Finding the shore of Redwater: Alberta Court of Appeal holds private litigant not entitled to “super priority” environmental remediation claim

The Supreme Court of Canada sent ripples across the insolvency waters in 2019 when it granted a regulator a “super priority” environmental remediation claim against a bankrupt debtor in Orphan Well Association v. Grant Thornton Ltd., 2019 SCC 5 (Redwater). Since Redwater was released, courts and insolvency practitioners alike have sought to determine the limits of Redwater’s elevation of environmental claims. In the recent decision of Qualex-Landmark Towers Inc v 12-10 Capital Corp, 2024 ABCA 115 (Qualex), the Alberta Court of Appeal (the Court) set one such limit. The Court refused to grant a private civil litigant a super priority claim for future environmental remediation costs against a polluting neighbour outside of insolvency proceedings because such elevation would have frustrated existing statutory priority schemes.

What you need to know

• Redwater’s impact. As a result of the Supreme Court of Canada’s 2019 Redwater decision, in insolvency proceedings, regulators’ environmental claims are generally considered to have a “super priority” over the claims of other creditors, including mortgagees and other secured creditors.
• Redwater’s application limited in private litigant context. In Qualex, the Court limited the application of Redwater in a private proceeding. It held that a claim that Redwater elevated the environmental remediation claims of a private litigant against its polluting neighbour, outside of an insolvency proceeding, was “hopeless”.
• Private litigation not equivalent to regulation in public interest. Importantly, the Court distinguished between a regulator acting in a bona fide regulatory capacity—as the regulator in Redwater had acted—and a neighbour seeking civil law recourse in tort. Private litigation is not equivalent to regulation in the public interest, and there was no assurance that the litigant’s recoveries would even be used for reclamation purposes.
• Secured lenders will find some comfort in having some certainty that their position will not be subordinated to private civil litigants with potential tort claims in relation to environmental remediation.
• Statutory environmental claims not contemplated. This decision did not address private claims that are specifically contemplated and authorized by environmental legislation. Further decisions will be necessary to consider the application of specific statutory claims, for example under section 84 of the Environmental Bill of Rights (Ontario), which allows private parties to pursue an enforcement action against third parties who caused environmental harm.

The details

Background

Qualex-Landmark Towers Inc. alleged that chemical contaminants had migrated to its land from adjoining lands owned by its corporate neighbour. Qualex brought an action against the neighbour and a related individual, alleging that they were liable for nuisance and negligence for this contamination. Qualex sought, among other things, damages for the resulting environmental remediation costs.

Qualex’s neighbour entered into an agreement to sell a portion of its land to a third-party purchaser. In response, Qualex sought an attachment order that would prohibit any dealings with the proceeds of sale, up to an estimate of the costs required to remediate Qualex’s land.

Importantly, Qualex argued that, as a result of the Redwater decision, its reclamation claim had a superior priority in relation to those sale proceeds than all other claims. This included claims secured by mortgages or PPSA registrations. Qualex asserted that, just as the bankrupt debtor in Redwater had a public duty under Alberta’s regulatory regime governing abandonment and reclamation obligations, Qualex’s neighbour had a public duty under the Environmental Protection and Enhancement Act (Alberta) (EPEA) to address the damage caused by the migration of contaminants from its lands.

Qualex’s argument hinged on the proposition that it—as a beneficiary of its neighbour’s duty under the EPEA—should have the same recourse as the EPEA regulator would have in carrying out the terms of an enforcement order. The EPEA provides that such enforcement orders constitute a charge in favour of the Alberta government “enforceable in the same way as a mortgage or other security on land and rank[ing] above any other claim.”

At first instance (see 2023 ABKB 109), the chambers judge accepted that there was a reasonable likelihood that Redwater would be applied in a manner that gave Qualex the priority it sought. The chambers judge found that environmental remediation is a duty owed to fellow citizens, and that 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. That is, Qualex should not be prejudiced on the sole basis that it is not a regulator.

Qualex’s neighbour appealed the decision.

Key issue

The key issue was whether the Supreme Court of Canada’s Redwater decision provided a private litigant pursuing civil litigation with a “super priority” claim against its polluting neighbour for environmental remediation costs.

The Court’s decision

The Court allowed the appeal, finding it to be “hopeless” that the Redwater decision would provide Qualex with a super priority environmental remediation claim.

The Court drew important distinctions between the circumstances before it and the Supreme Court of Canada’s Redwater decision. In Redwater, the priority scheme under the Bankruptcy and Insolvency Act (BIA) was not disrupted, because the AER was not acting as a “creditor” in its enforcement of the bankrupt’s reclamation obligations. Rather, those reclamation obligations were public duties that the bankrupt owed to fellow citizens, rather than to any particular creditor, meaning those obligations fell outside of the BIA’s distribution scheme as not constituting provable claims. In other words, the AER’s enforcement of those claims under provincial legislation did not result in a statutory conflict with the BIA.

In contrast, the Court found that there was a clear statutory conflict in Qualex’s circumstances. The Land Titles Act (Alberta) and the Personal Property Security Act (Alberta) both set valid statutory priorities for secured claims against the neighbour’s property. Qualex’s super priority claim would have frustrated those legislative priorities and the resulting commercial certainty that the neighbour’s secured creditors (and commercial parties, generally) rely on. Nothing in that legislation, the EPEA or federal insolvency legislation, if it applied, gave a private litigant a right to a priority charge that ranks above everything else merely because its claim can be characterized as involving environmental remediation obligations.

More broadly, the Court distinguished between a regulator acting in a bona fide regulatory capacity and a neighbour seeking civil law recourse in tort. Private litigation is not equivalent to regulation in the public interest because private litigants generally act in their own interests without obligation to act for others. Indeed, there was no assurance that Qualex would use recovered monies to remediate the land, rather than in service of its own interests. The Court found that this reality would have undermined, rather than supported, the object of the EPEA.

Implications

In Qualex, the Court determined that litigants pursuing private, civil claims are not entitled to super priority claims for environmental remediation obligations—a clear limit on the Supreme Court of Canada’s Redwater decision. It is difficult to imagine a scenario where a private litigant pursuing an environmental claim might be characterized as acting in a bona fide regulatory capacity, or where a provincial priority scheme would not be disrupted if such a claim were elevated above all others. However, given the interplay in the Court’s decision between provincial legislation governing the priority of claims and environmental remediation, it remains to be seen whether similar facts with different provincial legislation might produce a different result, including where a private party brings claims (outside of claims for damages) pursuant to, and specifically authorized by, environmental legislation such as the Environmental Bill of Rights (Ontario).