Orphan Well Associated v Grant Thornton Limited1

On April 24, 2017, the Alberta Court of Appeal upheld the decision in Redwater Energy Corporation (Re)2, and dismissed the appeals of the Orphan Well Association (OWA) and the Alberta Energy Regulator (AER).

The majority of the Alberta Court of Appeal held that Grant Thornton Limited (Grant Thornton), the Receiver and Trustee of Redwater Energy Corporation (Redwater), was entitled to disclaim their interest in certain uneconomic wells and pipelines of Redwater, but keep and sell the valuable wells and pipelines. The decision also confirmed that claims for abandonment and reclamation are typically subordinate to the claims of secured creditors.

Background

As a result of the recent economic downturn, Redwater, a publically traded junior oil and gas producer in Alberta, suffered financial setbacks and was unable to meet its financial obligations to Alberta Treasury Branches (ATB), its primary secured creditor (among others). ATB commenced enforcement proceedings and, on May 12, 2015, Grant Thornton was appointed as receiver over the assets, undertakings and property of Redwater. On October 28, 2015, a further Court order was issued adjudging Redwater bankrupt and appointing Grant Thornton as the trustee of Redwater's estate.

Grant Thornton, in its capacity as Receiver and Trustee of Redwater, disclaimed their interest in certain uneconomic wells and pipelines of Redwater. In reply, the AER issued orders requiring Grant Thornton to abandon and reclaim the disclaimed wells and pipelines. Upon the receipt of these orders, Grant Thornton brought an application seeking to declare certain provisions of the provincial Oil and Gas Conservation Act (OGCA) and the Pipeline Act (PA) unconstitutional by invoking the doctrine of federal paramountcy. The basis for the constitutional challenge brought by Grant Thornton was that the federal Bankruptcy and Insolvency Act (the BIA) determines the priority of claims in a bankruptcy. To the extent that the provisions of the provincial OGCA and PA disrupt the priority scheme established under the BIA, those provisions conflict with the BIA and should be rendered inoperative or inapplicable to the extent of the conflict or inconsistency.

The Chief Justice of the Alberta Court of Queen's Bench agreed with Grant Thornton, and held the claims of secured creditors have priority over the obligations to abandon and reclaim the uneconomic wells and pipelines.

The OWA and AER each appealed this decision.

Issues in Appeals

As stated in the Court of Appeal's majority decision, the issues in the appeals were the priority of environmental claims and whether a receiver or trustee in bankruptcy must satisfy the contingent liability inherent in the remediation of uneconomic wells and pipelines in priority to the claim of secured creditors. Determining these issues required that the Court of Appeal consider, inter alia:

  • The proper interpretation and application of section 14.06 of the BIA;
  • Whether requiring Grant Thornton to comply with the AER's abandonment orders would trigger the doctrine of federal paramountcy; and
  • The interpretation and application of the Supreme Court of Canada's decision in AbitibiBowater3 and the Alberta Court of Appeal's decision in Northern Badger4.

Decision of the Majority of the Alberta Court of Appeal

Section 14.06(4) of the BIA Assumes that a Trustee can Abandon Properties Without Value

The Alberta Court of Appeal confirmed that a receiver or trustee is entitled to abandon or renounce oil and gas assets encumbered with environmental obligations. As noted by the Court of Appeal, it is "common place for trustees and receivers to disclaim or 'abandon' assets" and whether they "formally abandon assets, or merely leave them unrealized at the end of the bankruptcy process makes little difference." According to the majority decision, section 14.06(4) of the BIA confirms that a receiver or trustee can "abandon" property burdened with environmental liabilities, notwithstanding that all assets of the bankrupt vest in the trustee. The majority stated that although section 14.06 does not appear to create a right in a trustee to abandon properties without value, it assumes that one exists upon bankruptcy. The inclusion of a receiver or trustee in the definition of "licensee" under the OGCA and the PA has no ultimate effect on the ability of a receiver or trustee to abandon assets because, inter alia, section 14.06(4) states that this subsection applies "notwithstanding anything in federal or provincial law."

Doctrine of Federal Paramountcy

The majority of the Court of Appeal began by setting out the following principles in relation to the doctrine of federal paramountcy:

  • The paramountcy doctrine will be engaged if (i) there is an operational conflict between the federal and provincial legislation because it is impossible to comply with both laws, or (ii) if the provincial legislation fundamentally frustrates the objectives of the federal legislation.
  • Priorities of the various claims in a bankruptcy are to be decided in accordance with the BIA. If the outcome under the BIA is consistent with the outcome under the provincial legislation, there is no constitutional issue. However, if the outcome under the provincial legislation is inconsistent with the outcome under the BIA, then it is conceded that the latter prevails.

As noted previously, the Court of Appeal characterized the central issue on appeal as the priority treatment of environmental liabilities on bankruptcy. Upon a review of section 14.06 of the BIA, the Court of Appeal noted that section 14.06 does not except environmental claims out of the general bankruptcy regime; rather it incorporates them into that regime. They held that section 14.06 assumes that the general bankruptcy regime applies to environmental claims, except for the particular rules found in section 14.06 itself. In other words, section 14.06 does not change the basic priority regime in bankruptcy, and the order of payment of claims in bankruptcy under section 136 of the BIA is still subject to the rights of secured parties.

Application of the AbitibiBowater Test

To determine whether an environmental order or abandonment order is considered to be a "provable claim" caught by subsection 14.06(8) of the BIA, the Court of Appeal turned to the three-part test set out in AbitibiBowater.

