Ontario Divisional Court Confirms That Former Directors and Officers Must Remediate While Order Is Under Appeal

On June 19, 2013, in Baker v. Ministry of the Environment2013 ONSC 4142 [Baker], the Ontario Divisional Court upheld the decision of the Ontario Environmental Review Tribunal (ERT) that refused to stay a Director’s order issued by the Ontario Ministry of the Environment (MOE) against former directors and officers of Northstar Aerospace (Canada) Inc. (Northstar Canada). Although the former directors and officers have appealed the Director’s order to the ERT, they remain responsible for monitoring, reporting and remediation (at an estimated cost of $1.4 million per year) at least until a final decision is rendered. As a result of the decision in Baker, as well as decisions by the Ontario Superior Court of Justice in Companies’ Creditors’ Arrangement Act (CCAA) proceedings regarding Northstar Canada, the directors and officers are now being held personally liable for costs associated with an order by the MOE even while that order is being appealed.

Background

Northstar Aerospace and TCE Contamination in Ontario

Northstar Canada, a subsidiary of Northstar Aerospace Inc. (Northstar), owned and operated a helicopter and aircraft parts manufacturing facility in Cambridge, Ontario (Site), from 1981 to 2010. In 2004, Northstar Canada discovered the presence of trichloroethylene (TCE) and hexavalent chromium (both human carcinogens) in the groundwater at the Site at concentrations well above MOE standards. Certain samples of groundwater from wells located in a residential area southwest of the Site contained up to 4,000 parts per billion (ppb) of TCE. At the time, the MOE standard was 50 ppb.

Between 2004 and 2012, Northstar Canada voluntarily carried out investigations, mitigation and remediation efforts at the Site. However, the MOE began to worry about Northstar Canada’s solvency in 2012. On March 15, 2012, the MOE issued an order under sections 17, 20 and 196 of the Environmental Protection Act (EPA) requiring Northstar Canada to continue carrying out the monitoring and remediation efforts outlined in a plan submitted to the MOE in July 2006. On May 31, 2012, the MOE issued a second order requiring Northstar Canada to provide financial assurance in the amount of approximately $10.353 million by June 6, 2012 (collectively, the MOE Orders).

The Northstar CCAA Proceedings

Northstar Canada did not have sufficient funds to satisfy the MOE Orders, and therefore, on June 14, 2012, it applied for and obtained protection under the CCAA. At that time, all the directors of Northstar Canada resigned, effective June 14, while two officers remained to manage the company. At the time of the initial order in the CCAA proceedings (the Initial Order), and as authorized by section 11.51(1) of the CCAA, the remaining officers sought the inclusion of a charge in the Initial Order, which provided that (i) Northstar Canada would indemnify the directors and officers against obligations and liabilities that they may incur as directors and officers of the CCAA entities after the commencement of the CCAA proceedings (unless incurred as a result of these directors and officers’ gross negligence or willful misconduct); and (ii) the indemnification would be secured by a charge of $1.750 million in priority to any existing secured claims (the D&O Charge).

On June 27, 2012, the CCAA Court approved a “stalking horse” sales process for the assets of the Northstar Canada. The MOE filed a motion opposing the sale. The MOE submitted that the sale should not be approved, or alternatively, that the proceeds of sale be held in reserve on the basis that the MOE Orders were “regulatory orders” and therefore not subject to the stay under the CCAA. In respect of this motion, the Court held that since the purpose of the MOE Orders was to enforce payment obligations of the company, the MOE Orders were stayed by the Initial Order. The sales process culminated in the stalking horse bidder purchasing, in August 2012, substantially all the company’s assets other than the Site. Northstar Canada’s secured lenders suffered a shortfall on the sale so there were no proceeds available for Northstar Canada’s unsecured creditors.

Northstar Canada’s Bankruptcy

As a result of the sale of assets to the stalking horse bidder, Northstar Canada was left with little to no assets other than the Site. Accordingly, on August 24, 2012, the company was adjudged bankrupt and all its remediation activities at the Site were discontinued. As contemplated by section 14.06 of the Bankruptcy and Insolvency Act, Northstar Canada’s trustee in bankruptcy abandoned the Site to the care of the MOE leaving the ministry with a secured claim for monitoring and remediation expenses against only the Site and an unsatisfied unsecured claim against Northstar Canada.

