Several years ago, the “Redwater” case held that in the case of insolvency, environmental cleanup obligations trump repayment to secured creditors. While Redwater applied to the oil and gas sector, as has been demonstrated in recent legal cases, it is not limited to oil and gas companies.
Below, we outline two recent legal cases that cite the Redwater Decision.
Travelers Capital Loan
Mantle Materials Group, Ltd. (Mantle) operated 24 gravel pits on public and private lands across Alberta. In order to purchase equipment to be used in its gravel site operations, Mantle obtained a $1.7 million loan from Travelers Capital Corporation (Travelers). “Travelers was granted a purchase-money security interest over the equipment and ultimately became a secured lender under the Bankruptcy and Insolvency Act” (Source: McLennan Ross).
Soon after obtaining the loan, Mantle had operational problems. These issues were exacerbated by the reclamation obligations placed on Mantle under several Environmental Protection Orders (Orders) issued by Alberta Environment and Protected Areas (AEPA). These Orders required Mantle to address the end-of-life abandonment steps to be taken at its gravel-producing sites and to perform any necessary work towards the conservation and reclamation of those lands.
On July 14, 2023, Mantle issued a notice: “We are writing to advise you that on July 14, 2023, the Company commenced restructuring proceedings by filing a Notice of Intention to Make a Proposal (‘NOI’) pursuant to section 50.4(1) of the Bankruptcy and Insolvency Act (‘BIA’).”
According to McLennan Ross, “One of the issues before the Court was whether all of Mantle’s assets, including those not directly related to its gravel site operations, could be used to satisfy its end-of-life environmental obligations prior to any distribution to secured creditors such as Travelers.”
Citing Redwater
Mantle and AEPA took the position that Travelers should not be permitted to “realize on its security prior to the completion of the reclamation work.” Mantle “emphasized the finding in Redwater that a company’s environmental remediation (or reclamation) obligations must be satisfied prior to distributions to creditors, and that any of the assets of the insolvent entity may be used to satisfy such obligations.”
Travelers argued that “Redwater stood for the principle that end-of-life obligations need only be satisfied using those assets specifically encumbered by or related to that obligation. In other words, Travelers argued that an exception to the Redwater principle arises for any assets that are unrelated to the environmental condition (which Travelers said was the case here). As a result, Travelers contended that it had priority with respect to the security in the equipment and that its claim should be paid out without delay” (Source: McLennan Ross).
“If left undisturbed, the (Qualex) decision is a dangerous precedent that could turn the entire Canadian real estate lending industry on its head.” (Photo by Adeolu Eletu on Unsplash)
According to CanLII Connects, “…The Alberta Court of King’s Bench in Mantle determined that since (i) the equipment over which Travelers had security was part of Mantle’s gravel business, (ii) the environmental obligations to be addressed through the Restructuring Charges related to Mantle’s gravel business, therefore (iii), the principles in Redwater and subsequent case-law meant that the Restructuring Charges should prime Travelers’ security.”
CanLII Connects also states, “Mantle is undoubtedly the next important decision in the ongoing evolution of the priority for environmental end-of-life obligations in Canadian insolvencies.”
“Dangerous Precedent for Canadian Real Estate Lending”
The second recent case that cited Redwater is summarized in a blog by Fasken: Qualex-Landmark Towers (Qualex), Inc v 12-10 Capital Corporation (Capital) Case. The Fasken blog states, “This is the first case that has applied the reasoning in Redwater to a private dispute between two citizens, rather than the enforcement of environmental remediation obligations by a regulator against a debtor in formal insolvency proceedings.”
Contamination Migrating onto Property
Very briefly, Qualex had purchased land adjacent to the Capital land and they knew the Capital property was impacted. Years later, Capital was ordered by Alberta Environment and Parks to submit a plan to delineate and remediate the contamination on the property. Despite follow ups, the plan was never completed.
Qualex, later discovered that the contamination from Capital had migrated onto their property.
As noted in the Fasken blog, “Capital Corp. was insolvent on a balance sheet basis and had negative cash flow, although it had not entered any formal insolvency proceedings.”
Qualex was concerned that Capital would sell the property and use the proceeds to pay mortgagees and leave Qualex to pay for remediation of the contamination. Again from the Fasken blog, Qualex “applied for an attachment order against Capital Corp. and requested that the attachment order be applied to any gross sale proceeds of the…Lands and that it also rank in priority to the mortgages already registered on title.”
Citing Redwater
In reaching a decision, the judge “relied on, and then expanded upon, the principles regarding environmental remediation obligations set out in Redwater.” Further, noting “prevailing law in Canada and Alberta provides that environmental remediation obligations may displace (i.e., rank in priority to) secured lenders.”
The judge “exercised his discretion to grant an attachment order against Capital Corp. and directed that $2,006,500 (being the estimated cost to remediate the Contamination on the [Qualex] Lands) from any sale of the …Lands be held in trust by Capital Corp.’s counsel pending the outcome of the Action.”
Dangerous Precedent
The Fasken blog, which takes a much deeper dive into this case concludes with, “If left undisturbed, the (Qualex) decision is a dangerous precedent that could turn the entire Canadian real estate lending industry on its head.”
How might these and other cases affect lenders, property transactions, and business in general? The regulatory landscape continues to change and it would be wise to keep a close eye on this and other developments.
If you want to learn more about these developments, we encourage you to visit the cited law blogs above.
If you need assistance with an environmental-related matter, contact Christopher Pare’, P.Geo. Q.P. at 519-948-7300, Ext. 114.
Dragun Corporation does not use artificial intelligence in drafting our blogs or any other material.
This blog was drafted by Alan Hahn. Alan has an undergraduate degree in Environmental Studies and completed a graduate program in Environmental Management. He has worked in environmental management for 45 years. He has written hundreds of blogs and articles. His published work includes HazMat Magazine, BizX Magazine, Michigan Lawyers Weekly, GreenStone Partners, Manure Manager Magazine, and Progressive Dairy.
This blog was reviewed by Christopher Paré, P.Geo. Chris is a senior geoscientist and manager of Dragun’s Windsor, Ontario, office. Chris has more than 30 years of experience on projects ranging from environmental site assessments (Phase One/Two ESA), excess soils, remedial investigations, soil and groundwater remediation, Permits to Take Water, Records of Site Conditions, vapour intrusion, and site decommissioning. Chris is a frequent speaker, author, and expert witness. See Chris’ bio.
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