It was conceded that the first two parts of the AbitibiBowater test were met. As such, the Court of Appeal was only considering the third branch of the AbitibiBowater test, which requires that the claim either be expressed in monetary terms, or not be too remote and speculative so that there is some certainty that the regulator will actually do the remediation work.

In considering whether the third branch of the test was met, the Court of Appeal noted that in the present case, it was clear that the Trustee was not going to operate Redwater's business. The plan was to sell the assets, distribute the proceeds and seek a discharge. The Court stated that it was clear that if the Trustee sought to sell the assets, the AER would either require (i) the posting of security; or (ii) the purchaser to purchase all of the assets (both producing and non-producing), which would have the effect of reducing the purchase price that the purchaser would pay. According to the Court of Appeal, placing either of these restrictions on the sale of the Redwater assets meets the sufficient certainty test under AbitibiBowater in both a technical and substantive way for the following reasons.

  • It is inconsequential whether Redwater's obligation to remediate the wells arises directly from an abandonment order, or indirectly from a Directive of the AER, which imposes financial consequences on the transfer of assets. The effect of the AER's policy on transfers is to strip away from the bankrupt estate enough value to meet the outstanding environmental obligations.
  • It does not matter which public body (e.g., the AER, OWA, etc.) actually does the remediation work. If the AER insists on funds being set aside up front by the trustee for environmental remediation, the AbitibiBowater principles are engaged and the obligation has been reduced to a certain monetary claim.
  • Whether it is sufficiently "certain" that the remediation work will be done depends on the factual context. It is not permissible for the AER to manage the timing of its intervention in order to escape the insolvency regime. If security is taken, it is no answer that the security might be held for an indefinite period of time. Additionally, if security is taken, the environmental obligation has clearly been reduced to monetary terms.
  • The effect of the AER's policy on the sale of assets is to artificially transfer the value of the oil and gas assets to the AER licence, which itself has no intrinsic value. The AER's policy effectively requires that the full value of the bankrupt's oil and gas assets be applied first to environmental liabilities. That not only demonstrates that the claim has been sufficiently reduced to money to meet the AbitibiBowater test, it also demonstrates that the effect of the policy is to create a super priority for environmental claims.

Ultimately, the Court of Appeal held that under the proper interpretation of the BIA, the AER cannot insist that a trustee devote substantial parts of the bankrupt estate in satisfaction of the environmental claims in priority to the claims of the secured creditor. To the extent that the interpretation of the provincial legislation leads to a different result, the paramountcy doctrine is engaged and the provincial legislation in inoperative or inapplicable to the extent of the conflict.

Dissenting Judgment

In her dissenting judgment, the Honourable Madam Justice Martin held that the BIA, OGCA and PA can co-exist and that the doctrine of federal paramountcy is therefore not engaged. In considering the issues on appeal, Martin, J.A. considers (i) whether the regulatory regime established under the OGCA and PA creates a provable claim subject to the bankruptcy scheme, and (ii) whether the regulatory regime conflicts with the BIA. With respect to the first question, Martin, J.A. concluded that the Alberta regulatory and licensing regime for oil and gas resources creates generally applicable public legal duties, outside the scope of claims provable in bankruptcy. In her view, there was insufficient certainty that the remediation work would be done by the AER or OWA and no certainty that a claim for reimbursement would be made. As such, there was no monetary claim capable of being advanced in bankruptcy proceedings. With regards to the second question, Martin, J.A. stated that the existence of an operational conflict is premised on the entitlement of a trustee to renounce assets. In her view, the proper interpretation of section 14.06(4) of the BIA does not permit a trustee to disclaim end of life obligations on the basis they are not real property; therefore there is no operational conflict. Martin, J.A. concluded that there was also no frustration of purpose since the Alberta oil and gas regulatory regime does not determine or reorder priorities among creditors; rather it is a valid provincial law of general application for the protection of the public.

Implications

The Court of Appeal's decision confirms that section 14.06 of the BIA assumes the ability of a trustee and receiver to disclaim assets and operates as a complete code for dealing with environmental claims in the context of a bankruptcy. Any provincial legislation purporting to reorder the priorities established under the BIA will be inoperative or inapplicable to the extent of the conflict, in accordance with the doctrine of federal paramountcy.

The decision also affirms the ability of insolvency professionals to renounce assets of the insolvent oil and gas producer for the purpose of permitting that professional to sell only the valuable assets of an insolvent debtor, and that the AER cannot prevent a transfer of such assets for the purpose of asserting a financial claim. The decision does not prevent the AER from refusing its consent to transfer assets in an insolvency based asset sale where there are other non-financial based concerns, such as the safety of such assets.

Prior to the issuance of this appeal the AER had continued to oppose the disclaimer of assets by trustees and receivers in other proceedings. Although this decision does not alter the existing state of the law since the release of the Court of Queen's Bench decision in Redwater Energy Corporation (Re)5, it remains to be seen whether the issuance of the Court of Appeal's decision will impact the AER's approach on matters relevant to the appeal.

It is currently unknown whether the AER or OWA will seek leave to appeal the decision to the Supreme Court of Canada.

Jeffrey Oliver and Danielle Maréchal of Cassels Brock acted as co-counsel to Grant Thornton Limited in this matter.

Footnotes

1 Orphan Well Association v Grant Thornton Limited, 2017 ABCA 124.
2 Redwater Energy Corporation (Re), 2016 ABQB 278.
3 Newfoundland and Labrador v AbitibiBowater Inc, 2012 SCC 67.
4 Panamericana v Northern Badger Oil, 120 AR 309 (Alta CA).
5 Supra, note 2.

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