The Claims Against the Directors and Officers

On August 2, 2012, the Court ordered a claims procedure for claims against the directors and officers in respect of obligations and liabilities accruing on or after the commencement of the CCAA proceedings.

On November 14, 2012, the MOE issued a Director’s order under sections 17, 18 and 196 of the EPA against the directors and officers requiring them to carry out the work outlined in the order at an estimated annual cost of about $1.400 million (the D&O Remediation Order). Concurrently with the issue of the D&O Remediation Order, the MOE submitted claims against the directors and officers in the CCAA proceedings for approximately $15 million for costs incurred and to be incurred by the MOE in carrying out certain remediation activities. The directors and officers also filed claims in the CCAA proceedings in respect of their potential personally liability under the D&O Remediation Order.

Since the D&O Charge had priority to any existing secured claims – if the claims by either the MOE or the directors and officers were accepted – potentially up to $1.750 million from the proceeds of the stalking horse sale ultimately would be paid to MOE. However, the CCAA Court held that the claims made by the directors and officers arising from the D&O Remediation Order were not proper claims under CCAA proceedings. The Court reasoned that if the claims relating to the D&O Remediation Order were claims for which the directors and officers were entitled to be indemnified and covered by the D&O Charge, that would wrongly and inequitably affect the priority of claims between the MOE and the secured creditors and would result in the MOE achieving indirectly in the CCAA proceedings what it could not achieve directly.

The Directors and Officers Appeal the D&O Remediation Order and Seek to Stay the Order

The named directors and officers of Northstar Canada appealed the D&O Remediation Order to the ERT on November 30, 2012 and December 7, 2012. They also sought to have the CCAA Court assume jurisdiction of their appeal. The CCAA Court’s decision on jurisdiction is still pending at the time of writing this Update. In addition, the directors and officers brought a motion to stay the D&O Remediation Order pending the resolution of the appeal (the Stay Motion).

On February 8, 2013, the ERT heard the motion to stay the D&O Remediation Order until a final determination was made by the ERT. It dismissed the Stay Motion on February 15, 2013, and provided written reasons on March 22, 2013. The ERT concluded that it lacked jurisdiction to stay certain portions of the D&O Remediation Order because section 143(2)(a) of the EPA forbids the ERT from staying an order “to monitor, record and report.”

The MOE argued that the ERT was also prevented from staying the D&O Remediation Order because section 143(3) of the EPA prohibits the ERT from doing so if the effect of the stay would endanger human health and safety. However, the ERT concluded that no such danger was likely to occur because the MOE had taken over the remediation efforts.

Finally, the ERT applied the three-pronged test from RJR-Macdonald v. Canada (Attorney General) to determine whether the directors and officers were entitled to a stay of the remaining provisions of the D&O Remediation Order. While the ERT concluded that the directors and officers had raised a serious issue in their appeals, they could not establish irreparable harm because, at the time, the CCAA Court’s decision on whether or not they could access the D&O Charge was still outstanding. They also were unable to convince the ERT that the balance of convenience favoured the stay. In the result, the ERT declined to grant the stay (the Stay Decision).

Appeal of the Stay Decision to the Divisional Court

The directors and officers appealed the Stay Decision to the Divisional Court and concurrently brought applications to judicially review the decision. In response, the MOE brought a motion (i) to quash this appeal on the basis that there is no right of appeal of an interlocutory decision under the EPA and (ii) to dismiss the judicial review applications on the basis of prematurity. The MOE was successful on both issues.

The directors and officers argued that the Stay Decision was “final,” not interlocutory, because it determined a “substantial issue” – namely, the requirement that they pay interim remediation costs, which they argued were unrecoverable because the ERT cannot order reimbursement as a remedy for a successful appeal of the D&O Remediation Order. The Divisional Court disagreed with the directors and officers, holding that the Stay Decision did not deal with any issues they raised in their appeal of the D&O Remediation Order; rather, the Stay Decision dealt with a “collateral” issue as to who should bear the interim remediation costs. The Divisional Court commented that deciding whether an order is final or interlocutory on the basis of the anticipated financial effect of the order would “introduce an unacceptable uncertainty into this already fraught area of the law.”

