Lender on a Hot Tin Roof: The Developing Doctrine of Lender Liability for Environmental Cleanup in Canada

SCOTT G. REQUADT

ABSTRACT

When a troubled company is forced into receivership or bankruptcy and leaves behind an environmental mess, who must bear the financial costs of cleanup? The article examines this topical issue from the perspective of an ever-popular "deep pocket": the lending institution. The author explores the principal avenues of liability which may arise for lenders, and subjects each to critical analysis. Although the issues in Canada are still largely unexplored, the author suggests that lenders should be held directly liable for their debtors' environmental mischief if they occupy a position of "control" over the debtor at the time the contamination occurs. It is argued that the notion of "control" requires that a lender have actual involvement in the management of the facility, such that the lender is in a position to materially affect the polluting activities. Lenders may also be indirectly affected by their debtors' activities, in that lenders may ultimately be forced to absorb the costs of environmental rehabilitation where their debtor has been placed into receivership or bankruptcy. The author argues that receivers will generally have to comply with environmental orders that have been invoked against an estate or any given asset therein, and that lenders consequently cannot induce receivership as a means of avoiding cleanup costs. In the bankruptcy context, the author suggests an approach that balances the imperative of environmental protection against the necessity of maintaining a certain and predictable bankruptcy regime. The approach taken in a recent Alberta Court of Appeal decision - that environmental orders receive superior priority to claims of secured lenders - is too all-encompassing, and therefore inadequate for this purpose. The author asserts that not all environmental claims should receive priority over the claims of secured lenders. Rather, only two categories of orders should receive such priority: (1) those orders that are necessary in order to stem an ongoing source of contamination; and (2) orders issued in circumstances which would otherwise lead to a lender's unjust enrichment. The article concludes with an examination of the conflict between federal bankruptcy legislation and provincial environmental statutes, arguing that the Bankruptcy Act was intended by Parliament to constitute a "full code" in the area of secured transactions. Thus, it is submitted that a legislative amendment is necessary before the Act may be read down in all circumstances where environmental orders are issued against a bankrupt's estate.

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Citation: (1992) 50(2) U.T. Fac. L. Rev. 194.
Copyright © 1992. University of Toronto Faculty of Law Review.
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