Canada: The Court Of Appeal Upholds The Redwater Decision

Last Updated: April 26 2017
Article by Kathleen Shannon

Field Law's Energy Group continues to follow developments regarding the Redwater Energy case. This Energy Alert summarizes the Alberta Court of Appeal's recent decision on the matter.

Highlights

  • In a 2-1 decision, the Alberta Court of Appeal has upheld the Court of Queen's Bench decision in Redwater Energy Corporation (Re) (Redwater)1
  • Federal Bankruptcy laws prevail to the extent of a conflict with otherwise valid provincial law. Receivers may renounce uneconomic assets as part of their mandate and only deal with economic assets in the receivership process
  • The Alberta Energy Regulator (AER) does not have a super priority over secured creditors. Receivers are not bound by closure or abandonment orders in respect of renounced assets
  • The AER is reviewing the decision. It is not yet known whether the AER will seek leave to appeal the decision to the Supreme Court of Canada

Background

In the spring of 2016, the Court of Queen's Bench issued a decision in Redwater that had significant effects in the oil and gas industry. In that decision, the Court held that sections of the Oil and Gas Conservation Act2 and Pipeline Act3 were inoperative to the extent they conflicted with section 14.06 of the federal Bankruptcy and Insolvency Act (BIA),4 which allows a receiver or trustee to renounce the uneconomic assets of a bankrupt energy company. Chief Justice Wittman determined that federal bankruptcy laws prevail to the extent of a conflict with otherwise valid provincial law. Receivers may renounce uneconomic assets and the AER does not have a super priority over secured creditors. Receivers are not bound by closure or abandonment orders in respect of renounced assets. As a result, a receiver or trustee can renounce AER-licensed assets (i.e., wells and facilities) along with their associated abandonment and reclamation obligations and those renounced licensed assets cannot be included in the calculation of the company's Liability Management Ratio. A more detailed discussion of the Court of Queen's Bench Redwater decision and its implications can be found in the Field Law Energy Group's previous Energy Alert.

The AER was concerned that "The decision may encourage further receiverships and bankruptcies as a means of avoiding end of life obligations and poses a risk of a significant increase in the number of orphaned AER licensed assets." The AER appealed the decision and put in place a number of interim measures in Bulletin 2016-16 and 2016-21 with a view to ensuring that statutory environmental liabilities associated with energy development in Alberta are adequately and appropriately addressed. For detailed summaries of these measures please see the Field Law Energy Group's Energy Alert on Bulletin 2016-16 and its Energy Alert on Bulletin 2016-21.

The Court of Appeal's Decision

The Alberta Court of Appeal issued its decision on April 24, 2017. Mr. Justice Slatter wrote the majority decision dismissing the appeal and Madam Justice Schutz concurred. Madam Justice Martin dissented and would have allowed the appeal.

Justice Slatter summarized the issue in the appeal as the priority and treatment of environmental claims in bankruptcy. Justice Slatter noted that the AER policies in place at the time of Redwater's insolvency derived from the Alberta Court of Appeal's 1991 decision in PanAmerican de Bienes y Servicios SA v Northern Badger Oil & Gas Ltd. (Badger)5 that involved the AER's predecessor the Energy Resources Conservation Board (ERCB). In that case, the Court of Appeal found that the ERCB's order did not create a claim in bankruptcy, that the duty on licensees to abandon wells was owed to the public at large and that duty was part of the general law of Alberta. The enforcement of that duty did not involve the recovery of money, rather it was merely enforcement of a general law. As such, the ERCB was not a creditor. The receiver had not been a licensee, but had stepped into the shoes of the licensee and had a public duty to abandon the wells. Finally, the Alberta Court of Appeal in Badger found that although the provincial legislative scheme may have some incidental effects on the priority provisions in the Bankruptcy Act, there was no direct operational conflict. After this decision was issued, the Alberta legislature amended the definition of "licensee" to include receivers and trustees.

In 1997, the BIA was amended to specifically address environmental claims. Justice Slatter considered these provisions, found in section 14.06, in detail. Justice Slatter noted that section 14.06 does not exempt environmental claims from the general regime, but rather incorporates them into the bankruptcy regime. He determined that the central question was whether the Redwater environmental claims were provable claims under section 14.06 of the BIA.

