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Supreme Court of Canada Orders Trustee in Bankruptcy to Comply with Environmental Remediation Orders Prior to Distributing Funds to Secured Creditors in Orphan Well Association v. Grant Thornton Ltd, 2019 SCC 5

On January 31, 2019, the Supreme Court of Canada released its highly anticipated decision in Orphan Well Association v. Grant Thornton Ltd, 2019 SCC 5 (“Orphan Wells”). Orphan Wells arose out of the bankruptcy proceedings of Redwater Energy Corporation (“Redwater”), a publicly traded oil and gas company whose assets included 127 oil wells, pipelines and facilities and their corresponding licences. When the Alberta Treasury Branches (“ATB”), Redwater’s principle secured lender, sought a bankruptcy order against Redwater, Redwater’s trustee in bankruptcy, Grant Thornton Limited (“trustee”), disclaimed 107 licensed wells that had onerous environmental costs. The Alberta Energy Regulator (“AER”) subsequently ordered the trustee to decommission the disclaimed wells prior to distributing funds to Redwater’s creditors. The trustee refused to comply with the AER’s orders, claiming that the orders were subject to the federal bankruptcy regime and did not have priority over Redwater’s secured creditors. At issue before the Supreme Court of Canada was whether the AER’s orders against the trustee were subject to the scheme of priorities in the Bankruptcy and Insolvency Act, RSC 1985, c B-3 (“BIA”).

Background

Oil and gas in Alberta cannot be exploited without a license issued by the AER. These licenses contain certain conditions, including “end of life” obligations for licensed oil wells. End of life obligations include the plugging and capping of the oil wells and restoring the surface to its previous condition (“abandonment” and “reclamation”). Where no licensee is financially capable of performing the prescribed end of life obligations, oil wells are designated as “orphan wells” under Alberta’s Oil and Gas Conservation Act, RSA 2000, c O-6, s 70 (“OGCA”). The AER has delegated authority to abandon and reclaim orphan wells to the Orphan Well Association (“OWA”), an independent non-profit entity.

Alberta’s Environmental Protection and Enhancement Act, RSA 2000, c E-12 ensures that licensees’ regulatory obligations are transferred to trustees in bankruptcy by including trustees in bankruptcy in the definition of “operator” for the purposes of the duty to reclaim, and by providing that an order to perform reclamation work may be issued against a trustee. Similarly, Alberta’s OGCA and the Pipeline Act, RSA 2000, c P-15 include trustees in the definition of a “licensee”.

In 2013, ATB advanced funds to Redwater in exchange for a security interest in Redwater’s present and after-acquired property. In 2014, Redwater experienced financial difficulties, and in 2015, upon application by the ATB, Grant Thornton Limited was appointed receiver for Redwater. The AER subsequently indicated to Grant Thornton that notwithstanding the receivership, Redwater remained obligated to comply with all end of life obligations for its spent and inactive wells and that it was required to fulfill these obligations prior to distributing any funds to creditors. The AER indicated that it would not approve the transfer of any of Redwater’s licences prior to Redwater’s compliance with the end of life obligations. The receiver subsequently renounced 107 licensed properties that were subject to onerous abandonment and reclamation obligations (the “Renounced Assets”).

The AER issued orders under the OGCA and the Pipeline Act requiring Redwater to suspend and abandon the Renounced Assets (the “Abandonment Orders”). The AER and the OWA then filed an application for a declaration that the receiver’s renunciation of the Renounced Assets was void and for an order requiring the receiver to comply with the Abandonment Orders. Grant Thornton was subsequently appointed as trustee in bankruptcy for Redwater and brought cross application seeking approval of its exclusion of the renounced assets and an order directing that the AER could not prevent the transfer of the licenses associated with the retained assets.

The Court of Queen’s Bench of Alberta dismissed the AER and OWA’s application, concluding that while the trustee remained liable for environmental obligations, the orders were subject to the priority scheme in the BIA. The Alberta Court of Appeal dismissed the AER’s appeal.

Issues before the Supreme Court

The Supreme Court of Canada allowed the AER and OWA’s appeal, finding that the trustee was obligated to fulfill Redwater’s end of life obligations prior to paying Redwater’s secured creditors. In its decision, the Court considered the following issues:

1) Is there a conflict between the Alberta Regulatory Scheme and section 14.06 of the BIA such that the BIA is paramount to the provincial regulatory scheme in this case?

