Secured creditors and environmental liabilities: The Qualex quagmire continues

18 août 2023 | Tamara Farber, Craig A. Mills

( Disponible en anglais seulement )

The stakes in the appeal from a recent case in Alberta,  Qualex-Landmark Towers  Inc  v  12-10  Capital Corp (“Qualex”) are rising with the recent decision of the Court of Appeal of Alberta granting leave to intervene to the Canadian Bankers Association [Qualex-Landmark Towers Inc v 12-10 Capital Corp, 2023 ABCA 177].  The Canadian Bankers Association sought leave to intervene on the basis that the decision in Qualex creates significant uncertainty for secured lending, particularly where the borrower may have environmental remediation obligations.  Being the first decision to apply the reasoning in Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5, [2019] 1 SCR 150 (“Redwater”) to non-insolvency proceedings between two private parties, the appeal decision will have far-reaching implications for secured creditors. If upheld, it not only could provide a super-priority security interest to a private party holding a contingent claim – in priority to registered mortgages – but it could limit the ability of secured lenders or their borrowers to deal with mortgaged property outside of bankruptcy or insolvency proceedings.  In short, this appeal has potentially significant implications for lenders in Canada.

In Qualex, the underlying case involved a private dispute over contaminant migration from land owned by the defendant to adjacent land owned by the plaintiff. The plaintiff brought an application for a pre-judgment attachment order to preserve the proceeds of sale of the defendant’s property up to the value of remedial costs of the plaintiff’s neighboring property.  The relief sought by the plaintiff was initially denied by the Master (as then he was), which it then appealed to the Court of King’s Bench of Alberta.

Over $17 million in mortgages were registered against the defendant’s property, who was likely insolvent, although no formal insolvency proceedings had been initiated. Despite arguments that the Court should not interfere with the priority ranking of secured creditors, the lower Court held that environmental remediation obligations could rank in priority to secured creditors, building on recent decisions, such as Redwater.  The chambers judge was prepared to preserve assets of the defendant by granting an attachment order and effectively stay any recovery by the secured creditors, pending a full trial of the case.

Justice Nixon did not agree with the mortgagees’ argument that super-priority charges based upon environmental liabilities only apply in formal insolvency proceedings, stating that « the super-priority charge over the real property of the corporation to remediate likely arises coincidental with the contamination and will hang over the real property like an umbrella until the environmental remediation obligation is satisfied. » [para 85]

The court also addressed arguments by the defence and third-party lenders that the rights sought to be imposed by Qualex were rights that only a regulator could impose. The Court held that « a bona fide neighbor seeking civil law recourse for the breach of environmental remediation obligations of a polluter should not be put in a worse position than a regulator to have those obligations fulfilled. » [para 99]

Lessons learned from Qualex

As noted above, the case potentially opens the door for the creation of a super-priority for environmental remediation obligations even in the absence of an environmental order or formal insolvency proceedings.  The defendant’s secured lenders have to wait to potentially recover proceeds of sale. The motion was an effective stay of their security and right to recovery.

The Qualex case invokes significant implications for lenders and lawyers in Canada, highlighting the importance of environmental remediation obligations and their potential priority over secured creditors. The central issue in the appeal has the potential to up-end priority rights for lenders in certain cases. While the appeal has yet to be argued, the addition of the Canadian Bankers Association will no doubt ensure that the Court of Appeal is made aware of the broad implications for secured lenders if a common law super-priority right for private parties in respect of environmental obligations were to be imposed, thereby subordinating their rights and remedies. We continue to monitor developments in this area and generally recommend that lenders take a cautious approach to minimize future priority disputes.

Should you have any questions or concerns, please feel free to reach out to a member of Miller Thomson’s Environmental Law or Restructuring & Insolvency group.

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