SUPERIOR COURT OF JUSTICE – ONTARIO

(COMMERCIAL LIST)

COURT FILE NO.: CV-12-9761-00CL
DATE: 20130718

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:
Paul D. Guy, Scott McGrath and Katherine Montpetit, for the Former D&O Group

Jacqueline L. Wall and Josh Hunter, for Her Majesty The Queen in Right of Ontario, as Represented by the Ministry of the Environment

Steven Weisz, for Fifth Third Bank, as Pre-Filing Agent

Craig J. Hill, for Ernst & Young Inc., Monitor

ENDORSEMENT

[1] Glen E. Hess, Craig A. Yuen, Greg A. Schindler, Michael J. Tkach, Gordon Flatt, David A. Rattee, James D. Wallace, Neil W. Baker, Mark Emery, Donald K. Jackson, Colin D. Watson and Wayne Shaw (collectively, the “Former D&Os”) bring this motion for an order that the Proof of D&O Claim filed by Her Majesty the Queen in Right of Ontario, as Represented by the Ministry of the Environment (“MOE”), against the Former D&Os, dated October 19, 2012 (the “MOE Claim”), be adjudicated by this court in the context of these proceedings. The Former D&Os concurrently seek an order permanently staying the proceedings entitled Baker et al. v. Director, Ministry of the Environment, which is currently pending before the Environmental Review Tribunal (“ERT”) as Case Numbers 12-158 to 12-169. The relief sought is opposed by the MOE.

[2] Much of the factual background giving rise to this motion has been described in previous endorsements in these proceedings, rendering an extensive review the facts in this endorsement superfluous. See Northstar Aerospace, Inc. (Re), 2012 ONSC 4423; Northstar Aerospace, Inc. (Re), 2012 ONSC 6362; and Northstar Aerospace, Inc. (Re), 2013 ONSC 1780.

[3] To briefly summarize the facts, one of the debtor companies in these proceedings, Northstar Aerospace (Canada) Inc. (“Northstar Canada”), owned a property located at 695 Bishop Street North, Cambridge, Ontario (the “Site”). The Site is contaminated and has contaminated the surrounding area.

[4] Northstar Canada conducted voluntary remediation of the Site. Remediation activities were continued at the Site and surrounding areas up to August 24, 2012, at which point Northstar Canada was declared bankrupt pursuant to a bankruptcy order issued on August 2, 2012 and effective on August 24, 2012.

[5] The debtor companies in these proceedings, collectively referred to as “Northstar”, were granted protection pursuant to the Companies’ Creditors Arrangement Act, R.S.C. 1985, c. C-36 (“CCAA”), by an Initial Order dated June 14, 2012.

[6] As part of the Initial Order, the court ordered that Northstar would indemnify the Former D&Os against post-filing obligations and liabilities. A Directors’ Charge in the amount of $1,750,000 was granted as part of the Initial Order in connection with this indemnification (the “Directors’ Charge”).

[7] The court approved the sale of most of Northstar’s assets to a third party on August 2, 2012. The sale excluded the Site, and closed on August 24, 2012. The court also approved the Claims Procedure Order on August 2, 2012, which set a claims bar date for any claims against the Former D&Os, and granted the Former D&Os authority to bring a motion to determine the adjudicative procedures to be used in connection with determining the validity of the MOE Claim.

[8] Northstar Canada’s trustee in bankruptcy abandoned the Site as of August 24, 2012. In anticipation of Northstar Canada’s impending bankruptcy, the MOE issued a Direction on August 15, 2012 directing the MOE to take over the remediation activities at the Site, which it did on August 27, 2012. Since then, the MOE has been expending money to remediate the Site; it is estimated that fully remediating the Site and surrounding areas will cost in excess of $15 million.

[9] On October 19, 2012, the MOE filed the MOE Claim against the Former D&Os. The MOE Claim attached a draft Director’s Order, which was formally issued against the Former D&Os on November 14, 2012. The Former D&Os take the position that the purported liability of the Former D&Os in connection with the MOE Claim is based entirely on the obligations set out in the Director’s Order.

