Business & Commercial Law

Alberta Court Gives Priority to Costs for Environmental Clean-Up

June 12, 2023

Photo of oil and gas field representing environmental obligations in Alberta

Alberta’s environmental laws impose various obligations on businesses operating in the oil and gas industry throughout the province. These responsibilities are intended to protect and enhance the environment and ensure that polluters pay for any environmental damage they cause. Occasionally, these obligations conflict with other business requirements. When such conflicts arise, the question of priorities comes to the forefront. A recent string of Alberta cases suggests that a business’s environmental obligations may be at the top of the list.

Alberta Corporations Have Environmental Responsibilities

The Alberta Energy Regulator is a regulatory body that administers several provincial environmental resource statutes, including the Environmental Protection and Enhancement Act. Where a business is responsible for releasing a substance that causes harm to land, the Environmental Protection and Enhancement Act imposes a duty on the business to take remedial steps. It requires those responsible to repair and confine the substance’s effects, in addition to remediating and disposing of it.

Section 113 of the Environmental Protection and Enhancement Act provides for the issuance of an Environmental Protection Order if the director thinks that the release of a substance harmful to the environment may occur or has occurred. Those subject to the order may be required to take remedial action.

How Have the Courts Applied Environmental Remedial Obligations?

A leading decision of the Supreme Court of Canada has provided guidance on how environmental obligations should be prioritized in the event of a bankruptcy. In Orphan Well Association v. Grant Thornton, the Court considered Alberta’s regulatory regime, under which a company must obtain a licence to extract oil and gas resources. Licence holders have certain end-of-life obligations to ensure the security of an oil and gas well. These obligations continue to apply after the start of insolvency proceedings.

The main issue in Orphan Well Association v. Grant Thornton was that the cost of the company’s environmental remedial obligations would have exceeded its expected asset sale proceeds from its insolvency. The Court concluded that the company’s end-of-life environmental obligations didn’t conflict with the priority rules in the Bankruptcy and Insolvency Act. The Court’s decision began a trend towards greater environmental responsibility for debtors and a super priority for certain environmental obligations.

Alberta Court Broadens Reach of Environmental Priority Principles

In Qualex-Landmark Towers Inc v 12-10 Capital Corp, the Alberta Court of King’s Bench applied the reasoning in Orphan Well Association v. Grant Thornton to the repayment of secured private lenders. 12-10 Capital Corp (“Capital Corp”) owned contaminated real property (the “12-10 lands”). Alberta Environment and Parks directed Capital Corp to submit an environmental site assessment in respect of the 12-10 lands. The assessment was to include a remediation action plan or a risk management plan for the lands.

When Qualex-Landmark Towers Inc. (“QLT”) discovered that Capital Corp was insolvent and was intending to put the 12-10 lands up for sale, it brought a claim against the company seeking an order for Capital Corp to finish the remediation as directed by Alberta Environment and Parks. Additionally, QLT sought to have Capital Corp’s environmental obligations prioritized over its outstanding mortgages on the property.

Claimant Seeks Attachment Order to Ensure Payments Go Towards Environmental Obligations

QLT sought an attachment order to hold any sale proceeds in trust for the purpose of the environmental remediation work pending the outcome of the claim. Specifically, QLT wanted the remediation obligations in respect of the 12-10 lands to take priority over the repayment of the mortgagees of the property.

Court Determines That the Claim Had a Reasonable Chance of Succeeding

In considering QLT’s application, the Court of King’s Bench noted that a pre-judgment attachment order is an extraordinary remedy. Referring to the criteria set out in the Civil Enforcement Act, the Court found that QLT had a reasonable likelihood of obtaining a judgment that would be paid in priority to other creditors. Relying on a line of Alberta case law beginning with Orphan Well Association v. Grant Thornton, the Court noted that environmental remedial obligations might outrank other secured lenders in priority if those obligations would not otherwise be satisfied.

Notably, the cases that the Court cited in reaching its decision involved environmental regulatory orders issued to debtors who had begun formal insolvency proceedings. However, the Court did not consider this to be a requirement, stating that at this point in the development of the case law, such formalities are not necessary.

Claimant Does Not Need to be a Regulator to Rank in Priority

In its arguments against the claim, Capital Corp said that only Alberta Environment and Parks, in its regulatory role, could have a claim that outranked the mortgagees in priority. The Court dismissed this argument, saying:

“..it is my view that regulators exist to enforce public duties. Regulators exist for this purpose because private citizens do not have a responsibility to enforce the environmental remediation obligations of their neighbours. However, when a bona fide neighbour seeks civil law recourse for the breach of environmental remedial 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, the Court decided to grant the attachment order against Capital Corp. It directed that $2,006,500 of the sale proceeds from the 12-10 lands be held in trust pending the outcome of the action.

Decision Focuses on Environmental Remediation

The Court’s decision in Qualex-Landmark Towers Inc v 12-10 Capital Corp carries on the trend of decision-makers highlighting the importance of environmental remediation. Essentially, the decision creates a common law super-priority for environmental remedial obligations in Alberta. Prospective lenders should take note and exercise due diligence in financing real property transactions.

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Conveniently located in the heart of downtown Calgary, DBB Law has proudly served clients throughout Alberta for over 35 years. If you have questions regarding a real estate transaction, contact us online or call 403-265-7777 to schedule a confidential consultation.

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