Canada: Supreme Court Of Canada Releases Its Decision In Orphan Well Association v. Grant Thornton Ltd, 2019 SCC 5

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.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Borden Ladner Gervais LLP
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions