On April 8, 2024, the Alberta Court of Appeal released its highly anticipated decision in Qualex-Landmark Towers Inc v 12-10 Capital Corp, 2024 ABCA 115 (the "Appeal Decision"). The Court allowed the appeal and set aside the Chambers' decision (the "Chambers' Decision") that granted an attachment order for the estimated costs to conduct environmental remediation on a parcel of lands owned by the Plaintiff, and elevated the priority of that attachment order so that it would be paid from the proceeds of the sale of the defendant's lands ahead of previously registered mortgages.

This Appeal Decision is good news for secured lenders, because it affirms the priority for distributions from the proceeds of the sale of lands that are set out in Alberta's Land Titles Act and Civil Enforcement Act. The Appeal Decision also affirms that private citizens cannot step into the shoes of a regulator unless legislation expressly provides for the right to do so.

Background Facts

The Plaintiff, QL Towers Inc. ("QLT") purchased lands (the "QLT Lands") located directly adjacent to lands owned by the Defendant, 12-10 Capital Corp. ("Capital Corp" and such lands being the "12-10 Lands"). Prior to the purchase of each of the QLT Lands and the 12-10 Lands, subsurface investigations revealed that the 12-10 Lands were environmentally contaminated (the "Contamination").

QLT eventually discovered that the Contamination had migrated from the 12-10 Lands onto the QLT Lands and commenced an action (the "Action") seeking damages.

The 12-10 Lands were Capital Corp.'s only asset. QLT grew concerned that Capital Corp. would sell the 12-10 Lands and distribute all of the proceeds to the mortgagees, leaving no further funds to satisfy a judgment from the Action, which QLT would use to remediate the Contamination that had migrated onto its Lands. Consequently, QLT applied for an attachment order against Capital Corp. and requested that the attachment order be applied to any gross sale proceeds of the 12-10 Lands in priority to the mortgages already registered on title.

The Chambers' Decision

The Chambers Judge granted QLT's application for an attachment order, on the basis that QLT had a "reasonable likelihood" of succeeding in its claim. In his reasons, the Chambers Judge relied on, and then expanded upon, the principles regarding environmental remediation obligations set out in Orphan Well Association, Alberta Energy Regulator v Grant Thornton Limited and ATB Financial, 2019 SCC 5 ("Redwater"), in which the Supreme Court of Canada held that in an insolvency proceeding, regulators enjoy an effective "super-priority" over secured lenders for funds required to perform environmental remediation work.

The Chambers Decision stated that environmental remediation obligations are duties in the public interest, and therefore, the "super-priority" enjoyed by an environmental regulator might extend to a private citizen engaged in litigation seeking damages for the estimated costs of remediating environmental contamination because the remediation benefited the public. Accordingly, the Chambers' Judge granted QLT's application for an attachment order against any proceeds derived from the sale of the 12-10 Lands, and provided that the attached funds would enjoy priority over the valid and enforceable mortgages registered against the 12-10 Lands.

For a more detailed discussion regarding the Chambers' Decision, see Fasken's bulletin here.

The Court of Appeal's Ruling

The Court of Appeal overturned the Chambers' Decision on the basis that the "super-priority" described in Redwater does not extend to private litigants. As a result, the Court of Appeal found, on a correctness standard, that the Chambers Judge erred in determining that there was a "reasonable likelihood" that QLT would succeed in obtaining a judgment that is paid in priority to all other creditors.

On this point, the Court of Appeal stated as follows:

"While 'reasonable likelihood' does not require the applicant to show on a balance of probabilities that they will obtain the remedy sought, something more than 'suspicion or subjective hope' is required for the purposes of granting an extraordinary pre-judgment remedy. In this case, the chambers judge was satisfied the reasonable likelihood threshold was met because, in his words, he suspected the boundaries "of the protective umbrella that Redwater ha[d] opened in respect of environmental reclamation obligations" would be tested for some time. In effect, he could go no further than to acknowledge the subjective hope of Qualex's claim. The attachment order is therefore set aside." [citations omitted]

The Court of Appeal emphasized that secured lending in Canada, both inside and outside the insolvency context, is governed by a complex web of federal and provincial legislation, and that courts must proceed with great caution when expanding or developing the common law because the ramifications can be significant. In that regard, the Court of Appeal explained that the Supreme Court's decision in Redwater did not create a new common law priority in favour of the regulator, but rather, it confirmed the priority scheme designed by Parliament. In contrast, there was no statutory authority to support QLT obtaining an elevated priority for its attachment order.

Lastly, the Court of Appeal highlighted the difference between a regulator enforcing statutory environmental remediation obligations for the public interest and a private litigant seeking a damages award. The Court stated:

"A private litigant, acting in its own interests, is under no obligation to act for the benefit of others. Private litigation is not equivalent to regulation in the public interest. Disrupting legislated priority schemes and the commercial certainty they provide by granting common law "super priorities" to private litigants for environmental remediation claims brings no assurance that money recovered will be used other than to serve the litigant's interests. This reality undermines, rather than supports, the object of the EPEA."

Implications and Key Takeaways

The Appeal Decision is a welcome outcome for secured lenders, as it provides certainty that their security won't be subordinated to the claims of private litigants that are unknown at the time of the advance of the loan. In that regard, the Court of Appeal affirmed that while public duties born of statute may exist independently of regulator involvement or enforcement, only a statutorily authorized regulator - not private litigants - may enforce those duties for the public good.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.