[10] The MOE Claims seeks:

(i) costs incurred to the date of the proof of D&O Claim to carry out remediation activities at the Site in the amount of $66,240.30;

(ii) future costs to carry out the remediation activities at the Site in the amount of $15 million; and

(iii) an unknown amount to conduct additional environmental remediation work necessary to decontaminate the Site.

[11] Under the Environmental Protection Act, R.S.O. 1990, c. E-19, s. 140 (“EPA”), the Former D&Os had 15 days from the date of service to appeal the Director’s Order. The Former D&Os filed an appeal to the ERT on November 30, 2012, made without prejudice to the Former D&Os’ position that this court was the proper forum for the adjudication of the MOE Claim and the underlying appeal of the Director’s Order.

[12] The Former D&Os moved before the ERT for a stay of the Director’s Order. On February 15, 2013, the ERT dismissed the motion for a stay. As a result, the Former D&Os are required to immediately take over the remediation of the Site; it is expected that they will be expending significant amounts of money to fulfill this obligation until the issue of the validity of the Director’s Order is determined.

[13] There are two potential forums for the adjudication of the MOE Claim; the issues for determination are narrow. The issues are as follows:

(a) Does this court have the jurisdiction to determine the appeal of the Director’s Order?

(b) If the answer to (a) is yes, should this court determine the appeal of the Director’s Order?

[14] Counsel to both the Former D&Os and the MOE submitted comprehensive factums. Certain aspects of the factums were directed to argument on the merits of the MOE Claim and the defences available to the Former D&Os. This endorsement does not address the merits of the MOE Claim; rather, it exclusively addresses the process by which the MOE Claim is to be adjudicated.

[15] The MOE submits that this court does not have the jurisdiction to determine the MOE Claim. MOE’s counsel submits that the Former D&Os are attempting to have this court intervene in an administrative review of the Director’s Order, a decision which the Legislature has assigned exclusively to the ERT.

[16] MOE’s counsel further submits that there is no legal basis for this court to interfere with the ongoing administrative proceedings before the ERT that will determine whether the Former D&Os are required to comply with the Director’s Order. Specifically, there is no evidence to suggest that any of the Former D&Os are insolvent, and there is no order made in the Northstar insolvency proceedings still in force that precludes the enforcement of the Former D&Os independent obligations under the EPA against the Former D&Os.

[17] Paragraphs 2.4, 2.5, 2.20 and 2.21 of the Director’s Order make it clear, from MOE’s standpoint, that the Former D&Os’ liability arises from their “management and control” of Northstar Canada, Northstar Inc. and the Site, in their capacities as directors and/or officers of the corporations, as contemplated by section 18(1) of the EPA. Counsel submits that this liability is independent of whatever liability the CCAA entities have.

[18] MOE’s counsel submits that the Legislature has granted the ERT the exclusive jurisdiction to determine whether a director’s order is a valid and reasonable exercise of the director’s powers under the EPA. Consequently, the question of whether the Director’s Order requiring the Former D&Os to conduct remediation work should be upheld is a question for the ERT and not this court.

[19] Under section 140 of the EPA, any “person to whom an order of the director is directed” may appeal the director’s order to the ERT. In this case, the Former D&Os have exercised their right to appeal the Director’s Order to the ERT, but have reserved their rights to have the court determine whether the appeal should be heard by the ERT or by this court.