The Divisional Court concluded that the EPA does not provide a right to appeal an interlocutory order. The Divisional Court also quashed the directors and officers’ judicial review application as premature because they failed to first avail themselves of all potential remedies within the administrative process. First, the Court pointed to the fact that the ERT’s Rules of Practice and Practice Directions allow for a party to request that the ERT review an order or decision, whereupon the ERT can confirm, vary, suspend or cancel the order or decision. Second, the Court noted that the directors and officers could have brought a motion to stay the D&O Remediation Order in light of new evidence and arguments not put forward at the Stay Motion. Finally, although the Court recognized that judicial review applications can be considered while administrative proceedings are ongoing in “exceptional circumstances,” the Court was unwilling to conclude that the requirement of expenditure of money was sufficiently “exceptional.”

The Court found that the directors and officers argued their motions on the basis that the Stay Decision resulted in a “fundamental unfairness” whereby they would be required to pay substantial unrecoverable costs. The Court was unwilling to accept that the costs would be unrecoverable because only some of the directors and officers may be found liable at the appeal of the D&O Remediation Order and, if so, the successful appellants may be able to recover from the unsuccessful appellants.

Ultimately, the Court commented that even if the result of the Stay Decision led to unfairness, this was a consequence of a legislative choice. The Court noted that prior to the Environmental Statute Law Amendment Act, 1990, Director’s orders were automatically stayed pending appeal. The amendments, passed by the legislature in the wake of a substantial fire at a tire facility, introduced section 143 of the EPA, which expressly limits the ability of the ERT to stay certain orders. The Court held that the consequences of this amendment – that in appealing orders, appellants may have to bear interim costs – are consistent with the legislative intent of the amendments and the purpose of the EPA – namely, “to provide for the protection and conservation of the natural environment.”

Discussion

The Divisional Court’s decision in Baker as well as the decisions by the Court in the CCAA Proceedings of Northstar Canada may have profound consequences for director and officer liability in Canada, and may have an impact on the way the MOE issues orders against insolvent companies.

  1. MOE has stepped up pursuit of collection efforts. Although the MOE ultimately was not successful, it pursued novel arguments in the Northstar CCAA proceedings by asserting (i) that the MOE orders properly constituted regulatory orders and therefore were not stayed by the Initial Order; and (ii) that the MOE orders were proper claims that could be indemnified under the D&O Charge.
  2. Former directors and officers may be responsible for environmental remediation costs. The MOE issued the D&O Remediation Order not only against all individuals who were serving as directors or senior officers at the time Northstar Canada sought protection under the CCAA, but also against one individual who had ceased serving as a director more than a year prior to that date. In addition, one director became a director several years after a monitoring and remediation plan had been prepared and submitted to the MOE. The decision in Baker confirms that all former directors and officers may be potentially personally liable for environmental remediation costs, in addition to their own legal defence costs, regardless of whether or not they were directors or officers at the time of the contaminating events.
  3. Infighting for recovery of interim costs. Because the ERT cannot order reimbursement for interim costs, the decision in Baker suggests that the only way individual directors can recover those interim costs is to attempt to appeal an order on an individual basis and, if successful, sue other directors who are unsuccessful on appeal. Although the situation may be affected by the nature of any applicable insurance coverage, appeals from such orders are likely to become more complicated because individual directors may retain their own counsel in an attempt to extricate themselves from personal liability. Directors and officers should examine their D&O insurance policies to confirm whether environmental remediation costs are expressly covered or excluded. Further, individuals should be wary about becoming a director of a company that has significant environmental concerns, even if, at the time they become directors or officers, those concerns are being addressed by the corporation through a remediation plan filed with the MOE.
  4. Targeted drafting of MOE orders. As a result of Baker, the MOE may attempt to frame its orders in such a way as to remove the jurisdiction of the ERT to stay an order pending appeal (e.g., by emphasizing the obligation to “monitor, record and report”). The MOE also may be more reluctant to intervene or take on monitoring and remediation activities after issuing an order against solvent entities so that the ERT may be less willing to stay an order on the basis of a perceived risk to human health and safety.

The full implications of Baker remain unclear due to the relatively unique circumstances surrounding Northstar Canada’s bankruptcy. However, Baker makes it clear that named orderees will be on the hook for interim expenses pending the appeal of an order, and that orderees seeking a stay will have a more difficult time obtaining that stay.