Qualex-Landmark: Redwater Scope and Environmental Priority in Alberta

April 11, 2024

Written By Denise Bright, Keely Cameron, Kelsey Meyer and Kaamil Khalfan

This week’s highly anticipated decision of the Alberta Court of Appeal in Qualex-Landmark Towers Inc v 12-10 Capital Corp, 2024 ABCA 115 [Qualex] limits the application of Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5 [Redwater] to regulators inside formal insolvency proceedings rather than private litigants and denies a common law "super priority" for environmental obligations of private litigants over secured claims.

Background

Qualex-Landmark Towers Inc. (Qualex) purchased lands (the Qualex Lands) located adjacent to lands owned by 12-10 Capital Corp. (12-10 Capital and the lands being the 12-10 Lands). Before Qualex and 12-10 Capital purchased their respective lands, subsurface investigations revealed that the 12-10 Lands were contaminated. In 2018, 12-10 Capital was directed by Alberta Environment and Protected Areas (AEPA) to submit an environmental site assessment (ESA) in respect of the 12-10 Lands. An ESA was not completed prior to the litigation. Qualex alleged that environmental contaminants had migrated to the Qualex Lands from the adjoining 12-10 Lands and sought damages.

Qualex claimed that the proceeds from the sale of the 12-10 Lands (12-10 Capital's only asset) by 12-10 Capital was unlikely to satisfy 12-10 Capital's outstanding mortgages, accrued interest and environmental remediation costs. Qualex also argued that 12-10 Capital was insolvent. As such, Qualex's concern was that the disposition of the 12-10 Lands with proceeds flowing first to the mortgagees would leave no funds to satisfy Qualex's damages claim to remediate the environmental contamination on the Qualex Lands.
Qualex applied for an attachment order against 12-10 Capital in respect of the remediation obligations, in priority to all other creditors of 12-10 Capital, including secured creditors and registered mortgagees.

The Chambers Judge's Decision

The chambers judge confirmed that under section 17(2) of the Civil Enforcement Act, RSA 2000, c C-15 (CEA), the Court may grant an attachment order if it is satisfied: (i) there is a reasonable likelihood the claimant's claim will be established; and (ii) there are reasonable grounds for believing the defendant is dealing with or is likely to deal with its property other than for the purpose of meeting its reasonable and ordinary business or living expenses and in a way that is likely to seriously hinder the claimant in enforcing judgment against the defendant.

The chambers judge held that there is 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 and subsequent decisions concerning environmental remediation obligations (including Manitok Energy Inc (Re), 2022 ABCA 117; PricewaterhouseCoopers Inc v Perpetual Energy Inc, 2021 ABCA 16 and PricewaterhouseCoopers Inc v Perpetual Energy Inc, 2022 ABCA 111). He reasoned that the obligation of the polluter 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. The chambers judge extended this point and noted that regulators exist to enforce public duties, but 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. He held, therefore, that Qualex did not need to be a regulator to obtain priority for costs of remediating the contamination on the Qualex Lands over the mortgagees' claims.

The chambers judge also held that selling the 12-10 Land to pay off mortgages that are excessively mortgaged is not an "ordinary business expense". He found that the minimal funds left over for environmental remediation obligations after the aggregate mortgage debt was repaid further reinforced this point. The chambers judge thus determined that the disposition of the only substantial asset held by 12-10 Capital would hinder the ability of Qualex to enforce a judgment against 12-10 Capital for environmental remediation claims.

The chambers judge granted an attachment order against 12-10 Capital in the amount of the approximate cost to remediate the Qualex Lands from any sale proceeds arising from the 12-10 Lands.

The Court of Appeal Decision

At the Court of Appeal, 12-10 Capital argued that the chambers judge made a legal error by holding that Redwater may apply outside of insolvency proceedings to create a common law super priority in favour of a private litigant, Qualex.

The Court allowed the appeal and set aside the chambers judge’s order to grant an attachment order, based on the standard of review of correctness. The Court reasoned that the priority declaration sought by Qualex is unsupported by any statutory or existing court authority and that the priority declaration sought by Qualex exceeded the limits on the power of the judiciary to change the law. Any such change could only be made by the legislature and/or parliament, within their constitutional authority. . . The Court found that the chambers judge displaced the valid statutory priorities and nothing in the CEA; the Land Titles Act, RSA 2000, c L-5; the Personal Property Securities Act, RSA 2000, c P-7; the Environmental Protection and Enhancement Act, RSA 2000, c E-12 (EPEA); or in federal insolvency legislation (if it applied) gives a private litigant a right to a priority charge above the first-priority charge against land merely because its claim can be characterized as involving environmental remediation obligations. The Court confirmed that mortgage lenders have a statutory priority by virtue of their registered mortgages pursuant to the Land Titles Act and that the legislature restricted the availability of a limited priority charge for environmental remediation costs to the government, pursuant to section 216 of the EPEA, making clear that the priority scheme under the Land Titles Act must otherwise prevail.

Further, the Court disagreed with the chambers judge’s broad reliance on Redwater and subsequent decisions on environmental remediation. The Court distinguished these cases from the chambers judge’s interpretation by noting that the courts in those decisions did not create common law rights or powers that were wholly inconsistent with the applicable statutes. The Court agreed that while Redwater and the subsequent decisions had the practical effect of giving the regulator a super priority over secured creditors in a formal bankruptcy proceeding, it did not create a common law priority entitlement disconnected from the applicable legislation and its objectives. In Redwater, for example, while section 14.06(7) of the Bankruptcy and Insolvency Act was not available to Alberta Energy Regulator because oil and gas operators do not own the land, the regulatory orders and liability management rating requirements under the provincial regulatory regime replicated section 14.06(7)'s effect. As such, Redwater and subsequent decisions went no further than to interpret and apply the law in harmony with the intentions of parliament and the provincial legislature to statutorily derive the regulator's super priority.

Applying this principle, the Court held that there is no statutory authority that supported an elevated priority in favour of Qualex. The Court noted that even if 12-10 Capital was in formal insolvency proceedings, as a private litigant, Qualex is not statutorily authorized to enforce 12-10 Capital's public duties. The legislature tasked AEPA—not private litigants such as Qualex—with enforcement of the environmental remediation obligations imposed by the EPEA for the public good. Finally, the Court noted that from a practical perspective, there is no assurance that the money private litigants could recover from super-priority environmental remediation claims will be used other than to serve the litigant's own interests.

In setting aside the chambers judge’s decision, the Court concluded that the reasonable likelihood standard for granting an attachment order was not met and that Qualex’s super-priority claim is hopeless.

Future Implications and Risks

The Court of Appeal's decision limited the application of Redwater and subsequent decisions to deny a common law super-priority for environmental obligations by private actors (as compared to regulators) over secured claims. The decision does not impact the ability of regulators to utilize their authority to enforce regulatory obligations, whether inside or outside of formal insolvency processes. Presumably the decision would have been different had AEPA sought to enforce reclamation costs which were covered by the priorities included in s. 216 of the EPEA. As such, it is important that lenders be alert to and monitor the regulatory obligations of their borrowers and engage with legal counsel regarding the risk of a regulator super-priority.

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