In Newfoundland and Labrador v. AbitibiBowater Inc. (AbitibiBowater),6 the Supreme Court of Canada set out the test for whether an environmental obligation is a provable claim under the BIA and set out some general principles. Justice Slatter applied that test, noting that it was conceded that the first two parts of the AbitibiBowater test are met: an obligation exists to the AER as a creditor, and the obligation has arisen prior to the conclusion of the insolvency. The third branch of the test, whether the claim can be expressed in monetary terms or not be too remote or speculative so that there is some certainty that the remediation work will be done, had to be considered. Justice Slatter concluded that the chambers judge was correct that Redwater environmental claims are provable claims under the BIA. He made that finding in both a technical and substantive way.

Justice Slatter found that the effect of the AER's policy on the sale of assets artificially transfers the value of the oil and gas assets to the AER licence, which he found has no intrinsic value. Further he stated the following:

The Trustee might choose to transfer the 20 producing wells alone, or with their existing AER licences. In either event, the purchaser would have to be qualified to hold those licences. Each well has its own AER licence. Therefore, what the Regulator is attempting to do is attach conditions on the 20 AER licences that might be transferred, which really relate to the 107 wells that have been disclaimed by the Trustee and are not being transferred. The effect is to transfer economic value from the producing wells to the non-producing wells in order to enforce the environmental obligations attached to the latter. This clearly has the effect of disrupting the distribution scheme under the BIA. Even if the Trustee must take the licences "warts and all", there is no justification for the Regulator transferring warts from one licence to another.

Justice Slatter noted that the AER cannot effectively upset the priorities in the BIA by purporting to deal with licensing requirements, rather than a monetary environmental obligation. He found that certain obligations on receivers and trustees under the Oil and Gas Conservation Act and the Pipeline Act are in operational conflict with the BIA and that they frustrate the federal purpose of managing the winding up of insolvent corporations and settling the priority of claims.

Justice Slatter considered the policy and fairness arguments made by the appellants, but in each case he found that the policy concerns cannot outweigh the wording of the statute. If the government had intended to give environmental claims super priority in the BIA it would have done so.

The Dissent

In Madam Justice Martin's view, the chambers judge's framing of the issue, which was whether the Regulator can "effectively create a priority for abandonment and environmental liabilities in bankruptcy" was incorrect. She framed the issue as "given Alberta's exclusive jurisdiction to regulate oil and gas resources, do the licence obligations created by the provincial legislation conflict with or frustrate the scheme of the priorities set out in the BIA?"

Justice Martin found that due to the constitutional nature of the case, the BIA should not be read as widely as the Trustee suggested and since it should be presumed that Parliament intends for federal and provincial laws to co-exist, courts should favour harmonious interpretations, rather than those that create operational conflicts. She stated there was a high constitutional law threshold for demonstrating an operational conflict or frustration of federal purpose and found that the Trustee had not met that threshold.

Justice Martin found that the Alberta oil and gas regulatory and licensing scheme created generally applicable public legal duties. She held that just because a dollar value could be assigned to compliance costs does not turn them into monetary claims under the BIA. She concluded:

The provincial legislation may have an impact on the value of Redwater's estate, but that does not mean the province is seeking an unauthorized priority in bankruptcy. Rather, it is enforcing laws and licence conditions designed to protect the public interest, the environment, and the rights of third-party landowners affected directly by this distinctive resource and regulatory regime.

Impact of the Decision

The result of the Court of Appeal's decision is the Court of Queen's Bench 2016 decision that found the AER does not have super priority over secured creditors in bankruptcy and that receivers can renounce uneconomic oil and gas assets still stands. This should provide comfort to creditors resulting in continued or increasing lending to oil and gas companies. It will also allow a receiver to attempt to sell economic wells and facilities and avoid unnecessary abandonment. On the other hand, receivers will be able to renounce uneconomic assets which will likely increase the number of orphan wells assigned to the Orphan Well Association. The Orphan Well Fund is primarily funded by oil and gas companies, so this could increase overall costs to producers.

Given the split decision by the Alberta Court of Appeal, an appeal to the Supreme Court of Canada is possible so the end result in this matter is not certain. We may also see a legislative or regulatory response to this decision.

Footnotes

1. 2016 ABQB 278.

2. RSA 2000, c O-6.

3. RSA 2000, c P-15.

4. RSC 1985, c B-3.

5. 1991 ABCA 181.

6. 2012 SCC 67.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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