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Nortel dodges environmental orders, for now

The Nortel ruling essentially deems the Ontario Ministry of the Environment as just another unsecured creditor.

Nathan Denette/The Canadian Press/Nathan Denette/The Canadian Press

Ontario's Environment Ministry is seeking to appeal a court ruling that allows insolvent Nortel Networks Corp. to ignore orders to clean up hazardous chemicals left behind at four of the company's former sites across the province.

The government argues the ruling has "the practical effect of completely releasing Nortel from its environmental obligations" and could unfairly stick taxpayers with the company's cleanup bill, which Nortel pegs at about $18-million.

But the issues at stake in the case go beyond Nortel's long-abandoned factory sites in Brockville, Kingston, Belleville and London. Courts have repeatedly wrestled with the question of what obligations insolvent companies have to cover the cost of environmental cleanups, even as they are besieged with demands from other creditors, including angry pensioners.

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The Nortel ruling, issued by Mr. Justice Geoffrey Morawetz of the Ontario Superior Court on March 9, essentially deems the Ministry of the Environment as just another unsecured creditor. Since the company is being wound up, the ministry's orders in this case are merely more bills to pay, the judge ruled, distinct from demands for action, with which a company would have to comply even while in bankruptcy protection.

Judge Morawetz does acknowledge in his March 9 decision that provincial environmental regulations and federal bankruptcy and restructuring laws "do not mesh very well." The conflict is at the centre of another case now before the Supreme Court of Canada involving AbitibiBowater Inc. and cleanup orders issued by the government of Newfoundland and Labrador.

For the moment, it is a side issue in the multibillion-dollar implosion of Nortel, as what's left of the company is sold in a court-supervised restructuring process, and the company's creditors fight over the proceeds.

At the four Ontario sites where Nortel once had factories that made telephones or other equipment, it left behind "volatile organic compounds" such as "chlorinated solvents," potentially contaminating soil and groundwater.

Nortel said it has spent $30.2-million on remediation efforts at these sites since the late 1990s, when it stopped using them. It now owns only part of one site in London, Ont. It was only after Nortel went into bankruptcy protection in 2009 that Ontario's Ministry of the Environment issued most of its cleanup orders.

It was Nortel that asked Judge Morawetz to send the Ministry of the Environment to the end of the creditors' queue. Alan Mersky, a lawyer with Norton Rose Canada acting for Nortel, declined to comment on the decision.

Officials with Ontario's Environment Ministry also declined to comment. But in their motion seeking leave, or permission, from the Court of Appeal to challenge the ruling, they take aim at the idea their orders are just more bills to pay.

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"The expenditure of money by an orderee is, in fact, a natural consequence of most environmental orders," the government's lawyers write.

The notion of distinguishing between companies that are operational and those that are not "creates a bias against environmental protection," they argue, adding that the case raises important arguments for how environmental issues should be handled under insolvency law.

David Ullmann, an insolvency lawyer at Minden Gross LLP in Toronto, said judges in these cases are left to balance two conflicting public policy goals: the rights of creditors to be paid at least some of the money they are owed in a bankruptcy, and the need to make companies pay for the pollution they create.

"If you're just a guy in the street, and you're asked, 'Should companies be responsible to pay for their environmental damages regardless of whether or not they are insolvent,' I think people would say yes," Mr. Ullmann said.

"But then if you asked them, 'Should they be paid before the workers and the people who supplied goods and services to the company and the pensioners,' they might say, 'No, they should all be treated equally.'"

Dianne Saxe, a Toronto environmental lawyer, said the central question in such cases is always: When is a regulator deemed a regulator, and when is it just another creditor?

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"This is a hundreds-of-millions-of-dollars issue, not just for Nortel but for Abitibi and big resource companies across the country, because this issue comes up over and over again," she said.

In the Nortel case, the judge relied on previous decisions to rule that cleanup orders for sites the company no longer owns, or for activity long in the past, are just like other debts, Ms. Saxe said. And while most agree companies should clean up after themselves, in insolvencies, no one gets everything they want.

"It's not a perfect solution. But there has to be some way of dealing with the problem of when [companies]with contamination problems go bust, which they often do."

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