2) Is the AER asserting a claim provable in bankruptcy?

In assessing the first issue, the Majority found that there was no conflict between the provincial regulatory scheme and 14.06 of the BIA. Section 14.06 (2) of the BIA provides as follows:

(2) Notwithstanding anything in any federal or provincial law, a trustee is not personally liable in that position for any environmental condition that arose or environmental damage that occurred

(a) before the trustee’s appointment; or

(b) after the trustee’s appointment unless it is established that the condition arose or the damage occurred as a result of the trustee’s gross negligence or wilful misconduct or, in the Province of Quebec, the trustee’s gross or intentional fault.

In addition, s.14.06(4) states:

(4) Notwithstanding anything in any federal or provincial law but subject to subsection (2), where an order is made which has the effect of requiring a trustee to remedy any environmental condition or environmental damage affecting property involved in a bankruptcy, proposal or receivership, the trustee is not personally liable for failure to comply with the order, and is not personally liable for any costs that are or would be incurred by any person in carrying out the terms of the order,

            …

(c) if the trustee had, before the order was made, abandoned or renounced or been divested of any interest in any real property, or any right in any immovable, affected by the condition or damage.

The Court rejected the trustee’s argument that because it had disclaimed the Renounced Assets under s.14.06(4), it should cease to have any liability in respect of the Abandonment Orders. The Majority found that while s.14.06 protects the trustee from personal liability where there is an order to remedy an environmental condition, s.14.06 does not protect the bankrupt estate from such liability. The Majority held that given the restraint with which the doctrine of paramountcy should be applied, no operational conflict or frustration of purpose could be found from the AER requiring the trustee, as a licensee, to expend estate assets on abandoning the Renounced Assets.

In considering the second issue, the Majority concluded that the AER was not asserting a claim provable in bankruptcy, and as such, the regulatory obligations imposed by the AER were not subject to the scheme of priorities set out in the BIA. The Court applied the test set out by the Supreme Court of Canada in Newfoundland and Labrador v. AbitibiBowater Inc., 2012 SCC 67 (“Abitibi”) which provided that a regulatory order will amount to a claim provable in bankruptcy where:

1) There is a debt, a liability or an obligation to a creditor;

2) The debt, liability or obligation was incurred before the debtor became bankrupt; and

3) It is possible to attach a monetary value to the debt, liability or obligation.

In applying the first part of the test, the Court found that the AER was not a creditor of Redwater. The Court held that a regulator is not always a creditor when it exercises its statutory enforcement powers against a debtor. The Court found that a regular that exercises a power to enforce a public duty is not creditor. According to the Court, in seeking to enforce Redwater’s end of life obligations, the AER was acting in the public interest in a bona fide regulatory capacity and did not stand to benefit financially.

The Court also considered the third part of the Abitibi test, finding that the environmental duty in the present case was unlikely to ripen into a financial liability owed to the AER. The Court noted that the end of life obligations imposed by the AER did not directly require Redwater to make a payment to the Regulator, being instead obligations for Redwater to take positive action.

According to the Court, in determining whether a non-monetary regulatory obligation of a bankrupt is of a monetary nature, it must be sufficiently certain that the regulator will enforce the obligation by performing the environmental work and seeking reimbursement. The Court found that it was not sufficiently certain that the AER would perform the abandonments and seek reimbursement. The Court noted that the AER was not in the business of performing abandonments and it had no statutory duty to do so. The evidence at trial had shown that the AER rarely abandons wells on behalf of licensees and that the AER had no intention of abandoning Redwater’s licensed assets. According to the Court, the AER’s claim was too remote and speculative to attract a monetary value.

Policy Implications

Orphan Wells evidently raises various public policy issues, most notably, the question of who should be burdened with the cost of abandoning spent oil wells. The dissenting opinion of the Alberta Court of Appeal cautioned that if Redwater could shed its end of life obligations, similarly situated companies may organize their affairs to do the same, resulting in even more orphaned wells. However, as was noted by the Honourable Justice Slatter at the Alberta Court of Appeal, establishing a “super-priority” for regulatory environmental remediation orders for spent wells may not only decrease the amount of financing available to the oil and gas industry, it could encourage lenders simply to walk away from their loans to oil and gas companies, which would also result in more orphaned wells. The broader implications of this decision on the future of orphan wells in Alberta remain to be seen.

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