Common Law Environmental Remediation Claims Not Entitled to Super Priority Over Secured Creditors

On April 8, 2024, the Alberta Court of Appeal released its decision in the appeal of Qualex-Landmark Towers Inc v 12-10 Capital Corp (“Qualex”)[1]. The Court of Appeal’s decision clarifies that the super priority of environmental remedial obligations recognized in Orphan Well Association v Grant Thornton Ltd[2], ("Redwater") does not apply to private litigants, alleviating significant uncertainty for secured lenders.

Overview of Redwater

Redwater involved the bankruptcy and receivership of Redwater Energy Corporation, which operated in the oil and gas industry in Alberta. Redwater held licenses for its resource extraction assets which imposed end-of-life decommissioning and restoration obligations. Redwater’s receiver, Grant Thornton Ltd. (the “Receiver”), determined that Redwater’s end-of-life environmental obligations would surpass the value of its assets in bankruptcy. In an effort to maximize recovery for Redwater’s creditors, the Receiver disclaimed certain assets to avoid their end-of-life environmental liabilities. The Alberta Energy Regulator took the position that the Receiver was obligated to discharge the environmental obligations for all of Redwater’s assets before making any distribution to its creditors. The Receiver argued that it should not be held liable under the provincial regulatory scheme as doing so would conflict with the Bankruptcy and Insolvency Act[3] (the “BIA”).

The Supreme Court found that the Receiver remained responsible for the end-of-life obligations of all of Redwater’s assets. The Court held that the doctrine of federal paramountcy need not be applied as it was possible to interpret Alberta’s regulatory scheme in a manner that did not conflict with the BIA. The Supreme Court also considered whether the Alberta Energy Regulator was asserting a claim “provable in bankruptcy” which would be covered by the BIA’s collective priority scheme.  In such instance, the provincial regulatory regime would be rendered inoperative to the extent that it conflicts with the federal BIA. Applying the provable claims test in Newfoundland and Labrador v AbitibiBowater Inc[4] (“Abitibi”), the Court found that the test was not met as the Alberta Energy Regulator was acting in the public interest and did not stand to benefit financially in the same way a creditor would benefit. As a result, the environmental claim was not provable in bankruptcy and did not conflict with the priority scheme set out in the BIA. In reaching this conclusion, the Supreme Court recognized a superiority of Redwater’s regulatory environmental remediation obligation ahead of secured creditors in insolvency proceedings.

Application of Redwater in Qualex

Qualex involves a private claim commenced by Qualex-Landmark Towers Inc. (“Qualex”) against 12-10 Capital Corp. (“12-10 Capital”), for damages arising from the migration of contaminants from 12-10’s property to Qualex’s property. Upon learning of 12-10 Capital's insolvency and impending property sale, Qualex sought a pre-judgment attachment order to secure sale proceeds for environmental remediation.

At first instance, the chambers judge granted an attachment order against 12-10 Capital in the amount of the approximate cost to remediate the Qualex property from any sale proceeds arising from the 12-10 property. The chambers judge held that there was a "reasonable likelihood" that Qualex's claim against 12-10 Capital will be established, despite Qualex not being a regulator but rather, a private litigant, in reliance on Redwater. The chambers judge reasoned that the polluter’s obligation to remediate is a "public duty to all citizens," and that the monetary recovery is for the benefit of the community for the purpose of ensuring that environmental remediation obligations are addressed – even in the context of private civil litigation.[5] The chambers judge also noted that while regulators exist to enforce public duties, a bona fide neighbour seeking civil recourse should not be put in a worse position than a regulator. Therefore, Qualex did not need to be a regulator to obtain priority over secured creditors for the costs of remediating its property.

The Court of Appeal Decision

The Court of Appeal analyzed Qualex's claim under Alberta's Civil Enforcement Act[6] and found that the pre-judgment attachment order was not supported by any statutory authority. The Court disagreed with the chambers judge’s application of Redwater. While Redwater had the practical effect of giving the Alberta Energy Regulator a super priority over secured creditors in a formal bankruptcy proceeding, it did not create a common law priority entitlement independent from statute. In Redwater, for example, the priority of the environmental obligations was established pursuant to Alberta’s oil and gas regulatory regime. As such, Redwater went no further than to interpret and apply the law with the intentions of parliament and the provincial legislature to derive the super priority of the regulatory environmental remediation obligations.   

As a private litigant, there was no statutory authority for Qualex to enforce 12-10 Capital's environmental duties. The legislature tasked Alberta’s regulator, not private litigants such as Qualex, with enforcement of the environmental remediation obligations imposed by statute for the public good. Finally, the Court noted that there is no assurance that any monetary recovery received by a private litigant pursuant to a civil claim would be used other than to serve the litigant's own financial interests. In setting aside the chambers judge’s decision, the Court of Appeal also concluded that the reasonable likelihood standard for granting an attachment order was not met. The Court found that Qualex's recourse against 12-10 Capital was to obtain a writ of enforcement post-judgment.

Conclusion

The Alberta Court of Appeal's decision in Qualex affirms that Redwater did not create a new priority in favour of common law environmental obligations.

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