SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

COURT FILE NO.: CV-12-9761-00CL
DATE: 20121109

IN THE MATTER OF THE COMPANIES’ CREDITORS ARRANGEMENT ACT,
R.S.C. 1985, c. C 36, AS AMENDED

RE: IN THE MATTER OF A PLAN OF COMPROMISE OR ARRANGEMENT OF NORTHSTAR AEROSPACE, INC., NORTHSTAR AEROSPACE (CANADA) INC., 2007775 ONTARIO INC. AND 3024308 NOVA SCOTIA COMPANY, Applicants

BEFORE: MORAWETZ J.

COUNSEL:
C. J. Hill, for Ernst & Young Inc., Court-Appointed Monitor
J. L. Wall, for Her Majesty The Queen in Right of Ontario as Represented by the Ministry of the Environment
P. Guy, for Former Directors and Officers Group (“Former D&O Group”)
S. Weisz, for Pre-Petition Agent

HEARD: OCTOBER 31, 2012 (with Supplementary Materials filed November 2, 2012)

ENDORSEMENT

[1] This motion was brought by the Former D&O Group for (a) an interim order, injunction or declaration restraining the Director, as appointed pursuant to the Environmental Protection Act (“EPA”), or anyone as he may direct (the “Director”) from issuing Director’s Order No. 5866 – 8WKU92 (the “Director’s Order”) dated October 19, 2012, filed in the CCAA Proceedings by Her Majesty The Queen in Right of Ontario, as represented by the Ministry of the Environment, (the “MOE Claim”), until such time as the court adjudicates the balance of the within motion; and (b) an interlocutory order, injunction or declaration restraining the Director from issuing the Director’s Order until such time as the court adjudicates the motion to be brought by the Monitor for an order prescribing adjudicative procedures (including the proper forum) to be used in relation to the determination of the MOE Claim and the other claims filed in the CCAA claims process (the “Adjudication Procedure Motion”).

[2] The Adjudication Procedure Motion is currently scheduled to be heard on November 14, 2012. As a result, the Former D&O Group seeks an interlocutory order restraining the Director from issuing the Director’s Order for 12 days pending the return of the Adjudication Procedure Motion.

[3] Northstar notified the MOE in 1995 that a spill at a manufacturing plant in Cambridge, Ontario (the “Site”) had contaminated groundwater that ran beneath hundreds of residential properties in the surrounding area (the “Bishop Street Community”).

[4] Since 1995, Northstar has voluntarily conducted various investigation, remediation and monitoring activities at the Site and in the Bishop Street Community, in conjunction with the MOE and local authorities.

[5] The MOE issued a Director’s Order on March 15, 2012 pursuant to sections 17, 18 and 196 of the EPA ordering Northstar to develop and implement a plan to clean up contaminated groundwater (the “First Director’s Order”).

[6] The MOE issued a second Director’s Order on May 31, 2012 ordering Northstar to provide financial assistance to the MOE in the amount of $10,352,906 within a week (the “Second Director’s Order”).

[7] Northstar obtained protection the CCAA on June 14, 2012. The Initial Order granted that day has been extended twice, most recently to October 31, 2012.

[8] On August 24, 2012, Northstar completed a court-approved sale of substantially all of its assets to Heligear Canada Acquisition Corporation. The sale was the culmination of a stalking horse sales process that was approved at the outset of the CCAA Proceedings.

[9] The Sale Transaction did not include the Site. Upon closing, Northstar was adjudged bankrupt and had no funds to continue the remediation efforts of the Site.

[10] On August 15, 2012, the Minister issued a Direction pursuant to section 146 of the EPA directing the MOE to perform the work required by the First Director’s Order (the “Direction”), and as a result, the MOE has taken over the remediation activities on the Site effective on or about August 27, 2012.

[11] The bankruptcy order against Northstar permits the continuation of the CCAA Proceedings to allow the completion of a claims process started under the CCAA.

