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Directors and Officers Will Pay Millions in Interim Environmental Clean-Up Costs Pending Determination of Liability

July-26-2013

Lawyer Catherine Lyons
Area Corporate Finance and Securities, Environmental Law, Mining and Natural Resources

Summary

As a result of recent regulatory and court decisions, former directors and officers of now bankrupt Northstar Aerospace (Canada) Inc. (“Northstar”) are required to fund ongoing environmental monitoring and remediation relating to a former Northstar facility until their actual liability is determined.  That funding is estimated to be approximately $1.4 million per year.

These decisions, which impose substantial financial obligations on directors and officers who were not in office at the time of the environmental contamination, not only raise important legal questions but clearly serve as a cautionary tale to current and potential holders of office with issuers facing potential environmental costs.

Background

Northstar and its predecessors owned and operated an airport parts manufacturing facility for approximately 30 years.  The facility was shuttered in 2010.

In 2004, Northstar notified the Ontario Ministry of Environment (MOE) that levels of known carcinogens far in excess of MOE standards were found in soil and groundwater at the facility.  Approximately 500 nearby residences were also impacted by the contaminants originating from the facility.  Northstar developed an Interim Remedial Action Plan (the “Remediation Plan”) which was deemed acceptable by the MOE and commenced work under the Remediation Plan on a voluntary basis.

In early 2012, in the face of Northstar’s disclosure of financial difficulties, the MOE issued an order under the Environmental Protection Act, (the “EPA”) against Northstar requiring it to continue carrying out the work it had been carrying out on a voluntary basis under the Remediation Plan.  The MOE’s report in support of the order stated that:

While Northstar has undertaken all needed investigation, mitigation and remediation programs on a voluntary basis without the need for a Director’s Order, recent financial disclosures made by Northstar have revealed there is significant doubt regarding the Corporation’s ability to continue as a going concern which could impact on the environmental remediation programs.

In June 2012, Northstar obtained protection from its creditors under the Companies’ Creditors Arrangement Act (including a stay of proceedings).  Northstar’s assets, other than the shuttered facility, were sold a few months later and the proceeds were distributed.

Northstar continued the work contemplated by the Remediation Plan until the asset sale following which the MOE began to carry out some or all of the required work.  In November 2012, days after the court’s stay of claim under Northstar’s insolvency proceedings expired, the MOE issued a further order under the EPA - this one against 12 former directors and officers of Northstar (the “D&O Order”) - requiring those individuals to carry out the work which the MOE had previously required Northstar to undertake.

The former directors and officers appealed to the Environmental Review Tribunal (ERT) and sought a stay of the D&O Order pending final determination of the appeal.  The ERT refused to grant the stay.  That refusal was the subject of the most recent Court decision.  The appeal of the D&O Order is proceeding before the ERT.

What the MOE is Alleging the Former Directors and Officers Did Wrong

Notably, none of the former directors or officers held their positions at the time the contaminants were initially discharged into the environment; in fact, they held their positions at a time when voluntary remedial measures were being undertaken with the assent of the MOE.  What the MOE is in effect arguing is that the former directors and officers violated the EPA by failing to anticipate insolvency and to set aside funds to ensure what has been estimated to be a 10 year remediation program.  In the D&O Order, the MOE noted that:

As no provision has been made for the continuation of the investigations, monitoring, mitigation and remediation of the contamination, the parties have 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 generally.

Before the ERT, the MOE has taken the position that it:

“is not alleging that [the former directors and officers] actively caused the contamination.  Instead, the [MOE] is of the view that [the former directors and officers] during their tenure as corporate directors and officers, permitted the discharge by failing to take appropriate steps to prevent the discharge of the contaminant in the long term.  For example, as corporate directors and officers . . . prior to [the] bankruptcy, the former directors and officers failed to plan for the resources and funds necessary for the Company’s long term obligations to prevent or repair the injury or damage” to the nearby residential community and the environment.

The MOE acknowledged that Northstar (and one assumes therefore its directors and officers), had “undertaken all needed investigation, mitigation and remediation programs on a voluntary basis” (emphasis added).  The MOE’s case does not appear to be based on the notion that Northstar and its directors and officers failed to take appropriate steps to undertake a remediation plan, but that they failed to adequately provide for the financial wherewithal to continue carrying out the plan over the next decade.

Procedural Impediments to a Stay of the Order

The EPA sets out a series of requirements relating to applications to the ERT to stay an order.  In essence, stays may not be granted:

  • in relation to an order to “monitor, record and report,” or 
  • if the stay would result in danger to health or safety of any person or the impairment or serious risk of impairment of the quality of the natural environment. 

The ERT in its decision gave very broad interpretation to the words “monitor, record and report”.  It found that the other requirements of the D&O Order that were beyond monitoring, recording and reporting could not be stayed as to do so would potentially give rise to human health issues.

Anomalously, an order to pay a cost or fine is automatically stayed by an appeal, but an order to undertake work (which in practical terms imposes a financial burden on those affected) may or may not be stayed.

Shifting the Cost of Protection

The environmental conditions in the residential community adjacent to the former Northstar facility are such that it is not an option to put remedial and health protection measures on hold while the issue of who should pay for those measures is determined.  The Province continued to carry out “some or all” of the Remediation Plan following the sale of Northstar’s assets.  As a result of the ERT and court decisions regarding the stay, the burden of protecting the public interest has shifted from the Province to individuals: the former directors and officers - at least until the appeal is finally determined.

This ongoing case highlights that it is important for directors and officers, particularly in circumstances where the company is in financial difficulty, to focus clearly on potential environmental exposure and the availability (or non-availability) of resources to fund such exposure.

For further information on these decisions, please contact any member of our Environmental Law Group.