Nortel's CCAA proceedings stay Ministry of Environment clean-up obligations

Since Nortel Networks Corporation, and a number of related companies (together, “Nortel”), initially filed under the Companies’ Creditors Arrangement Act (CCAA) over two years ago, the Ontario Ministry of the Environment (the “MOE”) has sought to hold Nortel responsible for environmental contamination remaining on properties it once owned. Specifically, the MOE has issued a remediation and prepared several other draft remediation orders (together, the “MOE Orders”). Nortel estimated that completing the work required by the orders would cost approximately eighteen million dollars. Nortel has long maintained that such environmental clean up orders should not be prioritized ahead of obligations set out in their CCAA plan of arrangement. Today, the Ontario Superior Court of Justice released its reasons in a number of motions relating to these environmental matters, brought together before Justice Morawetz.
 

Nortel sought a number of declarations and orders, as follows:

1. 1. authorization and direction that it cease performing any remediation at or in relation to the sites named in the MOE Orders (the “Sites”);
2. 2. a declaration that any claims in relation to remediation requirements by the MOE or any other person against Nortel or their current or former directors or officers in relation to the Sites be subject to resolution and determination in accordance with the terms of the Amended and Restated Claims Procedure Order and the Claims Resolution Order already authorized by the Court;
3. 3. an order repudiating or disclaiming any contractual obligations to carry out remediation requirements on the sites;
4. 4. an order declaring that the relief sought by the MOE Orders is financial and monetary in nature and that the MOE Orders are stayed by the general stay of proceedings already ordered by the Court at the time of the CCAA filing;
5. 5. a declaration that related proceedings before the Environmental Review Tribunal in relation to the MOE Orders be stayed; and
6. 6. advice and direction with respect to certain contaminated lands still owned by Nortel.

The Court’s decision turned heavily on whether the obligations set out by the MOE Orders and under the Environmental Protection Act can be characterized as financial obligations or as performance or regulatory obligations. Nortel noted that the CCAA already provides for the preferred treatment of certain environmental liabilities. It argued that in light of this, the MOE Orders constitute an effort to use measures outside the CCAA to privilege the MOE’s financial claims, which are more properly dealt with exclusively within the CCAA framework. For its part, the MOE argued that the CCAA provisions dealing with environmental liabilities only address claims where the MOE is acting as a creditor and do not address environmental liabilities generally. Further, it argued, the obligations set out in the MOE Orders are performance obligations which are not impacted by the CCAA proceedings and that allowing Nortel to evade these responsibilities amounts to an unfair shifting of expense from Nortel’s creditors, who chose to do business with the company, to the taxpayers of Ontario.

The Court notes that it is “necessary to emphasize: insolvency statues such as the CCAA and the BIA do not mesh very well with environmental legislation. The environmental legislation and its regulatory framework functions more effectively when insolvency is not present.” However, the Court determined that it must find in favour of Nortel, concluding that the realities of insolvency mean the MOE Orders can amount to nothing but an attempt to enforce a financial obligation:

“There is no going forward business. Nortel is in a position where it has no real option but to pay money to comply with any environmental issue. In my view, if the MOE moves from draft orders to issued orders, the result is clear. The MOE would be, in reality, enforcing a payment obligation, which step is prohibited by the Stay.”
 

Recognizing the challenges this conclusion leaves in dealing with the realities of environmental remediation costs, the Court notes that the CCAA does make some provisions for recognizing claims for clean-up costs of property still owned by a debtor company. In this case, however, Nortel had sold its interest in most of the properties subject to the MOE Orders prior to filing under the CCAA. Alternatively, the Court suggests that the MOE could file a claim as an unsecured creditor.