Canada: Alberta Court Of Appeal Confirms Scope & Application Of Redwater Outside Of Formal Bankruptcy Regime

In a landmark decision, the Alberta Court of Appeal (the Court) clarified the non-applicability of Redwater's environmental contamination principles to disputes between landowners outside insolvency proceedings, setting a precedent for the interpretation of secured lending and environmental remediation laws.

On April 8, 2024, the Court released its reasons in the appeal of Qualex-Landmark Towers Inc v 12-10 Capital Corp, 2023 ABKB 109. The appeal citation is 2024 ABCA 115 (the Decision).

The Decision addresses whether the reasons in Orphan Well Association v Grant Thorton Ltd, 2019 SCC 5 (Redwater) regarding environmental contamination apply to a dispute between neighbouring landowners outside of formal insolvency proceedings. The Court reviewed the Chambers Justice's decision for correctness and allowed the appeal.

The Chambers Justice granted a pre-judgment attachment order in favour of Qualex-Landmark Towers Inc. (Qualex), who asserts an environmental damages claim against the owner of alleged historically contaminated land. The attachment order attached to the alleged contaminating land in priority to mortgagees' mortgages. In granting the pre-judgment attachment order, the Chambers Justice effectively displaced the mortgagees' secured positions against land in favour of Qualex's pending tort claim.

The Court concluded that the principles in Redwater do not apply in Qualex's circumstances. The Court analyzed the test for an attachment order under section 17(2) of the Civil Enforcement Act (CEA) and described a pre-judgment attachment order as an extraordinary remedy which requires more than "suspicion or subjective hope" of success of a claim under CEA s.17(2)(a). In light of the current legislative framework regarding environmental remediation and secured lending, the Court held that the "reasonable likelihood" threshold for granting an attachment order under CEA s.17(2)(a) was not met.

The Court held that Qualex's claim, if proven, would not entitle it to recover damages from the sales proceeds of land in priority to the mortgagees. Such an entitlement is unsupported by any statutory or existing court authority.

Significance of Decision

The Decision is significant because it confirms the scope and application of Redwater outside of formal insolvency proceedings. The Court cautioned that secured lending and the availability of "superpriority" rights both inside and outside of an insolvency context are governed by a complex web of federal and provincial environmental and secured lending legislation. The Court affirmed that: (i) the priority declaration that Qualex sought runs afoul of clear statutory priority entitlements, and (ii) courts are limited in their power to vary priority entitlements established by statute, which power remains in the hands of the Legislature and Parliament.

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