[20] MOE relies on R. v. Consolidated Maybrun Mines, 1998 820 (SCC), [1998] 1 S.C.R. 706 (“Maybrun”) for the proposition that the EPA appeal provisions are a complete code for the review of director’s orders and that the Legislature clearly intended to set up a complete procedure, independent of any right to apply to a superior court for review. In Maybrun, supra, the court described the scheme of the EPA that provided for (i) a right of appeal from decisions of the director to the Environmental Appeal Board, predecessor to the ERT, which conducted a de novo hearing and (ii) a further right of appeal to the Divisional Court on a question of law and a right of appeal to the Minister on any other matter. Counsel submits that the court expressly held that “in establishing this process, the Legislature clearly intended to set up a complete procedure, independent of any right to apply to a superior court for review…”. The court went on to hold in Maybrun, supra, at paras. 56-57 and 62:

What is important is on whom the Legislature intended to confer jurisdiction to hear and determine the question raised. In the case at Bar, the answer to this question is not in doubt. The Legislature set up a specialized tribunal to hear questions relating to the environment and to take the appropriate action necessary to prevent it from being contaminated. I do not see how a penal court could be permitted to answer such questions in lieu of the Environmental Appeal Board, which was established precisely for this purpose, without undermining the scheme set up by the Act.

[21] Counsel to the MOE also noted that the principles set out in Maybrun, supra, were applied in Wood Producers Assn. of Ontario v. Ontario, [2005] O.J. No. 475 at paras. 9-12

[22] Former D&Os’ counsel raises two reasons for challenging the position of the MOE: there is a presumption that this court will adjudicate the claim (which, counsel submits, is not rebutted in the current circumstances), and the ERT is constitutionally precluded from adjudicating the MOE Claim because of federal paramountcy and inter-jurisdictional immunity.

[23] In particular, Former D&Os’ counsel argues that, although the CCAA does not contain explicit provisions dealing with the appropriate venue for the adjudication of a claim filed under the CCAA process, the starting point is a presumption that the claim be adjudicated by the CCAA court that is overseeing the insolvency proceedings as a whole. This presumption is inherent in the statutory scheme established by the CCAA, as supported by Deschamps J. following comments in Newfoundland and Labrador v. AbitibiBowater Inc., 2012 SCC 67 at para. 21: “One of the central features of the CCAA scheme is the single proceeding model, which ensures that most claims against a debtor are entertained in a single forum.”

[24] Counsel further submits that the CCAA empowers the CCAA court to adjudicate claims that would otherwise be heard in another forum pursuant to statutory authority or contractual provisions, citing Hayes Forest Services Ltd. (Re), 2009 BCSC 1169 and Pope & Talbot Ltd. (Re), 2009 BCSC 1552.

[25] Former D&Os’ counsel submits that a consideration of the following factors is relevant in determining the proper forum to adjudicate the MOE Claim and favours this court retaining jurisdiction over the claim as opposed to rebutting the presumption:

(i) the nature of the issues to be decided in adjudicating the MOE Claim;

(ii) the need to protect the integrity of the CCAA process;

(iii) the expertise of the CCAA court versus the ERT;

(iv) the interests of other stakeholders;

(v) the statutory scheme under the EPA:

(vi) the competing appeal routes; and

(vii) the ability to award costs.

[26] Former D&Os’ counsel also submits that the ERT is constitutionally precluded from adjudicating the MOE Claim because of federal paramountcy and inter-jurisdictional immunity. This argument focuses on the CCAA and the desirability of protecting the integrity of the CCAA process. Counsel acknowledges that this argument is confined to these particular circumstances:

This is not to say that every claim filed in a CCAA claims process must be adjudicated by the CCAA court – or that the ERT could never adjudicate such a claim in appropriate circumstances. The constitutional issues only arise in this case because of the particular nature of the allegations and the theory of liability that underlies the MOE Claim.

[27] In the context of an entity that is undergoing a restructuring under the CCAA, the foregoing arguments put forward by the Former D&Os’ counsel may have merit. However, in the circumstances of this case, it seems to me their arguments are flawed.

[28] In this case, there is no CCAA Plan of Compromise or Arrangement. There will be no compromise of claims as against directors and officers. In my view, the factors that counsel put forth as reasons why the claim should be adjudicated in the CCAA court are not persuasive for the following reasons:

(i) The nature of the issue to be determined is an MOE Claim against directors and officers. There is no CCAA plan of arrangement and consequently claims against the Former D&Os will not be the subject of any type of compromise under the CCAA.

