The recent decision from the Court of King’s Bench of Alberta (the “Court”) in Qualex-Landmark Towers Inc v 12-1- Capital Corp, 2023 ABKB 109 (“Qualex”) greatly extended the protective umbrella for costs associated with environmental reclamation obligations. Relying on case law that has evolved from the Supreme Court of Canada’s landmark decision in Orphan Well Association, Alberta Energy Regulator v Grant Thornton Limited and ATB Financial, 2019 SCC 5 (“Redwater”), the Court granted an attachment order and gave that order priority over prior-registered mortgagees outside of formal insolvency proceedings. The attachment order was granted against the defendant’s land to secure the estimated costs for remediating environmental contamination that had migrated from the defendant’s land onto the plaintiff’s land.
This is the first case that has applied the reasoning in Redwater to a private dispute between two citizens, rather than the enforcement of environmental remediation obligations by a regulator against a debtor in formal insolvency proceedings. Typically, a secured party such as a mortgagee can rest assured that its security will not get “primed” outside a formal insolvency proceeding; however, the Court’s decision in Qualex suggests that secured lenders face the risk that their security could be eroded by private citizens who advance claims in relation to environmental contamination against a land-owner. These claims are inherently unknowable and unquantifiable, causing a serious risk to secured lenders in Canada. While we anticipate that the Qualex decision will be appealed, in the interim it has set a dangerous precedent of which all secured lenders, and in particular real estate lenders, should be aware.
The Plaintiff, Qualex-Landmark Towers Inc. (“QLT”) purchased lands (the “QLT Lands”) located directly adjacent to lands owned by the Defendant, 12-10 Capital Corp. (“Capital Corp” and such lands being the “12-10 Lands”). Prior to the purchase of each of the QLT Lands and the 12-10 Lands, subsurface investigations revealed that the 12-10 Lands were environmentally contaminated (the “Contamination”).
Several years later, Capital Corp. was directed by the provincial environmental regulator, Alberta Environment and Parks (“AEP”), to submit an environmental site assessment and to complete a contamination delineation and remediation plan in respect of the Contamination . Although Capital Corp. initiated plans to perform the delineation, it ultimately never took place. Despite further follow-ups from AEP, Capital Corp. did not comply with AEP’s direction.
QLT eventually discovered that the Contamination had migrated from the 12-10 Lands onto the QLT Lands and commenced an action (the “Action”) seeking damages. After commencing the Action, QLT discovered that:
- the 12-10 Lands were Capital Corp.’s only asset;
- Capital Corp. had previously attempted to sell portions of the 12-10 Lands; however, the sale failed to close;
- the estimated value of the 12-10 Lands was roughly equivalent to the amounts then secured by various mortgages registered on title to the 12-10 Lands; and
- Capital Corp. was insolvent on a balance sheet basis and had negative cash flow, although it had not entered any formal insolvency proceedings.
QLT grew concerned that Capital Corp. would sell the 12-10 Lands and distribute all of the proceeds to the mortgagees, leaving no further funds to satisfy a judgment from the Action, which QLT would use to remediate the Contamination that had migrated onto its Lands. Consequently, QLT applied for an attachment order against Capital Corp. and requested that the attachment order be applied to any gross sale proceeds of the 12-10 Lands and that it also rank in priority to the mortgages already registered on title.
The Court’s Decision
Nixon J. began his analysis by noting that a pre-judgment attachment order is an exceptional remedy and that there is a judicial abhorrence to granting pre-judgment execution. Under the Civil Enforcement Act, RSA 2000, c C-15, the Court may grant an attachment order if it is satisfied that:
- there is a reasonable likelihood that the claimant’s claim against the defendant will be established, and
- there are reasonable grounds for believing that the defendant is dealing with the defendant’s exigible property, or is likely to deal with that property,
- otherwise than for the purpose of meeting the defendant’s reasonable and ordinary business or living expenses, and
- in a manner that would be likely to seriously hinder the claimant in the enforcement of a judgment against the defendant.
Capital Corp. effectively conceded that the Contamination on the QLT Lands originated from the 12-10 Lands, but argued that there was no basis for granting an attachment order that ranks in priority to the mortgages that had been registered against the 12-10 Lands. Nixon J. disagreed.