[12] The claims bar date for all claims under the CCAA process was October 23, 2012 and the MOE filed a claim under the CCAA Claims Process on October 19, 2012. The MOE Claim is based on the unissued Director’s Order.

[13] The MOE claims that the MOE will issue the Director’s Order as soon as the stay of proceedings against the former directors and officers expires. That stay has now expired, but MOE has undertaken not to issue the Director’s Order pending the determination of this motion.

[14] If the Director’s Order is issued, the Former D&O Group will have 15 days to appeal the Order to the Environmental Review Tribunal (the “Tribunal”) pursuant to section 140 of the EPA. An appeal to the Tribunal does not automatically stay a Director’s Order. The EPA gives the Tribunal the authority to stay a Director’s Order pending appeal only if certain statutory conditions do not apply and the subject of the order can satisfy the three-part RJR Macdonald test for an injunction.

[15] If the Director’s Order is issued prior to the hearing of the Adjudication Procedure Motion, counsel to the former D&O Group has indicated that the following consequences will ensue:

(a) first, the Former D&O Group will be forced to appeal the Director’s Order to the Tribunal within 15 days, or risk losing their right of appeal under the EPA;

(b) second, the Former D&O Group will then seek an immediate stay of the Director’s Order pending the determination of their appeal by the Tribunal;

(c) third, the Tribunal will then be required to determine issues such as whether the Former D&O Group “failed to carry out their duty and exercise their authority as a director/officer to make adequate provision to ensure implementation of the remediation strategy”;

(d) these determinations will, in turn,

(i) prejudge the Adjudication Procedure motion because they presume that the Tribunal is the appropriate forum to have these issues decided; and

(ii) raise the real possibility of inconsistent findings with those to be made by the CCAA court in its consideration of the MOE Claim.

[16] Two issues are raised on the motion:

(i) Does the court have jurisdiction to grant an interlocutory injunction restraining the MOE from issuing the Director’s Order?

(ii) If so, should an injunction be issued?

Issue 1: Does the court have jurisdiction to grant an interlocutory injunction restraining the MOE from issuing the Director’s Order?

[17] The starting point for the analysis is section 14 of the Proceeding Against the Crown Act (the “PACA”) which reads:

14(1) Where in a proceeding against the Crown any relief is sought that might, in a proceeding between persons, be granted by way of injunction or specific performance, the court shall not, as against the Crown, grant an injunction or make an order for specific performance, but in lieu thereof may make an order declaratory of the rights of the parties.

(2) The court shall not in any proceeding grant an injunction or make an order against a servant of the Crown if the effect of granting the injunction or making the order would be to give any relief against the Crown that could not have been obtained in a proceeding against the Crown, but in lieu thereof may make an order declaratory of the rights of the parties.

[18] Counsel for the former D&O Group acknowledged that this section establishes the general rule that an injunction against the Crown is prima facie impermissible. However, counsel submits that there are two exceptions to this general rule.

[19] The first is when the Crown is acting ultra vires or is deliberately flouting the law. Counsel goes on to acknowledge that this exception is not at issue on this motion because the Former D&O Group is not alleging that the MOE is deliberately flouting the law.

The Status Quo Exception

[20] Counsel for the Former D&O Group submits that a second exception exists that allows a court to issue injunctive relief in situations where it is necessary to preserve the status quo and protect the court’s process. This is the exception that the Former D&O Group is relying upon.

[21] Counsel referenced the text of Sharpe J.A. for the principle that courts have found exceptions to section 14 of the PACA outside of the ultra vires exception. Sharpe J.A. in his text, Injunction and Specific Performance, loose leaf, Thomson Reuters, 2012 at 3.1110 – 3.3.1120 and 3.1180 states that not to do so would leave “serious gaps”:

If an interlocutory injunction is unavailable, no immediate remedy to prevent or deter government wrongdoing will be possible and several judges have insisted that they have the power to grant interim relief.

Restricting injunctive relief against the Crown to the ultra vires principles would leave serious gaps.