(ii) With respect to the need to protect the integrity of the CCAA process, there is no ongoing CCAA process to protect.

(iii) With respect to the expertise of the CCAA court versus the ERT, although the CCAA court has had considerable experience with the Northstar insolvency proceedings and the relationship between Northstar and its Former D&Os, this does not alter the fact that, in these circumstances, the outstanding issue to be determined is the environmental liability claim against the Former D&Os. This is an area within the core competence of the EPA.

(iv) With respect to the interests of other stakeholders, in these circumstances, where the operating assets have been sold and the proceeds have been paid to the secured creditors and there are no further assets to distribute, the function of the CCAA court is very limited.

[29] It seems to me that, in these circumstances, there is no basis for the MOE Claim to be adjudicated in the CCAA court and there is no basis to question or distinguish the Maybrun analysis. Further, there is no obvious area of conflict as between the CCAA and the EPA.

[30] The doctrine of federal paramountcy renders inoperative an otherwise valid provincial enactment to the extent that enactment results in an operative conflict with valid federal legislation or frustrates a valid provincial legislative purpose.

[31] In view of the status of the CCAA proceedings, referenced above, there is no operational conflict in these circumstances.

[32] I am also of the view that the issue of inter-jurisdictional immunity does not have to be addressed. Inter-jurisdictional immunity protects against intrusion by one level of government in to the core of another level of government’s area of exclusive jurisdiction.

[33] The MOE Claim is against the Former D&Os. There is a clear and obvious connection between the MOE Claim and claims the MOE may have against Northstar, but the connection arises out of the factual matrix. However, in the absence of any plan of arrangement that purports to compromise claims against the debtor and its directors, it seems to me that, from a legal standpoint, the claims have to be considered independently.

[34] Former D&Os’ counsel submits that, in this case, the content of the MOE Claim goes to the heart of the insolvency process itself. This statement may be correct insofar as the facts are concerned, but, in these circumstances, does not raise any issue of conflict between the federal legislation and the provincial legislation referenced by counsel. Further, the circumstances of this case are such that there is no intrusion by the provincial government into the federal government’s area of exclusive jurisdiction.

[35] Former D&Os’ counsel also submitted that the Legislature did not provide the ERT with exclusive jurisdiction to adjudicate all appeals or related matters arising out of the MOE Director’s Order. This is to be contrasted with certain provincial statutory schemes that do provide specific exclusive jurisdiction.

[36] By way of example, Former D&Os’ counsel cites GMAC Commercial Credit Corp. – Canada v. TCT Logistics Inc., 2006 SCC 35 (“TCT”). In TCT, the Supreme Court of Canada held that a lower court judge erred in concluding that the bankruptcy court had jurisdiction to decide whether an interim receiver was a successor employer within the meaning of Ontario’s Labour Relations Act, 1995, S.O. 1995, c. 1, Schedule A (“LRA”). Among other reasons cited by Abella J. was that section 114(1) of the statute expressly gave the Ontario Labour Relations Board exclusive jurisdiction to make a successor employer determination. The section provides (emphasis added):

The [Labour Relations Board] has exclusive jurisdiction to exercise the powers conferred upon it by or under this Act and to determine all questions of fact or law that arise in any matter before it, and the action or decision of the Board thereon is final and conclusive for all purposes, but nevertheless the Board may at any time, if it considers it advisable to do so, reconsider any decision, order, direction, declaration or ruling made by it and vary or revoke any such decision, order, direction, declaration or ruling.

[37] Former D&Os’ counsel submits that TCT also stands for the proposition that, in order for the bankruptcy court or the CCAA court’s jurisdiction to be circumscribed by provincial legislation, clear language to that affect must be employed by the provincial Legislature – as is the case with the LRA.