In determining that QLT had a “reasonable likelihood” of succeeding in obtaining a judgment that is paid in priority to all other creditors, Nixon J. relied on, and then expanded upon, the principles regarding environmental remediation obligations set out in Redwater and the caselaw that has followed it (such as Manitok Energy Inc (Re), 2022 ABCA 117; PricewaterhouseCoopers Inc v Perpetual Energy Inc, 2021 ABCA 16 ; PricewaterhouseCoopers Inc v Perpetual Energy Inc, 2022 ABCA 111; and Orphan Well Association v Trident Exploration Corp, 2022 ABKB 839). He noted that the prevailing law in Canada and Alberta provides that environmental remediation obligations may displace (i.e., rank in priority to) secured lenders if those obligations would otherwise not be satisfied. Although those cases were in the context of environmental regulatory orders issued to debtors in formal insolvency proceedings, Nixon J. stated “I am not convinced at this juncture that such formalities are necessary. Certainly, I do not know how far the super priority regime will extend.”
The Court also rejected Capital Corp.’s argument that only AEP in its capacity as the environmental regulator could have a claim that ranked in priority to the mortgagees. Nixon J stated that:
“…the obligation of the polluter to remediate is a duty owed to its fellow citizens. When a polluter complies, the result is not the recovery of money by AEP or necessarily of a judgment for money. Monetary recovery is not the object of the process. Rather, it is simply the application of the general law for the benefit of the community for the purpose of ensuring that environmental remediation obligations are addressed.
As a result, when a polluter is found responsible for nuisance or negligence for failure to remediate environmental contamination in the context of private civil litigation, the nature of the underlying obligation is a public duty to all citizens.”
Nixon J. concluded his review of this issue by noting that regulators exist to enforce public duties, and when a bona fide neighbour seeks civil law recourse for the breach of environmental remediation obligations of a polluter, that neighbour should not be put in a worse position than a regulator to have those obligations fulfilled. As a result, he held that QLT did not need to be a “regulator” to obtain a first-priority charge for the costs of remediating the Contamination on the QLT Lands.
Nixon J. also determined that Capital Corp.’s decision to sell the 12-10 Lands and apply the proceeds of sale against the first-ranking, valid mortgages satisfied the requirement that Capital Corp. was dealing with its exigible property outside of ordinary business expenses. He made this finding notwithstanding the fact that he also found that Capital Corp. was a member of the Strategic Group of companies, a real estate investment and development group.
Further, His Lordship determined that if any such sale and distribution were to take place, QLT would be unable to enforce on any judgment award since Capital Corp was insolvent and had no other assets. This determination was made in the face of the respondents’ arguments that QLT would effectively be in no worse a position if it had any judgment to enforce, as the priority regime delineated by all of the Civil Enforcement Act, Land Titles Act, and Personal Property Security Act, would subordinate a registered writ to the previously registered mortgages.
In the result, Nixon J. exercised his discretion to grant an attachment order against Capital Corp. and directed that $2,006,500 (being the estimated cost to remediate the Contamination on the QLT Lands) from any sale of the 12-10 Lands be held in trust by Capital Corp.’s counsel pending the outcome of the Action.
Implications and Conclusions
Qualex is a notable and significant extension of the principles set out in Redwater. Whereas Redwater and the cases that followed it address the intersection of regulatory orders and the priority distribution scheme outlined in federal insolvency legislation, the Court’s decision in Qualex appears to go much further by creating a common law super-priority for environmental obligations.
This decision poses significant risk to real estate lenders, as it undermines the reliability of the land titles registry. Lenders may advance funds to a borrower on the understanding that it will be secured by a first-ranking mortgage, only to be subordinated some time later by a private citizen pursuing a civil claim against the borrower due to environmental obligations. Such a claim may take years or even decades to resolve, and any sale proceeds from the lands may be tied up for years pending resolution of the claim, assuming the parties could even sell the lands subject to such claims. To mitigate the risk posed by the Qualex decision, lenders may tighten their lending policies against real property to ensure that sufficient equity remains to account for any environmental remediation obligations that may arise in the future. Additionally, lenders may require more onerous environmental assessments of real property before advancing funds to potential borrowers, thereby increasing the costs of borrowing.
If left undisturbed, the Qualex decision is a dangerous precedent that could turn the entire Canadian real estate lending industry on its head.