In the red: towards a complete regime for cleaning up environmental messes in the face of bankruptcy.

Author:Clarkson, Alexander
 
FREE EXCERPT
  1. INTRODUCTION II. THE PROBLEM OF ENVIRONMENTAL RECLAMATION AT BANKRUPTCY i. Re Redcorp Ventures Ltd ii. Harbert Distressed Investment Fund, LP v General Chemical Canada Ltd iii. Newfoundland and Labrador v AbitibiBowater Inc III. THE ATTEMPTED COMMON LAW AND STATUTORY SOLUTIONS TO ENVIRONMENTAL RECLAMATION AT BANKRUPTCY i. The Alberta Court of Appeal's Solution in Panamericana ii. The Solution Attempted in the 1997 and 2007 Amendments to the BIA and CCAA iii. The Inadequacy of Other Environmental Protection Tools IV. THE ENVIRONMENTAL PROVISIONS OF THE CCAA AND BIA: CLARIFYING UNCERTAINTIES V. THE FIRST PROPOSED SOLUTION: A SUPER-PRIORITY CHARGE OVER ALL THE PROPERTY OF THE BANKRUPT i. Environmental Harm is Reduced ii. Secured Lending Principles Suggest that a Super-Priority Charge is Fair to Secured Creditors iii. A Super-Priority Charge Burdens a Company Less Than a Reclamation Fund or a Reclamation Tax VI. THE SECOND PROPOSED SOLUTION: THE COURT SHOULD GIVE DUE WEIGHT TO THE ENVIRONMENT IN ALLOWING AND EXTENDING CCAA STAYS i. The Protection of the Public Interest is a Key Purpose of the CCAA ii. The Protection of the Public's Interest in the Environment is a Purpose of the CCAA VII. CONCLUSION I. INTRODUCTION

    "The goal is shut down, walk away. This will be a flat spot," said the Project Manager of the Redcorp Ventures Ltd ("Redcorp") mine development in northwestern British Columbia. (1) When Redcorp began the project its end-plan for the mine site was to seal off the acid-generating rock, restore the topsoil, and allow the area to re-seed naturally. (2) In reality, Redcorp went into receivership in 2009. (3) The CEO resigned, (4) the receiver took possession of the assets to pay off the secured creditors, (5) and the site was abandoned. (6) The site did not become a flat-spot. (7) Rather, it continued to leak toxic effluent (8) into the Tulsequeah River--a major tributary to the largest salmon run in southeastern Alaska. (9)

    The Redcorp story is one piece of a larger history of environmental degradation in Canada. There are approximately 10,000 abandoned mines in Canada alone (10) many of which pose health threats. (11) Abandoned sites also exist in numerous other key Canadian economic sectors such as forestry, oil production, and heavy manufacturing. (12) In 2005, the federal government earmarked $3.5 billion to clean up sites across Canada over 15 years. (13) These funds are likely insufficient: The cost of cleaning up a single mine site in the Northwest Territories ballooned to $903 million for that site alone. (14) In the United States, the cleanup of abandoned and inactive waste sites will cost as much as $100 billion and require roughly 50 years to complete. (15)

    Different techniques are used in Canada to prevent companies from abandoning their site before paying remediation costs. Environmental enforcement officers can issue cleanup orders to a polluting company. (16) Some jurisdictions also establish trust funds at the outset of development. (17) Other jurisdictions tax the entire industry and create an industry-wide pollution fund. (18) In addition, the Bankruptcy and Insolvency Act (19) and the Companies' Creditors Arrangement Act (20) give the federal and provincial Crown a super-priority charge over the contaminated real property and contiguous real property of the bankrupt to be used to pay for cleanup costs.

    Despite these techniques, Canada's current scheme of allocating the cost of environmental reclamation upon bankruptcy is environmentally harmful and fundamentally unjust. At bankruptcy, financially distressed companies do not comply with expensive environmental cleanup orders. Environmental trust funds and the super-priority charge have repeatedly proved grossly insufficient to fund the massive clean costs of contaminated sites. Finally, the courts have under-utilized the CCAA as an environmental remediation tool.