[22] Counsel submits that the status quo exception originates from the Supreme Court of Canada’s decision in Canada (Attorney General) v. Law Society of British Columbia, (1982) 2 S.C.R. 307, where Estey J. reasoned that, even in the face of legislation which renders such an order, viewed independently, beyond the court’s jurisdiction, the court must retain the power to issue an interim order in order to protect its own process.

[23] Counsel also referenced Anishanabe v. Ontario (Minster of Health and Long-Term Care), (2002) O.J. No. 4212 (S.C.J.) and Couchiching First Nation v. Fort Frances (2010) 2010 ONSC 2442, O.J. No. 2558 (S.C.J.) as decisions where the reasoning of Estey J. has been followed.

[24] Counsel submits that the relief sought by the Former D&O Group is in the nature of a preservation order and is sought solely to maintain the rights of the parties pending the determination of the Adjudication Procedure Motion. Counsel goes on to submit that the relief sought does not require the Minister to take a positive action, and it does not seek to permanently enjoin the Minister from taking any action and it simply preserves the state of affairs between the parties pending a determination of their rights in a related motion.

[25] Counsel to MOE disputes the position put forth by counsel for the former D&O Group, relying on Smith v. Nova Scotia (Attorney General) (2004) 2004 NSCA 106, N.S.J. No. 343; leave to appeal dismissed (2004) S.C.C.A. No. 498.

[26] For the purposes of disposition of this motion, I am proceeding on the basis that there is some authority for the proposition put forth by counsel for the Former D&O Group.

[27] However, in the circumstances of this case, I have not been persuaded that the status quo exception has application. Firstly, as Sharpe J.A. seems to suggest the exception can be applied to “prevent or deter government wrongdoing”. In this case, there is no evidence or suggestion that there is government wrongdoing. Indeed, the Former D&O Group is not alleging that the MOE is deliberately flouting the law. Secondly, Sharpe J.A. seems to suggest that the exception has application where restricting injunctive relief against the Crown to the ultra vires principle would leave serious gaps. The EPA sets out a complete statutory scheme for the issuance of environmental orders including provisions for the issuance, and appeal of those orders. In view of this scheme, I have not been persuaded that there is a “serious gap” such that an interim order is required to ensure the effectiveness of the disposition of the issue.

[28] Further, even if the argument of the Former D&O Group is placed at its highest, there is still the necessity to meet the three-part test for injunctive relief set out in RJR-Macdonald Inc. v. Canada (Attorney General), (1994) 1 S.C.R. 311.

[29] On the first point of whether there is a serious issue to be tried, I am in agreement with counsel for the MOE that the Former D&O Group has sought relief to which they are not entitled. The EPA sets out a complete statutory scheme for the issuance of environmental orders including provisions for the issuance, stay and appeal of those orders. Counsel to the MOE has provided sufficient authority to establish the position that there is no serious issue to be tried because the Former D&O Group’s motion constitutes a collateral attack on the administrative process set out in the EPA. It has been established that the validity of the Director’s Order to be issued under the EPA against the directors/officers is to be determined by the Tribunal. (See Wood Producers Association of Ontario v. Ontario (2005) O.J. No. 475 at para. 7, which relies upon the decision of the Supreme Court of Canada in R. v. Consolidated Maybrun Mines Limited (1998) 1 S.C.R. 706.)

[30] On the second issue of the demonstration of irreparable harm, I have not been persuaded by the submissions put forth by the Former D&O Group to the effect that their professional reputations will be harmed if the Director’s Order is issued. As noted by counsel to the MOE, the mere risk of damage to reputation or other harm is not sufficient to establish irreparable harm and, furthermore, there is a lack of evidence to establish that the Director’s Order, once issued, would constitute a “penalty” or “sanction” that any of them would have to disclose under securities law.

[31] In view of the foregoing, it is not necessary to address the issue of balance of convenience.

[32] In the result, the motion of the Former D&O Group is dismissed.

MORAWETZ J.

Date: November 9, 2012