On December 7, 2012, the Supreme Court of Canada released its decision in Newfoundland and Labrador v. AbitibiBowater Inc. The Supreme Court held that orders issued by environmental regulators requiring the remediation of contaminated property can, if certain criteria are met, be characterized as monetary claims, and those claims can be subject to compromise in insolvency proceedings. This decision has important implications for commercial lenders, restructuring companies and stakeholders of companies that have historical environmental liabilities.
AbitibiBowater Inc. (collectively with its affiliates, “Abitibi”), a pulp and paper manufacturer headquartered in Montréal, operated in Newfoundland and Labrador (the Province) for more than a century. In 2008, however, after suffering significant financial distress, Abitibi announced that its last paper mill in the Province was scheduled to close in March 2009. Subsequent to the announcement but prior to the closure of the last mill, the Province passed a law that expropriated most of Abitibi’s property. Abitibi then filed for chapter 11 protection from its creditors in the United States on April 16, 2009 and for protection from its creditors in Canada under the Companies’ Creditors Arrangement Act (Canada) (the CCAA) the following day.
On November 12, 2009, the Province’s Minister of Environment and Conservation (MOE) issued five orders (the EPA Orders) under the provincial Environmental Protection Act. The EPA Orders required Abitibi to submit remediation action plans to the MOE for five industrial sites (three of which had already been expropriated by the Province) and to complete the remediation contemplated by these plans. Evidence before the CCAA judge indicated that remediation of the five sites was projected to cost anywhere from “the mid-to-high eight figures” to “several times higher.” Contemporaneously with the issuance of the EPA Orders, the Province brought a motion asserting that the Province could enforce the EPA Orders because they constituted nonmonetary obligations and, accordingly, were not “claims” under the CCAA that could be stayed by the CCAA court or compromised by a claims procedure order.
Gascon J., of the Quebec Superior Court (the Quebec Court), which supervised Abitibi’s CCAA case, held that the EPA Orders were “claims” because the regulatory obligations were “truly financial and monetary in nature” and that the stay of proceedings in the CCAA prohibited the Province from enforcing the EPA Orders. In addition, Gascon J. held that the EPA Orders were subject to the claims procedure order and could be compromised in Abitibi’s CCAA proceedings. The Province sought leave to appeal to the Quebec Court of Appeal, which was denied. Chamberland J.A. held that the appeal had “no reasonable chance of success” because Gascon J. had found as a fact that the EPA Orders were financial or monetary in nature. The Province appealed the denial of leave to the Supreme Court of Canada.
Writing for a seven justice majority, Deschamps J. articulated a three-prong test to determine whether a regulatory order constitutes a monetary claim that may be compromised under the CCAA: (i) there must be a debt, liability or obligation to a creditor; (ii) such debt, liability or obligation must have arisen prior to the time limit for inclusion in the CCAA claims process; and (iii) it must be possible to attach a monetary value to the debt, liability or obligation. In addition, the factual matrix to be considered in determining whether an order is a claim that can be compromised under the CCAA includes whether the debtor has the means to comply with such order and the effect that requiring the debtor to comply with the order would have on the CCAA process.
Applying that test in AbitibiBowater, Deschamps J. found that the first two prongs were easily satisfied: first, an obligation was due to the Province, as a creditor, because the Province had resorted to EPA enforcement mechanisms and, second, the environmental damage clearly occurred before the commencement of the CCAA proceedings. Thus, the case turned on the third prong of the test – whether it was possible to attach a monetary value to the obligation owed by Abitibi to the Province to remediate the contaminated properties. The Supreme Court’s focus, therefore, was on whether orders not expressed in monetary terms can be characterized in those terms.
Deschamps J. noted that the Province’s claim against Abitibi was “contingent” to the extent that the Province had not commenced any remediation activities or formally exercised its power to ask for the payment of money from Abitibi. The test used by courts to determine whether a contingent claim can be included in an insolvency process and compromised is whether the event that has not yet occurred is too remote or speculative. Applying that test, Deschamps J. held that monetary value attaches to a claim – and a debtor’s obligations pursuant to a regulatory order can be compromised under the CCAA – as long as it is “sufficiently certain” that the regulatory body will perform remediation work and be in a position to assert a monetary claim against the debtor.
Based on the Quebec Court’s findings of fact, it was sufficiently certain that the Province would perform the required remediation work and make a monetary claim against Abitibi because, inter alia: (i) the EPA Orders likely constituted an attempt by the Province to lay the groundwork for monetary claims against Abitibi, possibly to offset claims that Abitibi could assert against the Province with respect to the expropriation of Abitibi’s property; (ii) the Province was assessing the cost of doing the remediation work itself; (iii) the Province probably did not intend for Abitibi to complete the remediation work because Abitibi no longer controlled the properties and lacked the funds to perform the remediation work during the CCAA proceedings; and (iv) Abitibi was intentionally targeted as the sole entity responsible for the remediation, even though it was not the only party that caused the contamination. Accordingly, the Quebec Court held, and Deschamps J. agreed, that 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.” In summary, because the evidence indicated that it was sufficiently certain that the MOE would conduct the remediation itself, the MOE’s claim was not too speculative or remote, a monetary value could be attached to the claim and the third prong of the test was satisfied.
