August 12, 2020

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Feds may not recoup $19M: lawyers

Damaged rail lines to Churchill at centre of lawsuit

THE CANADIAN PRESS/HO-OmniTrax</p><p>A portion of the damaged Hudson Bay Railway to Churchill, Man., shown in 2017.</p>


A portion of the damaged Hudson Bay Railway to Churchill, Man., shown in 2017.

Hey there, time traveller!
This article was published 15/3/2018 (881 days ago), so information in it may no longer be current.

OTTAWA — The federal government has likely thwarted its chance of getting $18.8 million back from Omnitrax over the damaged railway link to Churchill, corporate lawyers argue, after Ottawa agreed to remove the company from its lawsuit.

Last November, Ottawa sued Omnitrax for the funding it gave under a 2008 maintenance contract, because the Denver-based company refused to repair its railway after last May’s flooding. Last week, a judge amended the lawsuit to only name against Omnitrax’s subsidiary, the Hudson Bay Railway Company (HBRC).

HBRC defence lawyer Jamie Kagan suggested last month only Omnitrax has millions of dollars. "The only thing that is left is a claim against a railroad that isn’t operating right now," he said, days before a judge certified the legal change.

Four corporate lawyers told the Free Press it’s unlikely Ottawa will now be able to recuperate its $18.8 million in damages.

It's unclear, however, whether the government would take ownership of the line should HBRC declare bankruptcy.

"It's way too early to tell," Toronto-based lawyer Kevin O'Brien said Wednesday, adding it would depend on what's in Canada's contract with HBRC and whether there are other creditors who are also owed money. "It may end up being a practical solution in the circumstances, but that would just be wild speculation." 

O’Brien, who focuses on complex corporate litigation for the Osler firm, said it would be exceptional for a judge to order a parent company to pay damages on behalf of a subsidiary.

"It's rare that a court would do that, because it violates that bedrock possibility of corporate law: that a corporation is its own, separate entity," he said.

The theory is rooted in common law through the 1896 Salomon case in Britain, which found creditors of an insolvent company couldn't sue its shareholders over outstanding debts.

There have been rare circumstances where courts have agreed to "pierce the corporate veil," which means looking outside the corporation to attribute liability to a parent company. But those are almost exclusively limited to corporations that have formed shell companies to commit fraud.

In the filings, government lawyers say they believed HBRC and Omnitrax have an identical leadership structure, but they didn’t claim either is committing fraud.

"The law's pretty clear on it. You really need to be able to show that the subsidiary was a sham, if you want to have a chance," O’Brien said. "These cases get fought all the time. It's a very common issue."

All four corporate lawyers said it’s likely Ottawa will be left on the hook if HBRC goes insolvent, as the 2008 contract seems to not have a clause guaranteeing Omnitrax would be held responsible should HBRC be dissolved. The 2008 contract appears to only mention Omnitrax in email addresses, and names the railway owner as HBRC.

Omnitrax had raised that same dichotomy at the Canadian Transport Agency in January, in vain. The regulator has been probing whether the company broke federal law by discontinuing service along the line, after lawyers told the Free Press it appeared that was the case.

The CTA dismissed HBRC’s claim it was separate from Omnitrax, noting the parent company has co-ordinated its entire public outreach since the washout, which occurred almost 10 months ago.

The federal Liberals have touted their lawsuit as a demonstration of their resolve for the Churchill, but that rings hollow to NDP MP Niki Ashton, who represents Manitoba’s north.

"It's enraging," Ashton said. "It's a farce that they're making an argument that they're not the company involved."

She said it’s another blow to Churchill, the northern Manitoba town which has been reeling since Omnitrax’s 2016 port layoffs. "It adds insult to injury. They got the public money when they wanted it."

Ashton blamed the federal Liberals for not holding Omnitrax’s feet to the fire when it started layoffs.

"Omnitrax has done everything in its power to escape responsibility," she said, noting it has multiple holdings that seem to be turning a profit. Corporate registries show Omnitrax has at least four subsidiaries in various Canadian provinces.

With Canada’s consent, a judge recently approved Omnitrax’s request to no longer be named in the suit, and ordered Ottawa to pay the company $2,100, plus court fees.

In filings, Ottawa consented to Omnitrax’s request, "to further the public interest and in the expeditious determination of Canada's claim" and move the case along "as expeditiously as possible."

O’Brien said it may have taken "months and months" to deliberate how Omnitrax and HBRC are linked, plus at least six months if there was an appeal. "You could be several years down the road before you start fighting about who was legally responsible for this."

Transport Canada would not explain its reasoning, and didn't indicate whether it expects to take over the line should HBR declare bankruptcy. It instead reiterated statements it’s made since the flooding 10 months ago about Omnitrax having a duty to fix the line.

"The government of Canada is actively supporting the community of Churchill to address immediate needs and resulting economic impacts," wrote spokesman Pierre Manoni, noting the 2008 contract holds Omnitrax responsible to maintain the line until March 31, 2029.

The Town of Churchill declined to opine on the court proceedings; representatives have focused on Ottawa’s ongoing negotiations aimed at transferring the railway and port to a consortium of two local groups.

One group is led by Grand Chief Arlen Dumas, who had tried securing ownership of the railway prior to being elected head of the Assembly of Manitoba Chiefs.

He questioned how much Ottawa has spent in lawyers fighting the case, especially if it doesn’t lead to the compensation they’re seeking. "We all know these things cost ridiculous amounts of money," he said.

Dumas secured a deal last summer to have Omnitrax transfer the railway to his group, but he needed $20 million in government spending to purchase it. He now wonders what would have happened had the deal gone through.

"What is the cost of having the people in northern Manitoba stranded and held hostage in the way that they are?" Dumas said.

Federal Energy Minister Jim Carr, who is overseeing issues in Churchill, said last Friday he wasn’t aware of the change in the court filings. Transport Minister Marc Garneau was not available for an interview Tuesday or Wednesday; his office said it couldn’t comment in detail due to the legal proceedings.

"The private owner of the line had the obligation to repair the rail track when it was damaged and it is irresponsible that they did not commence repairs," spokeswoman Delphine Denis wrote.

The Manitoba government has not said whether it will sue Omnitrax for the $20 million it gave the company through a similar 2008 contract, which the province has withheld from the Free Press on the grounds of a possible lawsuit.


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