The priority of unfunded environmental obligations was once again at the fore of a recent decision from the Alberta Court of King's Bench (the "Court"). In Re Mantle Materials Group, Ltd, 2023 ABKB 488 ("Mantle"), the Court grappled with the question of whether a debtor's entire estate, including assets "unrelated" to the environmental condition, must be used to satisfy end-of-life environmental obligations prior to any distribution to creditors. In this particular case, the Court answered this question in the affirmative, concluding that there were no "unrelated assets" in the sense that all assets in dispute were used by the company in relation to its gravel pit business (being the business giving rise to the environmental obligations). In reaching this conclusion, the Court applied the principles first espoused by the Supreme Court of Canada in Orphan Well Association v Grant Thornton Ltd, 2019 SCC 5 ("Redwater"), finding that environmental obligations take priority over secured creditors even outside the oil and gas context.
Background Facts
Mantle Materials Group Ltd. ("Mantle") operates various gravel pits pursuant to licenses issued by Alberta Environment and Protected Areas ("AEPA"). Mantle acquired its gravel-producing assets in the Companies' Creditors Arrangement Act ("CCAA") proceedings of JMB Crushing Systems Inc. ("JMB") through a Reverse Vesting Order ("RVO"). Following the commencement of JMB's CCAA proceedings, AEPA issued Environmental Protection Orders ("EPOs") to JMB respecting some of the gravel-producing properties. The EPOs are analogous to an Abandonment and Reclamation Order ("ARO") issued by the Alberta Energy Regulator ("AER"), as they impose environmental abandonment and remediation obligations upon the party to whom the EPO is issued. Pursuant to the RVO, Mantle remained liable for the abandonment and reclamation obligations issued with respect to properties acquired through its transaction with JMB.
Following the completion of the JMB CCAA proceedings, Mantle entered a loan transaction with Travelers Capital Corp ("Travelers"). Travelers loaned Mantle $1.7 million for the acquisition of equipment for use in its gravel operations, which was secured by a purchase-money security interest ("PMSI"). Travelers' security interest was designated to have first priority.
Subsequently, Mantle experienced operational problems and was burdened with excessive debt inherited from the JMB CCAA proceedings. Mantle itself eventually became insolvent and sought to restructure through a Notice of Intention to Make a Proposal ("NOI") under the Bankruptcy and Insolvency Act. Mantle maintained the central premise of its anticipated proposal to creditors in the NOI proceedings was to perform its environmental obligations and complete reclamation work to satisfy the EPOs.
In the case at hand, Mantle sought to have various charges (the "Restructuring Charges") on its property approved by the Court in the NOI proceedings. Mantle's application entailed giving the Restructuring Charges priority over all other debts, including the first-ranking PMSI of Travelers. Mantle advanced this position on the basis that Redwater requires all end-of-life environmental obligations to be satisfied prior to payment being made to any creditors. In response, Travelers argued the Restructuring Charges should not have priority over its PMSI because the assets subject to this security were not related to Mantle's environmental obligations. Therefore, they were an "unrelated asset" to the environmental condition or damage, and not caught by the so-called Redwater super-priority.
The Court's Decision
In coming to his conclusion, Justice Feasby considered Redwater as well as ensuing Alberta caselaw, which contemplated the super-priority principle and environmental obligations in insolvencies, specifically Orphan Well Association v Trident Exploration Corp, 2022 ABKB 839 ("Trident") and Manitok Energy Inc (Re), 2022 ABCA 117 ("Manitok").
Feasby J. began by noting that each of Redwater and Manitok left open the question of whether "unrelated assets" could be captured by the super-priority and called upon to satisfy environmental obligations ahead of all creditors. The Court then turned to the applicability of Trident, which considered whether certain assets of an oil and gas company—namely sale proceeds from real estate and equipment—constituted unrelated assets. In Trident, the Court held that Trident had one business: oil and gas exploration and production, and as such, all assets were related to the environmental obligation and available to satisfy its end-of-life obligations, including the disputed proceeds.
Following Trident, Feasby J. held that no distinction could be made between Travelers' assets and those at issue in Trident; stating that, "the equipment over which Travelers has a security interest is as much a part of Mantle's gravel business as the equipment and real estate in Trident was a part of Trident's oil and gas business." As such, Mantle's environmental obligations had a super-priority over it's secured creditors including Travelers' PMSI, resulting in the approval of the Restructuring Charges with priority over Travelers' PMSI.
Implications and Conclusions
Mantle is one of the few applications of the Redwater decision outside of the oil and gas context, the other recent decision being in relation to real estate development in the Qualex matter. It affirms the Court's decision in Trident, that all assets in relation to a business that results in environmental obligations are available to satisfy such obligations pursuant to the Redwater principles. However, the Court still declined to comment on the concept of "unrelated assets", stating: "In finding that the equipment in the present case is part of Mantle's gravel business, I make no comment on how in theory a line should be drawn between related and unrelated assets or even if a line should be drawn. As the Court of Appeal said in Manitok, that "can be left for another day." Where a company has multiple business divisions, only some of which create environmental obligations, it thus remains to be seen whether assets devoted to the so-called "non-polluting" business units, will be available to satisfy unfunded environmental obligations created by their "polluting" counterparts.
Secured lenders should continue to perform appropriate due diligence in relation to credit extended to any enterprise that contains a so-called "polluting" business unit, as the courts continue to demonstrate a trend of prioritizing environmental obligations above all other interests, including those of secured creditors.
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