In addition, Deschamps J. responded to various policy arguments put forth by the Province as to why the EPA Orders should not be compromised pursuant to the CCAA claims process. First, Deschamps J. held that subjecting environmental orders to the CCAA claims process simply means that the claim will be paid according to the payment and priority regime established by the applicable insolvency legislation. It does not extinguish a debtor’s environmental obligations any more than subjecting any creditor’s claim to the process extinguishes a debtor’s obligation to pay its debts. Second, making the Abitibi estate pay to remediate environmental claims that are actually monetary in nature would shift the burden of paying for such remediation to Abitibi’s third-party creditors, who were not responsible for the contamination of the properties. Third, compromising the Province’s claims would not give debtors a “licence to pollute” because insolvency proceedings do not affect a debtor’s future conduct and reorganized debtors must comply with all environmental regulations going forward. Finally, because corporate restructurings under insolvency legislation are “hardly ever a deliberate choice,” compromising regulatory orders will not incentivize corporations to restructure simply to avoid their environmental liabilities. For all of these reasons, the majority dismissed the Province’s appeal.
McLachlin C.J. dissented and would have allowed the appeal by the Province because, in the Chief Justice’s opinion, environmental remediation orders impose continuing obligations on offending corporations, which may only be compromised in “narrow circumstances.” Accordingly, she interpreted the “sufficient certainty” standard as requiring a “likelihood approaching certainty” that the regulatory agency will perform the remediation work before a court can convert environmental obligations into contingent claims that can be compromised under the CCAA. McLachlin C.J. asserted there was no objective evidence that the Province was certain to perform the work required in the AbitibiBowater case, except at one of the five sites in question.
LeBel J. also dissented and would have allowed the appeal. While LeBel J. adopted Deschamps J.’s “sufficient certainty” standard for the third prong of the analysis – rather than the Chief Justice’s more stringent “likelihood approaching certainty” standard – he reached a different conclusion on the facts. Like the Chief Justice, LeBel J. found that there was no evidence that the Province intended to perform the remedial work itself and, accordingly, Abitibi’s obligations under the EPA Orders could not be compromised.
The AbitibiBowater decision confirms that if environmental damage occurs before the commencement of a CCAA proceeding and a regulatory body issues a remediation order but has no realistic alternative other than performing the remediation work itself, such an order will almost certainly constitute a claim that can become subject to the claims process. Otherwise, regulatory agencies would be able to create a priority claim – at the expense of the debtor’s other creditors – by delaying the commencement of remediation work and arguing that they do not have a monetary claim because they are not yet creditors.
The CCAA provides that environmental regulators have a super-priority claim for remediation costs secured by a charge on the contaminated real property and contiguous property that is “related to” the activity that caused the contamination. The majority highlighted the fact that such super-priority claims do not extend to the totality of the debtor’s assets. This evidences a balance struck by Parliament between the public’s interest in enforcing environmental regulations against the contaminated real property alone and the interests of third-party creditors with claims against the totality of the debtor’s assets. As Deschamps J. pointed out, “[t]o exempt [regulatory] orders which are in fact monetary claims from the CCAA proceedings would amount to conferring upon provinces a priority higher than the one provided for in the CCAA.” The Supreme Court’s majority decision ensures that provincial regulators cannot create such priority claims for themselves depending on when they decide to perform environmental remediation work.
The Supreme Court did leave open the possibility, however, that not all orders issued by regulatory bodies would be characterized as monetary claims subject to compromise. Deschamps J. outlined certain nonexhaustive fact-specific circumstances that will affect whether obligations under a regulatory order can be compromised, including: (i) whether the regulated activities are ongoing; (ii) whether the debtor still controls the property; and (iii) whether the debtor has the means to comply with the regulatory order. Accordingly, if a CCAA debtor’s ongoing business operations cause environmental harm, the CCAA, or any stay of proceedings issued pursuant thereto, will not relieve the debtor company of its obligations to comply with regulatory orders requiring that it cease its environmentally damaging activity.
CCAA cases in which environmental claims are a central issue are currently pending before courts in Ontario, including at the appellate level. Notwithstanding the unique facts present in the AbitibiBowater case, the Supreme Court’s framework for considering and assessing environmental claims provides helpful and constructive guidance to these lower courts as well as greater comfort to secured lenders (including DIP lenders) and insolvent companies with environmental contamination issues. The AbitibiBowater decision also reaffirms that the CCAA and claims processes issued thereunder are meant to ensure fairness between creditors, finality in the insolvency process and, in the restructuring context, an opportunity for the debtor to make as fresh a start as possible once its plan of promise or arrangement is approved.