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Last Directors Standing: Expanding the Scope of Directors’ and Officers’ Environmental Liability in the Northstar Aerospace Case

Date

November 11, 2013


In the recent case of Baker et al. v. Director, Ministry of the Environment, a number of former directors and officers of Northstar Aerospace, Inc. (Northstar) and its parent Northstar Aerospace (Canada) Inc. (Northstar Canada) found themselves as the last line of defence between Ontario Ministry of the Environment (MOE) and a contaminated property located at the site of the now insolvent company’s former manufacturing and processing facility in Cambridge, Ontario (Site).

For this group of former Northstar directors and officers, the uncertainty about their personal liability for environmental contamination at the Site ended when the Ontario Environmental Review Tribunal (ERT) accepted the Minutes of Settlement on October 28, 2013 between the directors and the MOE. This settlement involved, among other things, the payment of $4,750,000 to the MOE by the group in exchange for the withdrawal of an MOE order which required them to personally carry out the remediation of the Site.

Under the broad sweep of environmental legislation, it is generally understood that directors and officers are subject to potential liability for the environmental remediation of contaminated sites, particularly where they have had management of or control over contaminants or where they have made decisions that resulted in contamination. However, the Northstar case highlights the willingness of regulators to seek out all potentially responsible parties to recover the costs of remediation where a company is no longer able to continue financing remediation activities, even where the directors and officers did not cause or were not involved in the decision-making that led to the contamination.

Background

The environmental contamination at issue resulted from Northstar’s industrial activities at the Site, where the company operated a manufacturing and processing facility for aircraft parts from 1981 to 2009. Trichloroethylene (TCE), a human carcinogen, was used by Northstar in its operations and caused contamination under the Site, which then migrated beneath approximately 652 residential properties within the Bishop Street Community.

Timeline of Events

  • In October 2004, Northstar notified the MOE that it had identified soil and groundwater contamination on the Site which was possibly migrating to adjacent properties. The primary contaminants were identified by Northstar as TCE and hexavalent chromium.
  • In 2005, Northstar further confirmed with the MOE that the contamination had migrated from the Site to the adjacent Bishop Street Community. Under MOE’s supervision, Northstar commenced a voluntary remediation plan.
  • In 2008, 2009 and 2010, Northstar released annual reports which estimated the future cost of remediation of the Site in the millions of dollars. However, at no time did it secure the funding for such work in the form of a trust account or other means.
  • On March 15, 2012, amidst growing concern about Northstar’s financial difficulties, the MOE issued a remedial order to secure the continued performance of the remediation work.
  • On June 14, 2012 Northstar, Northstar Canada and two other related companies sought and obtained protection from creditors pursuant to the Companies’ Creditors Arrangement Act (CCAA). Subsequently in July 2012, the Ontario Superior Court of Justice approved the sale of substantially all of the operating assets of Northstar and Northstar Canada, other than the Site, leaving no personnel or resources to carry out the remediation work. Substantially all of the proceeds of sale were distributed to Northstar’s secured lender.
  • In August 2012, on the basis of human health concerns, the MOE stepped in to continue the remedial work on the Site.
  • On October 21, 2012, when the stay of proceedings under the CCAA proceedings expired, the MOE issued a remediation order against the directors and officers of Northstar on the basis that they were directors and officers from 2004 to 2012 and as such had management and control of the Site and the remediation systems (Order).

Launching an Unsuccessful Appeal

The former directors and officers appealed the Order and brought a motion before the ERT to stay the Order claiming that the they would suffer irreparable harm if the Order was not stayed as they would have to incur remediation costs of approximately $1.4 million per year. In addition, the directors and officers submitted that they could not recover any costs from the insurance policy intended to indemnify former Northstar directors and officers as it excluded environmental remediation costs. The ERT did not grant the stay and it ordered the former directors and officers to immediately pay for the continuation of the requisite remedial work regardless of whether the Order was appealed and until any such appeal process was completed.

On appeal, the directors and officers claimed a range of defenses, including that some of them were not on the board during the time of the contamination and had no specific responsibility for environmental matters. The MOE’s view was that the directors had allowed the company to file for CCAA protection and stop remediation activities at the Site, which made them responsible for remediation under the Environmental Protection Act (Ontario).

The defenses were unsuccessful, and liability was imposed immediately resulting in the payment of approximately $800,000 for the completion of interim remedial work until the results of the appeal were determined. The financial burden of having to fund the interim remediation work was likely a key motivator for the former directors and officers to reach a settlement with the MOE.

An Uncertain Path Forward

The Northstar case introduces uncertainty to the role of directors and officers as it relates to their responsibility for environmental contamination. In particular, the Northstar case serves as a cautionary tale for even if the MOE has a weak case, directors and officers may be expected to personally finance significant remediation costs (regardless of whether they had knowledge of, involvement in, or oversight of the work being completed) until the appeal of a remediation order has run its course.

Now that the parties have reached a settlement, it is unclear whether the facts of the Northstar case would have supported the MOE’s assertion that the former directors and officers were liable for the remediation of the Site. In another recent case, the Ontario Court of Appeal upheld an MOE order issued against an innocent landowner in Kawartha Lakes (City) v. Ontario (Environment). These cases show the MOE’s willingness to seek out and issue orders to all potentially responsible parties in order to recover remediation costs, notwithstanding fault.

Risk Mitigation Strategies

It is too early to tell whether the Northstar case will have a chilling effect on the ability of companies to recruit talented board members for their organizations, and to what extent other provincial regulators will follow the MOE’s lead in expanding the scope of director and officer liability for cleaning up environmental contamination, especially where a company runs into financial trouble. For individuals who currently serve on boards or are considering taking up a board position, it is important to ask the right questions, particularly if the company operates in an industry that is at higher risk for environmental contamination. To mitigate the risks of environmental liability not only for directors and officers, but also for companies, the following actions should be considered:

  • reviewing the organization’s environmental policies and practices;
  • ensuring sufficient protection for directors and officers in indemnity agreements;
  • determining whether insurance policies cover environmental remediation liability and if not, acquiring such coverage if the company conducts high risk activities;
  • establishing a fund or setting aside money in a trust that is dedicated to covering any potential environmental costs;
  • regularly consulting with the company’s environmental managers to address any issues of concern and ensuring that issues are reported to senior management in a timely way;
  • ensuring that employees are aware of their responsibilities to comply with requirements under environmental legislation (e.g., spill reporting obligations);
  • ensuring that remedial and preventative measures are in place to respond to environmental incidents; and
  • ensuring that environmental audits are carried out at regular intervals.

In the aftermath of the Northstar case, it is more important than ever for directors and officers to manage environmental issues proactively and implement policies to help minimize their risk exposure. This will go a long way in ensuring that directors, officers and their companies are able to manage and respond appropriately to risks arising from constantly evolving environmental liabilities.

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