Canada: Court Of Appeal Upholds Redwater Decision

In a majority two to one decision released on April 24, 2017, the Alberta Court of Appeal has upheld the lower court ruling in Re Redwater Energy Corporation. The trial decision in Redwater, which settled a lengthy conflict between the Alberta Energy Regulator and insolvency professionals on the proper interpretation of section 14.06 of the Bankruptcy and Insolvency Act (Canada), was previously analyzed in detail here. The majority judgment confirms the proposition that a receiver or trustee is entitled to disclaim or not take possession of a debtor's interest in select AER licensed properties that have no value due to abandonment obligations and to vend the remaining licensed assets that have value. By extension, the AER cannot refuse a license transfer solely because abandonment and reclamation obligations associated with the disclaimed properties will go unperformed. The proceeds of sale must then be disbursed in accordance with the priority regime established in the BIA. In more simple terms, the decision confirms that a court-officer appointed under federal legislation may pick and choose the realizable property in an estate in order to maximize the recovery available for creditors without undue interference from a provincial regulator.

As was anticipated, the appeal turned on the interpretation of Newfoundland and Labrador v. AbitibiBowater Inc., where the Supreme Court of Canada established the circumstances in which environmental reclamation or abandonment orders will qualify as "claims" under bankruptcy and insolvency laws. The applicable test has three distinct parts: (1) there must be a debt, liability or obligation to a creditor; (2) the obligation must be incurred before the debtor's bankruptcy; and (3) it must be possible to attach a monetary value to the debt, liability or obligation.

The critical consideration in the insolvency context is often whether it is possible to attach a monetary value to the claim. In analyzing this question, AbitibiBowater established that there must be sufficient certainty that the regulatory body will ultimately perform the remediation work and assert a monetary claim for it to be properly subject to the insolvency process. The lower court recognized some reservations on this issue in Redwater but ultimately determined that the AER orders were intrinsically financial because they would require the trustee to expend funds and such expenditure provided priority to the AER that it is not entitled to assert at law. Writing for the majority, Mr. Justice Slatter did not share such concern and was emphatic that the final question posed in AbitibiBowater was both substantively and technically satisfied due the AER's long-standing policy of not approving license transfers unless environmental reclamation obligations were secured or otherwise satisfied. That position, which lies at the very heart of the dispute between the regulator and secured creditors, allowed for a quantum to be assigned to the AER's claim, provided certainty that subsequent performance would occur and gave rise to an operational conflict between the federal insolvency and provincial environmental statutes as it allowed the regulator to attach an impermissible priority right to its otherwise unsecured claim. The Court of Appeal has therefore clarified that, in the event of conflict, federal insolvency laws take precedence over provincial environmental laws.

The most notable part of the dissenting judgment is also the application of AbitibiBowater, albeit for very different reasons. For the past several years the AER has consistently asserted that it is not a creditor at the outset of insolvency proceedings. While the AER had initially advanced this position in Redwater, it eventually conceded that the first part of the AbitibiBowater test (being the existence of a debt, liability or obligation owing to a creditor) was satisfied. Madam Justice Martin challenged this position by relying on the Ontario Court of Appeal decision in Re Nortel Networks and, in doing so, suggested that provincial environmental legislation that regulates well abandonment, site reclamation and license transfer (including transfers that impose a financial security requirement) constitutes an ongoing obligation that continues following bankruptcy and does not give rise to a "monetary claim". If this analysis were to be followed, the AER is not a creditor of the insolvent debtor and the initial question posed in AbitibiBowater (which is whether there is a debt owed to a creditor) can never be affirmatively satisfied. In contrast to the reasoning of the majority, Justice Martin held in dissent that the fact that compliance with the provincial regulatory regime would have the effect of reducing creditor recoveries did not alter the priority afforded to claims under federal legislation.

Although it is hoped that the new appellate level authority will create further clarity on insolvency driven sale transactions involving AER licensed assets, it should be remembered that following the release of the trial decision in Redwater, the AER imposed regulatory changes (discussed here) and challenged proposed modifications to the template receivership order (discussed here). The lengthy and detailed dissent in Redwater may mean that these outcomes, as well as a possible further appeal to the Supreme Court of Canada or a request for legislative amendment, will be the ultimate result of the case.

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