    In Part II of this article, I highlight the problems with the Canadian remediation scheme using three cases: Redcorp, Harbert Distressed Investment Fund, LP v General Chemical Canada Ltd (21) and Newfoundland and Labrador v AbitibiBowater Inc. (22) Although the courts and Parliament have devised rules to ensure bankrupt companies fulfill their environmental duties, these three cases illustrate that these rules are inadequate. Three common themes arise in these three cases: (1) the value of Crown's super-priority charge is often worthless given that it applies to contaminated property; (1) the prevalence of secured lending typically leaves no funds for the unsecured creditors after bankruptcy; and (3) companies with environmental contamination issues have nonetheless been able to attract financing from secured lenders by carefully limiting their security to uncontaminated personal property. In Part III, the common law and legislative attempts at a solution are outlined. It will be shown that neither of these solutions has been effective. Judicial attempts to provide a solution have been limited by Parliament and have been fraught with unworkable distinctions. Parliament's creation of the super-priority charge has also proven useless given the negative value of contaminated real property. I will also explain why legislative tools outside of the bankruptcy field are useless when the responsible company is facing bankruptcy. In Part IV, I will address central uncertainties in the environmental cleanup provisions of the BIA and CCAA and I will attempt to provide clarifications. In Part V, a more complete solution to environmental cleanup at bankruptcy is presented. Specifically, this article proposes that Parliament amend section 14.06(7) of the BIA and section 11.8(8) of the CCAA such that the Crown is given a super-priority charge for environmental remediation that extends over all the assets of the bankrupt rather than just the contaminated real property and contiguous real property. I will argue that this is the preferred solution for three reasons: A priority charge over all the assets of the bankrupt (1) reduces environmental harm; (2) is fair to secured creditors; and (3) relieves ailing companies of the burden of reclamation trust funds and reclamation taxes. In this section I will also provide reasons why the courts can also decrease the prevalence of abandoned sites by placing more weight on environmental concerns during the CCAA process.

  2. THE PROBLEM OF ENVIRONMENTAL RECLAMATION AT BANKRUPTCY

    The problem with Canada's environmental reclamation regime at bankruptcy is simple: At bankruptcy the cost of cleanup is often transferred from the bankrupt company to the public. Therefore, there is an incentive for companies to neglect their environmental obligations before bankruptcy. The cases of Redcorp, General Chemical, and AbitibiBowater illustrate the difficulty of assigning the cost of reclamation at bankruptcy to the person responsible and the common causes of this misallocation.

    i. Re Redcorp Ventures Ltd

    When Redcorp filed for creditor protection under the CCAA in March 2009, their mine site in northwestern British Columbia was leaking bright orange effluent into the Tulsequah River. (23) Acute lethality testing of the effluent found that it caused 100% mortality in fish in less than three hours. (24) Flow data indicated that the effluent was annually depositing into the watershed 23,861 pounds of zinc, 5,099 pounds of copper, 122 pounds of lead, 97 pounds of cadmium, and 49 pounds of arsenic. (25) Redcorp sought an extended period of protection in May 2009. (26) Redcorp claimed that more time would allow it to install an interim effluent-treatment facility and find a buyer for the mine. (27) It was obvious to the Court that there were no interested buyers. (28) The Court lifted the creditor protection and appointed a receiver. (29) Redcorp's secured assets fell into receivership for distribution to the creditors, (30) the CEO resigned, (31) and the leaking site was abandoned. (32)

    Despite the intentions of Redcorp, the provincial government, and the federal government, the tools used to ensure environmental reclamation of the site all failed to provide the funds required to clean up the site. From the outset of development, it appeared that Redcorp intended to restore the site to its natural condition. (33) Redcorp acquired the site from Cominco Ltd in 1992 and as part of this purchase Redcorp accepted the environmental liabilities associated to the site. (34) Redcorp set up a $1.2 million escrow fund to pay for the treatment of the acid effluent. (35) The government was also aware of the environmental liabilities and established four different lines of defence to ensure cleanup of the mine site. First, the operating permit granted to Redcorp by the province at the outset of development stipulated that Redcorp must clean up the mine site. (36) However, upon bankruptcy, compliance with this permit became financially impossible for Redcorp. Second, prior to bankruptcy, the province also required Redcorp to place $1.7 million in a restricted account to be used for reclamation costs for the final cleanup of the site at the conclusion of operations. (37) However, upon bankruptcy, it became clear that interim cleanup facilities for the acid water treatment facilities alone would cost $6 million to construct and $1 million a year to operate and the permanent cleanup and reclamation costs were unknown. (38) Third, as early as 2002, Environment Canada issued an environmental cleanup order under section 38 of the Fisheries Act. (39) This line of defence was also ineffective as Redcorp never complied with the order prior to bankruptcy and, after bankruptcy, Redcorp did not have the assets to comply with the order. Finally, upon bankruptcy, section 14.06(7) of the BIA and section 11.8(8) of the CCAA also gave the provincial and federal Crowns a super-priority charge on Redcorp's contaminated real property and real property "contiguous" to the contaminated real...

To continue reading

FREE SIGN UP