[38] Former D&Os’ counsel submits that, in this case, the Legislature did not expressly provide the ERT with exclusive jurisdiction to adjudicate all appeals or related matters arising out of a MOE Director’s Order, and that no such language can be found anywhere in the EPA. Counsel acknowledges that the ERT is the normal venue for such disputes, but submits that the statute does not mandate that the ERT is the only possible venue.

[39] The language of the EPA is to be contrasted with the provisions of the statutory scheme in Alberta as set out in the Environmental Protection and Enhancement Act, R.S.A. 2000, c. E-12. Section 102 of that Act bestows exclusive jurisdiction upon the Environmental Appeals Board (emphasis added):

Where this part empowers or compels […] the Board to do anything, […] the Board has exclusive and final jurisdiction to do that thing and no decision, order, direction, ruling, proceeding, report or […] the Board shall be questioned or reviewed in any court, and no order shall be made or process entered or proceedings taken in any court to question, review, prohibit or restrain […] the Board of any of its proceedings.

[40] Former D&Os’ counsel submits that the EPA, by contrast, not only fails to provide exclusive jurisdiction to the ERT, but also expressly contemplates decisions of the ERT being reviewed by the Divisional Court on appeal. As a result, a decision by this court to retain jurisdiction to adjudicate the MOE Claim would not conflict with the statutory scheme established by the EPA.

[41] During the course of argument, a recent decision of the Court of Appeal for Ontario came to light: Metropolitan Toronto Condominium Corporation No. 1352 v. Newport Beach Development Inc., 2012 ONCA 850 (“Newport Beach”). Counsel provided supplementary submissions to address whether this decision impacted their arguments on the point of exclusive jurisdiction.

[42] Former D&Os’ counsel acknowledged that the case was distinguishable because it arose from an entirely different set of facts – among other things, it did not involve the CCAA or the EPA. However, counsel submitted that this case was relevant because the court addressed the issue of determining the legislative intent in a particular statutory scheme and that the analysis was consistent with the submissions by the Former D&Os in this case in regards to the statutory scheme created by the EPA, which does not contain “exclusive” jurisdiction language.

[43] MOE’s counsel submitted that there was a significant difference between the situation in Newport Beach and the one at bar. In Newport Beach, the court held that a homeowner may commence an action against Tarion itself because Tarion is not only a decision maker but also the administrator of the guarantee fund and that a civil action against Tarion would seek payment out of the fund for breach of the statutory warranties. Thus, such an action would not seek a review of the validity and reasonableness of Tarion’s decision denying warrantability. This is to be contrasted to the circumstances in this case where the Former D&Os seek to have this court, and not the ERT, determine the validity and the reasonableness of the Director’s Order.

[44] MOE’s counsel also points out that the permissive aspect of the language in section 140(1) of the EPA relates to the fact that an orderee may appeal to the ERT from a director’s order; however, it is not mandatory that the orderee do so. This is to be contrasted with the permissive aspect of the language in section 16(2) of the Ontario New Home Warranties Plan Act, R.S.O. 1990, c. O.31, as considered in Newport Beach, where a homeowner is entitled to appeal to the LAT from a decision by Tarion not to pay a claim under the guarantee fund, as well as pursue claims at common law. In my view, the argument put forward by MOE’s counsel is persuasive and Newport Beach does not impact on this case.

[45] The circumstances in this case are such that the outcome is clear. Fundamentally, the findings in Maybrun are binding and I must conclude that the Legislature intended to confer jurisdiction to hear and determine the question issued on the ERT.

[46] It could very well be that there is jurisdiction in the CCAA court to address whether any ultimate claim against a director can be compromised under the CCAA, including claims arising out of the ERT, but that is not the issue that is before me at this time.

[47] In the result, I find that the MOE Claim is to be adjudicated by the ERT and not by this court. Consequently, the Former D&Os requests for an order that the MOE Claim be adjudicated by this court in the context of these proceedings and an order staying the proceedings entitled Baker et al v. Director, Ministry of the Environment are dismissed.

MORAWETZ J.

Date: July 18, 2013