the CCAA.  It is only the extent of the company’s liability to a third party (i.e., the provincial regulator) that is compromised.  Moreover, such compromise only arises when the provincial regulator undertakes or is sufficiently certain to undertake the costs of remediation – i.e., when the third party becomes a creditor.  At such point, the debtor’s general obligations to the public are transformed into a financial obligation to the provincial regulator. Such obligation is compromisable; however, the environmental obligations to the public are taken up by the regulator.

Different result where Continued Ownership/Use of the Lands?

The majority of the SCC also noted that it may be the case, where a debtor’s statutory obligations relating to polluting activities and related damage continue after the reorganization, that such obligations are exempt from the CCAA claims process [19]. It is implicit in this concept that the majority interpreted “ongoing obligations” to be limited to continued ownership and use of contaminated sites.  In such circumstances, as the majority stated, the continuing damages would exceed the time limit of a claim [20]. Accordingly, for the majority of the SCC, the fact that Abitibi no longer owned or operated the sites served to crystallize the Province’s claim.  This suggests that on different facts – i.e., where a debtor continues to own the land – the decision might be different.  Indeed, from a policy standpoint, it would be difficult, if not impossible, to compromise the pre-filing portion of an ongoing environmental obligation but hold the debtor responsible for all post-filing elements of the same.

Focus on the True Purpose of Regulatory Orders

In view of the forgoing, the decision should be taken for the proposition that, generally, regulatory orders are not “claims” within the CCAA – unless their true purpose and intent is to recover monetary compensation.  Whether or not they will be found to be claims, is dependent on the facts.  The SCC’s decision affirms that in the context of the CCAA, the facts are crucial.  The CCAA court has the jurisdiction to look behind the “form” of a regulatory order to determine if, in substance, a regulator is acting in the general public interest or in an effort to establish or enforce a “claim”.  In the former circumstance, the regulatory order and the associated corporate obligations should survive the CCAA proceedings, whereas in the latter the same would be compromised. 

Ultimately, the SCC’s decision means that there is considerable discretion on the part of a supervising the CCAA court to interpret the actions of a provincial regulator, within the factual matrix of each case.  This jurisdiction includes, as the majority of the SCC held, the ability of the CCAA court to “consider the effect that requiring the debtor to comply with the [environmental] order would have on the insolvency process” [21]. This statement will undoubtedly be seized upon by judges, debtors, regulators and other stakeholders as they debate the nature of environmental clean-up orders in future CCAA proceedings (not to mention other regulatory orders).  However, in Nfld. v. Abitibi, the SCC also established a framework in which future facts can be argued and a paradigm of sorts for future comparison – i.e., whether there is “sufficient certainty” that the regulator will take such steps as to give rise to a compromisable claim.  Even so, the decision leaves a degree of uncertainty as to how similar issues should be decided in future CCAA proceedings.  In other words, the “untidy intersection” of environmental and insolvency law shall continue for the time being; however, it shall exist only within the four corners of the battleground established by the test enunciated by the SCC.