Canada: Redwater Appeal Dismissed In Favour Of Creditors

On April 24, the Court of Appeal of Alberta released its much-anticipated decision in the receivership proceedings of Redwater Energy Corporation (Redwater), ultimately dismissing the joint appeal of the Alberta Energy Regulator (AER) and the Orphan Well Association (OWA).1 The Court upheld the lower Court's decision that the Alberta Energy Regulator does not have a priority over secured creditors, and receivers may renounce uneconomic assets in the receivership process. It is expected that the AER will seek leave to appeal the decision to the Supreme Court of Canada.

Background

Redwater held a number of licensed oil and gas properties in Alberta. After Redwater initiated insolvency proceedings in May 2015, Redwater's principal secured lender successfully sought the appointment of Grant Thornton Limited as Receiver and eventual Trustee in Bankruptcy (the Receiver) of the estate of Redwater.

The Receiver advised the AER that it disclaimed any interest in 107 of Redwater's 127 total AER-licenced properties pursuant to section 14.06 of the Bankruptcy and Insolvency Act (BIA),2 which allows trustees and receivers to renounce any interest in real property where environmental liability exists. The disclaimed assets were non-producing and had substantial abandonment and reclamation liabilities that outweighed any potential value. The result of the Receiver disclaiming these wells is that they would become the responsibility of the AER and ultimately the OWA.

The AER responded by issuing abandonment orders with respect to the disclaimed licenced properties. The Receiver did not comply with these orders and advised the AER of its intention to sell the 20 producing wells that it had assumed possession of. The AER withheld authorization to the transfer and sale of these producing properties by relying on its Licensee Liability Rating Program, which allows the AER to refuse the transfer of a licenced property by an insolvent licensee if the insolvent licensee's Liability Management Rating is less than zero.

The AER and the OWA brought a joint application asking the Alberta Court of Queen's Bench to determine whether the Receiver could pick and choose among Redwater's realizable properties and ignore the AER's abandonment orders. The Receiver cross-applied, seeking approval of its sales process to market and sell the licensed properties that it took possession of.

Alberta Court of Queen's Bench Decision

The AER and the OWA claimed that under the definition of "Licencee" in the Oil and Gas Conservation Act (OGCA)3 and the Pipeline Act (PA),4 receivers and trustees are considered licensees and are therefore subject to the statutory obligations of the AER. They argued that the Receiver could not rely on section 14.06(4) of the BIA to disclaim certain interests because it is not possible to disclaim AER-licensed properties under provincial legislation.

The Receiver argued that there was an operational conflict between section 14.06(4) of the BIA and the definitions of licensee under the OGCA and the PA. Based on the constitutional doctrine of paramountcy, when otherwise validly enacted federal and provincial laws cover the same or similar subject matter, but there is an operational conflict between the two, the federal legislation (the BIA) must prevail.

Chief Justice Wittmann ultimately agreed with the Receiver and ruled that certain sections of Alberta's provincial oil and gas legislation frustrate the purposes of the federal BIA and therefore must be inoperative to the extent of the frustration. Wittmann CJQB held that the Receiver could disclaim its interest in certain oil and gas licensed properties and was not bound by oil and gas well abandonment orders issued by the AER with respect to disclaimed licensed properties.

The OWA and the AER appealed this decision. 

Appeal Decision

Justice Slatter (with Justice Schutz, concurring) wrote the majority decision dismissing the appeal. Justice Slatter identified the key issue on appeal as the priority and treatment of environmental claims in bankruptcy, and whether environmental claims were provable claims under section 14.06 of the BIA. Justice Slatter noted that in 1997, the BIA was amended to specifically address environmental claims, and it now incorporates environmental claims into the general bankruptcy process, rather than exempting them.

Justice Slatter relied on Newfoundland and Labrador v AbitibiBowater Inc. (AbitibiBowater),5 in which the Supreme Court of Canada set out the test for whether an environmental obligation is a provable claim under the BIA. Justice Slatter applied this test, noting that it was already conceded that the first two parts were met—an obligation exists to the AER as a creditor and the obligation arose prior to the conclusion of the insolvency. The third part of the test is whether the claim can be expressed in monetary terms or that there is some certainty that the remediation work will be done. Justice Slatter concluded that the AER's claims were provable claims under the BIA.

Justice Slatter ultimately found that the AER's policy on the sale of assets disrupts the distribution scheme under the BIA. In this regard, Slatter JA upheld the decision of Chief Justice Wittmann. Justice Slatter held that under the proper interpretation of the BIA, the AER cannot insist that the Receiver devote substantial parts of the bankrupt estate to the satisfaction of environmental claims in priority to the claims of a secured creditor. To the extent that the interpretation of the provincial legislation leads to a different result, the paramountcy doctrine is engaged.

With respect to the AER's argument that the chambers judge's 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," Justice Slatter held that these fears are exaggerated, as bankruptcy is not an easy solution to financial problems. Further, policy concerns cannot outweigh the proper interpretation of a statute.

Dissent

Justice Martin offered a dissent, concluding that there is no conflict or frustration between the BIA and the OGCA and PA. Justice Martin disagreed with Wittmann CJQB's framing of the issue, which was whether the AER could create a priority for abandonment and environmental liabilities in bankruptcy. Justice Martin 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 on the paramountcy issue, both the federal and provincial schemes at issue in this case may continue to co-exist. She found that the BIA should not be read as widely as the Receiver contends, and that the powers granted under the BIA are designed to protect trustees from personal liability, but not grant them the authority to disregard binding provincial legislation. Justice Martin further contended that the OGCA and PA operate to manage the exploration and exploitation of a largely public resource, and ensure public and environmental safety in its development. This provincial legislation does not seek to reorder priorities in bankruptcy and does not amount to the sort of "clear conflict" required to declare a provincial law to be inapplicable in bankruptcy.

The Redwater Appeal marks another chapter in the saga between the AER, the OWA. lenders, operators, receivers and trustees operating in Alberta. It is a decision that the AER and the OWA will likely seek leave to appeal to the Supreme Court of Canada. In the meantime, the Commercial Court and insolvency professionals in Alberta will be re-engaged navigating the waters where regulatory law, insolvency law, and federal and provincial legislation intersect—and as Redwater has demonstrated, sometimes clash.

Footnotes

1. Orphan Well Association v Grant Thornton Limited, 2017 ABCA 124.

2 RSC 1985, c B-3.

3. RSA 2000, c O-6.

4. RSA 2000, c P-15.

5. 2012 SCC 67.

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